Bankruptcy code will change how business is done: TK Viswanathan

If you want to a good market to attract venture capitalists, you need a good legal framework, says the author of the bankruptcy code 

The insolvency and bankruptcy code 2015 was tabled in the Lok Sabha on Monday. It will make insolvency a time-bound process, make it easier for business to find non-bank funding, and create a data bank of serial defaulters.

T.K. Viswanathan, 67A former law secretary who has also held the post of secretary general of the 15th Lok Sabha, his legal skills have been often tapped by the government. Besides the committee tasked with formulating India’s bankruptcy code, Viswanathan heads a panel on ways to fight cyber crime.

In an interview, T.K. Viswanathan, author of India’s bankruptcy code, spoke about the need for its quick implementation and how it will make life easier for businesses in India.
Edited excerpts:
The key motivating factor behind this bankruptcy code is to create an insolvency framework. How will this change the way business is done in India?
We are excessively depending on the banks for finance. If somebody has to raise loans, he has to approach the banks. But banks are not in a position to cater to the huge demands of the masses. In the US, people raise money from the bond market. That is because the unsecured creditors also have a vital say in the winding-up of a company. They are assured that their investment will be safe and they will be able to take back what they have invested. So, the system of winding up everything is very robust.
Unfortunately, the two Acts we have—the Presidency Towns Insolvency Act and the Provincial Insolvency Act enacted in the last century—were never operationalized. We have tried to deal with bank defaults in different ways. We had SICA (Sick Industrial Companies Act), BIFR (Board for Industrial and Financial Reconstruction), which was abused by debtors and only used to get automatic stay by debtors. It only applied to industrial undertakings.
If you want to have a good market where venture capitalists will come and fund the ventures, you need a good legal framework. We have tried to address the problem of bank loan defaults through Sarfaesi Act (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002). It was in response to the abuse of SICA as secured creditors felt unsafe.
We have to see holistically on supporting those who want to go to the market and raise funds. We wanted to put in a legal framework.
Coming to insolvency of corporations, we have the Companies Act dealing with winding up. There is an official liquidators office working under the supervision of the court. The system takes many years. If the company has to be liquidated, ideally the whole process should not take a long time and the proceeds should be distributed to the creditors. That doesn’t happen. It takes 10-15 years and siphoning of assets also takes place. And right now, the test for finding out if a company is sick or not is the erosion of 51% of net worth. This detection at 51% is too late as you will not be able to revive it.
So, we would like to have a system where, at a very early stage, if the company is not able to pay its debts, then action can be taken so that it can be revived. So that the firm is not wound up, employees are not retrenched and there is no lockout. At the earliest indication of default, a debtor can trigger the proceedings.
So, at one level, you are doing a fundamental mindset reset of this country.
It is very much required. It will change the way business is done in India to a great extent. More money will come into the market.
But you have to be prudent in managing your financial affairs. If a default triggers, then you will not have excuses like before. Initial stages, there may be a few hiccups, but it will be beneficial. It will be useful for the start-up economy.
If this goes through, will the flow of unsecured credit to small and medium enterprises, who do not have any collateral, increase?
More money will come in for them because they will get an assurance that they have a say. We are moving away from institutional finance to market. It will be transactional, not personal. This is a reform which is long overdue. It will take away most of the problems that banks are facing today.
You have proposed a new class of insolvency professionals to assist companies. Will they have to get registered with any body?
The insolvency professionals will be drawn from different fields like investment bankers, lawyers, cost accountants, chartered accountants, engineers. They will take over the management of the company and restore the health of a company. They will be given 180 days during which you have to decide if a company can be revived or if there is no hope. If it can be revived, then a resolution has to be planned. The management committee will come under suspension and the creditors committee will take over.
We are providing a regulator to regulate these professionals. We are providing a transient provision also till they are formally recognized. The central government will recognize who will be identified as insolvency professionals.
Why will people want to become insolvency professionals?
First charge on the assets of the company will be the fees due to an insolvency professional. They will be well paid. Also, they will be interested because of the professional challenge that this entails.
Many bureaucrats are heading sick PSUs (public sector units). They may be best placed to become insolvency professionals. Insolvency professional needs to have credibility. People have to believe him so that he can raise funds.
You have proposed a timeline of 180 days for deciding on an insolvency application. Is it too short?
Six months is a long time. It is enough to know if the company can become viable. You are detecting the sickness at a very early stage. So, it is not very difficult to determine if it is worthwhile to put in more money.
There is a scope for extension of 90 days. If you still can’t resolve it, then you have to just liquidate the company. The creditors’ committee will take a decision on dissolving it and the tribunal will stamp it.
In other countries, the courts don’t take too much time. In India, the number of litigants is enormous. We don’t have a proper way of disposing of cases.
So, every decision has to go to a tribunal?
Every decision will be a decision dictated by market forces. It will not be a judicial decision where there are many adjournments. It has to be a time-bound process.
Once you decide to go ahead with liquidation, it will happen quickly. Because it will be done by the insolvency professional who will act as a liquidator.
Dissipation of assets takes place at that time. Management has to change because there is a lot of siphoning of money that takes place.
How do you prevent someone from approaching the court and seeking a stay?
It is not possible under the system we have devised. The courts will not interfere. The matter will go to a tribunal, the National Company Law Tribunal, and the appeal will go to the National Company Law Appellate Tribunal.
How will the information utilities work?
We need to have information utilities where the credit rating is easily available. We do not have a unified system where all details are in one place like CIBIL (Credit Information Bureau India Ltd). There is already a lot of information that companies are giving MCA (ministry of corporate affairs). All this information will be available and easily accessible.
Will you be using existing utilities?
Initially, we will use existing utilities. We want to encourage more private utilities to come up. The regulator will supervise.
You spoke of a fresh start for individuals. Will banks write off these debts?
The threshold is very low at Rs.60,000. Using legal resources to recover such money is not commensurate. So, it is better to write it off. It will be a part of the credit history. It will be taken into account that you have defaulted. You can’t have a serial defaulter. There are fly-by-night operators.
How will individual insolvency be handled?
At present, insolvency is a matter of district court. They are all doing many cases and do not have any specialized knowledge. It will go to debt recovery tribunals now. When this starts, many cases will come.
As an individual, how do you prevent misuse of these laws against you by someone for personal reasons?
There are penalties in the bill if someone is maliciously and for ulterior purposes targeting the individual.
If the bankruptcy code becomes a law, do you think there will be a sea change in the legal infrastructure of the country?
Bankruptcy code is a beginning. There are many more steps that can be taken. There is a plethora of tribunals. They have to be streamlined. The whole process has to be relooked at. Services of the tribunals have to be outsourced. That is a large part of the judicial reform.
Then the other is judicial impact assessment. When a bill is introduced in Parliament, it should have a judicial impact assessment accompanying it. Every legislation adds to the dockets of the courts. More and more cases are going to arise. But the government is not providing any budgetary provision in the bill to fund the expenditure and the burden on the judicial system.