June 10, 2023

The near complete washout of the winter session of Parliament has meant that several important bills have not been taken up. Apart from the now celebrated GST Bill, there was the new bankruptcy law that was to be introduced. The government has announced that it will try to push through this bill in the remaining days of this session and the chances are bright that it will be passed.

The new bill proposes to amend the Companies Act, 2013 in order to allow a secured creditor to start rescue proceedings against a company before an insolvency adjudicating authority if that company fails to pay a debt beyond a certain limit.

In India, it is often seen that by the time creditors start proceedings against a company, it has already turned sick, having eroded more than 50 per cent of its capital. Hence, by proposing early identification of financial distress in a company – a thing which managements refuse to acknowledge – the bankruptcy bill will ensure that timely intervention shall be made to revive the company.

The adjudicating authority must dispose of the applications within 180 days, choosing to extend the same by a further 90 days only in the most exceptional case. It also prescribes that during the resolution period, the management of the company will vest in an administrator or a resolution professional. In case it feels that the company cannot be rescued, it will be liquidated.

Similar kinds of insolvency regimes have been proposed for unlimited liability partnerships and individuals.

If the Parliament manages to clear this bill, it will address a major issue. For long, managements of companies have managed to coerce or grease the palms of bank officials to make them throw good money after bad. In the process, the nation’s financial sector is saddled with mountains of sticky loans in companies that have gone bust despite several infusions of capital. Early detection of financial distress through failure to repay debts in time will reduce this and keep managements on their toes. It will also eliminate the management-bank officer corruption nexus to an extent, while allowing genuinely distressed firms to restructure their companies with professional help.