The word “Bankruptcy” is formed from the ancient Latin bancus (a
bench or table), & ruptus (broken). When a banker failed, he
broke his bank, to advertise to the public that the person to whom
bank belonged was no longer in a condition to continue his
business. Bankruptcy is a legal status of a person or other entity
that cannot repay the debts it owes to creditors. In most
jurisdictions, bankruptcy is imposed by a court order, often
initiated by the debtor. India does not have a clear law on
corporate bankruptcy even though individual bankruptcy laws have
been in existence since 1874. The current law in force was enacted
in 1920 called the Provincial Insolvency Act. The legal definitions
of the terms bankruptcy, insolvency, liquidation and dissolution
are contested in the Indian legal system. There is no regulation or
statute legislated upon bankruptcy which denotes a condition of
inability to meet a demand of a creditor as is common in many other
jurisdictions. Winding up of companies is in the jurisdiction of
the courts which can take a decade even after the company has
actually been declared insolvent. On the other hand, supervisory
restructuring at the behest of the Board of Industrial and
Financial Reconstruction is generally undertaken using receivership
by a public entity.

Under Indian law, bankruptcy is dealt with under the Indian
Companies Act, 1956, the Sick Industrial Companies (Special
Provisions) Act, 1985 (“SICA”), Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (SARFAESI), the Indian Contract Act, 1872, the
Indian Civil Procedure Code, 1908 and other substantive and
procedural laws. As there is no single comprehensive &
integrated policy on corporate bankruptcy in India, four different
agencies have overlapping jurisdiction: 1) High courts 2) Company
law board 3) Board for Industrial & Financial Reconstruction
(BIFR) and 4) The Debt recovery tribunals (DRTs). Bankruptcy
process begins with a petition filed by the debtor (most common) or
on behalf of creditors (less common).

All of the debtor’s assets are measured and evaluated, whereupon
the assets are used to repay a portion of outstanding debt. Upon
the successful completion of bankruptcy proceedings, the debtor is
relieved of the debt obligations incurred prior to filing for
bankruptcy. However, filing for bankruptcy in India will not
reflect well on your credit rating for a long time, making it hard
for you to advance or borrow money in future. Filing for bankruptcy
in India also results in social stigma. Bankruptcy laws in India
are not as effective as US-style Chapter 11 bankruptcy procedure.
RBI governor Raghuram Rajan wants effective resolution of bad loans
that shows zero tolerance of mismanagement and fraud but makes room
for genuine, surmountable difficulty. Indian legislators still have
to put more efforts in order to provide us with effective
bankruptcy laws. Existing laws are not all sufficient. Under
chapter 11, company undergoing bankruptcy gets an automatic stay to
hold on to assets, run the business and also control the bankruptcy
process. An automatic stay will prevent lenders from rushing to
take possession of the company’s assets, without giving promoters
time to examine the viability of a turnaround. Such provisions are
not available under Indian law.

Government should introduce such US-like provisions. Most
celebrated bankruptcy case was that of an Indian – Rajendra Sethia,
who lost over €70 mn. India is still lacking in its bankruptcy
laws. Heavy loan write-offs have impaired the profitability of the
biggest and most profitable banks in the system. While on one hand
restructured agriculture loans have piled up bad assets in the
books of PSUs banks. On the other, unwilling corporates have chosen
to default on loan payments rather than restructure their
businesses. Lack of legal redressal for banks and investors by way
of bankruptcy law has accentuated the problem. Overall discussion
implies that there is still a necessity for a water tight
bankruptcy law in India in order to overcome those problems.

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