1. INTRODUCTION
It's no secret that the Indian banking industry has a rather large number of loans outstanding that have simply gone wrong. With non-performing loans estimated at just over INR 6.3 trillion1 market. In this context, the new Insolvency and Bankruptcy Code (the "Code") passed by Parliament earlier this year, promises to address the structural problems hampering the efficient recycling of capital and rebalance the rights of creditors, giving them much needed recourse to take timely and effective action against defaulting borrowers.
It is hoped that the Code will become effective by the end of this year2 and in order to achieve this, institutions need to be set up and regulations are required to be put in place. At the beginning of August, India's central government gave notice for the appointment of a chairman and board for the new Bankruptcy Board constituted by the Code, essentially kick-starting the process for the future operation of the Code.
So what does the new Code contain and how effective will it be in promoting the efficient and timely resolution of insolvent entities? This article will highlight the key parts of the Code and assess its likely impact on the Indian debt market.
2. THE CURRENT REGIME
In India, insolvency and bankruptcy are terms that are common with many other jurisdictions. However, they are not synonymous and should not be confused to mean the same thing (they often are). Insolvency refers to a situation where any person or a body corporate is unable to fulfill its financial obligations (often occurring due to several factors such as a decrease in cash flow, losses and other related issues).
Bankruptcy on the other hand is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.3
Put otherwise, the difference is that one comes before the other: insolvency is a state of affairs, which triggers the legal process of bankruptcy.
Note that the position in India is slightly different than in England & Wales, whereby the distinction between insolvency and bankruptcy is determined by whether the entity is a body corporate (governed by the insolvency regime) or an individual (governed by the bankruptcy regime).
At present, the laws governing insolvency and bankruptcy in India are not consolidated. Insolvency of individuals is dealt with under the Presidency Towns Insolvency Act, 1909 (the "Presidency Act") and the Provincial Insolvency Act, 1920 (the "Provincial Act").
Insolvency for companies is dealt with under a number of pieces of legislation including the Companies Act, 2013 (the "Companies Act"); the Sick Industrial Companies Act, 1985 (the "SICA"), the Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (the "Recovery Act") and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI").
As a result of this overlap, several institutions have jurisdiction over the insolvency and bankruptcy process. The Company Law Board, the High Courts, the Debt Recovery Tribunals and the Board of Industrial and Financial Reconstruction deal with the insolvency of entities they govern, which leads to the problem of concurrent jurisdiction, systemic delays and other related complexities.4
Providing a coherent and unified structure under a consolidated legal framework to deal with insolvency and bankruptcy in India has long been overdue. To this end, the Rajya Sabha passed the Code on 11th May 2016 and sections 188 to 194 of the Code relating to the constitution of the Insolvency & Bankruptcy Board (the "Board") came into force on 5 August 2016.
The Code seeks to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner by creating authorities and agencies that will specifically deal with insolvency processes framed under the Code.
The Code will therefore merge the insolvency related provisions under the Companies Act, SARFAESI, the SICA, and the Recovery Act. Furthermore, the Presidency Act and Provincial Act stand repealed.
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Footnotes
3 Raj Kumar S. Adhukia, A Study On Insolvency Laws In India Including Corporate Insolvency (http://www.mbcindia.com/Image/18%20.pdf) last visited on 10.05.2016 at 12.17 pm
4 Insolvency and Bankruptcy Code: A legislation to promote investments, develop credit markets – (http://indianexpress.com/article/india/india-news-india/insolvency-and-bankruptcy-code-a-legislation-to-promote-investments-develop-credit-markets/#sthash.782eZ4x4.dpuf)
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