Major Drawbacks Of The Insolvency and Bankruptcy Code

Any individual, company or partnership firm can go bankrupt due to personal or business losses. When a unit becomes bankrupt, it fails to repay the debts and get rid of the liabilities although lack of clarity often makes it difficult to deal with the situation. According to the new law in India, The National Company Law Tribunal proposes to declare a company as bankrupt and the Debt Recovery Tribunal executes the process of bankruptcy.

However, the bankruptcy and insolvency act does not include the provision for cooperation between the foreign and the Indian courts in case of overseas bankruptcy issues. According to many people, the law is more inclined to the creditors and does not have enough solutions to cater to the needs of the debtors. Apart from this, it is also argued that the new law does nothing to solve the current problems of the NPAs of banks as it takes about a year to implement the law.

Getting the facts

As many as twelve big cases referred under the insolvency and bankruptcy code to the NCLT neared the deadline of 180 days for resolution, and the loopholes surfaced clearly. Although the team responsible for drafting the code may not have left much room for ambiguities to occur, it was believed long back that the practicality of the act would be tested when the cases come before the NCLT. When one and a half years passed and the code turned into law, the government released ordnance to make it challenging for the defaulting promoters and their related parties to go for bidding without making the payments at first on which they defaulted. The tenets of the law have been tweaked since then, but the primary issues that require changes are gradually becoming clear and the first one is to figure out the parties that can go for bidding.

Does the insolvency professional need to provide the details to the bidders who have already faced rejection with the filing under the insolvency and bankruptcy law, and this is primarily because each bid is different in nature in the context of the mix of conditions it offers and scores are assigned for varied parameters of the bid. While some of the loopholes are straightforward and quantitative in nature, the element of judgment is a part of it as well.

Identifying the stumbling blocks

Even though the IBC was initially figured as one of the major achievements of the Indian government, it is two years since it has come into force, and the action is much slower than was expected. The insolvency law in India has certain flaws that is preventing it from making an impact. A majority of the cases exceed the 180 days resolution along with the extension of ninety days by a longer margin. Due to a large number of cases waiting before the tribunal, it is becoming difficult to resolve the case within the deadline of 270 days even when the government has increased the number of judges and benches.

Despite the wait for the resolution to come, bankruptcy law is changing the way in which the corporate world operates in this country. Several promoters are coming to term with the reality that they might lose their business without repaying the debts to the banks and the creditors. Quite naturally, many of these companies are avoiding the idea of skipping the loan repayments. Even then, a number of corporations with more capital reserve find ways to hold the cases to keep them in motion always between the NCLT and NCLAT. The following are some of the major loopholes of the code.

The bankruptcy law in India requires the decisions of the committee of creditors to be accepted by a seventy-five percent vote share of the members. However, the creditors who hold the one percent vote have the potential to hold about seventy-four percent to ransom although in many jurisdictions the decisions are implemented via the seventy-five percent vote share and sixty percent in number. The law in India requires a similar provision for improving the decision-making process.

The requirements of disclosing the value of liquidation in the information has also led to a spin. As the law states that the resolution plan is to be based on the information memorandum, the potential bidders are using it as a threshold for the resolution plan, which is eventually resulting in deeper slicing of the creditors. According to the recommendations of the top lawyers in India, the requirements of disclosure is to be deferred for later stages.

Furthermore, the crafting of regulation 27 of the liquidation process is evasive as far as the norms of the RBI are concerned. While running an enterprise, the RP may require to raise money from the current or new lenders. As a matter of fact, the existing lenders of the debtor are not too keen to provide new loan to the NPA account. The new lenders are reluctant as well due to the tenets of regulation 27 that freezes the interest payment after the passing of the order of liquidation. The lawyers in India also agree to this shortcoming.

A bankruptcy law lawyer can easily make out the language and definition of the insolvency process that limits the advance against supplies and similar payments to be taken as the cost of resolution process, thereby preventing the refund in the event of default.

While a legal firm in India struggles to file for insolvency in India, it seems that the issues can be resolved through amendment of the regulations although others require a change in the law and all this needs to be done without any delay.