Budget 2015 recognises the need for legal reforms to stimulate business and growth. Economic policies overwhelmingly focus on >fiscal measures, monetary interventions and >welfare programmes to aid businesses, but the legal processes that underlie commerce are often ignored. Laws that are concerned with starting businesses, enforcing contracts, ensuring debt repayments and exiting businesses, play a critical role and can thwart growth, rendering even good policies ineffective. It is in such a spirit of broadening the approach that Finance Minister Arun Jaitley has >identified reform in bankruptcy laws as a key priority, envisaging legal clarity and speedy processes that will ultimately ease doing business in India. The connection between better insolvency laws and economic growth is straightforward: >stronger bankruptcy laws protect the rights of borrowers and lenders, promote predictability, clarify the risks associated with lending, and make the collection of debt through bankruptcy proceedings more attractive. These factors ultimately facilitate credit and thus a higher flow of capital in the economy. But as per the recent Doing Business, 2015 Report, India is ranked 142 on the ease of doing business and at 137 for resolving insolvencies. The average time taken for insolvency proceedings in India is about 4.3 years, while it is only 1.7 years in high-income OECD countries. The recovery rate (cents on the dollar) is 71.9 in high-income OECD countries as opposed to 25.7 in India.
This is why the Interim Report of the Bankruptcy Law Reform Committee released in February 2015 is welcome. The Committee set up by the Ministry of Finance in August 2014 will be crucial to the new legislation promised in the Budget. The Committee sees the early recognition of financial distress and timely intervention as key features of efficient rescue regimes and believes that the degree of viability of a company must be the central consideration for allowing it to be rescued, and that an unviable company should be liquidated as soon as possible to minimise losses for stakeholders. They recommend that secured creditors be allowed to file an application for the rescue of a company at a sufficiently early stage, rather than wait for the company to have defaulted on 50 per cent of its outstanding debt, as currently provided for in the Companies Act, 2013. The Committee suggests that unsecured creditors representing 25 per cent of the debt be allowed to initiate rescue proceedings against the debtor company. The report also focusses on individual insolvency, a crucial area covering sole proprietorships and small and medium enterprises in India. Therefore, a new bankruptcy law coupled with practical changes, removing the judicial bottlenecks and delays, will be crucial to the reform process.
Correction
>>“Bankruptcy law reform needed” (Editorial, March 4, 2015) said as per the recent Doing Business, 2015 Report, India is ranked 134 on the ease of doing business. It should have been 142nd rank.
