Bankruptcy Code
Insolvency and bankruptcy code by Parliament will be the first single biggest reform by NDA government.
This could prove to be a panacea for ailing Public sector banks.
One Law to deal with bankruptcy
- Two repealed
- 11 amended.
Time bound Process
- 180 days for resolution of insolvency
- 270 days for some circumstances.
Everyone gets the dues in order of priority
- Cost of insolvency process
- Workers and secured creditors.
- Employees’ wages
- Unsecured creditors
- Government dues
- Any remaining debts
- Shareholders.
Comprehensive Coverage
- Companies
- Partnership
- Limited Liability Partnership
- Individuals,
- Any other to be included.
Bankruptcy resolved in prescribed time
- If not resolved in time, assets to be sold to pay debtors.
- Regulators to Protect Everyone
- The Insolvency and Bankruptcy Board to keep watch
- 10 member board to have RBI and Government representation.
The Big Gain
- India will improve its Ease of doing business ranking
- Banks and Reconstruction Companies are immediate Gainers.
- Lift Lender Comfort-This will lead to greater investment and corporate bond market will develop
- Locked up assets will be freed
No Asset Stripping
- The insolvency professionals to hold charges of assets during insolvency resolution
Information Backbone
- . The code establishes multiple information utilities
- Collect, collate and disseminate financial information related to a debtors
New dedicated Institutions
- Licensed professionals to guide the insolvency process
- Agency to regulate professionals
Funds for the Future
- Insolvency and bankruptcy Fund
- Voluntary contribution from any person
- Fund available to contributors if they face bankruptcy proceedings
Bankcruptcy Code is still in embryo stage and the related bill is passed by Parliament and to be signed by President of India to become law. I submit below certain facts which enlightens on intricacies of Proposed bankruptcy bill which has been passed in Lok Sabha ,
Detailed authenticated and correct position of the said code will emerge and will be available only when it takes the form of an Act and it is put in public domain by RBI for the benefit of persons concerned.
So far as my views are concerned, I cannot believe that mere passing of Bankruptcy code will solve the problem of rising bad debts.
The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. But it failed to serve the purpose for which it was enacted.
When DRT was established in the year 1993, it was planned to recover the money from loan defaulters in six months. But unfortunately this could not happen as it was desired and planned to happen.
Not to speak of six months, DRT failed to recover the money even in six years .Cases filed in DRT court are allowed to be postponed on flimsy ground in nexus with defaulting borrowers for years and decades.This is why lacs of cases all over the country are pending in variius DRTs for disposal and for real recovery from wilfull defaulters.
This led to the enactment of one more drastic act titled as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, also called as SRFAESI Act or SRFAESIA for short. Unfortunately this drastic act also failed to yield desired quickness in recovery of dues from defaulting borrowers.
It is hard nut to crack for bankers to take possession of mortgaged properties of defaulting borrowers . Years and decades pass , but result does not precipitate in way it was envisaged and desiged to happen.
The hardness narrated in lines of the said act gets diluted as soon as the act comes into action in practical field.
Attrative polices are framed by the government from time to time , but they all are punctured and proved futile by corrupt officials sitting in administrtive offices and in judiciary.
Obviously the euphoria generated by DRT act or SERFACIE Act has ended in course of time. We have wasted as much as two decades and more but could not create a fear complex in wilfull defaulters.
Lakhs of Cases filed by different banks to recover money from high value defaulters have been lanuishing in different courts for years and decades and they do not yet appear to help banks in easy recovery of dues from defaulters.
In such position I am not much optimistic about the success of proposed bankruptcy code . Banks or debtors can declare a defaulter a insolvent, but there is no guarantee that entire dues will be recovered. People and companies will rather opt for insolvency as they hitherto allow their loan accounts to be declared Non Performing Asset (NPA ) by their lending bank. Borrower wilfully avoid repayment because they know either their loan will be waived or they will get considerable amount of discount at the time of final payment.
Under the porposed Bankruptcy law, bankers may be empowered to take possession of assets of defaulting company. But the bitter truth is "How Bank officers who are not skilled even in banking work can manage different type of businesses. And where is the guarantee that these bankers will not dispose of the acquired asset in extremely low price to earn side income for himself.
If we talk of small loans, farmers and traders do not repay their instalment because they know sooner or the later , political leaders of ruling party or opposing party will advocate waiver of loan to enhance their vote bank. Similarly if we talk of high value loans , it is open secret that such defaulters manage heavy discount with the help and influence of powerful politicians to whom they help at the time of election.
Lastly it is middle class borrowers who have to face the hard steps taken by bankers and by the government.
It is taxpayer who have to pay higher taxes when government infuse capital in sinking public banks.
It is depositors who have bear the brunt of mismanagemnt and corruption in banks and in politics that they are paid less interest on deposits they keep in these banks.
It is poor investors who have to suffer loss on thir investment when stock value of these banks go down and when these banks pay no dividend or pay negligible low dividend.
Borrowers who repay their loans is time feel cheated when defaulters are awarded by bankers either through waiver of loan or by heavy discount in final repayment. Borrowers who avail loan and do not repay are winner in the era when all policies are made borrower frinedly and which are designed to give discomfort to depositors, investors, taxpayers and to loanees who repay their dues honestly in time.
I say so because RBI, GOI and every businessmen want Banks to sanction loans at lowest interest rate and this is possible only when depositors are paid least interest.
Who bothers for poor depositors?
In my opinion Interst rate payable to depositors for five years and more should be 10%. This in turn will help bank in lending for long term projects. Best option will be uniform rate structure for all banks to avid unnecessay competition among banks of same government.
Similarly government should declare that defaults of all borrowers who have availed a loan of Rs.10 lacs and more will be considered as wilfull and a criminal act attracting arrest without any cross examination.Only bankruptcy code without any provision for punitive action against defaulting borrowers will increase the culture of default only.
Politicians are habituated to extend help to defaulting individuals and companies to serve their selfish interest.
Know About Bankruptcy Code Proposed by Government of India
Detailed authenticated and correct position of the said code will emerge and will be available only when it takes the form of an Act and it is put in public domain by RBI for the benefit of persons concerned.
So far as my views are concerned, I cannot believe that mere passing of Bankruptcy code will solve the problem of rising bad debts.
The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. But it failed to serve the purpose for which it was enacted.
When DRT was established in the year 1993, it was planned to recover the money from loan defaulters in six months. But unfortunately this could not happen as it was desired and planned to happen.
Not to speak of six months, DRT failed to recover the money even in six years .Cases filed in DRT court are allowed to be postponed on flimsy ground in nexus with defaulting borrowers for years and decades.This is why lacs of cases all over the country are pending in variius DRTs for disposal and for real recovery from wilfull defaulters.
This led to the enactment of one more drastic act titled as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, also called as SRFAESI Act or SRFAESIA for short. Unfortunately this drastic act also failed to yield desired quickness in recovery of dues from defaulting borrowers.
It is hard nut to crack for bankers to take possession of mortgaged properties of defaulting borrowers . Years and decades pass , but result does not precipitate in way it was envisaged and desiged to happen.
The hardness narrated in lines of the said act gets diluted as soon as the act comes into action in practical field.
Attrative polices are framed by the government from time to time , but they all are punctured and proved futile by corrupt officials sitting in administrtive offices and in judiciary.
Obviously the euphoria generated by DRT act or SERFACIE Act has ended in course of time. We have wasted as much as two decades and more but could not create a fear complex in wilfull defaulters.
Lakhs of Cases filed by different banks to recover money from high value defaulters have been lanuishing in different courts for years and decades and they do not yet appear to help banks in easy recovery of dues from defaulters.
In such position I am not much optimistic about the success of proposed bankruptcy code . Banks or debtors can declare a defaulter a insolvent, but there is no guarantee that entire dues will be recovered. People and companies will rather opt for insolvency as they hitherto allow their loan accounts to be declared Non Performing Asset (NPA ) by their lending bank. Borrower wilfully avoid repayment because they know either their loan will be waived or they will get considerable amount of discount at the time of final payment.
Under the porposed Bankruptcy law, bankers may be empowered to take possession of assets of defaulting company. But the bitter truth is "How Bank officers who are not skilled even in banking work can manage different type of businesses. And where is the guarantee that these bankers will not dispose of the acquired asset in extremely low price to earn side income for himself.
If we talk of small loans, farmers and traders do not repay their instalment because they know sooner or the later , political leaders of ruling party or opposing party will advocate waiver of loan to enhance their vote bank. Similarly if we talk of high value loans , it is open secret that such defaulters manage heavy discount with the help and influence of powerful politicians to whom they help at the time of election.
Lastly it is middle class borrowers who have to face the hard steps taken by bankers and by the government.
It is taxpayer who have to pay higher taxes when government infuse capital in sinking public banks.
It is depositors who have bear the brunt of mismanagemnt and corruption in banks and in politics that they are paid less interest on deposits they keep in these banks.
It is poor investors who have to suffer loss on thir investment when stock value of these banks go down and when these banks pay no dividend or pay negligible low dividend.
Borrowers who repay their loans is time feel cheated when defaulters are awarded by bankers either through waiver of loan or by heavy discount in final repayment. Borrowers who avail loan and do not repay are winner in the era when all policies are made borrower frinedly and which are designed to give discomfort to depositors, investors, taxpayers and to loanees who repay their dues honestly in time.
I say so because RBI, GOI and every businessmen want Banks to sanction loans at lowest interest rate and this is possible only when depositors are paid least interest.
Who bothers for poor depositors?
In my opinion Interst rate payable to depositors for five years and more should be 10%. This in turn will help bank in lending for long term projects. Best option will be uniform rate structure for all banks to avid unnecessay competition among banks of same government.
Similarly government should declare that defaults of all borrowers who have availed a loan of Rs.10 lacs and more will be considered as wilfull and a criminal act attracting arrest without any cross examination.Only bankruptcy code without any provision for punitive action against defaulting borrowers will increase the culture of default only.
Politicians are habituated to extend help to defaulting individuals and companies to serve their selfish interest.
Know About Bankruptcy Code Proposed by Government of India
In Ancient Greece, bankruptcy did not exist. If a man owed and he could not pay, he and his wife, children or servants were forced into "debt slavery", until the creditor recouped losses through their physical labour. Many city-states in ancient Greece limited debt slavery to a period of five years; debt slaves had protection of life and limb, which regular slaves did not enjoy.
However, servants of the debtor could be retained beyond that deadline by the creditor and were often forced to serve their new lord for a lifetime, usually under significantly harsher conditions.
The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of the business.
For private households, it is argued to be insufficient to merely dismiss debts after a certain period. It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur.
Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
Bankruptcy is not the only legal status that an insolvent person or other entity may have, and the term bankruptcy is therefore not a synonym for insolvency.
In some countries, including the United Kingdom, bankruptcy is limited to individuals, and other forms of insolvency proceedings (such as liquidation and administration) are applied to companies.
In the United States, bankruptcy is applied more broadly to formal insolvency proceedings.
Bankruptcy fraud is a white-collar crime. While difficult to generalize across jurisdictions, common criminal acts under bankruptcy statutes typically involve concealment of assets, concealment or destruction of documents, conflicts of interest, fraudulent claims, false statements or declarations, and fee fixing or redistribution arrangements.
Falsifications on bankruptcy forms often constitute perjury. Multiple filings are not in and of themselves criminal, but they may violate provisions of bankruptcy law. In the U.S., bankruptcy fraud statutes are particularly focused on the mental state of particular actions. Bankruptcy fraud is a federal crime in the United States.
Bankruptcy fraud should be distinguished from strategic bankruptcy, which is not a criminal act, but may work against the filer.
All assets must be disclosed in bankruptcy schedules whether or not the debtor believes the asset has a net value. This is because once a bankruptcy petition is filed; it is for the creditors, not the debtor, to decide whether a particular asset has value. The future ramifications of omitting assets from schedules can be quite serious for the offending debtor.
In the United States, a closed bankruptcy may be reopened by motion of a creditor or the U.S. trustee if a debtor attempts to later assert ownership of such an "unscheduled asset" after being discharged of all debt in the bankruptcy. The trustee may then seize the asset and liquidate it for the benefit of the (formerly discharged) creditors. Whether or not a concealment of such an asset should also be considered for prosecution as fraud and/or perjury would then be at the discretion of the judge and/or U.S. Trustee.
Lok Sabha on Thursday passed the Insolvency and Bankruptcy Bill 2015 paving the way for creating a formal insolvency resolution process for businesses, either by liquidation of assets or charting out a sustainable survival mechanism.
What does the Bill do?
The Bill attempts to simplify the process of bankruptcy proceedings by streamlining and consolidating different laws that exist pertaining to bankruptcy.
It provides an easy way out for insolvent and ailing companies.
The Code enables prompt and timely action during early-stage debt defaults, thereby maximising the recovery amount.
A new regulator —Insolvency and Bankruptcy Board of India — is likely to be set up for dealing with bankruptcy proceedings.
It will also create a formal insolvency resolution process (IRP).
Aren't there enough laws already?
Currently, there are several laws such as Companies Act and Sick Industrial Companies Act that govern bankruptcy proceedings.
But such laws are complicated and at times ask for lengthy proceedings.
Will there be separate tribunals?
Yes. The National Company Law Tribunal (NCLT) will adjudicate insolvency resolutions for companies.
The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
What do creditors stand to gain?
The Bill gives a leg-up to creditors as it cuts the red tape and holds promoters directly accountable for financial lapses.
Who can initiate the IRP?
Any company or debtor defaulting on dues can inititate IRP, besides lenders or creditors.
What is the timeframe for completion?
The process is to be completed within 180 days from the initiation of IRP.
If creditors agree that the case is complex, a one-time extension of up to 90 days can be granted.
What happens if the case is not solved?
If the insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.
Within theses 180 days, 75 percent of the creditors must agree on a revival plan. Else, the firm’s assets will be liquidated.
Insolvency professionals, or adjudicators, armed with greater powers can begin criminal proceedings if they find promoters of debtors liquidating assets.
The Silver Lining
The Code can help alleviate bad loan issues faced by public sector banks.
It also allows enterprenuers a fresh lease of life as the law underlines that ventures can fail.
Employee interests are safeguarded as money due to them from provident fund, pension fund and gratuity funds won’t be included in the liquidation assets of the bankrupt.
The Downside
Critics say the Bill promotes an easy way out for companies to give pink slips to employees.
What Next?
The Code now goes to the Rajya Sabha for approval.
Implementation of the code before May 31 2016, will improve India’s rankings on World Bank’s ease of doing business index.
My View: Indian Government and RBI together with top officials of public sector banks are making effort for cleaning of bad debt and for this purpose they are planning to formulate a uniform compromise policy with bank loan defaulters so that people's angle of suspicision towards bank officials gets diluted and bank officials may clean their balance sheet by resorting to negotiatd settlement with defaulters.
But in my view, officers whose intention and whose culture is bad will definitely invent their stretegy to earn money through illegal ways in such compromise too.
Unless and until , Government or regulating agencies learn to punish guilty officials and send a clear message down the line, they cannot inculcate good habits among bank officials and that in borrowers and politicians.
This is copy of news published in newspaper The Hindu Today
India is considering setting up an independent panel to help state-owned banks negotiate settlements with big businesses on bad loans, in order to shield bankers from a populist backlash they say is hobbling efforts to clean up their balance sheets.
India's $121 billion troubled debt pile, over $100 billion of which is on the books of state-owned banks, has come under close scrutiny from prosecutors, media and politicians. Some have blamed banks for going too easy on corporate tycoons, and do not want taxpayers propping up the struggling banking sector.
Proposal
The proposal, being examined by the government and in its early stages, would give the panel power to define the “haircut" a bank should face on a loan gone sour, protecting bankers from critics who want failed Indian firms to pay back in full, two finance ministry and two central bank officials said. Bad debt has hampered banks’ ability to lend, threatening to throttle a nascent economic recovery. Prime Minister Narendra Modi has made repairing bank balance sheets his administration's “top-most priority,” a senior government official said.\
The proposal, being examined by the government and in its early stages, would give the panel power to define the “haircut" a bank should face on a loan gone sour, protecting bankers from critics who want failed Indian firms to pay back in full, two finance ministry and two central bank officials said. Bad debt has hampered banks’ ability to lend, threatening to throttle a nascent economic recovery. Prime Minister Narendra Modi has made repairing bank balance sheets his administration's “top-most priority,” a senior government official said.\
A Finance Ministry spokesman declined to comment. The Reserve Bank of India (RBI) did not immediately respond to requests for comment on the proposal.
Fear of bad headlines was one reason why state-run banks declined to consider embattled tycoon Vijay Mallya's offer to pay up to $900 million in tranches to settle about $1.4 billion his defunct Kingfisher Airlines owed, two banking sources said.
Mallya now also faces a money laundering investigation. Mallya told the Financial Times late last month that he wanted a “reasonable” settlement that he could afford and banks could justify. Bad loans have piled up as subdued consumer demand hits corporate earnings, making it harder for big businesses to repay loans.
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