Impact of Bankruptcy on the Financial Sectors in India


Bankruptcy is a legal procedure imposed by the federal code on a firm or individual who fails to pay their outstanding debts. There are many laws in India which govern the Bankruptcy proceedings which includes SARFAESI Act, Companies Act etc. The Bankruptcy code was build in order to amend the Companies Act. Parliament of India has passed a law to deal with the problem of insolvency which promises to recover debts by various means like speedy liquidation or survival mechanism. Insolvency and Bankruptcy Board of India will be responsible for the conduction of the resolution process.  The Bankruptcy code was introduced in November 2015 under the banner of Bankruptcy Law Reform Committee. The code offers a comprehensive legislation of insolvency by generating a time bound process.

The average duration to resolve insolvency in India is 4.3 years so it’s probably the worst’s nightmare for the creditors. On the contrary, according to it, the insolvency of companies and individuals should be resolved within 180 days. However, the in special circumstances the law can have a grace period of another 90 days. This law is strongly dependent on the institutions and expertise which includes regulatory bodies like licensed Insolvency Professional, National Company Law Tribunal, Debt Recovery Tribunal. The Bankruptcy Code will also create a new Institutional structure which will also protect the workers who are left unpaid by the companies. Another important feature of the Code is that it can join hands with the overseas government in case of the debtor having access abroad. The Code will also provide a order of priority where the unsecured creditors will have a priority over secured creditors. The new Law will also influence the private sector since it will force those firms who are unable to pay their debts to shut their firms.

However, the main challenge lies in the establishment of several new entities. An in-solving plan has to satisfy various criteria before resolution .Firstly it have to be approved by voting-share creditors than it has to be sanctioned by the adjudicating authority. Although the new law will work as the “magic wand “to the financial system of India, its success depends on the execution of the law, and the banks potential to exercise their rights. According to Ashwin Bishnoi, a partner of Khaitan and Co the implementation of the insolvency code will take time since the so called four pillars of the Bankruptcy Code i.e., the insolvency professionals, information depositors, a new regulator and high quality adjudication have to be very strong for the successful implementation of the law. According to the new Law an In-solvancy and Bankruptcy fund will also be created.

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