Arun Jaitley's Right India's New Insolvency Laws Protect Business Assets Not Destroy Them

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Cautioning corporate defaulters, finance minister Arun Jaitley on Saturday said the old regime by which “lenders would get tired chasing errant borrowers and end up recovering nothing” was over. He warned that if a borrower has to survive, he will have to service the debt or make way for somebody else. “I think this is the only correct way by which businesses would now be done,” Jaitley said, adding that for endless years, a system existed that effectively protected the debtors and allowed assets to rust away, as there was hardly any law for individual and partnership insolvencies.

The important part there is the assets rusting away. As he also said:

New insolvency law has significantly reversed defaulting debtor-creditor relationship said Finance Minister Arun Jaitley. "The ultimate objective really is not liquidation of assets, (but) to save these businesses, get either the existing promoters with or without new partners or new entrepreneurs to come in and make sure that these valuable assets are preserved," Jaitley said.

Exactly so, as I've said before one of the most important parts of an economy is how it cleans up the inevitable failures.

To start from the beginning, there always are going to be failures. Perhaps it's the people doing the work who got it wrong, perhaps it was just a bad idea in the first place. But there will be failures. One of the reasons to have a market economy is to maximise the number of failures--no, really, we don't know what people want, we don't know what is possible. We have to try things out and see. And quite obviously many of those tries will be failures. So, we've got to clean those mistakes up. In a planned economy it's even more important, because the planners will themselves make mistakes, we need to clean those up too.

As a result of mistakes we'll find that we've got potentially useful business assets (land, machinery, labour, ideas, whatever) locked up in failed corporate or other structures. We'd like to liberate them from that failed structure or purpose so that people can use those scarce economic resources to go and do something potentially at least more productive. Thus we've got to have a system whereby we can all agree--right, that's a failure, investors have lost their money, how sad and boo hoo, now, who wants these fine business assets at what price? That system being bankruptcy and insolvency.

The previous Indian system was, as Jaitley says, roughly that this would take decades and those business assets would rust away. The new laws aren't perfect, perfection isn't possible here it's a trade off. But that matters can happen in less than geologic time these days does mean that those business assets can be liberated more quickly and thus before they've rusted too much.

How we clean up the inevitable mistakes in an economy is important and as Jaitley says, doing so before business assets devalue to nothing is the point and purpose of an insolvency and bankruptcy system--India's system is getting better by being faster.

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Arun Jaitley is still exerting himself, as perhaps he should, to explain to people the point behind India's new insolvency and bankruptcy laws. It isn't, at all, that we want to bring businesses crashing to the ground. Nor do we want to waste business assets--our aim is entirely the opposite, we want to liberate business assets so that they can be used again elsewhere:

Cautioning corporate defaulters, finance minister Arun Jaitley on Saturday said the old regime by which “lenders would get tired chasing errant borrowers and end up recovering nothing” was over. He warned that if a borrower has to survive, he will have to service the debt or make way for somebody else. “I think this is the only correct way by which businesses would now be done,” Jaitley said, adding that for endless years, a system existed that effectively protected the debtors and allowed assets to rust away, as there was hardly any law for individual and partnership insolvencies.

The important part there is the assets rusting away. As he also said:

New insolvency law has significantly reversed defaulting debtor-creditor relationship said Finance Minister Arun Jaitley. "The ultimate objective really is not liquidation of assets, (but) to save these businesses, get either the existing promoters with or without new partners or new entrepreneurs to come in and make sure that these valuable assets are preserved," Jaitley said.

Exactly so, as I've said before one of the most important parts of an economy is how it cleans up the inevitable failures.

To start from the beginning, there always are going to be failures. Perhaps it's the people doing the work who got it wrong, perhaps it was just a bad idea in the first place. But there will be failures. One of the reasons to have a market economy is to maximise the number of failures--no, really, we don't know what people want, we don't know what is possible. We have to try things out and see. And quite obviously many of those tries will be failures. So, we've got to clean those mistakes up. In a planned economy it's even more important, because the planners will themselves make mistakes, we need to clean those up too.

As a result of mistakes we'll find that we've got potentially useful business assets (land, machinery, labour, ideas, whatever) locked up in failed corporate or other structures. We'd like to liberate them from that failed structure or purpose so that people can use those scarce economic resources to go and do something potentially at least more productive. Thus we've got to have a system whereby we can all agree--right, that's a failure, investors have lost their money, how sad and boo hoo, now, who wants these fine business assets at what price? That system being bankruptcy and insolvency.

The previous Indian system was, as Jaitley says, roughly that this would take decades and those business assets would rust away. The new laws aren't perfect, perfection isn't possible here it's a trade off. But that matters can happen in less than geologic time these days does mean that those business assets can be liberated more quickly and thus before they've rusted too much.

How we clean up the inevitable mistakes in an economy is important and as Jaitley says, doing so before business assets devalue to nothing is the point and purpose of an insolvency and bankruptcy system--India's system is getting better by being faster.

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