Rajya Sabha passes Bankruptcy Code

Rajya Sabha passes Bankruptcy Code

The Rajya Sabha on Wednesday passed the Insolvency and Bankruptcy Code Bill, enabling a single law to deal with distressed companies, their promoters, creditors, employees and other stakeholders for the first time in India.

The law - which will ensure a time-bound process of winding-up a company or limited liability entity, a 'Fresh Start' for debt-laden individuals under a certain threshold and temporary transfer of management of the troubled entity into the hands of resolution professionals - was passed by the Lok Sabha on Thursday.

Speaking during the debate on the Bill in the Upper House on Wednesday, Minister of State for Finance Jayant Sinha called it a "historic legislation". "We are changing the Indian economy. We will do so while protecting the people who matter most. The way this law is being set up, it protects the workers. We are trying to create a robust safety net."

The move was hailed by experts, dubbing it as an important reform measure of the Narendra Modi government.

"This law rebalances the equation between the debtor and the creditor and puts the power back in the hands of the creditor," said Cyril Shroff, managing partner at Cyril Amarchand Mangaldas.

"After GST (Goods and Services Tax), and land reforms, this is the most important regulation and the government deserves credit for this," said Varun Gupta, partner at Deal Advisory, KPMG. "It brings troubled companies into a common process. Earlier the promoter, creditors, shareholders, employees, everyone had to go through a separate process. That has been streamlined."

The law is expected to help banks deal with about Rs 8 lakh crore of stressed assets and will streamline the existing insolvency process, which has so far depended on 11 separate laws. The law repeals the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. In addition, it amends laws such as the Companies Act, 2013, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, among others.

"The objective of the new law is to promote entrepreneurship, availability of credit, and balance interests of all stakeholders by consolidating and amending laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximisation of value of assets of such persons and matters connected therewith or incidental thereto," said an official statement by the Finance Ministry. The government expects the new framework to help improve India's position in the World Bank's ease of doing business ranking.

The law allows the setting up of an insolvency regulator, for oversight over insolvency professionals who will carry out the bankruptcy process. Debt Recovery Tribunals will be the adjudicating authority for individuals and unlimited liability partnership firms and the National Company Law Tribunal will adjudicate for companies and limited liability entities.

"Implementation will be a challenge. There is a significant amount of work still to be done in creating the insolvency practitioners eco-system, the tribunals and the operating guidelines over the next few months," Gupta said.

The Bill was tabled in the Winter Session of Parliament and was immediately sent to a joint committee. The panel, headed by Rajya Sabha Member of Parliament Bhupender Yadav, comprised 20 members of Lok Sabha and 10 from the Upper House.

The panel suggested a number of changes, including provisions for dealing with cross-border insolvency, an increase in workers' outstanding dues, and providing a greater voice to operational creditors like employees and suppliers of a bankrupt entity.

Such suggestions, especially related to greater power to employees, gain significance in the background of issues relating to the now-defunct Kingfisher Airlines, where many employees were badly affected.

The law also specifies penalties for offences committed under corporate insolvency (such as concealing property). This penalty will be imprisonment up to five years, or a fine up to Rs 1 crore, or both. For most offences committed under individual insolvency (such as providing false information), the penalty will be imprisonment up to six months, or a fine up to Rs 5 lakh, or both.


  •      Law allows early identification of financial distress to help revive a company
  •     75% of creditors have to agree on a revival plan
  •     Individuals to be given a chance of 'Fresh Start', where outstanding debt will be written off
  •     Allows for insolvency regulator; says regulatory powers with govt till such body is set up
  •     Specifies penalties for offences committed under corporate insolvency
  •     Penalty will be imprisonment up to five years, or a fine up to Rs 1 crore, or both.
  •     Debt Recovery Tribunal mooted as adjudicating authority for individuals/ unlimited liability entities
  •     National Company Law Tribunal to be adjudicating authority for companies/ limited liability entities

Business Standard New Delhi,12 May 2016