As Sri Lanka drafts its Rescue, Rehabilitation and Insolvency Bill, it should refer to the nature by which the Indian Insolvency and Bankruptcy Code (IBC), 2016 has enabled significant reduction of NPLs, time-bound debt-distressed business revival, and alternate means of liquidation which Sri Lanka’s existing laws do not accommodate, TWC Executive Chairperson Thilan Wijesinghe said, speaking at the Committee on Public Finance (COPF) recently (28).
“Having studied the Indian Insolvency and Bankruptcy code of 2016, it is very clear that non-performing loans (NPLs) on Indian balance sheets went down from 8-9% to 2% or less, upon the implementation of the Indian Insolvency and Bankruptcy code,” Wijesinghe said, during a discussion of the COPF, in the presence of officials working on the draft law.
The draft law, as approved for formulation in 2023 by the then Cabinet of Ministers, is meant to replace the colonial Insolvency Ordinance of 1853, and is to update the Companies Act of 2007. One of the main focuses is to shift conventional practices of resorting to liquidation of failed or debt distressed businesses, towards resuscitating those that can be revived.
Referring to India’s IBC, Wijesinghe explained that Sri Lanka too must follow suit in enabling failed or debt-distressed businesses a legal, time-bound process of revival, instead of resorting to liquidity. “There are targeted time frames within which the revival process needs to be completed by law. The minimum is 180 days and the maximum is 330 days, so there is a legal time-bound time period for resolution of insolvency cases.”
He added: “Then there is a committee of creditors that decides on the restructuring, sale, and liquidation. In summary, it is a creditor-controlled model.”
Referencing Sri Lanka’s Parate Execution law, which allows commercial banks to sell mortgaged property through public auction, upon a borrower’s default, without court intervention, Wijesinghe added: “In the case of the current Parate law, only banks are considered as creditors. Laws such as this should help the Government, the UDA, the creditors, including contractors, not just the banks, to have an equal say, along with the owners in resolving the matter and failing which, in specific time frames, to move towards liquidation.”
According to the Indian code, India’s IBC of 2016 was introduced as a means of balancing stakeholder interest with a 270-day maximum period, thereby shifting the legal framework for cases from a debtor-in-possession to creditor-in-control system.
“There should be a time-bound compulsion through the insolvency law, like in the case of India, for these assets to come to the market after going through a proper process, so they can be recycled and repositioned,” Wijesinghe added.
“In the case of the smaller companies, where the banks sometimes do not hesitate to execute Parate execution, because the bigger companies are “too big to fail”, the smaller companies are put through the process at great distress. Now the actual way of doing this and how it happens in other countries, the small businesses get aggregated into pools that we call “bad banks”, so that large amounts of capital can come and look at all these small assets and see the first instance, can you work with the owners of those assets to resuscitate them? That provision is absent from an economic planning perspective.”
Officials of the Central Bank of Sri Lanka and the COPF have previously agreed on the need for the creation of a ‘bad bank’ to manage distressed debt restructuring of small businesses.