India’s existing laws that deal with corporate insolvency are not in sync with each other and do not address all stakeholders in one forum. This leads to delays and destruction of value for the stakeholders, said Nikhil Shah, Managing Director of Alvarez & Marsal India, a leading player in turnaround management and corporate restructuring, during a chat with BusinessLine on the new bankruptcy code.
The code, announced last month, is a comprehensive draft legislation, with the objective of reducing the delay in resolution of insolvency or bankruptcy cases and improving recoveries of the amount lent.
In India, it takes anywhere between five to 15 years for lenders to recover money in the event of default — and even then they manage to get back only a fraction, usually about a fourth of the amount lent.
Explaining some of the drawbacks under the current system, Nikhil said that parallel proceedings before different forums (from courts to debt recovery tribunals) often lead to conflicting views and cause further delay in resolving debt-related issues for lenders.
Assigning priority The draft Bill on bankruptcy code has fixed a timeline of 180 days, extendable by another 90 days, to resolve cases of insolvency or bankruptcy. It envisages the setting up of a specialised Bench at the National Company Law Tribunal (NCLT) to adjudicate bankruptcy cases.
The new code clearly provides for priority of claims by different classes of creditors, which in the current system has remained ambiguous, Nikhil said. In several cases, secured creditors ended up taking a haircut (or a delayed repayment schedule) while the defaulting company’s unsecured bondholders (who rank lower in priority) filed winding up petitions and were able to receive payment of their claims in full. This would not be possible under the new code if it is implemented correctly, he said.
Ease of doing business The new bankruptcy code will also help India improve its ‘Ease of Doing Business’ rankings, currently at 130, as resolving insolvency is a key criteria in the World Bank’s survey, Nikhil said.
The support infrastructure envisaged under the new code, including resolution professionals, information utilities, specialised law firms, claims management firms, and liquidators, need to be in place when the Bill is enacted, which may take a year or so to set up, he said.
The Centre plans to introduce the Bankruptcy Bill in the ongoing Winter Session of Parliament.