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Rajya Sabha passes Insolvency and Bankruptcy Code 2016

The bill was passed by the Rajya Sabha on 11th May with voice vote. It got Lok Sabha’s nod last week. It got the support of majority of the parties in both Houses, as government accepted all the amendments proposed by a joint parliamentary committee. The new law provides for time-bound settlement of insolvency, enables faster turnaround of businesses and creates a database of serial defaulters.

Need of the Code:

  • In the age of globalization, ease of doing business is the most important demand of investors. The ease of doing business is not only about convenient entry into the market but also providing easy exit and restricting debt. The new Code takes care of the 2nd
  • Increasing NPA is the major concern of financial sector. The time bound settlement will help both the debtors and creditors. The timely settlement will save value and hence repaying capacity. It will also enable faster turnaround of businesses and create a database of serial defaulters.
  • The benefit of Perfect Competition is possible only when there is ease of doing business. The new Code will promote not only easy entry but also easy exit and will promote a Perfect economy.
  • Easy exit norm is needed to save money and resource. A capital scarce country like India will benefit from the New Code with huge saved capital on the one hand and time bound saving on the other.
  • Labour and creditors are the two pillars of production. Their security is needed for consistent and sustained development. This Code also ensures their interest. The Code ensures that creditors are secured in India and this could usher in a new economic era, where India could attract investors more than ever.

Major features of the Code

  • It covers individuals, companies, limited liability partnerships and partnership firms
  • It proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies. Such professionals will be accessible to the persons who need them because they will be registered with the agency as ‘Insolvency Resolution Professionals’, who will ensure an efficient, effective and professional handling of repayment of debt.
  • It also provides for the creation of Information Utilities for the collection of all authentic information at one place. It will facilitate one to check the information before investing. It will consequently ensure one’s investment is secured.
  • It proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator of these utilities and professionals.
  • It also proposes to use the existing infrastructure of National Company Law Tribunals and Debt Recovery Tribunals to address corporate insolvency and individual insolvency, respectively.
  • The code has set the framework for bringing in changes in the debt recovery tribunals
  • It also has provisions to address cross-border insolvency through bilateral agreements with other countries. If one cannot repay debt, then assets situated outside India can also be considered for repayment if the Indian property is insufficient.
  • The Code also prescribes the time limit for procedures at every stage to ensure a result in 180 days. It also has provisions for force majeure and one time extension of 90 days in certain circumstances. There is also a fast track option with a 90-day limit and a single extension of 45 days if needed. Today, it’s not only important to have a law to ensure repayment of debt but also to ensure timely repayment. Bankruptcy applications will now have to be filed within three months; earlier, it was six months.
  • To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.
  • It also provides that once a person is declared bankrupt, he should be debarred from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt.
  • Another unique feature of the bill is that it gives right to operational creditor to initiate procedure and the right is not limited to big creditors only who want their money back.

Benefits of new Code

  • It will help creditors recover loans faster
  • The move is also expected to help India move up from its current rank of 130 in the World Bank’s ease of doing business index, since all reforms undertaken by 31 May are incorporated in the next ranking.
  • It will attract more foreign investment
  • Security to labour will lessen industrial dispute and hence will save time and money
  • More transparency in the system will attract new and young entrepreneurs.
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