Jaitley unsure about the effectiveness of new NPA resolution mechanism

In what looks like the government having second thoughts on the Bankruptcy Code to resolve the problems of insolvency and bankruptcy among corporates, finance minister Arun Jaitley today said that while previous laws were only partly effective in resolving the problem, one would have to wait to judge the effectiveness of the current mechanism to deal with the issue.

Jaitley, who is also in charge of corporate affairs and defence was delivering the Inaugural address at the National Conference on 'Insolvency and Bankruptcy: Changing Paradigm' in Mumbai today.

"Earlier, if companies were for insolvency, they got stuck in courts indefinitely. The SICA merely provided an 'Iron Curtain' against debtors, otherwise it was an absolute failure and could achieve very little of the purpose for which it was created," Jaitley said.

The Debts Recovery Tribunal (DRT) was somewhat faster, but not as effective as envisaged, while the Sick Industrial Companies Act (SICA) failed and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) served a limited purpose since being a creditor inherently put one at a disadvantage under it, he said.

The days of creditors chasing the borrowers endlessly are over as the new bankruptcy law is quite clear on settling defaults in a specified timeline, Jaitley said at the seminar on bankruptcy organised by the CII.

The issue is being currently addressed by the Insolvency and Bankruptcy Board of India (IBBI), he said.

Jaitley said companies have to face the new reality that borrowers either pay up or lose their business.

While timeline should be adhered to since speed is essence for the success of the Bankruptcy and Insolvency Code, Jaitley said that the code is evolved to safeguard the health of both the borrower and the lender.

He said the National Company Law Tribunal (NCLT) has to decide within 14 days on whether or not to admit a company for insolvency resolution proceedings. Once a company is admitted, the lenders and borrowers should mutually arrive at resolution plan within 270 days, failing which the assets of the company will be liquidated.

After the law was enacted in January this year, 250 companies including 12 large companies like Essar Steel, JP Associates and Lanco have been admitted to IBC.

But, he said, liquidation of companies is not the essence of the law, rather, it is meant to improve the financial abilities of corporates as well as lender banks.

Jaitley said that for endless years we lived in a system that protected debtors and allowed assets to rust away. The implementation of IBC would reverse the creditors and defaulting debtors relationship.

"One thing is very clear. The old regime by which the creditor would get tired chasing the debtor and end up recovering nothing is now over," the finance minister said.

"If a debtor has to survive, he will have to service his debt. Or, he will have to make way for somebody else. I think this is the only correct way by which businesses would now be done and this message has to go loud and clear," he added.