India is ranked at 136th out of 189 countries in the World Bank’s index on the ease of resolving insolvencies.
The ranking came as a wakeup call for the government and Insolvency and Bankruptcy Act was passed on 28th May, 2016. With the introduction of this enactment, there is a hope for much needed clarity on liquidation proceedings of Indian corporates. This Act applicable on all companies, partnerships and individuals.
The insolvency proceedings were previously dealt by the Companies Act 1986, the Sick Industrial Companies (Special provisions) Act 1985 , Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. The provisions under the previous laws will be replaced by the provisions of this Act.
The Act provides for the establishment of a whole new institutional framework, comprising of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, facilitating time bound insolvency resolution process and liquidation. The quick resolution of proceedings will prevent liquidity issues in the domestic market.
The Insolvency and Bankruptcy Board of India is the new regulator of insolvency proceedings and insolvency professionals. All the corporate and insolvency matters are to be adjudicated by newly established National Company Law Tribunal and Debt recovery Tribunal. The highest appellate authority will be Supreme Court.
This Act envisages a two-step process- Insolvency Resolution Process and Liquidation process.
Under the insolvency resolution process, the creditors assess whether the debtor’s business is viable to continue and the options for its rescue and revival. On failure of this process, the liquidation stage commences.
The most important reason for introduction of this Act was –the threat of growing non-performing assets (NPAs) in corporate financial statements. Substantial portion of NPAs are into real estate sector as well. Several Developers had taken debt route for completing their projects while the real estate market was experiencing a sluggish period, leading to delayed repayments of loan. Now, the Creditors have an option of recovering their debts through a faster legal channel.
The Creditors will be able to recover their money and re-invest into other projects. Thus, increasing the inflow of capital into real estate industry. The Act will bring transparency and boost confidence in debt relations, opening the doors of debt markets to real estate companies.
The government was keen to enact this law to improve India’s ranking on the index of “ease in doing business”, in order to improve the foreign investor sentiment. With the positive outlook of investors, the Make in India initiative of government is set to prosper. Thus, Real estate sector will also witness rising inflow of investment .