Two Years Since the Bankruptcy Code; How Far Has it Been Able to Bring Financial Discipline in Businesses?
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As dark humour makes constant rounds of the social media space ridiculing the serial flight of the bank defaulters from India to greener terrains, the Bankruptcy Code (IBC), 2016 is about to complete its second year on 5 May 2018. IBC is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
India is presently at the 136th position in World Bank's ranking of resolving insolvency. It takes about 4.5 years to resolve insolvency and an added 5-10 years for liquidation in our country. The figures are very high when compared to those of the western countries. This has resulted in a long-drawn winding-up the process for corporate entities and pendency of such cases has been piling at an alarming rate.
Records say that in the past, businessmen managed to carry on operations with defunct companies for more than ten years. The existing laws of governing bankruptcy proceedings in India have even allowed companies with massive debts to do business and indulge in new ventures, while not paying salaries to employees. With close to 60,000 bankruptcy cases pending in the Indian courts, the new bankruptcy law could not have been better timed.
People in the know feel that the code will dramatically strengthen creditors’ rights in India. Presently creditors’ rights are largely known to be very weak in the country. Strengthening creditors’ rights and offering the creditors a provision to summon defaulters are altering the power play between equity holders and debt holders in a business. This is expected to create tangible improvement in the prevalent business situation of the country.
According to V.G. Kannan, Chief Executive, Indian Banks’ Association, the code will help in improving both ease of doing business and investment scenario along with ease of entry and ease of exit from the business.
“Law will bring in some sort of financial discipline among the corporate sector. The purpose of IBC is prima facie a restructuring resolution rather than resolving insolvency. The law was to bring in a higher value of assets rather settling for distress sale. IBC is a work in progress and it is still to evolve and delays in proceedings will be a thing of the past,” he pointed out.
Strengthening the Internal Systems is Important
The prime objective of bankruptcy law is to reduce Non Performing Assets. However, it is being said that although laws have been enacted, until mindset of both the borrower and creditor changes, the code will not reach its fruition.
“Before going to IBC resolution, financial creditors must provide debtors a chance to restructure loans. Strengthening the internal system such as auditing and monitoring can greatly reduce the need for insolvency resolution,” opined M.R. Sarbadhikari, Advocate and Retired GM, Allahabad Bank.
Default Will be a Thing of the Past
The Bankruptcy Code, 2016 (IBC/Code) ensures settlement mechanism for insolvency in a definite time period. The legislation considerably reduces the decision-making time once a borrowing is reported to have failed to pay the bank on time. Creditors can now settle the dues in a matter of 180 days. There is an extension of 90 more days only if three-fourths of the creditors agree to it. During the pre-bankruptcy code age, there existed a number of confusing and cumbersome legislation to handle corporate bankruptcy cases.
Mamta Binani, Chairperson, ICC National Committee on Insolvency and Bankruptcy Code and Past National President of The Institute of Company Secretaries of India maintained that governance is about mitigating risk and bankruptcy is an offshoot of Corporate Governance. “We are entering a zone of financial conservatism, which will bring in a lot of financial discipline. Defaults will be a thing of the past in the coming days,” she predicted.
Whether IBC can help banks to recover all their dues is still not confirmed. However, the general belief is that it will certainly provide the banks with much needed lawful sanctions to take early legal steps. The code will also enable a bank's exit or attempt to restore a business. The code aims to develop a proper insolvency resolution process, which can be done by designing a feasible survival mechanism or by making sure a prompt liquidation. This would also reduce the huge pending cases in various courts across the country.