I always maintained that a business, in many ways, is quite like a human being - it has its birth, it has its growth, it has to have its inputs, its deliverables, it is supposed to have its set of values thru which it plans to do its bit and finally it has to count eventualities of the death!
In my four decades in the corporate world, I saw it is easier to start a business but tough to get out of it although you might be absolutely clear in your convictions that the business can no longer survive no matter how much oxygen you administer. More often one lands up with the millstone of the dead business and its creditors around one’s neck.
Insolvency and Bankruptcy is one way out - for a business to call it a day, when it can no longer survive. Insolvency means when the business is no longer able to pay its debts. Bankruptcy refers to the consequential process for insolvency to be declared. There can be only two ways that can follow viz a - the business is sold to another promoter who will then take over the assets, plan reorganization and pay off the debts or b - the business goes into liquidation and its assets are auctioned and with the proceeds the debts are paid off. The current insolvency laws were made in 1909 and 1929 respectively for individuals and for companies there are the 12 laws including the company law and the High Courts, the lenders, employees, shareholders, liquidators et al. As a result enormous amounts of time, resources, energy and uncertainties follow. This is scary for investors who view the exit process in our country as a veritable risk.
In the US, there are two main bankruptcy procedures for companies - Chapter 7 and Chapter 11, which provide for quick settlements or smooth reorganization. In the UK there are three laws “ viz the Individual Voluntary Orders which the company can itself file, or the Debt Relief Order and finally the Bankruptcy petitions which the lenders or creditors can file. There are thresholds and time limits prescribed.
Our bankruptcy code known as the Insolvency and Bankruptcy Bill 2015 was tabled in Parliament last December. The bill does away with the High Courts’ requirements except in points of law in appeals; in its single piece legislation it structures the Insolvency Resolution Process and proposes a specific new regulator the Bankruptcy Board of India. The process is clear and either the borrower or the lenders and the employees can file for bankruptcy. There is a 180 days freeze during which the lender cannot press recoveries which can be extended by 90 days if more than 75 percent of lenders are willing. During this period the borrower has to come up with a reorganization plan acceptable to 75 percent of Lenders otherwise the business will be dissolved automatically and assets will be auctioned and the loans will be paid off along with the dues to employees and unpaid taxes. Fairly simple.
The difficulties faced today primarily on the recovery of assets and also the time and multifarious laws and authorities involved are being addressed in the proposed law. Banks would find it easier to recover their money thru this route.
There are safe guards for the unpaid employees as well “ and this is important as in the the Kingfisher mess people talk of the Rs 9400 crores due to the banks “ nobody speaks of the Rs 300 crores due to the 3000 employees.
But the bad news is that legislation and implementation are different kettles of fish. Whilst some defaults do arise due to poor foresight of economics of that industry a lot of delinquencies also arise thru deliberate acts of swindling with active connivance or negligence of lenders. It is this segment of defaults which calls for strict implementation. Second - these compliance regulations have to have all pervading support and in my view the bill should have passed quite easily thru the Rajya Sabha as well and the government should not have attempted the money bill route “ which means the opposition is excluded. Third - the bankruptcy board should function without any political interference. Fourth - I have quite often seen “ no sooner a new law comes in - ingenuous ways and means are devised to not only circumvent the law but hold its provisions to the advantage of defaulters particularly the rich and the powerful “ for example in post arrangement asset stripping where it becomes nearly impossible at times to unearth the assets trail. Penalties are provided in the Bill. Fifth “ greater clarity on recoveries from foreign assets of borrowers should have been provided now that we might be wiser from the Kingfisher experience! Lastly “ bankruptcy with unsatisfied debts at the end should be rightfully a social stigma and therefore there should be provisions which should debar bankrupt people with unsatisfied charges from either holding public offices or contesting elections nor should they be able to start a fresh enterprise before full and final satisfaction of all charges.
The importance lies in the implementation and the spirit behind the law. In no case should wilful defaulters escape unscathed. In the words of Benjamin Franklin “Rather go to bed without dinner than to rise in debt!”
Binayak Datta is a senior chartered accountant and a corporate consultant. He is also a visiting lecturer at prestigious educational institutions across Goa
