Bankruptcy code may hit finmin wall

EW DELHI: The proposed new corporate bankruptcy code, which seeks to efficiently rescue financially distressed companies, is likely to face some hurdles from the finance ministry on its implementation.

Finance ministry officials told ET that they cannot dilute lenders��� right to take possession of a defaulting borrower���s assets in order to facilitate the introduction of the new bankruptcy code.

The new code provides for a reasonable stand-still period, during which lenders cannot attempt to take possession of the defaulting borrower���s assets.

The idea is to give reasonable time to a distressed company to revive before the court decides to liquidate it and pay off liabilities by selling its assets. It seeks to help a distressed company that is making genuine and all out efforts to revive.

However, this is not in sync with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act, which allows secured creditors to take possession of the assets of a borrower who fails to pay dues within 60 days of demanding repayment. The Sarfaesi Act is known for helping lenders to recover their loans from defaulters trying to avoid payment.

A finance ministry official, who asked not to be named, told ET, ���A loan becomes a bad loan only after 90 days of non-payment of principal or interest. Banks do not take recovery action immediately after that. They negotiate with the borrower for restructuring the loan as per RBI���s guidelines. Only if nothing works out, they invoke the Sarfaesi Act, which has given a comfort level to banks in taking lending decisions as it provides a safety net to recover their assets. Diluting this right can severely affect credit offtake.���

However, insolvency experts have a different view. ���In practice, banks put a lot of pressure on the borrower during the 60-day period after demanding payment, which distracts him from focusing on restructuring the company. Besides, the proposed stand-still period is not an automatic stay on creditor action as is the case now. This will commence only on the order of the court, after which the debtor cannot sell or transfer the assets of the company. There are other safeguards to protect the interests of the creditors,��� said Sumant Batra, president of UK-based International Association of Restructuring and Insolvency Professionals, who assisted the government on bankruptcy reforms.

When the court orders a stand-still period depending on the merits of the restructure scheme, it also appoints an independent administrator who will oversee the company���s operations. If creditors have no confidence in the debtor���s management, they can ask the management to hand over the reins to the independent administrator.

Under the existing law, Sica, creditors do not have such safeguards. Once distressed firms make a reference to the Board for Industrial and Financial Reconstruction, it triggers an automatic stay on creditor action for many years. Finance minister Pranab Mukherjee recently said the government will bring the new bankruptcy code once the Parliament passes the Companies Bill.