What is India’s New Bankruptcy Code?
India currently has several laws to deal with insolvency resulting in significant delays in winding up a business. The Bankruptcy Code will consolidate the existing framework and create a new institutional structure.
The new law will also likely create a new class of insolvency professionals who will help ailing businesses and banks smoothly take over the insolvent business and manage the liquidation process.
The bill also proposes the creation of a new entity, the Insolvency and Bankruptcy Board of India, which will regulate insolvency professionals and information companies – those which will store all credit information of businesses.
The Bankruptcy Code provides two authorities to deal with insolvency. The National Company Law Court will adjudicate cases for corporations and limited liability companies, while the Debt Recovery Court will do the same for sole proprietorships and general partnerships.
How will a company be liquidated?
An insolvency resolution plan must be approved by 75% of voting creditors. Once the plan is approved, it would also require the approval of the contracting authority.
During the insolvency resolution period, the management of the debtor is entrusted to a resolution professional.
The code proposes to protect workers in the event of insolvency, the payment of their wages for up to 24 months will have priority during the liquidation of assets.
“The code comes as a relief for workers and employees who are not being paid by failing companies,” said Varun Gupta, partner at KPMG in India.
In the case of an insolvent debtor with overseas assets, the Federal Government of India may enter into an agreement with a foreign country to enforce the law.
How long will the law save?
Currently, it takes an average of 4.3 years to resolve insolvency in India and the debt collection rate is very low compared to other countries, according to a report by Nomura. India also ranks 136th in the World Bank’s insolvency resolution ranking. That’s below China, which ranks 55 and takes 1.7 years to resolve insolvency.
The new law introduces a time limit for bankruptcy proceedings. In the event of default, the period is 180 days, during which resolution must be completed. This can be extended for an additional 90 days by the adjudicator, depending on the process.
Analysts say the new deadline will help India improve its World Bank insolvency ranking.
What is the purpose of the new law?
The new bankruptcy law is not a “magic wand”, says brokerage firm Religare Capital Markets. He sees the benefits flowing after 3-5 years from now.
According to analysts, the main challenge will be to create a large pool of insolvency professionals who will contribute to the rapid implementation of the law. The new regulators will also have to draft rules of procedure for insolvency professionals and information services, among others.
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