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Wait to judge effectiveness of mechanism on bad debts: Jaitley

Author: IANS/Monday, August 21, 2017/Categories: Government

Wait to judge effectiveness of mechanism on bad debts: Jaitley

Mumbai - Previous laws were only partly effective in resolving the problems of insolvency and bankruptcy in the corporate world and one would have to wait to judge the effectiveness of the current mechanism to deal with the issue, Finance Minister Arun Jaitley said.

"Earlier, if companies were to go for insolvency, they got stuck in courts indefinitely. The SICA merely provided an 'iron curtain' against debtors, otherwise it was an absolute failure and could achieve very little of the purpose for which it was created," Jaitley said.

The Debts Recovery Tribunal (DRT) was somewhat faster, but not as effective as envisaged, while the Sick Industrial Companies Act (SICA) failed and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) served a limited purpose since being a creditor inherently put one at a disadvantage under it, he said.

The Minister said while the Reserve Bank Of India's (RBI) previous efforts to tackle insolvency met with "some success", eventually it was still tough for creditors to change the defaulting debtors.

Jaitley was addressing a 'National Conference on Insolvency and Bankruptcy: Changing Paradigm', organised by the Ministry of Corporate Insolvency and Bankruptcy Board of India. 

He urged the debtors to make sure the debt is serviced under the insolvency mechanism though the ultimate objective is not liquidation but resolution of assets.

"The cumulative effect of the amended laws is loud and clear that the debtors will have to make sure that debts are serviced. There needs to be an alternative mechanism by which businesses can be saved. The ultimate objective is not liquidation but save the businesses by bringing in new entrepreneurs or with existing partners and save valuable assets," he said.

The Minister said while more time is needed to understand the efficacy of the National Company Law Tribunal (NCLT), it must be ensured that the timelines given by the NCLT are adhered to.

It will facilitate a better understanding of the intricacies of the Insolvency and Bankruptcy Code, 2016, sharing of the experiences gained during the initial nine months and also discussion on the challenges that need to be overcome.

"The institution of resolution professionals has to remain detached and avoid possible conflict of interest. An effective supervision mechanism is required and the powers of resolution mechanism needed to be clearly defined," he said.

The IBC, a key economic reform, provides the much-needed unified legal framework to resolve insolvency and afford a faster and efficient exit framework for corporates.

Through its time-bound processes, the IBC aims to provide greater certainty around the bankruptcy process and bring the Indian statutory regime on par with some of the most legally advanced jurisdictions in the world.

Since the Insolvency and Bankruptcy code has been implemented a few months back, this has changed the debtor and creditor relationship, the Finance Minister noted.

"A legislation is a skeletal structure, the flesh and blood is provided by judicial interpretation. The new legislation should see that effective functioning of a company does not come to a standstill. Debtors will have to make sure that debts are serviced. For endless years, we lived in a system that protected debtors and allowed assets to rust," he said.

The conference was also addressed by RBI Governor Urjit Patel and Securities and Exchange Board of India Chairman Ajay Tyagi.

Patel said that the enactment of the Insolvency and Bankruptcy Code in 2016 is a watershed towards improving the"credit culture in the country". 

"The Insolvency and Bankruptcy code, in essence, provides for a single-window time-bound process for resolution of an asset with emphasis on promotion of entrepreneurship, maximisation of assets and balances the interest of all stakeholders," the RBI Governor said.

In his address, Sebi Chairman Ajay Tyagi said that the Insolvency and Bankruptcy Code is an important piece of legislation in recent times with clearly defined roles for professionals and quasi judicial bodies.

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S Vijaykrishnan
S Vijaykrishnan


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