Government for giving more power to creditors

Published Dec 22, 2015, 4:19 pm IST
Updated Mar 26, 2019, 3:41 pm IST
Bankruptcy code aims to reduce bank NPAs.
(Representational Image)
 (Representational Image)

New Delhi: The government on Monday introduced a bill in Parliament that seeks to speed up the process of corporate bankruptcy by empowering creditors so that losses on bad loans can be minimised.

The Insolvency and Bankruptcy Code Bill will replace the provisions of insolvency and bankruptcy strewn across four different laws and would be a single source of regulation and authority over such matters.


To ensure that the bill does not fall prey to party politics in the Rajya Sabha, the government has put it in the category of a money bill. Money bills are legislations related to imposition of new taxes or those seeking approval for expenditure from the consolidated fund of India. These bills can only be tabled in the Lok Sabha and the Rajya Sabha has no powers to amend them or sit over them. A money bill sent to the Elders for discussion has to be returned within 14 days.

“We need a bankruptcy law as it helps banks in taking timely action and reducing the NPA level,” IDBI Bank executive director R K Bansal said.

Some other bankers said that they would study the finer details of the code before commenting on it. The bill provides for allowing a financial creditor or a defaulting corporate to initiate insolvency proceedings. If passed by Parliament, it will allow a creditor to initiate the insolvency proceedings either by itself or jointly with other lenders when a default happens.

This resolves two problems: one, it prevents companies from playing around with multiple lenders by paying some while defaulting on loans of others and secondly, it flags problems early. Under the existing rules, the RBI has asked bankers to form a joint lending forum when the first signs of distress are received to recover their loans.

It also says after admission of the application for start of bankruptcy proceedings, the process would have to be completed within 180 days.

Both by empowering a single bank to start the legal proceedings in case of a default and putting a timeframe for taking a decision on the fate of a defaulting firm, the bill seeks to rescue a deteriorating asset before its total value is wiped out.

In the bill, there is a financial memorandum that talks of government for setting up tribunal benches that would adjudicate on the cases brought before it. The adjudicating authority in case of firms will be national company law tribunal and for individuals it will be debt recovery tribunals.

The code also provides for establishment of insolvency and bankruptcy board of India for insolvency resolution professionals.

As per the proposals of the bill, once insolvency proceedings are started the full management control of a firm would be in the hands of a resolution professional. The job of the professional would be to collect all information relating to assets, finances and operations of the debtor to determine its financial position. He will also take control of any asset over which a corporate debtor has ownership rights.

The resolution professional would draw up the insolvency resolution plan that has to be approved by 75 per cent of the voting share of financial creditors.

Once the plan is approved it will need the sanction of the adjudicating authority. If an insolvency resolution is rejected, the tribunal will make an order for liquidation of the company.

Finance minister Arun Jaitley had said on Saturday the government would like to get the bankruptcy bill passed in the ongoing winter session itself. The session gets over on Wednesday.

Opposing the introduction of bill, N K Premachandaran (RSP) said it was poorly drafted as its financial memorandum was not clear and not enough notice was given for its tabling. The speaker overruled his objections and allowed the introduction of the bill.

By the end of September the gross NPAs of PSBs had risen to 6.21 per cent from 6.03 per cent of advances at in Q1. Taking gross NPAs and restructured loans together the stress on PSBs stood at 14.20 per cent of total advances at the end of Q2.



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