IT has been said that Capitalism without bankruptcy is like Christianity without hell. The very fact that the proposed Bankruptcy Code hit the headlines at around the same time as did corporate loan waivers in form of NPAs (Non Performing Assets) by public sector banks has raised the eyebrows of many. The Bankruptcy Code is a reform aimed at facilitating speedy settlement of bankruptcies so as to ensure maximum recoveries from impaired assets; but in this garb, it also seeks to tilt the balance of negotiations in such settlements towards stakeholders who represents capitalist interests and away from workers’ interests.

Increasing NPAs

The rise in NPAs has much to do with the slowdown of the Indian economy in the wake of persisting global economic crisis. The Indian Express reported that “… Even as the government has been trying to shore up public sector banks through equity capital and other measures, bad loans written off by them between 2004 and 2015 amount to more than Rs 2.11 lakh crore. More than half such loans (Rs 1,14,182 crore) have been waived off between 2013 and 2015”. In continuation the repost says, “In other words, while bad loans of public-sector banks grew at a rate of 4 per cent between 2004 and 2012, in financial years 2013 to 2015, they rose at almost 60 per cent. The bad debts written off in financial year ending March 2015 make up 85 per cent of such loans since 2013”.

Another report in the same newspaper states that, “According to RBI estimates, the top 30 loan defaulters currently account for one-third of the total gross NPAs of PSBs. Till March 31, 2015, the country’s top five PSBs had outstandings of Rs 4.87 lakh crore to just 44 borrowers, if borrowers were to be categorised in terms of those having outstandings of over Rs 5,000 crore.” While the banks earlier used naming and shaming techniques for individual and small time borrowers for recovery of loans, they have been clearly reluctant to use the same which it comes to big defaulting corporations.

This is alarming situation for the banking sector and for credit generation in the economy, and raises doubts on recovery of the economy as the nature of the growth hitherto has been credit fuelled. This also explains the government’s keen willingness to infuse capital in banks by budget provisioning to meet Basel forms and sustain credit generation, as well as legislative measures for early settlement of bankruptcies in the form of the proposed law.

What Does The Law Seek To Achieve?

The Insolvency and Bankruptcy Code, 2015 (as the bill is formally called) is intended to provide for resolution of insolvency in a speedier and time-bound manner. According to the statement of objects and reasons of the bill tabled in Lok Sabha by Finance Minister Arun Jaitley, an effective legal framework for the timely resolution of insolvency and bankruptcy would support the development of credit markets and encourage entrepreneurship. As per the proposed legislation, corporate insolvency would have to be resolved within a period of 180 days, extendable by 90 days. It also provides for fast-track resolution of corporate insolvency within 90 days. Currently, there is no single law dealing with insolvency and bankruptcy in India. Liquidation of companies is handled by the high courts; and individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.

Other laws which deal with the issue include SICA (Sick Industrial Companies Act), 1985; Recovery of Debt Due to Banks and Financial Institutions Act, 1993, Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 and Companies Act, 2013.

As a result, four different agencies, the high courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs), have overlapping jurisdiction, giving rise to systemic delays and complexities in the process. It is argued that a strong bankruptcy law can help overcome these challenges, given the relatively long duration of insolvency settlement proceedings (an average 4.3 years in India vis-à-vis other OECD countries where average hovers around 1-1.5 years).

Impact On Other Stakeholders

The mainstream media’s coverage of the bill has restricted itself to counting the virtue of speedy settlements and freeing of productive assets in a time-bound manner, and fails to analyze and test the bill on the principles of equality and equity in settlements between various stakeholders. After insolvency resolution process cost and liquidation costs are paid in full, the bill’s provisions state that liquidation proceeds will then be used to clear debts owed to secured creditors, and then to pay workmen’s dues for 12 months, unpaid dues to employees other than workmen, and financial dues owed to unsecured creditors, in that order. Government taxes for two years, other debts, preference shareholders and equity shareholders will receive last priority for payment. Thus the bill changes the priorities of repayments from existing framework and favours those stakeholders who represent interests of capital.

Existing provisions in Companies Act, 2013 and earlier laws governing winding up of Companies have provided that workmen dues will have proportionate charge with the secured creditors on the liquidation proceedings. The existing provisions also mention that secured creditors and workmen dues will have foremost priority for repayment from liquidation proceedings. The new bill proposes to change this, and give workers rights for repayments of their dues during liquidation a quiet burial both in terms of priority of repayment and also by restricting the amounts that would be classified as workmen dues by putting a limit of one year on dues. There has also another subtle change in priorities where government tax dues have been put back in the queue from even unsecured creditors and amount restricted to last two years tax dues. This has been done in the name of promoting unsecured bond markers. The public exchequer’s loss will be gain of some private interests.

Prioritizing Liquidation Over Continuation Of Business: At Whose Cost?

The scheme of the whole proposed legislation works in the way that it favours liquidation over continuation of business unless seventy five percent of creditors agree for the same. It’s more likely that a large chunk of secured creditors being banks and financial institutions, they would act as a block and would have unstated veto rights over the course of liquidation proceedings. They are likely to favour early recoveries in distressed times especially while handling small and medium enterprises, which still account for around forty percent of production of manufactured goods, and provide for a major chunk of workforce employed in these industries that are comparatively speaking labour intensive in nature.

While big business houses, consultants and asset reconstruction companies (ARCs) have come out in support of bill, there has been no consultation with those from the micro, small and medium enterprises (MSMEs) sector, small entrepreneurs and industrialists regarding the effect of proposed legislation on the Indian economy. As per the provisions of the proposed Bill, it seems that even a minor default will lead to the company being placed into the hands of a private “Insolvency Expert” and the company will be dissolved unless 75 per cent of the creditors agree to continue its operations. More drastically, all the workers will be automatically dismissed. According to a recent article in a financial daily, based on the data obtained from the RBI, Asset Reconstruction Companies (ARCs) have spent barely Rs 3,400 crore to acquire total assets of the book value of Rs 1.89 lakh crore, till date. This shows that the cozy club of ARCs has paid only an amount of 2 per cent to acquire the debts. Is it not a genuine fear than the whole proposed act will only facilitate dirty buyouts to serve someone else’s financial interests rather than genuine stakeholders?

As per the Government, the present Bill has been necessitated because of the failure of the Board for Industrial and Financial Reconstruction (BIFR), working under Sick Industrial Companies Act (SICA, 1985, Special Provision), to provide relief or rehabilitation to industry as well as to financial institutions. The actual cause for BIFR’s inability to deliver goods has been the failure of the Government to appoint adequate members on the Bench, which results in delays in adjudication of matters. The SICA provides for up to 14 members. Currently (till January 24, 2016), the BIFR Bench has one member.

Conclusions

The present framework for settlement of insolvencies may need refinement but not necessarily through revising the legal framework, when the possibilities of working within the existing institutions have not been exhausted. Instead the capacities of existing institutions should be strengthened as needed. When the Government does not even explore this option, and instead rushes to pass bankruptcy code legislation while hesitating to name willful defaulters, one may ask if these defaulters are seeking to clean themselves up legally, while rescuing the best value for Banks and FIs from impaired assets at cost of other stakeholders, so they can begin again as part of ‘Start Up India’?!