'New bankruptcy law is necessary for reviving economy'
The government has embarked on an ambitious mission to usher in sweeping changes to the country's bankruptcy law. It unveiled the first draft of the new Bankruptcy Code recently. TK Vishwanathan, chairman of the committee that drafted the law, talks to Business Today's Dipak Mondal on various aspects of the Bill. Excerpts:
Q. How will the new bankruptcy code be different from the existing laws?
A. The existing laws are out of tune with market realities. They are scattered, and they are housed in different statutes. The corporate insolvency law comes under the Companies Act, and the individual insolvency laws are under two old acts - Provincial Towns Insolvency Act and Presidency Towns Insolvency Act - that are almost 100 years old. The district courts responsible for dealing with these insolvency petitions are not very effective, as they do not give any valuable solution to the creditors in releasing their assets.
Corporate insolvency related liquidation takes 10 to 20 years, and by the time assets are realised, no value is left in them. Debtors indulge in siphoning off and stripping of assets.
In the present system of rehabilitation, for example SICA (Sick Industrial Companies Act) and BIFR (Board of Industrial and Financial Reconstruction), there is the formula of 51 per cent erosion of net worth. By the time 51 per cent erosion takes place, the company is gone; there's no question of reviving it. SICA and BIFR have been used by debtors to delay payments and render the assets valueless for creditors.
In reaction to the misuse of SICA and BIFR, the government brought the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act). But, the SARFAESI act is meant for banks and other financial institutions. Banks and financial institutions are not the only creditors; there are other unsecured creditors as well.
This kind of time lag for liquidation of assets is not good in a market economy. Therefore, the finance minister announced in the last budget that he would come up with a bankruptcy code. So we studied the global good practices and arrived at this kind of comprehensive code, which deals with both corporate as well as individual insolvency.
Q. What kind of infrastructure does it require to get this law operational? When can we expect the infrastructure to be ready?
A. We have kept the corporate insolvency cases under the National Company Law Tribunal which is going to be in place shortly. The recruitments are going on and we expect the tribunal to be functional soon. As far as the individual insolvency is concerned, we are taking it out of the district courts and bringing it under the Debt Recovery Tribunal (DRT). Now, this requires a massive re-engineering of the existing tribunals. At present, DRTs have to focus only on recovery of debts due to banks and financial institutions. Now, we want to expand their powers in a very big way.
The finance minister has plans to upgrade the tribunals and convert them into online courts where hearings can take place without the physical presence of the creditor and debtors. We also have to infuse new manpower in a large number, because we are replacing district courts with these tribunals.
We also need to ensure that there is a change of attitude among the people working under the new insolvency regime. This we are taking care of by creating a new breed of professionals called 'insolvency resolution professionals'. They are bankers, lawyers, chartered accountants, cost accountants and professionals from other fields. These are the people who would be entrusted with the work of rehabilitation of an insolvent company. They would be independent professionals and not government employees. They would be supervised by a professional body, Insolvency and Bankruptcy Board, which would control the conduct of these professionals.
An insolvency professional would be appointed immediately after a company files for bankruptcy. And then he would take over the management of the company and try to run it along with the creditors' committee for 180 days. If, during this period, they can revive the company, it is well and good; else, the insolvency professional starts the liquidation process.
Q. How do you ensure that insolvency professionals stick to the deadline set by the code, given that even courts fail to do so?
A. The courts are constrained by many other compulsions, but here it is the insolvency professional's duty to stick to the deadline, otherwise he is held responsible by the board for his code of conduct.
So, this system would work efficiently because most of the reasons for delays have been taken care of. Once this system starts working, lot of money would flow from non-banking players. Right now, companies have to excessively depend on banks for funds. Once the system is in place, you would see many more venture capitalists and private equity players coming to the corporate debt market.
We also want to send out the message that big failures are acceptable in a market economy. If somebody starts a business/venture and it fails, it should not be held against him. He should get a second chance.
Q. That means you need a whole new ecosystem in place. How do you plan to do that?
A. Yes, indeed. First, as I said, we are going to bring in insolvency professionals and then we would have information utilities. Information utilities would be like rating agencies on a larger scale run by private entities who would be manning 24-hour data base.
Q. How would you select these insolvency professionals?
A. The board would lay down the conditions, rules and regulations for insolvency professionals. They would be drawn from different streams to begin with and, in the course of time, we would have a separate stream of insolvency profession.
Q. What happens to the existing rules?
A. We are amending the Companies Act. We are taking out the rehabilitation part - Chapter 19 of the Companies Act is being removed and brought under the code. The code also makes various amendments in the provisions of the Companies Act that related to insolvency.
We are also amending the Debt Recovery Act. The act, which is currently known as Recovery of Debts Due to Banks and Financial Institutions Act, would now be called Recovery of Debt and Bankruptcy Act. There is a jurisdictional limit of `10 lakh under this act, which we are overriding and making it eligible for all kinds of bankruptcy.
We are repealing the Provincial Towns Insolvency Act and the Presidency Towns Insolvency Act. The Sick Industrial and Companies Repeal Act Bill is already there, but it is not in force. This Act would be brought into force and all cases under SICA would abate. All the proceedings under SICA can be brought under the code within 180 days.
Q. The code floats the concept of an insolvency regulator. What kind of powers would be bestowed on it? Will it be an independent body or would it come under some government ministry?
A. That is something the government would decide. The code is neutral on this. It simply says that the regulator would be a semi-government body. Once the Bill is passed, the government can decide which ministry would handle it and what kind of powers it should have. It's a policy decision, not a legal one.
Q. When will this Bill be tabled in Parliament and what are the chances of getting it passed?
A. The Bill is almost ready; all it needs is a little fine-tuning. The finance minister wants it to be tabled in the winter session itself. This Bill is not contentious, and everybody would like it because it is necessary for reviving the economy.
