Bankruptcy Law: Beyond The Code

At long last, we have a Bankruptcy Law in the country. While it's not clear if it will work like the US' Bankruptcy Code, it's start nevertheless, but several if and buts remain.

The just passed law creates a formal insolvency resolution process; and also calls for the setup of a new regulator - the Insolvency and Bankruptcy Board of India (IBBI). It also supersedes The Companies Act, the Sick Industrial Companies (Special Provisions) Act (SICA) and the Recovery of Debts Due to Banks and Financial Institutions (RDDB) Act. But before you cheer, there is a hell lot of work to be done from here on as far bad-loans and truant borrowers go.

Will it fire?
According to Alavarz & Marsal (A&M) -- a world leader in the turnaround of distressed firms - a time-bound insolvency resolution will require establishment of several new entities. Also, given the pendency and disposal rate of debt recovery tribunals (DRT), their current capacity may be inadequate to take up the additional role.

PRS Legislative Research notes that licensed insolvency professional agencies (IPA), regulated by IBBI, will be created for regulating the functioning of insolvency professionals (IP). "This approach of having regulated entities further regulate professionals may be contrary to the current practice of regulating licensed professionals. Further, requiring a high value of performance bond may deter the formation of IPAs", notes PRS.

The Code provides an order of priority to distribute assets during liquidation. But it is unclear why: (i) secured creditors will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.

The Code provides for the creation of multiple Information Uitilities (IUs). However, it does not specify that full information about a company will be accessible through a single query from any IU. This may lead to financial information being scattered across these IUs. Then the Code creates an Insolvency and Bankruptcy Fund, but does not specify the manner in which the Fund will be used.

Says Amit Vyas, Founder Partner-Vertices Partners: "Having experienced the practical difficulties in the current regime, my biggest concern is with respect to the role to be played by insolvency professionals who would be required to discharge duties akin to the Court Receiver of High Court. It would take some time to have in place necessary infrastructure, appropriate rules and regulations governing such professionals and having competent professionals on board to act as insolvency professionals for successful implementation of the bankruptcy law".

The total stressed assets in the banking system have multiplied by over five times since fiscal'11 to $133 billion in fiscal'15. The average duration for insolvency resolution in India is at a high of 4.3 years compared to the south-Asian region's average of 2.6 years. The World Bank's "Doing Business" ranking, which uses insolvency resolution as a key parameter, has placed India at 137 out of 189 countries.

A&M says it conducted interviews with industry practitioners with regard to challenges faced and BLRC recommendations proposed to gain a holistic perspective of the bankruptcy and insolvency landscape currently in India. The findings were

* 40 per cent of industry practitioners rated execution difficulties as the biggest challenge with respect to revival of a stressed asset.

* 33 per cent said that in practice, raising additional working capital is one of the biggest execution challenges during revival; replacing existing management and maintaining promoter cooperation are other issues

* 40 per cent agreed that fear of vigilance action is a primary impediment in creating creditor consensus; other reasons cited were policy differences across banks and vacancies in senior leadership roles at certain banks

* 33 per cent blamed insufficient bandwidth of the Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT) as a major legal gap.

Chaprter 11 of the US Bankruptcy Code -- frequently known as the reorganisation chapter of the Code -- allows a debtor to reorganise financial obligations while retaining assets, generally through the sale of certain assets to pay down debt and refinance existing debts. Right now what we have is a Law - to make it bite other institutional mechanisms and support systems have to be in place; it will take time.