India Passes Comprehensive Bankruptcy and Insolvency Law

By Dezan Shira & Associates
Editor: Tracie Frost

The Indian Insolvency and Bankruptcy Code, 2015 passed a critical milestone last week when the upper house of Parliament, the Rajya Sabha, passed the bill with no changes. The bill is now waiting to be signed by India’s President Pranab Mukherjee. Once signed, it will be India’s first comprehensive bankruptcy and insolvency framework and is expected to promote entrepreneurship, increase availability of credit, and balance the interests of stakeholders by consolidating and forming new laws relating to reorganization and insolvency resolution. 

The new framework is widely seen as a critical juncture in India’s ability to compete in the international business arena. Indian officials hope that its implementation will lead to improved ease of business rankings from the World Bank. While the bill reforms domestic bankruptcy law, it also sets the framework for developing an effective system for addressing cross-border insolvencies in India.

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Under the new law, all creditors are empowered to initiate the resolution process in the event of non-payment of a valid claim. When a claim is initiated, the board of directors or promoters’ powers are immediately suspended and an insolvency professional takes control. Previously, the law favored promoters, who, according to the Governor of the Reserve Bank of India, were able to “insist on their divine right to stay in control.”   

The bankruptcy law creates an ecosystem of regulations, professionals, courts, and information management systems to deal with insolvencies and to promote the healing of struggling companies. Notably, an insolvency and bankruptcy board is created which will regulate the appointment of insolvency professionals and the use of information utilities. Information utilities are specialized bodies that will collect, collate, authenticate, and disseminate financial information to be used in insolvency, liquidation, and bankruptcy proceedings. It is hoped that the availability of this information will deter “serial promoters” who start business after failed business. The third component of the insolvency ecosystem is an insolvency professional agency – an organization that will develop professional standards and a code of ethics and will regulate agency members. The members of this agency form the fourth component of the ecosystem. They will be licensed professionals trained to resolve insolvency issues or liquidate assets in the case of bankruptcy. The law also provides for two adjudicating authorities which will hear firm and individual insolvency cases. 

To resolve India’s incredible four and a half year average for insolvency proceedings, the new law gives a committee of creditors 180 days to evaluate proposals from various players about resuscitating the company or taking it into liquidation. In a press release, the government stated, “When decisions are taken in a timebound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy … can be put to the best use. This is in complete departure with the [previous regime] where there were delays leading to destruction of the value of the firm.” 

Liquidated assets will be distributed in the following order of priority:

1. Costs of the liquidation process

2. Claims of secured creditors

3. Employees’ salaries

4. Financial debt owed to unsecured creditors

5. Amounts due to state and federal governments

6. Any remaining debts

Observations

The law is ambitious and will require an army of new insolvency and tech professionals, attorneys, board members, and people qualified to write comprehensive regulations. Industry experts have expressed concern over whether India can effectively and quickly train enough insolvency professionals to implement the law. Additionally, regulators must draft regulations for the insolvency professionals, adjudicating authorities, and information utilities. Nevertheless, the law is an important step to aid India’s growth in the international economy. 

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