THE DRAFT INSOLVENCY AND BANKRUPTCY BILL, 2015
The report of the Bankruptcy Law Reforms Committee, popularly known as the
Vishwanathan Committee, recently released must be
considered as a watershed
development for ‘Easing of Doing Business’. The report annexed with a draft Insolvency and
Bankruptcy Bill, fulfils a long standing demand from the Industry and business for an legal
environment facilitating easy exit from a non viable venture. Structured on the model of U S
Bankruptcy Code, the greatest contribution of the proposed Act, if enacted, will be repelling
of draconian Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act,
1920 under which the straight path for an insolvent was prison.
The cornerstones of the proposed act are the transparent processing of the bankruptcy /
insolvency case and stipulation of strict time frame for the entire process. The draft Bill
proposed a total time frame of 180 days for closure of any bankruptcy / insolvency
proceeding, which in certain cases could be closed in straight 90 days. The draft even
proposes the maximum number of days an Bankruptcy / Insolvency Adjudication Authority
may take at each stage to dispose of the matter. We can easily imagine the extent of
enhancement in realisation by the creditors of an closed unit, if the case is disposed of in
180 days instead of lingering on for years….
The real paradigm shift proposed in the draft Bill is in the treatment of Bankrupt / Insolvent
non corporates, i.e. the Proprietory and Partnership firms, which constitutes nearly 99% of
the MSME sector in India. While some legal framework were already existing for the
Bankrupt / Insolvent corporate entities, for the non corporate firms any failure of the entity
meant lifelong hassles for the owner(s). The present Bill has a complete ‘Part’ on treatment
of Bankrupt / Insolvent non corporate entities for which three routes, i) Fresh Start for tiny
enterprise, ii) Insolvency resolution process for any firm and finally iii) Bankruptcy Order, has
been specified. Again there are strict time frame for each step so that the case is closed
within specified time frame.
While there are quite a few laudable initiatives under the proposed Act, there are also issues
of concern particularly regarding treatment of Bankrupt / Insolvent non corporates to which
category the Indian MSMEs predominantly belong. The existing Debt Recovery Tribunals
(DRT) have been proposed to be the Adjudicating Authorities in relation to insolvency
matters of individuals and (partnership) firms. With their present focus on expeditious
adjudication and recovery of debts due to banks and financial institutions, how these
institutions will be able to take a balanced view on the creditors’ and debtors’ interests, is a
big question. The experiences of majority MSMEs are these DRTs mostly take care of the
Bankers’ interests.
The draft Bill also specifies the crucial role of processing the Insolvency / Bankruptcy
application from an individual / firm and preparation of the ‘Repayment Plan’ to the
Resolution Professional. In India today, where there is not much expertise available on
Insolvency resolution and large number of Non- performing Assets of the Banks, availability
of required number of Resolution Professionals to expeditiously process the Insolvency
cases will be a big question.
Again while the U S bankruptcy code the debtor or successor entity will be free of all
Bankruptcy Code restrictions on operations and reporting except for the obligation to carry
out the plan and to comply with the court’s confirmation order, requirements, the draft Bill
stipulates A bankrupt, from the bankruptcy commencement date, shall not act a s a director
of any Company, or directly or indirectly take part .. in the promotion or management of a
Company. While there is a provision in the Bill to waive the restrictions under certain
conditions, it may be the end of the road for many ‘Start Up’s which are the cherished
entrepreneurs for our Prime Minister for their exponential growth prospects but at the same
time, show a very high, global, failure rate.
Another glaring lapse in the proposed Bill is while the archaic Bankruptcy Acts have been
proposed to be repealed, the two more recent Acts, viz., Recovery Of Debts Due To Banks
And Financial Institutions Act, 1993, popularly known as DRT ACT and Securitisation And
Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002,
popularly known as the SARFAESI Act, have been left intact. Both these acts are at present
the principal tools of the Banks, who in most cases are the predominant creditors of any
entity, both corporate and non- corporate, for realisation of debts and with the enactment of
the proposed Insolvency and Bankruptcy Bill should become infructuous. While the draft Bill
mentions that in both cases of Insolvency and Bankruptcy,” on the date of admission of the
application, the moratorium period shall commence in respect of all the debts and during the
moratorium period (a) any pending legal action or legal proceeding in respect of any debt
shall be deemed to have been stayed; and (b) creditors shall not (generally) initiate any legal
action or legal proceedings in respect of any debt, there will remain scope for filing case
under the existing two Acts, by the Banks, in case of failure of the ‘Repayment Plan’ etc.
thus jeopardizing the purpose of the present Bill.