http://economictimes.indiatimes.com/slideshows/economy/pm-modis-one-yearreport-card-how-government-scored-in-10-key-areas/investment-remains-amatter-of-concern/slideshow/47427353.

cms
http://economictimes.indiatimes.com/slideshows/economy/factbox-key-pendingreforms-facing-indias-next-government/power/slideshow/34255860.cms
http://www.livemint.com/Industry/pPpXe0GXFAigd8Ny2eB98I/Do-we-needconsolidation-in-Indian-banking-sector.html

The asset reconstruction companies or ARCs in India, which are in the business of
buying bad loans from banks and making money by recovering them
Under norms, they can be 100% owned by foreign investors who can lend
money muscle and expertise, but none of them is entirely foreign-owned and, in
fact, very few have foreign stakes. They blame the 49% cap on single holding for
their failure to attract foreign investments
Capital is the biggest problem for the ARCs. If indeed a fragmented ownership is
coming in the way to attract foreign capital, the ARCs should be allowed to tap
the capital market by selling shares to the public. Its not clear whether the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, which governs ARCs, allows them to do so. It may not also
be easy for them to raise money from public as legal issues remain the biggest
hurdle for the recovery of bad assets, leading to inordinate delays

Till the proposed bankruptcy law is put in place, ARCs will struggle to recover
and redeem SRs. There are other issues as well. For instance, the stamp duty is
not uniform in Indian states. This influences the pricing of such assets.
Pricing always remains a bone of contention for the sale of bad assetswhile
banks want a higher pricing, ARCs want to buy at a hefty discount. Nobody has
clarity on the fair value of a bad asset put up for sale. One way of addressing this
could be a recovery rating of such assets before they are sold, instead of rating
them six months later. Recovery ratings reflect a fundamental analysis of the
underlying relationship between financial claims on an entity and potential
sources to meet those claims. The pricing can be based on such ratings and even
if the banks are required to offer high discounts, they will not be afraid of being
hounded by agencies like the Central Bureau of Investigation and Central
Vigilance Commission.
The auction process must also be transparent. Currently, ARC officials are not
allowed to visit the factories of a company offered as a security of the loans that
are being sold. Unless they get a sense of the value of the securities that are
backing such loans, how would they make a fair offer to buy them? We need a
fair practice code both for the banks as well as ARCs to make the business of
asset reconstruction a success.
When the asset reconstruction business started more than a decade ago in India,
banks were selling bad loans and receiving SRs in return (nobody really bothered
about their redemptions). This way, banks suppressed their non-performing
assets as such assets got shifted from their loan books to the investment books
(in the form of SRs). The cosy relationship that many banks had with the ARCs is
now being enjoyed by the defaulters. There are instances where defaulters are
buying back from the ARCs the underlying securities of the loans cheap. In fact,
back-to-back arrangements are put in place for such deals before an ARC buys
the bad loans from banks
Indradhanush, the seven-point reform agenda announced by the government in
August 2015 to revive public sector banks, promised to strengthen the ARCs, but
nothing has been done. The finance ministry had set up a key advisory group in
2011 to look into the issues of ARCs. Does anyone know when this group met last
time?

An asset reconstruction company is in the business on acquiring Non performing

assets( Loans which are not being repaid by borrowers even after repeated
notices/efforts of the Bank/financial institution).
Now you may ask why would someone buy these loans...simple reason because they are
spoiling the balance sheets of the banks so they will be eager to recover some amounts
out of them rather than losing all of it.
So the Banks & an Asset reconstruction company get into an agreement whereby the
ARC agrees to take over the NPAs from the Banks Balance sheet at a certain amount

(Lower than the book value of course) & then try to recover these amounts from the
Borrowers or if the borrowers are corporates then they can even offer them attractive
settlement terms for their loans. For eg: If there is a 40 cr NPA which an ARC purchased
for 30 crores it can go back to the borrower & offer them to settle the loan at 35 crores
this way both parties benefit from the arrangement.
So how do ARCs arrange for such huge amounts of money...the answer is QIBs who
invest in Security receipts issued by ARCs to raise these amounts.
XXXXXXXXXXXXXXXXXX
The bad bank proposal is a variant of the fourth option. The idea is to transfer NPAs of banks,
perhaps only PSBs, to the bad bank. The bad bank will manage these NPAs in suitable ways
some may be liquidated, others may be restructured, etc. Getting NPAs off the books will help the
PSB management focus on new business instead of having to expend their energies on trying to
effect recoveries. A bad bank will be better focussed on the task of recovery. If its a private entity,
it can also bring in superior expertise. It would appear that the bad bank concept has many things
going for it.
Alas, the devil, as always, is in the detail. First, who will have the majority stake in the bad bank?
Will it be the government or private investors? Let us suppose its the former. Given the size of
NPAs at PSBs, the capital required by a bad bank for acquiring NPAs will be substantial. If the
government is to be the majority owner, how does it find the required funds? Second, a
government-owned bad bank will be subject to the same constraints in managing bad loans as
PSBs. Third, managing the sheer size and diversity of bad loans acquired from multiple PSBs will
be a tall order. Last, a government entity may not be able to pay specialists what it takes.
Whichever way you look at it, a government-owned bad bank appears to be transferring the
problem from one part of the government to another.

(GOVT CAN PROVIDE CAPITAL TO BAD BANKS FROM THE FUNDS THEY R
PROVIDING TO PSBS TO ENHANCE THEIR CAPITAL. DUE TO TRANSFER OF ALL
BAD LOAS CAPITAL NEED OF PSBS WILL DECREASE SO THIS SURPLUS CAN BE
TRANFERRED TO BAND BANK)

Now consider the second possibility, namely, that private investors have a majority stake in the
bad bank. These could be long-term investors such as sovereign wealth funds and pension funds.
In this case, the price at which PSB loans are sold to the bad bank could become a major issue. If
the price is too high, the bad bank will not viable. If its too low, PSBs will be accused of selling
their loans too cheaply to private investors we will have the makings of an NPA scam.
There are other issues with transferring NPAs to a bad bank. As former RBI Governor Raghuram
Rajan pointed out, a big chunk of NPAs at PSBs pertains to projects that are viable. These
projects have not gone through to completion for reasons that are mostly extraneous to the
project, such as problems in land acquisition or environmental clearance. With restructuring and
additional funding, they can be completed and would create significant capacities.
Selling these loans to a bad bank, on the other hand, would be a time-consuming process. It
would impede fresh flow of funds into these projects. Their debt would rise as the interest piles
up. Mr. Rajan had pointed out that bad banks were typically intended for situations where

projects were not viable. They were not meant for a situation such as ours where projects are
viable.

XXXXXXXXXXXXXXXXXXXXXXX

What exactly is the idea?

The objective is to have banks clean up their balance sheets. If they are
permanently selling their bad assets, they write off the loss in year one, and
then restart on a clean slate. The capital adequacy ratio improves as they are
shrinking their balance sheets, and the level of NPAs and the provisions that
have to be made come down sharply. This appears to be a panacea for public
sector banks (PSBs) which are currently the focus of attention. Once the
balance sheets are cleaned, then they can raise capital as they become stockmarket worthy.
The issue is as to who will start this bad bank? Such a bank needs share
capital and will have to raise funds to buy these assets and pay off the banks.
One idea is to have the government start such a bad bank.
This is different from capitalising a PSB as it involves actually purchasing the
assets and then trying to realise the best value. In case of capitalising the
bank, one is only covering the liabilities side and not addressing the issue.
When assets are bought, it directly lowers the delinquent assets and is hence
superior.
As the problem has arisen due to a large-scale clean-up operation of the
Reserve Bank of India (RBI)and the banks affected the most are
government-owned institutionsit makes sense for the government to buy the
assets, which, in a way, is analogous to a loan waiver scheme in a modified
form, as the recoveries will accrue to the government. Having the private
sector create a bad bank is similar to an asset reconstruction company (ARC),
which currently does not have the financial strength to handle these large
amounts.

The creation of bad banks has been pursued after the Asian crisis in 1997 in
the East Asian economies. The model has involved an outright purchase,
which is called the Swiss approach, and a repurchase option, which is the
German way of doing things. The idea is nonetheless compelling because it
addresses the issue in a full-hearted manner. There, however, have to be
conditions attached to such a bank being crafted which buys bad assets.
The first is that it should be based on a criterion as any such exercise creates
a moral hazard which should be eschewed. Second, there have to be strict
performance criteria for the banks selling such assets. This can be through a
multi-stage approach where these assets are bought piecemeal by the bad
bank based on how future incremental assets perform. Third, the criteria for
buying assets should be transparent and a pecking order must be drawn up
where probably the restructured assets get priority. Last, a competitive
approach should prevail among the banks so that they work hard to qualify for
the sale of bad assets to the bad bank. This, in fact, will ensure better
governance standards too.
We certainly need to attack this problem and, given the scale, the government
has to play a role here. The challenge is to structure it in such a way that
moral hazard is avoided, which is also the issue with all loan waiver schemes.
Fiscal support is a corollary that has to be provided for in the budget and has
to be done. Similar to how the UDAY scheme involves state governments
working out ways to reduce losses of state electricity boards, the Union
government has to take on this responsibility to address the bad assets
created by banks owned by them. This would be the ultimate justification for
the same.
This clean-up operation will make banks stronger and in a position to lend
money when the economic cycle seems to be on the verge of looking up. If it
is not done, the regulatory factors could constrain their lending ability.
Therefore, this option should be explored and implemented.

The author is chief economist, CARE Ratings. Views are personal

Similar to how the UDAY scheme involves state governments working out
ways to reduce losses of SEBs, the Centre has to take on this responsibility to
address the bad assets created by banks
-Madan Sabnavis
A national bad bank to cleanse the balance sheets of PSBs is actively being
considered by the government, according to reports. This body would take on
PSBs bad loans in exchange for government debt, freeing them to lend more
and promote growth. In principle, separating bad loans from good ones allows
a bank to derisk, deleverage, regain investors confidence and improve its
market value; a bad bank specialises instead in maximising the value of the
troubled assets through recovery, sales and so on. But, in practice, achieving
success with a bad bank isnt easy due to numerous tradeoffs related to costs,
capital, profits and viability of the business. In India, choices could be both
complex and controversial, given the role of the government as the owner of
PSBs and its support and involvement in the bad bank.
The organisational structure of the proposed body is not yet known, but the
structuring of incentives, which is linked to who has a major say, is crucial.
Different varieties exist in countries like Germany, Ireland, the US, Sweden,
etc. Reportedly, RBIs concern is that a majority stake of the very banks whose
NPAs are to be bought could create a moral hazard. This is well-justified
because key decisions relate to pricing and the eventual management, i.e.
recovery, sales, restoring market value, etc, of these bad assets. Such a body
necessitates specialised professional skills that can mean ruthless business
decisions too.
A couple of problematic issues can be imagined for India. One, the valuation
or price at which bad loans are bought from PSBs; two, the implications for

public debt. Both are intertwined in a delicate political economy context. If bad
assets are bought from lenders at too high a pricesay, at a book value or
without any discountPSBs benefit, but the public exchequer or taxpayers
bear the losses (it is evident here what a majority say by the banks on the
other side, bad bank, implies). In the event NPAs are offloaded with a sharp
haircut, PSBs would have to immediately book large losses, and their capital
takes a hit; the government would incur a huge expense in purchasing the
stressed assets (if providing capital support to the bad bank) and
recapitalising PSBs on the other side, with the hope to recoup these costs
from future sales, recovery or improved market values of what at present are
troubled assets. Were a private banks assets to be acquired so, deep
discounts would be a positive because buy-cheap-sell-dear is likely to fetch
higher profits in the future.
There could be many agreeable price points in between these extremes, but
the key point is that price discovery is inherent in the idea; finding just that
price that balances economic sense with public acceptability in view of the
state-owned nature of lenders could be complex, troublesome. Discount
pricing can be a problem, especially if NPAs are offloaded at knock-down
prices, but this is not matched by rigorous, professional overhaul. For what
prevents recurrence? Controversies could also arise depending upon who the
NPAs are eventually sold off to, at what price, who pockets the profits and so
forth. And considering that many bad loans are linked with infrastructure, it
would be quite tricky to mark down value of the assets to market prices. As
observed from some mortgaged property auctions, banks are clearly reluctant
to mark down prices.
Some of these issues are evident from observations like that of Uday Kotak
of Kotak Mahindra Bank, which deals in stressed assets; he was reported to
say that lack of convergence between lenders valuations of stressed assets
and what his bank judged was a fair price was obstructing deal-making. It

appears most of the assets backing banks loans are either viable or can be
made so. In which case it isnt clear as to how a separate, public-private body
can do a better job. Far more could be achieved, and with greater efficiency,
were the government to reduce its shareholdings below 51% instead.
Transferring unwanted assets of all PSBs uniformly may end up keeping alive
even those banks that are unviable; alternately, choosing could be difficult and
quite likely meet with strong resistance.
Last, considering the immediate recapitalisation demands that would arise,
public debt levels would be impacted. It is reported that the government is
likely to reallocate some parts of the public sector balance sheet so as to not
affect increases in public debt. But this must be transparent, free of moral
hazard and not set any undesirable precedent for future governments to
emulate. If at all the government creates a fund for stressed assets, it needs
to draw a clear line for the extent of risk it will assume.
The author is a New Delhi-based economist
It isnt clear as to how a public-private body can do a better job. Far more
could be achieved, and with greater efficiency, were the government to reduce
its shareholdings below 51% instead
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

The idea of the government taking the initiative to set up a bad bank merits attention
and careful analysis. To start with, what is the objective in setting up a bad bank?
Second, what are the constraints in the current setup, i.e. one without a bad bank?
Finally, what features should the bad bank possess so that such constraints can be
overcome?
Though obvious, policymakers must clearly state the objective in setting up a bad bank.
In my opinion, instead of muddling the bad bank with multiple objectives, the
government must state clearly that the bad bank is being set up to bring back the
vitality of the Indian banking sector at the least cost to the taxpayer.
Why is a banking sector without a bad bank incapable of fulfilling this objective? First,
managing stressed assets requires specialised expertise which is sporadically

dispersed across several different banks. Second, senior managers in the public sector
banks are forced to devote the lions share of their attention to managing the stressed
assets in their portfolio. As a result, public sector bank managements are unable to pay
adequate attention to their normal business, which is to screen borrowers, originate
new loans and monitor these loans. No wonder the Indian banking sector is in deep
slumber when it comes to new lending activity.
Third, public sector banks face several legal and institutional restrictions in managing
stressed assets. Take for instance the possibility of action by the Central Vigilance
Commission (CVC) or Central Bureau of Investigation (CBI). With any stressed asset, a
bank faces the problem that the current value of the asset is significantly lower than
the payment that the promoter of the firm owes the bank. If the bank does not write
down the value of its claim, the promoter has no incentive to exert effort in improving
the value of the stressed asset. However, in the current setup, bank management
cannot take the judgment calls to write down such claims.
Enhancing the value of the stressed assets involves significant uncertainty. Inevitably,
some judgment calls will go wrong. If bank management anticipates that CVC/CBI will
not distinguish between bad judgment and malafide intent, then a fear psychosis
paralyses it.
Finally, given the stressed assets in their portfolios and the need to provide capital
for them, banks are short of capital required for initiating new loans.
To remove all these constraints, the bad bank should be set up as a private equity
fund where the government holds less than 50% equity stake. First, the bad bank can
draw experts in managing and restructuring bad assets from several banks to create
a crack team. Second, this structure will free the bad bank from external vigilance
emanating from CVC/CBI. Instead, the bad bank should have its own internal
vigilance department.
Internal vigilance enforcement is more likely to use information gathered within the
organisation to assess employee integrity and reputation. As a result, when
compared to investigations by external agencies, internal vigilance is less likely to
either err by not identifying a dishonest employee or by unfairly targeting an honest
employee. Resolution of cases both enforcement actions against the dishonest and
dropping actions against the honest is also quicker with internal vigilance.
Third, if government holds less than 50% equity stake, the bad bank will not be
constrained on employee compensation. This feature is extremely important if the
bad bank initiative is to succeed. Expertise in managing and restructuring bad assets
is uncommon and therefore needs to be rewarded adequately. It is therefore critical
to structure the bad bank as a private equity fund where employees can be
compensated adequately for their specialised expertise. Use of equity-based
compensation is a common practice in private equity. To provide strong incentives to
employees, this needs to be implemented in the bad bank as well.

Fourth, the proposed structure will provide room for private investors to participate
in the equity of the bad bank. Apart from reducing the amount of taxpayer money
that the government has to cough up as capital for the bad bank, this structure can
reduce the risks incurred by the government as well.

More importantly, the governance benefits from such private investor participation
would be enormous. Private investors will be able to provide independent pricing and
market information for purchases of distressed assets from the banks. Neither
bureaucrats nor politicians have the expertise to price the distressed assets.
Moreover, by providing private investors board seats that are commensurate with
their equity stake, the governance of the bad bank can be significantly enhanced.
Experts appointed on the board of the bad bank by private investors would be able to
monitor the management carefully. The government and RBI should, however, ensure
that no promoter for business house that is involved in any of the stressed assets gets
to be an investor in the bad bank. This can easily be achieved by RBI implementing the
fit and proper criteria.
A well-structured bad bank would enable the existing banks to renew their focus on
their long-term core operations without the ongoing distraction of troubled assets.
Free of the troubled assets, the existing banks can expect restored investor and market
confidence. This will in turn enable them to raise capital more easily and at more
affordable rates. Bureaucrats and policymakers must grasp the benefits inherent in
structuring the bad bank as a private equity fund with less than 50% government
equity.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXX

When it comes to resolving insolvency, India ranks an abysmal 136

out of 189 countries according to the Doing Business 2016 report. On
average, secured creditors in India recover only 25.7 cents for every
dollar of credit from an insolvent firm at the end of insolvency
proceedings and the whole process takes 4.3 years to conclude. This
contrasts poorly with the OECD countries where creditors recover 72.3
cents within just 1.7 years on average. With the new code in place, it is
expected that India will witness a drastic improvement on both parameters.

Indias Parliament has passed a bankruptcy law that promises to

make it easier to wind up a failing business and recover debts in
Asias third-largest economy

India currently has multiple laws to deal with insolvency, which leads to
significant delays in winding up a company. The Bankruptcy Code will
consolidate the existing framework and create a new institutional structure.
The new law will also likely create a new class of insolvency professionals
who will help sick companies and banks with a smooth takeover of the
insolvent company and manage the liquidation process.
The bill also proposes the setting up of a new entity, the Insolvency and
Bankruptcy Board of India, which will regulate insolvency professionals
and information companies those which will store all the credit
information of corporates.
The Bankruptcy Code proposes two authorities to deal with insolvency. The
National Company Law Tribunal will adjudicate cases for companies and
limited liability partnerships, while the Debt Recovery Tribunal will do the
same for individual and partnership firms.

During the insolvency resolution period, the management of the debtor is

placed in the hands of an resolution professional.
The code proposes to protect the workers in case of insolvency, paying their
salaries for up to 24 months will get first priority during the liquidation of
assets.
In the event of an insolvent debtor having assets abroad, Indias federal
government can enter into an agreement with an overseas country to
ensure enforcement of the law.

Currently, it takes an average of 4.3 years to resolve insolvency in India and

the recovery rate of debt is very low compared with other countries,
according to a report from Nomura. India also ranks 136 in the World
Banks resolving insolvency ranking. This is below China, which ranks 55
and where it takes 1.7 years to resolve insolvency.
The new law introduces a time limit on the bankruptcy process. In the case
of a default, the time-limit is 180 days, within which the resolution has to

be completed. This can be extended by another 90 days by the adjudicator,

depending on the process.
Analysts say the new time frame will help India improve its World Bank
insolvency ranking.

Xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Lok Sabha last week passed The Insolvency and Bankruptcy Code, 2015, a law
aimed at speedy winding up of insolvent companies, lowering NPAs, and
redeploying capital productively
Being bankrupt is a state of inability to repay debts to creditors. Under the
proposed law, a bankrupt entity is a debtor who has been adjudged as bankrupt
by an adjudicating authority that has passed a bankruptcy order. The
adjudicating authority would be the National Company Law Tribunal (NCLT) for
companies and limited liability partnerships, and the Debt Recovery Tribunal
(DRT) for individuals and partnership firms.

There are, in fact, several laws that deal with insolvency for companies, such as the
Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial
Institutions Act, and Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI). Then there are a couple
of laws dating from the time of the British Raj for dealing with individual debtors.
However, this multiplicity of laws has been a problem in the way of banks failing
to recover their loans. For example, DRTs are dealing with a backlog of Rs 4
trillion = 4 lakh crore worth of cases. For the last three financial years, less than
20% of cases taken up by various channels such as DRTs, Lok Adalats and
SARFAESI courts have been successfully resolved.

What exactly will the new law do that is different?

For one, the new Bill seeks to consolidate all existing laws. Secondly, it specifies a
timeframe 180 days after the process is initiated, plus a 90-day extension for
resolving insolvency.
It proposes to do this by creating a host of new institutions. These would include:
* Insolvency Professionals, who will conduct the insolvency resolution process,
take over the management of a company, assist creditors in the collection of
relevant information, and manage the liquidation process,
* Insolvency Professional Agencies, who will examine and certify these
professionals,
* Information Utilities, which will collect, collate and disseminate financial
information related to debtors, and

* Insolvency and Bankruptcy Board of India, a regulator that will oversee these
new entities.

Under the new law, what are the various stages through which
the resolution process must pass from the time a company files
for bankruptcy?

There are five stages in all.

One, when a loan default occurs, and either the borrower or the lender approaches

the NCLT or DRT for initiating the resolution process.

Two, the creditors appoint an interim Insolvency Professional (IP) to take control

of the debtors assets and companys operations, collect financial information of

the debtor from information utilities, and constitute the creditors committee.
Three, the committee has to then take decisions regarding insolvency resolution

by a 75% majority.
Four, once a resolution is passed, the committee has to decide on the restructuring

process that could either be a revised repayment plan for the company, or
liquidation of the assets of the company. If no decision is made during the
resolution process, the debtors assets will be liquidated to repay the debt.
Five, the resolution plan will be sent to the tribunal for final approval, and

implemented once approved.

Neat. Could the messy situation with regard to promoters like
Vijay Mallya or Jaypee have been avoided if this new law had been
in place?

In an ideal world, if this law were in place, once a default occurred, it would be
resolved within 180 days (plus the 90-day extension) after a bankruptcy application

was registered. But analysts say setting up the necessary institutional infrastructure
could take some time.

Xxxxxxxxxxxxxxxxxxxxxxxxx
So how did the Bankruptcy Code escape a similar fate? There are many reasons. First,
Reserve Bank of India (RBI) governor Raghuram Rajan has begun cracking the whip; he has
asked banks to clean up their books. For a long time now, banks have making inadequate
provisions for NPAs. The quantum of bad debts is threatening to sink several banks unless
they are bailed out by the government (read: taxpayers money). According to a study by
chamber of commerce Assocham, the stressed assets (gross NPAs plus restructured assets) of
banks were around Rs. 10 trillion ($150 billion) at the end of fiscal 2015-16. The banks have
been belatedly providing for this. (Earlier, some of them used to give the incipient defaulter a
fresh loan to pay the next installment to avoid being classified as an NPA.)
How much time will it take to have an impact? The 1978 Code in the U.S. took a couple of
years to get going, but it quickly had a major effect on U.S. bankruptcy practice,
Crisils analysis shows recoveries by ARCs have been low around 36% with the average
resolution taking about five years. That is in line with a World Bank study which says it takes
more than four years to wind up a sick company in India, or twice the time taken in China,
with recovery at just around 25%, which is among the lowest in emerging economies. But, in
the long run, the code will structurally hasten the resolution of the problem of weak assets
(currently forecast at around Rs. 8 trillion by March 31, 2017).

Xxxxxxxxxxxxxxxxxxxxxxxx

Key Features[edit]
Insolvency Resolution : The Code outlines separate insolvency resolution processes for
individuals, companies and partnership firms.The process may be initiated by either the debtor or
the creditors. A maximum time limit, for completion of the insolvency resolution process,has been
set for corporates and individuals. For companies, the process will have to be completed in 180
days, which may be extended by 90 days, if a majority of the creditors agree. [5]
Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to
oversee the insolvency proceedings in the country and regulate the entities registered under it.
The Board will have 10 members, including representatives from the Ministries of Finance and
Law, and the Reserve Bank of India.[4]
Insolvency professionals: The insolvency process will be managed by licensed professionals.
These professionals will also control the assets of the debtor during the insolvency process. [4]
Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to
oversee the process of insolvency resolution, for individuals and companies: (i) the National
Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt
Recovery Tribunal for individuals and partnerships.[4]

Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

What is the need for the Act in India?

There was no single law dealing with insolvency and bankruptcy in
India.Liquidation of companies was handled by high courts and individual cases were
handled under various Acts (around 12 in number). Some of them were:

Presidency Towns Insolvency Act, 1909

The Provincial Insolvency Act, 1920
Sick Industrial Companies Act
The Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (also known as the Sarfaesi Act)
Companies Act 2013
Recovery of debts due to banks and financial Institutions Act
So, there was an overlapping Jurisdiction of different authorities like High Court,
Company Law Board, Board for industrial and financial reconstruction and Debt
recovery tribunal.
Due to multiplicity of laws, the process of insolvency resolution became very
cumbersome in India.
Nearly 60,000 bankruptcy cases are pending in Indias courts. As per the World
Bank data, it takes on average 4.3 years to wind up a company in India. The
new code seeks to reduce it to 1 year.
What are the salient features of the Act?

The code covers individuals, companies, Limited Liability Partnerships and

partnership firms.
The insolvency resolution process can be initiated by any of the stakeholders:
business/ debtors, creditors & employees
When firm defaults, a committee of its creditors will decide whether to revive
the company or liquidate it. This has to be completed within 180 days. It
can be extended by 90 days if the case is complex.
The bodies which are already existing have been chosen as adjudicating
authority(the authority who make judgement) for cases on insolvency
namely National Company Law Tribunal (NCLT) for corporate
and Debt Recovery Tribunal (DRT) for individuals
The code will also address cross-border insolvency through bilateral
agreements with other countries.
Insolvency professionals have been created to do the process of
insolvency resolution. They will specialise in helping sick companies.
Insolvency professionals will be members of Insolvency Professional
Agenciescreated under the code. These agencies will certify the
professionals.
Information utilities have also been created to collect, collate and
disseminate all information about debtors to make a database about serial
defaulters.
Insolvency & Bankruptcy Board will be set up to regulate insolvency
professionals, insolvency professional agencies and information utilities.

What are the potential benefits of the Act?

Ease of doing business is not just about easy entry but also easy exit. To ensure the
survival of fittest in a market economy, ease of exit is also very important. The ancillary
benefits of the code are:

It will improve Indias ranking in the ease of doing business index. On the
parameter of resolving insolvency, India is ranked 136th among 189
countries. The code is expected to improve this ranking.
It will promote investment and entrepreneurship in the economy.
It will address Indias bad debts problems. Banks will be able to recover their
loans from the bankrupt companies in a timely manner. The code could
reduce the chances of another Kingfisher like incident in India
Timely resolution of companies will free up banks resources and also
increase credit availability in the economy
Productive resources of the economy will be put to best use
The code will help all stakeholders involved in an insolvent company. As a statement by
the Finance Ministry puts it- Some business ventures will always fail, but they will be
handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead
of being bogged down with decisions taken in the past.
Xxxxxxxxxxxxxxxxxxx

National Bankruptcy Law:

The aggravated focus on the debt worth $1.3 billion created by the collapse of Vijay
Mallyas Kingfisher Airlines and the tormenting effect it has had on the Indian Banking
system has paved way for the new law.
The new Bankruptcy Code aims to make the winding up process faster. As of now
theprocess in India typically takes 4 years, twice as much as time taken in China or
Russia.
With the suggestion of the Committee headed by former law secretary,
T.K.Vishwanathan, a timeline of 180 days has been provided to resolve cases of
bankruptcy or insolvency which is extendable by 90 days.
Debt Recovery Tribunal is the adjudicatory authority over individuals and unlimited
liability partnership firms. National Company Law Tribunal is the adjudicatory authority
over companies and limited liability partnerships.
The new law would mean timely resolve of bankruptcy cases in the absence of
continuous delays in hearings. However, it will take some time before the process is as
effective as the provisions lay down. This is because the Code provides for various
institutions to be established in order to create a favourable and systematic
infrastructure.
Some of the institutions to be set up are:

Insolvency Professionals to conduct insolevncy resolution process, take

over the management of company, assist creditors and manage the
liquidation process.

Insolvency Professional Agencies who will examine and certify these

professionals.
Information Utilities that shall collect information related to debtors.
Insolvency and Bankruptcy Board of India, a regulator that will
oversee all the above entities.
The new bankruptcy code has been welcomed by cheery investors as the legal system till
now was heavily in favour of businesses and reviving them for the sake of the workers.
Heres hoping that the Indian legal system succeeds in implementing the new law
effectively!

A comprehensive bankruptcy code can mean that banks can no longer show their bad
loans as non performing assets. They can quickly claim the collateral and record losses
on their balance sheets. It frees the banks from having their liquidity stuck in some loan
that is not paying them back just to avoid showing losses.
An easy insolvency procedure will also improve the profitability and competitive
positioning of the remaining players by allowing excess/inefficient capacity to exit, and
reduce systemic risks for potential lenders.

The move is also expected to help India move up from its current rank of 130 in the World
Banks ease of doing business index, since all reforms undertaken by 31 May are
incorporated in the next ranking.
On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At
present, it takes more than four years to resolve a case of bankruptcy in India, according to
the World Bank. The code seeks to reduce this time to less than a year.
The bill proposes the creation of a new class of insolvency professionals that will specialize
in helping sick companies. It also provides for creation of information utilities that will
collate all information about debtors to prevent serial defaulters from misusing the system.
The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator
of these utilities and professionals.
It also proposes to use the existing infrastructure of National Company Law tribunals and
debt recovery tribunals to address corporate insolvency and individual insolvency,
respectively
Bankruptcy applications will now have to be filed within three months; earlier, it
was six months.

3. Institutional Infrastructure
(a) The Insolvency Regulator
The Code provides for the constitution of a new insolvency regulator i.e., the Insolvency and
Bankruptcy Board of India (Board). Its role includes: (i) overseeing the functioning of
insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies
and information utilities; and (ii) regulating the insolvency process.

(b) Insolvency Resolution Professionals

The Code provides for insolvency professionals as intermediaries who would play a key role
in the efficient working of the bankruptcy process. The Code contemplates insolvency
professionals as a class of regulated but private professionals having minimum standards of
professional and ethical conduct.
In the resolution process, the insolvency professional verifies the claims of the creditors,
constitutes a creditors committee, runs the debtor's business during the moratorium period
and helps the creditors in reaching a consensus for a revival plan. In liquidation, the
insolvency professional acts as a liquidator and bankruptcy trustee.

(c) Information Utilities

A notable feature of the Code is the creation of information utilities to collect, collate,
authenticate and disseminate financial information of debtors in centralised electronic
databases. The Code requires creditors to provide financial information of debtors to multiple
utilities on an ongoing basis. Such information would be available to creditors, resolution
professionals, liquidators and other stakeholders in insolvency and bankruptcy proceedings.
The purpose of this is to remove information asymmetry and dependency on the debtor's
management for critical information that is needed to swiftly resolve insolvency.

(d) Adjudicatory authorities

The adjudicating authority for corporate insolvency and liquidation is the NCLT. Appeals from
NCLT orders lie to the National Company Law Appellate Tribunal and thereafter to the
Supreme Court of India. For individuals and other persons, the adjudicating authority is the
DRT, appeals lie to the Debt Recovery Appellate Tribunal and thereafter to the Supreme
Court.
In keeping with the broad philosophy that insolvency resolution must be commercially and
professionally driven (rather than court driven), the role of adjudicating authorities is limited
to ensuring due process rather than adjudicating on the merits of the insolvency resolution.

CONCLUSION
India currently ranks 136 out of 189 countries in the World Bank's index on the ease of
resolving insolvencies. India's weak insolvency regime, its significant inefficiencies and
systematic abuse are some of the reasons for the distressed state of credit markets in India
today. The Code promises to bring about far-reaching reforms with a thrust on creditor driven
insolvency resolution. It aims at early identification of financial failure and maximising the
asset value of insolvent firms. The Code also has provisions to address cross border
insolvency through bilateral agreements and reciprocal arrangements with other countries.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

ndia: The Insolvency And Bankruptcy Code, 2016 New Road And New Challenges
INTRODUCTION
As a demonstration of India's combined political will, the much awaited and debated
Insolvency and Bankruptcy Code, 2016 (Code) was passed by the Upper House of the
Parliament on 11 May 2016 (shortly after being passed by the Lower House on 5 May 2016).
The Code has been enacted at a very critical time for the Indian economy when the
domestic banking industry is struggling to cope with a welter of bad loans and eagerly
looking for a legal framework to manage stress situations in a time bound and efficacious
manner. The Code is aimed at addressing the concerns of both domestic and foreign
creditors by creating a level playing field, and ensuring greater certainty around the
bankruptcy process. This is expected to encourage cross border financing and unsecured
lending to local borrowers, thereby reducing the pressure on credit institutions in India.
Once the Code receives the assent of the President of India and is notified, the country will
have a new legal regime that primarily enables time-bound restructuring and bankruptcy of
debtors. As such, the Code is a landmark piece of legislation establishing a robust legal
framework which brings about a much overdue reform that is aimed at creating necessary
procedures for swift resolution of insolvency and bankruptcy in India. It attempts at bringing
the Indian statutory regime at par with some of the most legally advanced jurisdictions of the
world.

OBJECTIVES
Some of the primary objectives with which the Code has been conceptualized are:
A. to consolidate the laws relating to insolvency, reorganization and liquidation/
bankruptcy of all persons, including companies, individuals, partnership firms and
Limited Liability Partnerships (LLPs) under one statutory umbrella and amending
relevant laws;
B. time bound resolution of defaults and seamless implementation of liquidation/
bankruptcy and maximizing asset value;
C. to encourage resolution as means of first resort for recovery;
D. creating infrastructure which can eradicate inefficiencies involved in bankruptcy
process by introducing National Company Law Tribunal (NCLT), Insolvency
Resolution Professional Agencies (IPAs), Insolvency Professionals (IPs) and
Information Utilities (IUs).

SALIENT FEATURES
1. Unified Legislation
The Code is a comprehensive piece of legislation addressing insolvency/ bankruptcy issues
pertaining not just to companies, LLPs (and other limited liability entities); but also to
individuals and partnerships. The Code also attempts to streamline the multifarious
legislations which are currently in operation in India in this area and bring all relevant

provisions under one common umbrella. In order to cover bankruptcy of individuals, the
Code will repeal the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act,
1920. Additionally, the Code will amend 11 statutes including, inter alia, the Companies Act,
2013 (Companies Act) Sick Industrial Companies (Special Provisions) Repeal Act, 2003
(SICA), Limited Liability Partnership Act, 2008 (LLP Act), Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI).

2. Code Mandated Infrastructure

a. Insolvency Regulator
The Code seeks to establish an Insolvency and Bankruptcy Board of India (Board)
which will function as the regulator for all matters pertaining to insolvency and
bankruptcy. The Board will exercise a range of legislative, administrative and quasijudicial functions. Some of the primary functions of the Board will include regulating
entry, registration and exit of IPAs, IPs and IUs in the field of insolvency resolution,
setting out eligibility requirements for such entities, making model bye laws for IPAs,
setting out regulatory standards for IPs, specifying the manner in which IUs can
collect and store data, and generally acting as the regulator overseeing the resolution
process in the manner specified under the Code.
b. Insolvency Adjudicating Authority
The Code specifies 2 different adjudicating authorities (the Adjudicating Authority)
which will exercise judicial control over the insolvency process as well as the
liquidation process.
In case of companies, LLPs and other limited liability entities (which may be specified
by the Central Government from time to time), the NCLT shall be acting as the
Adjudicating Authority. All appeals from NCLT shall lie with the appellate authority, i.e.
the National Company Law Appellate Tribunal (NCLAT).
In case of individuals and partnerships, the Adjudicating Authority would be the Debt
Recovery Tribunal (DRT) with the Debt Recovery Appellate Tribunal (DRAT)
continuing to be the appellate tribunal even for insolvency/ bankruptcy matters. The
Supreme Court of India shall have appellate jurisdiction over NCLAT and DRAT.
c. Insolvency Professionals
Under the Code, IPs will be the licensed quasi-administrators who will carry out on
ground supervision of resolution process, manage affairs and assets of the debtor
during the process, receive and finalise resolution plans with the committee of
creditors (COCs) and carry out the liquidation/bankruptcy of the debtor if the trigger
for liquidation/bankruptcy (as set out below) gets activated.
d. Insolvency Professional Agencies
The IPAs will admit IPs, prepare model of code of conduct, establish performance
standards for IPs, redress customer grievances against the IPs and act as a
disciplinary body for all IPs registered with them.

e. Information Utilities
One of the dilatory factors plaguing the existing winding up proceedings has been the
time taken by the courts in deciding whether a debt exists or not. In order to address
this issue in an objective way, the Code seeks to put in place a robust infrastructure
of IUs with an aim to have such information readily available for an Adjudicating
Authority to rely upon. IUs are expected to collect, classify, store and distribute all
possible relevant data pertaining to the debtors to/from companies and financial and
operational creditors of a debtor, including but not limited to the data on financial
defaults. However, the specific nature of data required to be managed by IUs will be
clarified only when the rules under the Code will be notified.

3. Corporate Insolvency
a. Meaning and Scope
Part I of the Code deals with corporate insolvency mechanism pertaining to limited
liability entities including companies, LLPs and other limited liability entities
(Corporate Insolvency) as may be notified from time to time; but does not include any
financial service provider. Corporate Insolvency includes two processes within its
ambit, (i) Insolvency Resolution and (ii) Liquidation.
b. Strict Timelines
The Code prescribes a timeline of 180 days for the insolvency resolution process,
which begins from the date the application is admitted by the NCLT. The period is
subject to a single extension of 90 days in the event the Adjudicating Authority (being
petitioned by a resolution passed by a vote of 75% of the COC) is satisfied that the
corporate insolvency resolution process cannot be completed within the period of 180
days. This time period is also applicable to individual insolvency resolution process.
During this period, the creditors and the debtor will be expected to negotiate and
finalise a resolution plan (accepted by 75% of the financial creditors) and in the event
they fail, the debtor is placed in liquidation and the moratorium lifted.
c. Triggers for Insolvency Resolution Process (IRP)
In order to achieve quick resolution of distress, the Code prescribes certain 'early
detection' triggers which can be activated on first signs of stress. The moment a
default occurs, a financial creditor, an operational creditor or a corporate applicant
may approach the Adjudicating Authority (i.e. NCLT) with an application for initiation
of IRP. The procedure for these 3 group of applicants under the Code varies and are
primarily as follows:
i.

Financial Creditors: Financial creditors are those who extend financial debt
to a corporate debtor or to whom a financial debt is assigned by a financial
creditor. In case of a financial creditor, the moment a financial default occurs,
the financial creditor can make an application to the NCLT for initiating IRP.
The financial creditor for this purpose has to submit records of default with IU
or evidence of such default in case the information is not available with IU.

ii.

Operational Creditors: These are creditors to whom corporate debtor owes

operational debt (including claims for goods and services, employment or

dues to any government under any law) or to whom such debt is assigned by
an operational creditor. The operational creditor may upon occurrence of a
default on operational credit, serve a demand notice or invoice demanding
payment on the corporate debtor. If the corporate debtor fails to make such
payment within 10 (ten) days or fails to notify operational creditor of a dispute
in relation to the requested payment, the operational creditor can make an
application to NCLT along with demand notice/invoice and other documents
as prescribed therein.
iii.

Corporate Applicant: A Corporate applicant includes the corporate debtor

(whose IRP is proposed to be initiated) or its shareholder, management
personnel or employees satisfying certain criteria. A corporate applicant may
file an application for IRP upon occurrence of any default and shall along with
application submit its books of account and other documents to initiate the
IRP.

d. Transfer of Powers and Moratorium

The Code stipulates a statutory moratorium during the limited IRP period whereby no
suits, proceedings, recovery or enforcement action may take place against the
corporate debtor. However, the IP will be appointed as the resolution professional in
terms of the procedure outlined in the Code, who will take over the management and
powers of board of directors of the corporate debtor. All officers and managers of the
corporate debtor are required to act on instructions of the IP and all accounts of the
corporate debtor will be managed by it.
e. Committee of Creditors to chart the course during IRP
The COC shall only include financial creditors as decision makers (operational
creditors with more than 10% aggregate exposure have mere observer status during
the COC meetings) and shall be responsible for deciding the important affairs of the
company. It shall also be responsible for authorising the IP (acting as resolution
professional) to take (or not to take) certain actions such as raising interim finance
upto the limit specified by the committee, creating security on assets of the secured
creditor, undertaking related party transactions, amending constitutional documents,
change of capital structure or management of the Borrower etc. More importantly, the
COC shall approve the resolution plans received by the IP. All decisions of the COC
are required to be approved by a majority of 75% of the voting shares/value of the
financial creditors.
f.

Liquidation
In the event that:
i.

the COC cannot agree on a workable resolution plan within the IRP Period
(i.e. 180 days extendable once by another 90 days);

ii.

the COC decides to liquidate the company;

iii.

the NCLT rejects the resolution plan; or

iv.

the corporate debtor contravenes provisions of the resolution plan,

the NCLT shall:

v.

pass an order requiring liquidation of corporate debtor;

vi.

make a public announcement of corporate debtor entering liquidation; and

vii.

require a liquidation order to be sent to the registering authority of the

corporate debtor (for example Registrar of Companies in case of companies
incorporated under Companies Act).

The IP acting as the resolution professional shall, upon commencement of liquidation

shall be appointed as the liquidator for the process, unless replaced by NCLT.
g. Waterfall
In case of liquidation, the assets of the corporate debtor will be sold and the
proceeds will be distributed amongst the creditors in the following order of priority:
i.

cost of the insolvency resolution process and liquidation;

ii.

secured creditors (who choose to relinquish their security enforcement rights

and workmen's dues relating to a period of 24 months preceding the
liquidation commencement date);

iii.

wages and unpaid dues of employees (other than workmen) for a period of 12
months preceding the liquidation commencement date;

iv.

financial debts owed to unsecured creditors;

v.

statutory dues to be received on account of Consolidated Fund of India or

Consolidated Fund of a State (relating to a period of whole or part of 2 years
preceding the liquidation commencement date) and debts of secured
creditors (remaining unpaid after enforcement of security);

vi.

remaining debts and dues;

vii.

dues of preference shareholders; and

viii.

dues of equity shareholders or partners (as may be applicable).

TIME BOUND INSOLVENCY RESOLUTION PROCESS

4. Individual Bankruptcy
a. Scope and Threshold
Part III of the Code sets out the legal regime dealing with the insolvency mechanism
for individuals and partnership firms and includes within its ambit, 3 processes,
namely, the 'fresh start process', 'the insolvency resolution process' and 'bankruptcy'.
The threshold for applicability of Part III of the Code to individuals and partnership
firms have been set at a minimum of INR 1,000. However, the Central Government
may by notification increase the threshold to a minimum of INR 1,00,000.
b. Fresh Start Process
An application for a fresh start process, can be made for any debt (other than
secured debt, debt which has been incurred 3 months prior to the date of application
for fresh start process and any 'excluded debt').
The Code has introduced the concept of 'excluded debt' and 'excluded assets' for
individuals and partnership firms under which certain debt and assets of the debtor
would be exempted from the purview of fresh start process and the insolvency
process under the Code. For example, any liability imposed by a court/tribunal, any
maintenance required to be paid under any law and any student loan form a part of
'excluded debt'. Similarly, any unencumbered tools, books or vehicles of the debtor
which are required for personal use, employment or vocation, unencumbered life
insurance policies, pension plans, personal ornaments having religious sentiments
and single dwelling unit of the debtor fall within the ambit of 'excluded assets'.
i.

Eligibility criteria
The Code provides for stringent criteria for any debtor to be eligible to apply
for a fresh start process under the Code. For example, any person who does
not own a dwelling unit and has a gross annual income of less than INR
60,000, with assets of a value not exceeding INR 20,000, and the aggregate
value of the qualifying debt of such individual or partnership firm not

exceeding INR 35,000 shall be eligible to apply for a fresh start process. In
addition, it is imperative that such applicant is not an undischarged bankrupt
and there are no previous fresh start process or insolvency resolution process
subsisting against him.
ii.

Moratorium
The Code stipulates an interim-moratorium period which would commence
after filing of the application for a fresh start process and shall cease to exist
after elapse of a period of 180 days from the date of application. During such
period, all legal proceedings against such debtor should be stayed and no
fresh suits, proceedings, recovery or enforcement action may be initiated
against such debtor.
However, the Code has also imposed certain restrictions on the debtor during
the moratorium period such as the debtor shall be not be permitted to act as a
director of any company (directly/indirectly) or be involved in the promotion or
management of a company during the moratorium period. Further, he shall
not dispose of his assets or travel abroad during this period, except with the
permission of the Adjudicating Authority.

c. Insolvency Resolution Process

An application to initiate an IRP under the Code can be either made by the debtor
(personally or through an insolvency resolution professional) or by a creditor (either
personally or jointly with other creditors through an insolvency resolution
professional).
However, a partner of a partnership firm is not eligible to apply for an IRP unless a
joint application is filed by majority of the partners of the partnership firm.
i.

Repayment Plan
In the IRP, the creditors and the debtor need to arrive at an agreeable
repayment plan for restructuring the debts and affairs of the debtor,
supervised by an IP. The repayment plan will require approval of a threefourth majority of financial creditors in value.
The repayment plan may authorize or require the resolution professional to:
(a) carry on the debtor's business or trade on his behalf or in his name; or (b)
realize the assets of the debtor; or (c) administer or dispose of any funds of
the debtor.

ii.

Moratorium
The Code prescribes a timeline of 180 days within which the Adjudicating
Authority shall pass an order on the repayment plan and beyond such period,
if no repayment plan has been passed by the Adjudicating Authority, the
moratorium in respect of the debts under consideration under the IRP shall
cease to have an effect.

d. Bankruptcy
The bankruptcy of an individual can be initiated by the debtor, the creditors (either

jointly or individually) or by any partner of a partnership firm (where the debtor is a

firm), only after the failure of the IRP or non-implementation of repayment plan. 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 set out in the Code.

5. Key Changes in the Insolvency/Liquidation Regime

a. Decision Making in the Hands of Creditors
Presently, winding up of companies as envisaged in the Companies Act vests the
decision on whether a company should be wound up or not on the wisdom of the
High Court/NCLT. On the other hand, under the new regime, if the restructuring fails
to be implemented as prescribed under the Code it would lead to automatic
liquidation of the debtor (except in case of individuals).
b. Unsecured Creditors Vote at Par
Under the Code, each financial creditor of the COC, whether secured or not, gets to
vote on the resolution plan of the corporate debtor on the basis of its voting share
(proportionate to the money advanced by the creditor).
c. Government Dues Take Backseat
Under the Code, government dues including taxes rank lower than the unsecured
creditors and wages as against the exiting regime, where after secured creditors and
workmen dues, government dues including all taxes take preference on liquidation
payouts.
d. Individual bankruptcy gets a shot in the arm
Currently, individual bankruptcy proceedings are adjudicated upon by district courts
under 2 different statues. The Code proposes to unify the regime governing individual
bankruptcy and in case where the individual bankruptcy is initiated alongside the
corporate insolvency, NCLT will have jurisdiction to hear the matter relating to
individual bankruptcy along with corporate insolvency. This is expected to speed up
resolution on such matters.
e. Protection to workers
The Code protects the workers in case of insolvency, paying their salaries for up to
24 months in priority over all other creditors including secured creditors. This is a
welcome change as in most cases of corporate insolvency, the workers and
employees end up bearing the brunt of long drawn insolvency/bankruptcy process.
f.

Incentive to Insolvency Professionals

In the distribution of liquidation proceeds, the cost of IP and the IRP has first priority,
thereby acting as an incentive for them to strive for speedy resolution. This is at par
with international practices.

g. Interim Financing
The Code prescribes that any interim financing and the cost of raising such financing

will be included as part of the IRP cost, thereby giving it first priority in the waterfall
and also in any creditor driven plan. Security can be created over the assets of the
company to secure such financing by the interim resolution professional without the
consent of existing creditor(s) if the value of the property secured in favour of existing
secured creditors is at least twice the outstanding debt. However, any financing after
the appointment of the resolution professional and constitution of the COC must be
approved by 75% of the financial creditors by value.
h. Cross Border Insolvency
The Code for the first time attempts to addresses the issue of cross border
insolvency given the multi-jurisdictional spread of assets of large corporates. In order
to deal with this aspect, the Code stipulates a two pronged solution, one being the
Central Government entering into agreements with other countries for enforcing the
provisions of the Code and the other giving the Adjudicating Authority the authority to
write a letter to the courts and/or authorities of other countries (as may be relevant)
for seeking information or requesting action in relation to the assets of the debtor
situated outside India.

6. Road Ahead
a. Operational Issues
i.

Infrastructure Requirements: The Code proposes the establishment of the

Board and NCLT, which if the government is able to set up even within a year
will be laudable, considering the manpower/ facilities these institutions will
require to perform their respective functions and the expertise and training
they will need to do justice to the aims of the Code.

ii.

Quality Professionals: Successful implementation of the Code will require a

huge force of trained and skilled insolvency professionals. A strong focus and
a well-defined plan will be needed to develop a large pool of insolvency
professionals and an institutional structure which will produce, certify and
regulate them. Such insolvency professionals will not only need to understand
the nuances of restructuring/ liquidation but must also be capable of carrying
out the affairs of the company during the process. This process will definitely
take a substantial amount of time, resources and expertise. Moreover, effort
will be needed to ensure that such professionals are available across the
entire country and not just for high profile cases in financial hubs.

iii.

Information Systems: The underlying assumption for the success of the Code
is to have access to quality information. For this to materialize, robust utilities
with state of the art technologies will swiftly need to be put in operation.

iv.

Adjudication Infrastructure: By December 2015, almost 59,000 cases were

pending before DRTs, which currently deal with recovery cases of only banks
and certain financial institutions. This is despite a strict statutory prescription
of 180 days for resolution of disputes in relation to recovery of debt. The
major reason for clogging of pending cases is the multiplicity of proceedings
and misuse of the remedy of appeal to DRAT and other forums. The Code
does not take away this option and the order of the DRT and NCLT may be
further challenged with DRAT and NCLAT, respectively. The appellate order
may also be further challenged at the Supreme Court. Therefore, while the

intent objective behind the Code is laudable, the sheer enormity of

disputes/appeals in the country and the lack of infrastructure to support this
legislative intent, will be a key challenge which will need to be overcome in
order to achieve the intended speed.
In addition, the already over-burdened DRTs are now being assigned with the
additional responsibility of adjudicating insolvency/ bankruptcy cases of
individuals (which can be initiated by all creditors or the individuals
themselves). A major overhaul of DRT infrastructure both in terms of physical
facilities and manpower will be needed to achieve what the Code seeks.
v.

Role of the Board: Instead of making the IPs and/or IPAs self-regulated, the
Board has been assigned with the responsibility of regulating their
performance and laying down the standards of performance. In most
insolvency/ liquidation proceedings, government will be an interested party for
recovery of the unpaid statutory dues of its several departments. This will
make the impartial operation of insolvency professionals (whose entry and
exit in the insolvency profession is regulated by the government through the
Board) difficult. As such, for achieving the objectives of the Code and
ensuring good governance of the IPs and/or IPAs, the minimum standards set
by the Board should be further strengthened in practice with self-regulation.

b. Legal Considerations
i.

Code yet to be effective: The Bill will become a statute upon receiving the
Presidential assent. However, the Act provides that the provisions of the Act
will come into effect on the date appointed by Central Government and
notified in this behalf. Looking at the infrastructural requirements of the Act, it
may be even possible that similar to the Companies Act, different provisions
of the Bill are notified on different dates, as and when the corresponding
infrastructure is implemented. In other words, before the Code is fully
operational, we are likely to see a lot of teething issues which will need to be
addressed.

ii.

Interplay of Existing Laws: As outlined earlier in this note, the Code not only
repeals 2 statutes, but also amends 11 other statutes such as Companies Act,
SICA and SARFAESI for effectuating the provisions relating to insolvency and
liquidation/ bankruptcy of all legal and natural persons under the Act.
However, the interplay of provisions of the Code, the amended statutes and
several other statutes (such as Negotiable Instruments Act, 1881) will be an
important factor in determination of insolvency proceedings. It is imperative
that the provisions of all the key legislations are synchronized in order to
ensure that there are no discrepancies or overlaps with existing laws. Failure
to ensure this may lead to more confusion in the short run, as far as
applicability of specific laws is concerned.

iii.

Cross Border Insolvency: Even though the Code suggests 2 mechanisms to

deal with the cross border element of insolvency/liquidation, a comprehensive
framework needs to be imbibed to effectively deal with this issue. Various
Indian companies have assets and creditors located across different parts of
the world and various foreign companies have subsidiaries in India. Issues
relating to Insolvency/liquidation of Indian companies with assets located in
several jurisdictions outside India and vice-versa cannot be achieved without
having a mechanism like adoption of the UNCITRAL Model Law on Cross

Border Insolvency. In case of bilateral agreements suggested by the Code

presently, it will not only be difficult but will also take a very long time to
negotiate an agreement with each country. In addition, several countries may
refuse to divulge any information about the assets located in their country
upon receipt of a letter envisaged under the Code. As such, while the Code
recognises cross border issues, it does not specifically deal with them other
than providing the legal basis for dealing with the issue down the line.
c. Practical Ramifications
i.

Paradigm shift in approach to debt: The Code will fundamentally change the
approach to debt in India across a cross-section of society, including the
approach and psychology of promoters towards lenders, the way business is
done and for individuals, who will all need to adapt to the new framework.

ii.

Balancing Interests of Different Creditors: In any restructuring process,

different creditors have varying interests which often leads to conflicts.
Depending upon the nature of their debt (operational or financial) or the
security of debt (secured or unsecured), each creditor may have a different
strategy of recovery. Likewise, foreign creditors may have a different
approach from domestic creditors. The new inter-creditor dynamics
introduced by the Code will realign the existing practices of various creditor
groups.

iii.

Delaying Tactics: One of the key objectives of the Code is to have a system
which curbs tactics used by debtors to delay enforcement/winding
up/restructuring by 'gaming' the system. This is often done by restricting
dissemination of correct information to the lenders and filing of frivolous
appeals against the orders passed in favor of the lenders. While the Code
addresses the underlying causes for such delaying tactics and seeks to put
robust information systems in place, it is yet to be seen if this is sufficient in
practice to prevent debtors from arm-twisting the lenders who may not see
sufficient recovery from the liquidation process.

iv.

Time bound process and restrained role of the Courts: The Code seeks to
implement a time bound restructuring of the debtor while encouraging a
limited the involvement of Adjudicating Authorities and other judicial remedies.
No doubt the ability of Adjudicating Authorities and courts to exercise this
restraint will be tested by corporate debtors.

v.

Third Parties Stepping-in: Based on the processes contemplated by the

Code, a concern arises as to how well equipped would third party
professionals and creditors directing them be, to step into the shoes of the
promoters and take control of the board, especially at the beginning of the
insolvency process, and run the underlying business of a defaulting debtor.

vi.

Applicability: Unlike bankruptcy laws in the US, the Code does not envisage
'debtor in possession' (DIP) financing, which would effectively allow the
debtor to keep control of the assets during the IRP. Rather, it follows a UK
style approach where the IP controls the process during the IRP. However, in
the Indian context, the Code does not allow the IP to sell assets without
creditor consent, thereby making UK style administration sales or prepackaged sales ('pre-packs') difficult to achieve.

Comment
The Code is a landmark piece of legislation providing a major facelift to the existing regime
relating to restructuring and insolvency and bankruptcy in India. It promises to provide the
one big missing piece in the existing jigsaw of laws in the form of establishing a framework
for timebound resolution for delinquent debts. India now has a bankruptcy and insolvency
framework which is comparable with international standards and while this will go a long way
in bringing an element of certainty and predictability to commercial transactions in the
country and facilitating the ease of doing business, the litmus test for its success will be in
how it is implemented. In particular, various practical, logistical and legal hurdles will need to
be overcome and the coming months will be crucial with a lot resting on the nuts and bolts of
the rules which are now expected to be notified under the Code.

Insolvency is a financial status: your debts are greater than the fair market value of your
assets & you're unable to pay your debts as they generally become due.
Bankruptcy is a legal status: it's a legal procedure whereupon an insolvent person files
for protection from her creditors so that they cannot commence or continue legal
proceedings (like a wage garnishment) against her to recover their debts. In return for
this protection, she surrenders her assets to the bankruptcy trustee who becomes the
legal owner of her assets. The trustee then sells her assets and distributes the sale
proceeds amongst her creditors. And if she has no assets in the first place, her creditors
end up getting nothing. They then write off their debts against her as a business loss.
Bankruptcy is a status that a person is given by the Authority after Insolvency
Proceedings are over. Insolvency proceedings can be initiated for an Individual, or
Partnership Firm or a Company (body corporate). But only an individual can be called as
Bankrupt.