India has always been in the limelight in context of defaulting borrowers wherein corporates or high networth individuals raise large ticket loans from banks and amass huge wealth only to create shell companies or fund their luxurious lifestyle at the cost of taxpayer’s money. A case in point is recent news of liquor baron, Vijay Mallya being declared as ‘willful defaulter’ owing Indian banks over Rs 9,000 crore to save his ailing airline company, Kingfisher Airlines.
Hence, the RBI governor has taken stringent measures to clean off PSU banks’ balance sheet off the NPAs. Additionally, to address this burning topic, the government has taken a step in the right direction to consolidate and amend the bankruptcy and insolvency laws of the country to suit the present-day scenario.
‘Bankruptcy’ is a state of a person who is a bankrupt. A bankrupt is the legal status of a person who is insolvent and not in a position to repay the debts it owes to the creditors. The term ‘bankruptcy’ is derived from the Italian word bancarotta, meaning ‘broken bank’. This may have its roots in a custom of breaking a moneychanger’s worktable or desk to signify his bankruptcy.
The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha on December 21, 2015 and was referred to Joint committee on the Insolvency and Bankruptcy Code, 2015. The report was presented in Lok Sabha and laid down in Rajya sabha on April 28, 2016. The code has been passed by Lok Sabha on May 05, 2016 and Rajya Sabha on May 11, 2016.
This Code now would permit banks to push for recovery of money from a company within a period of 180 days, with a grace period of a further 90 days, if majority (i.e.75%) of the creditors agrees. In a situation where the company does not meet the recovery terms, it will be liquidated involuntarily. This will make it easier for banks and other financial institutions to deal with bad debts arising out of failed ventures.
Some of the key highlights of the Code are as follows:
- The Code proposes to cover Insolvency of individuals, unlimited liability partnerships, Limited Liability partnerships (LLPs) and companies.
- Bankrupt individuals would be barred from contesting elections.
- Under the new law, a debtor could be jailed for up to five years for concealing property or defrauding creditors.
- It will strengthen hands of lenders to recover outstanding debts by setting a deadline of 180 days for companies to pay or face liquidation.
- Consolidate all existing laws on bankruptcy and insolvency.
- To cover individuals, companies, limited liability partnerships and partnership firms.
- To use the existing infrastructure of National Company Law tribunals and debt recovery tribunals to address corporate insolvency and individual insolvency, respectively.
- To create Insolvency Professionals who will specialize in such cases, assist creditors, manage liquidation process. These professionals will in turn be certified by a newly created Insolvency Professional Agency.
- It will also create Information Utilities who will collect, collate and disseminate financial information related to debtors.
- The entire operation of insolvency and bankruptcy through these various newly created agencies will be overseen by a regulator – Insolvency and Bankruptcy Board of India.
- Bill can resolve cross-border insolvency through bilateral agreements with other countries.
- To have shorter time frames for speedier resolution.
- Bankruptcy applications to be filed within three months from earlier six months.
- Workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.
- Money due to employees from PPF, gratuity fund will not be included in the estate of the bankrupt company or individual.