DNA Explainer: Vijay Mallya is going bankrupt, know what is the bankruptcy process in India

Fugitive Indian businessman, the 65-year-old chairman of UB Group, Vijay Mallya was declared bankrupt on Monday by the Insolvency and Companies Court of the London High Court. After being declared bankrupt by the British court allowing Indian banks to pursue his assets worldwide, Vijay Mallya launched a tirade on Twitter accusing lenders of making him bankrupt.

Meanwhile, Union Finance Minister Nirmala Sitharaman on Monday introduced Insolvency and Bankruptcy Code (Amendment) Bill 2021 in Lok Sabha. Many small and medium businesses have been severely affected due to the COVID-19 pandemic and hence this bill was necessary to ease the financial stress.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, was promulgated by President Ram Nath Kovind on April 4 to offer an alternate bankruptcy resolution scheme for small businesses. The minimum payment default threshold to avail this scheme is Rs 10 lakh. This scheme takes into account the special circumstances in which micro, small and medium enterprises function.

The Insolvency and Bankruptcy Code, 2016, is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. This will help faster insolvency proceedings to help creditors, such as banks recover dues and prevent bad loans.

As India witnessed a rare recession last year due to the onset of the COVID-19 pandemic, the government made some changes to bankruptcy processes to deal with the financial losses during pandemic times.

What is Bankruptcy Code?

It is legislation, which suggests time-bound settlement for insolvency cases. This is particularly useful when lenders struggle to recover their loan dues.

Why is it needed?

The ordinance is issued as the government wants to streamline tribunals on priority, save considerable costs involved in running them and get speedy justice delivery.

Indian banks are now distraught with bad loans eating into their profits significantly as many corporate borrowers have defaulted repayments running in lakhs of crores, many a time wilfully.

This essentially leads to court cases as lenders try to get back their dues through legal means, which is pretty lengthy compared to other countries. This aggravates banks' woes further.

The time to resolve insolvency (number of years from the filing for insolvency suit in court until the resolution) is 4.3 years in India.

It is just six months in Japan, eight months in Singapore, one year in Malaysia as well as the United Kingdom, and 1.5 years in the US, as per World Bank data till 2015.

Backed by the regulators, banks are now seeking liquidation of those willful defaulting companies but at the shortest possible time, a move that will save the banks' bleeding balance sheets.

According to a government analysis, tribunals have not necessarily led to faster justice delivery in the last three years. The government believes many tribunals only add to another additional layer of litigation.

Salient features of Insolvency and Bankruptcy Code (Amendment) Bill 2021 

The finance ministry increased the minimum default threshold for initiation of bankruptcy proceedings from Rs 1 lakh to Rs 1 crore.

This is mainly to save small, micro, and medium enterprises which make up for over half of India's manufacturing GDP and are the largest source of regular employment.

The government provides that insolvency proceedings against defaulting companies will not be initiated for a calendar year starting from March 25, 2020.

Aimed specifically for small businesses that were the hardest hit by COVID-19, the government promulgated the IBC ordinance, which now needs to be passed by Parliament.

The government introduced so-called 'pre-packages' as an insolvency-resolution process.

This allows for a prior bankruptcy-resolution agreement between a creditor, such as a bank, and an investor without initial approval from the National Company Law Tribunal, the bankruptcy regulator.

What will change?

IBC for individuals will bring in two important changes to the bankruptcy process. One, the process will become more timebound than what the current laws provide.

Two, it will provide for an automatic moratorium or stay on debt recovery efforts, once you file an insolvency application before the 'adjudicating authority' under IBC.

Under the current laws, the grant of a stay is at the discretion of the court.

The bankruptcy process

If you live in Mumbai, Kolkata, or Chennai, you will be governed by the Presidency Towns Insolvency Act, 1909. For all other places in India, you will be governed by the Provincial Insolvency Act, 1920.

Both laws are similar and eventually are meant to be replaced by the Insolvency and Bankruptcy Code (IBC).

Under the Provincial Insolvency Act, you can file for bankruptcy if you are unable to repay a debt. This basically means you can get a stay order against further recovery efforts by your creditors.

Once your application is admitted, your property vests with the 'receiver' appointed by the court.

This official then distributes your assets among the creditors, unless a compromise proposed by you has been accepted by your creditors and the court.

Once this process is completed, you will be 'discharged from bankruptcy' by the court, giving you the opportunity to build your life and finances afresh, without being hounded by your previous creditors.

While the insolvency proceedings are pending before the court, you can apply for a minimum maintenance amount for your own and your family's survival.

However, until you are discharged from bankruptcy, multiple restrictions apply - you cannot act as a director in a company, be a public servant, be elected or sit or vote as a member of any local authority, etc.