Major Insolvency Reform: India

Michael Sloan and Kathryn Smith from Ashurst share their article with us.

A new Insolvency and Bankruptcy Code (Code) has been passed in India. The Code is aimed at modernising the process of liquidation and revival of companies in India.

Why was reform necessary?

The previous process was Court driven and often resulted in a deadlock of over 4 years before a final decision to liquidate was handed down. This delay allowed management, who remained in control of the ailing company during the Court deadlock, time to divest the company’s assets, leaving little return for creditors. The result was that India had one of the lowest corporate insolvency recovery rates in the world.

The Code in a nutshell

The Code will comprehensively cover all types of insolvency: including companies, partnerships, limited liability partnerships and individuals.

Key reforms that will be introduced under the Code are:

1. the introduction of a system of registered insolvency practitioners;
2. the insolvency practitioners will operate under a regulatory body and company law tribunal – this will replace Court processes and involvement of the Official Liquidator;
3. displacement of a distressed company’s management by insolvency professionals to prevent asset-stripping;
4. new specialised adjudicating bodies, including the “Debt Recovery Tribunal” (for individual bankruptcy and most partnerships) and the “National Company Law Tribunal” (for companies);
5. powers for the relevant tribunal to grant the distressed company a moratorium period staying creditor action, upon the recommendation of the insolvency professional;
6. strict timelines for reaching a decision to liquidate a company (90-180 days);
7. introduction of an order of priority; and
8. provisions for cross border insolvency.

This legislation will greatly improve the ease of doing business India, it will improve investor and financier confidence, reduce the workload of the Courts, and free locked up assets.