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The Insolvency Code

Published on Tue, Nov 10,2015 | 23:36, Updated at Tue, Nov 10 at 23:36Source : 

By: Divyanshu Pandey, Partner, J Sagar Associates

A comprehensive insolvency code that preserves value of a viable business and liquidates an unviable enterprise is a long pending and an essential legislation, required to establish India as a credible and attractive investment destination. Multiple laws on insolvency (and debt recovery) which are implemented in different forums give rise to conflicts between creditors and debtors. This results in destruction of economic value of an enterprise and thereby negatively effects development of a robust corporate debt market. The Bankruptcy Law Reform Committee (BRLC) has, by living up to its mandate, consolidated a highly fragmented insolvency framework in India into a single code applicable to individuals and non-financial firms.

The draft Insolvency and Bankruptcy Bill, 2015, provides a legal framework which is premised on stated objectives such as achieving insolvency resolution in lesser time, lowering the loss for creditors and other stakeholders and to increase availability of debt in different forms (both secured and unsecured).

The insolvency code prescribes various measures to achieve its stated objectives. By empowering both the creditors (secured and unsecured) and debtor to initiate insolvency resolution process it facilitates assessment of the viability of the enterprise at an early stage. A detailed and a time bound insolvency resolution process under supervision of an insolvency professional not only aims to minimize conflict in negotiations between a creditor and a debtor or between different creditors but also helps in preserving the economic value of an enterprise. By proposing to set up information utilities, who will make available relevant information to all stakeholders, the insolvency code aims to minimize information asymmetry between creditors and debtors which is essential for any debt workout. During insolvency resolution, the moratorium on debt recovery actions and new cases and management of the debtor’s asset in trust by the insolvency professional will make negotiations on viability of the enterprise more effective without the fear of asset stripping or of erosion of asset value. The insolvency code shifts the incentive from individual recovery by lenders to a more coordinated and collective action by all the stakeholders. By treating foreign lenders at par with domestic lenders, enabling operational creditors (employees and trade creditors) to initiate insolvency resolution and according operational creditors a defined priority in distribution waterfall, the insolvency code is a step towards according a more equitable treatment to all class of creditors.

The insolvency code also proposes setting up of an Insolvency and Bankruptcy Board as an insolvency regulator. The insolvency regulator by having an oversight of insolvency professionals, agencies and information utilities will help in preventing abuse of power and help in fostering accountability. Further, vesting the insolvency regulator the power to make regulations, within a defined statement of objectives, will help adapting the insolvency law in response to changing conditions.

With a view, to provide legal clarity, the committee has recommended repeal of the existing laws for corporate and individual insolvency and be replaced by the insolvency code. It recognizes the importance of a common framework for corporate insolvency and individual bankruptcy especially in context when the two interact (i.e. personal guarantee provided for a corporate debt). It will help in adopting a synchronized approach which will be less costly and will protect creditors’ interest by enabling efficient recovery.

The BRLC under the insolvency code has outlined all the elements that are needed for developing an effective and robust insolvency framework. However, the ball is now in the government’s court and it should work towards getting the bill enacted as law and ensure that a supporting ecosystem is developed to provide an enabling infrastructure for such law to be implemented effectively.

The views reflected in this article are personal to the author and do not reflect the position of the firm.

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