Bankruptcy law in a Deep Mess!

Thu, 26 Nov Pre-Open

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If the World Bank is to be believed, it takes about four years to wind up an ailing company in India. That's way above when compared to China, where it doesn't take more than two years to complete this task.

Further, in India, creditors are able to recover just 25.7 cents on the dollar. This ratio is the worst among the emerging economies. The statistics indicate that a strong bankruptcy law is required to end this mess.

The bankruptcy procedures in India are not at all efficient currently. There are large number of conflicting laws in relation to insolvency. The court tries to interpret a number of laws before coming to a conclusion. This leads to delays in decision making. As many as 60,000 bankruptcy cases are pending before the courts today.

There are various flaws in the current system. Let's discuss a few of them...

Some laws prevent creditors from taking any legal actions against the defaulter, unless a restructuring plan is in place. Now just imagine the time it will take to carve a restructuring plan. Realistically, it may take more than a year to restructure an entire company. Till this time, creditors will not be able to take any action against the defaulter.

Further, as per the 'Board of Industrial and Financial Reconstruction', a company can be declared sick only if the accumulated losses equal to or exceeds its entire net worth at the end of any financial year. This means an ailing company has to wait till such time to be declared a 'sick company'.

While there are creditor-friendly laws which help in liquidating such firms rather than restructure them. However, such laws face conflicts with regulations on land and labour laws which prevent the selling of property or the laying off of workers at the factories.

However, it seems that the government has come up with a bankruptcy code that could solve the current mess. As reported by 'Economist', a new bill has consolidated various laws into one and is designed to reduce conflicts among creditors. The new code also sets a deadline of 180 days to decide the fate of an ailing firm. Further, it puts the unsecured lenders ahead of the government in recovering the amount due. The new bankruptcy reforms will be introduced in the winter session of parliament. Will it be passed? Let us see...

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