As per the World Bank Index on the ease of resolving insolvencies India stood 136th out of 189 countries.
| Q | A |
|---|---|
| Context: |
|
| What is the objective of the code? | As per the World Bank Index on the ease of resolving insolvencies India stood 136th out of 189 countries. The average time taken for insolvency proceedings in India is about 4.3 years, while it is only 1.7 years in high-income OECD countries. The recovery rate (cents on the dollar) is 71.9 in high-income OECD countries as opposed to 25.7 in India.India’s weak state of the insolvency regime, its significant inefficiencies and systematic abuse has resulted into distressed state of credit markets in India today.
The objective of the code is to seek consolidate and amend the existing laws on bankruptcy and insolvency matters and creates a unified legal framework for resolution and insolvency/bankruptcy issues in a time bound manner. |
| Why the code needed? |
Stronger bankruptcy laws protect the rights of borrowers and lenders, promote predictability, clarify the risks associated with lending, and make the collection of debt through bankruptcy proceedings more attractive. These factors ultimately facilitate credit and thus a higher flow of capital in the economy. |
| What is the difference between the Insolvency and Bankruptcy? | 1. Insolvency- Insolvency is the financial state of being when one is unable to pay off his/her debts on time. Its prompt an individual to file for bankruptcy. An entity, a person, family or company becomes insolvent when it not able to pay its lenders back on time where cash flow in falls below its cash flow out. For individual debtors as concerns this means that their incomes are too low for them to pay off their debts. For companies, the money flow into the business plus and its assets are less than its liabilities. Typically those who become insolvent will take certain steps towards a resolution. One of the most common solutions for insolvency is bankruptcy.
2. Bankruptcy- This is the legal process that serves the purpose of the resolving the issue of insolvency. This is the legal declaration of one’s inability to pay off debts. If one file for the bankruptcy he/she obliges to pay off what is owned with the help from the Government. Following two forms denotes the bankruptcy: a. Recognition Bankruptcy – Debtors restructure their repayment plans to make them more easily met. b. Liquidation Bankruptcy – Debtors sells some assets in order to make money they can use to pay off their creditors. |
| What are the salient features of the law? | The salient features of the law are as follows:
a) Clear, coherent and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable. b) Two distinct processes for resolution of individuals, namely- “Fresh Start” and “Insolvency Resolution”. c) Debt Recovery Tribunal and National Company Law Tribunal to act as Adjudicating Authority and deal with the cases related to insolvency, liquidation and bankruptcy process in respect of individuals and unlimited partnership firms and in respect of companies and limited liabilities entities respectively. d) Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities. e) Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and be first level regulator for insolvency professionals members leading to development of a competitive industry for such professionals. f) Information utilities would collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings. g) Enabling provisions to deal with cross border insolvency. With this unified regime envisages a structure and time bound process for insolvency resolution and liquidation, which should significantly improve debt recovery rates and revitalize the ailing Indian corporate bond markets. |