The government-appointed Bankruptcy Law Committee has recommended a uniform law for dealing with insolvency of companies and a speedier process of winding up insolvent companies.
The draft bill presented by the committee has proposed a timeline of six to a maximum of nine months to deal with insolvency and winding-up of operations of insolvent entities.
The draft law prepared by the panel has also proposed early identification of financial distress so that steps can be taken to revive the ailing company.
The draft bill has consolidated the existing laws relating to insolvency of companies, limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals which are presently scattered in a number of legislations, into a single legislation.
The bill seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure and clearly allocate losses in macroeconomic downturns.
The committee has observed that the enactment of the proposed bill will provide greater clarity in the law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt and will address the challenges being faced at present for swift and effective bankruptcy resolution.
During the insolvency resolution period, an interim resolution professional would manage the debtor. The professional would prepare a plan that needs to be approved by a majority of 75 per cent of voting share of the financial creditors.
Once the plan is approved, the adjudicating authority must give its nod. However, if an insolvency resolution plan is rejected, the adjudicating authority will order liquidation.
The bill proposes to establish an Insolvency Regulator to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities.
The adjudicating authority will have the jurisdiction to hear and dispose of cases by or against the debtor.
The Debt Recovery Tribunal (''DRT'') shall be the adjudicating authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).
The National Company Law Tribunal (NCLT) will be the adjudicating authority with jurisdiction over companies, limited liability entities. Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal (NCLAT).
NCLAT will be the appellate authority to hear appeals arising out of the orders passed by the regulator in respect of insolvency professionals or information utilities.
The draft bill proposes to regulate insolvency professionals and insolvency professional agencies. Under regulator's oversight, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role over errant members leading to the development of a competitive industry for insolvency professionals.
The bill proposes for information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals.
To revamp the revival / re-organisation regime applicable to financially distressed companies and limited liability entities; and the insolvency related liquidation regime applicable to companies and limited liability entities.
It also lays down a clear, coherent and speedy process for early identification of financial distress and revival of the companies and limited liability entities if the underlying business is found to be viable.
The bill prescribes a swift process and timeline of 180 days for dealing with applications for insolvency resolution.
This can be extended for 90 days by the Adjudicating Authority only in exceptional cases. During insolvency resolution period (of 180/270 days), the management of the debtor is placed in the hands of an interim resolution professional/resolution professional.
An insolvency resolution plan prepared by the resolution professional has to be approved by a 75 per cent majority of voting share of the financial creditors. Once the plan is approved, it would require sanction of the Adjudicating Authority. If an insolvency resolution plan is rejected, the Adjudicating Authority will make an order for the liquidation.
As a precursor to a bankruptcy process, the draft Bill envisages two distinct processes under this Part, namely, Fresh Start and Insolvency Resolution.
In the Fresh Start process, indigent individuals with income and assets below the specified thresholds (annual gross income does not exceed Rs60,000 and aggregate value of assets does not exceed Rs20,000) shall be eligible to apply for a discharge from their ''qualifying debts'' (ie debts which are liquidated, unsecured and not excluded debts and up to Rs35,000).
The resolution professional will investigate and prepare a final list of all qualifying debts within 180 days from the date of application. On the expiry of this period, the Adjudicating Authority will pass an order on discharging of the debtor from the qualifying debts and accord an opportunity to the debtor to start afresh, financially.
In the Insolvency Resolution Process, the creditors and the debtor will have to negotiate to arrive at an agreeable repayment plan for composition of the debts and affairs of the debtor, supervised by a resolution professional.
The bankruptcy of an individual can be initiated only after the failure of the resolution process. The bankruptcy trustee is responsible for administration of the estate of the bankrupt and for distribution of the proceeds on the basis of the priority.
The draft bill lays down a transition provision during which the central government will exercise all the powers of the Regulator till the time the Regulator is established. This transition provision will enable quick starting of the process on the ground without waiting for the proposed institutional structure to develop.
Any proceeding pending before the AAIFR or the BIFR under the SICA, 1985, immediately before the commencement of this law shall stand abated. However, a company facing such proceeding stands abated may make a reference to Adjudicating Authority within 180 days from the commencement of this law
Finance minister Arun Jaitley, in his budget speech 2015-16, had identified bankruptcy law reform as a key priority for improving the ease of doing business and had announced that a comprehensive bankruptcy code, meeting global standards and providing necessary judicial capacity, will be brought in fiscal 2015-16.
The government had constituted a Bankruptcy Law Reform Committee under the chairmanship of T K Viswanathan, former law secretary to look into various bankruptcy related issues and give its report along with a draft bill on the subject to the government.