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Bankruptcy Code – Borrowers Beware

Bankruptcy Code – Borrowers Beware

Now becoming an NPA is a more serious problem for the borrowers. Earlier plethora of laws governing recovery was used by the borrower to their advantage to delay the process. Thanks to the new law which is coming up soon and approved by both the houses of Parliament.

The message from the bill is clear. Restructure, repay or wind up.

Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor.

  1. The adjudicating authority shall, within 2 days will accept or reject the application.
  2. The adjudicating authority shall, within two days of accepting the application communicate the order to creditor and debtor.
  3. If within 10 days of the receipt of the above notice debtor fails to pay or indicate dispute, the creditor may file the application for insolvency process for the debtor.
  4. Corporate insolvency process will start from the day of admission of the above application.

The entire insolvency and recovery process shall be completed within 180 days, with one extension of up to 90 days in exceptional cases.

There will be fast-track insolvency resolution process also. This is for  special category of creditors, mainly smaller creditors and the process will be completed with 90 days.

There is also a voluntary liquidation process. A corporate person registered as a company shall meet the following conditions:

(a) a declaration from a majority of the directors of the company verified by an affidavit stating that –

(i) they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets sold in the voluntary liquidation; and

(ii) the company is not being liquidated to defraud any person;

There will be a new breed of professionals like Interim resolution professional, Resolution professional, Insolvency professional. These professionals will have various rights and duties in the entire process.

The proceeds from the sale of the liquidation trust assets shall be distributed in the following order of priority and within such period as may be specified:

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following :-

(i) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 53; and

(ii) workmen’s dues for the period of three months before the liquidation commencement date;

(c) wages and any unpaid dues owed to employees other than workmen for the period of three months before the liquidation commencement date;

(d) the following classes of creditors shall be paid equally between and among the following :-

(i) financial debts owed to unsecured creditors; and

(ii) workmen’s dues in respect of the period of nine months beginning from twelve months before the liquidation commencement date and ending three months before the liquidation commencement date;

(e) the following dues rank equally between and among the following :-

(i) any amount due to the State Government and the Central Government in respect of the whole or any part of the period of two years before the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

There is a separate insolvency mechanism for individual and partnership firms. For individuals, some of their personal assets are excluded from the process. These are;

(a) unencumbered tools, books, vehicles and other equipment as are necessary to the debtor or bankrupt for his personal use or for the purpose of his employment, business or vocation,

(b) unencumbered, furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his immediate family;

(c) any unencumbered personal ornaments of the debtor or his immediate family which cannot be parted with, in accordance with religious usage;

(d) any unencumbered life insurance policy or pension plan taken in the name of debtor or his immediate family; and

(e) an unencumbered single dwelling unit owned by the debtor of such value as may be prescribed;

For smaller debtors there is a mechanism called Fresh Start Process. Here smaller debtor who cannot pay his creditor can apply under this provision.

There will be suitable changes in the Company’s Act. SICA, Limited Liability Partnership Act, SARFAESI, Recovery of Debt Due to Banks and Financial Institution Act and Partnership Act.

This single Act will simplify the entire insolvency and bankruptcy process in the country. Lenders /Creditors’ rights will be protected stringently. As per the World Bank report insolvency process in India takes an average 4.3 years as against 8 months in Singapore and one year in Malaysia. Now with this code in India,  this time, will be 9 maximum months. More safety and quicker recovery will boost lending climate in the country and this will also discipline borrowers.

Borrowers beware.

Sunil Gandhi
Sunil Gandhi

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