Developing the corporate insolvency regime
World’s bank’s ease of doing business report 2014 placed India at 137th position out of 189 countries, in ‘resolving insolvency’ indicator. Resolving insolvency in India takes 4.3 years on an average. Corporate failure has ripple effect on the economy and stability of the other organizations in the economy. Hence for the healthy economy it is important, either not to allow companies at the verge of bankruptcy or framing a structure to prevent such fall.
What at insolvency means?
Insolvency is the term used for both individuals and organization. For individual it is known as bankruptcy and for corporate it is known as corporate insolvency. It is that situation in which company is unable to pay its debt in the present or in near future. Also the value of the company’s assets is less than its liability.
It is carried out by a professional insolvency practitioner who is licensed and qualified to do so. There can be different arrangements. Some of them include:
- Company voluntary arrangement which means an arrangement between the board of company and its creditor to reschedule the debt and in return accordingly restructure the company’s business under the new business development strategy.
- Taking over the administration of the company and protecting company’s assets from any form of creditor’s action.
- Liquidation is a process where the company is closed down by converting all the assets into cash value and then it is distributed, sold off to the creditors and the shareholders of the company.
India’s insolvency regime
India’s insolvency regime is not very effective. It is not entrepreneur friendly, and no easy exit option is available to them. The lethargic insolvency procedure in India is mainly because of the officials attending to it and the delays in courts and tribunal. A high level committee set up under the chairmanship of T K Vishwanathan by government to study a corporate bankruptcy legal framework (BLRC) to prescribe a highly efficient corporate insolvency regime.
Recommendation of the T K Vishwanathan committee
The committee recommended a structure similar to efficient insolvency regime across the world. It suggested that the company should not be allowed to remain alive only for the purpose of preventing the unemployment. It recommended amendments to the company’s law to fasten the liquidation process and to ensure the creditor have dominance over the viability of the company. The panel recommended that the creditor may initiate the rescue proceeding if the debtor company fails to pay single undisputed debt exceeding a prescribed limit and within 3 months of the notice of demand.
The panel says committees for distressed micro small and medium enterprises should be established for resolving the financial distress through administrative mechanism. The committee also gave nod to the SEBI’s amendment to the Securities Contract Regulation Act (SCRA) 1956 which provide certain provisions for settlement in the financial contracts which provide exemptions from the normal operation of insolvency law.
The committee observed that liquidation should not be the last resort for insolvent companies; rather approach should be to minimize the losses of all parties and give way to concrete framework to the India’s insolvency regime through a mixture of substantive institutional changes.
The easy exit option will give the entrepreneurs a viable choice to start. However the investment climate would also get a boost and would further strengthen the stability of the economy.