The Resolution Of Bankruptcy Cases In Time Bound Manner And Reduced NPAs

According to the World Bank Report of Doing Business, the insolvency resolution process in India is complex, time consuming and expensive due to presence of multiple laws. It takes an average of 4.3 years to resolve bankruptcy, which is extremely high as compared to countries like Japan, Singapore and Finland[1]. India is ranked at 136 out of 189 countries in resolving insolvency. On an average, a secured creditor in India recovers 25.7% for every dollar of credit from an insolvent firm which takes 4.3 years for proceeding to conclude. In comparison OECD countries, creditor recovers 72.3 cents and the process takes around 1.7 years to conclude. A complex judicial system in India has restricted the use of formal legal bankruptcy procedure to resolve financial distress. The usage of legal bankruptcy procedure is only 0.04% in India compared to 4% in the USA in 1990s[2].

The Insolvency & Bankruptcy Code, 2016 (I&B Code 2016) would improve the ease of doing Business in India by reducing not only NPA's but also delays in resolution of bankruptcy cases & recovery of debt.  Under I&B Code 2016, the banks can proceed in case of single default and they need not to wait for account being NPA. It accordingly works as a deterrent for the defaulter (Corporate Debtor) as they are now aware that one single default in servicing of debt will make them eligible for being proceeded under I&B Code 2016.   Even if it is presumed that the Banks will wait and follow the procedure of declaring a Corporate Debtor as NPA as per the guidelines issued by RBI before undertaking action under I&B Code 2016 then also the time to recover the debt will be less.

The Code envisages filing of an application under section 7, 9 and 10 which needs to be decided within 14 days of receipt of the application. The Code also provides seven days period for rectification of any defect. The admission of application of insolvency initiates the Corporate Insolvency Resolution Process (CIRP) for a period of 180 days with the extension of 90 days. The CIRP is over seen by an Insolvency Professional who has to ensure that no asset stripping has taken place from the company by checking transactions for last two years. The law also enshrines a moratorium period on the occasion of admission of the application where the Insolvency Professional and Creditors Committee is expected to analyze the records of the company, hear resolution proposals and make up its mind on the issue. A Resolution Plan is binding on all creditors and stakeholders if 75% of voting share of Creditors Committee agrees to it. Whereas, if in 270 days no Resolution Plan achieves support of 75% of creditors, the Corporate Debtor goes into liquidation.

Now if one try to compare I&B code 2016 and NPA, the picture is clear for Corporate Debtor to be declared as NPA the banks need to track its performance for continuous period 90 days and in between the period of 90 days it has to take various steps as per the RBI guidelines to revive the Corporate Debtor including but not limited to forming of Joint Lender Forum Committee, plans w.r.t rectification, restructuring etc but in case bank decide to proceed with action under I&B Code 2016 on day one of the default then within 270 days of filing of the application under I&B Code 2016, it knows that how and how much debt will be recovered.  Accordingly, the Banks instead of waiting for declaring an account NPA would like to proceed under I&B Code 2016 which will indirectly will lessens the NPA.

Mr. Manoj K Singh is the Founding Partner at Singh & Associates.

[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same]

[1] World Bank Doing of Business Report, 2017 available at http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB17-Full-Report.pdf

[2] Ibid