Corporate insolvency law is an essential business law which provides for efficient liquidation of assets of a non-viable enterprise. An insight into provisions on insolvency proceedings under the Companies Bill, 2009…
The insolvency law regime in India is fragmented, as it is not consolidated in a comprehensive code. The architecture of the insolvency law structure can be segregated into two heads, namely, ‘Personal Insolvency’ and ‘Corporate Insolvency’. Personal insolvency, which deals with individuals and partnership firms, is regulated by the Provisional Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1908. In the arena of corporate insolvency, there are a number of ways in which a beleaguered corporate entity can restructure or liquidate itself. It can be dealt with under the Indian Companies Act, 1956 (1956 Act), or the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), or Corporate Debt Restructuring mechanism propounded and governed by Reserve Bank of India, or lastly, the Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SRFAESI).
The 1956 Act deals with the winding up of companies and gives jurisdiction to the high court of the concerned state as the liquidation court. SICA provides for the establishment of the Board for Industrial and Financial Reconstruction (BIFR), which is entrusted with the revival and rehabilitation of companies.
The government of India has recently introduced the Companies Bill, 2009 (the Bill) in the Parliament of India. The Bill will revise and modify the 1956 Act and bring the law relating to companies in consonance with changes in national and international economy.
The most conspicuous change, which the Bill seeks to make, is establishment of the National Company Law Tribunal (NCLT), which will replace the Company Law Board (CLB) in all respects. The NCLT will also take over from the BIFR and will have power and jurisdiction relating to winding up of companies, which are presently vested in the high court of states. Thus, a single forum shall be created to help in speedier disposal. The appeals from the decisions of these tribunals shall go to the National Company Law Appellat Tribunal (NCLAT). These tribunals are bound not by the ‘rigid’ rules of procedure but by the ‘principles of natural justice’.
The process under the 1956 Act is extremely time-consuming and cost-escalating, as the liquidation process takes about twelve years in India while in most of the developed countries; it takes only one to three years. Thus, foreign investors have a real and genuine fear that in case the market conditions in India turn adverse, they could get trapped here. They have another fear of not getting proper valuation for their assets during liquidation, which acts as big disincentive for foreign investors and they are reluctant to invest in India. The Bill tries to address and solve these problems.
The Bill proposes to have a separate chapter to deal with insolvency proceedings. It provides for engagement of professionals in the management and valuation of assets, and special audit investigations. This process will improve the use of assets, which used to lie dormant because of the delays in dissolution of a company, owing to the requirement of sanction of a High Court for dissolution.
However Delep Goswami, FCS, Corporate Lawyer, opines, “The Bill is silent on issues like how soon the official liquidator will get the details of the assets and liabilities of the company in liquidation. In most of the cases, such information is not readily forthcoming from erstwhile company directors. While the erstwhile auditors can play a very significant role in furnishing some vital details regarding the assets and liabilities of the company in liquidation, however, the Bill is silent with espect to their co-operation. Unless this handicap faced by the official liquidator is overcome, the liquidation process cannot be expedited.”
The NCLT will also deal with ‘oppression and mismanagement’. Goswami adds “NCLT has not yet been operational and will take its own time to streamline procedures. It will also have other cases like revival of sick companies (presently being handled by BIFR) and the bulk litigation in the area of oppression and mismanagement cases, so it is unlikely that speed in company liquidation can be expected.”
“The Bill is silent on issues like how soon the official liquidator will get the details of the assets and liabilities of the company in liquidation. In most of the cases, such information is not readily forthcoming from erstwhile company directors. While the erstwhile auditors can play very significant role in furnishing some vital details regarding the assets and liabilities of the company in liquidation, however, the Bill is silent with respect to their co-operation. Unless this handicap faced by the official liquidator is overcome, the liquidation process cannot be expedited.”
Mr. K Cherian Varghese
Chairman, BIFR
The government has yet not given any notification of the repeal of the SICA. As of now, BIFR continues to function as earlier to revive sick companies. The BIFR has to follow the laws laid down in SICA. The objective of SICA is to ensure that the company’s property assets are put to appropriate use, that employment of workers is protected and also the dues of the financial institutions, banks and the government are recovered to the extent possible. With this objective, we explore possibilities of restructuring the dues of the sick industrial companies.
Under the present law, people who have lent money on an unsecured basis, trusting the company, are at a great disadvantage. Their consent is not required for the Scheme. However, BIFR protects them as the settlement proposed by the company, ultimately, has to have the approval of BIFR and only then does the Scheme becomes binding. Only after considering the objections of unsecured creditors and workers, does the BIFR arrive at a fair Scheme for covering their dues. We won’t simply agree for mass-scale retrenchment unless a fair compensation is given to the workers.
We always ask the company what steps they are taking to revive the company so that the employment of workers is protected.
When the economic downturn occurred, we were very apprehensive that the number of companies approaching BIFR will increase greatly. However, as of now, this apprehension is misplaced as very few companies have come to us so far. This shows that the Indian economy is more resilient and has been able to withstand the shock of the global meltdown. The government and banking sector have taken a lot of proactive measures which have had an effect of postponing the ‘sickness’ in companies. There is a possibility that companies might do even better in the days to come. We can see from tax reports that the industrial sector is fairing reasonably well in spite of the economic shock. I do not, as of now, see the meltdown impacting the Indian industry in a significant way.
The idea is to have a common forum for dealing with matters relating to shareholders and revival of sick companies. More than deciding the legal issues, the revival of companies involves also a commercial approach. BIFR is like a doctor who tries to cure sick industries. Therefore the person sitting in the forum should have sound knowledge about how a company functions and how accounts are prepared. On that basis only, a good rehabilitation or restructuring package can be prepared for the sick industrial company. Therefore, proposed setup of the NCLT should have people possessing a sound understanding of how the industry works and then suggest a way out for the companies in best interest of the public.
At the same time, let there be a due place for regulation in the proposed law. The society has a right to regulate the conduct of any organization in a civilized human community. We have to clearly distinguish between regulation and control and have a system of regulation which is judicially administered for the orderly development of the economy and the society.
The Bill lays down a transparent process for the selection and appointment of members of the tribunals. It requires specialised qualification for members. Its members shall consist of experts in diverse fields like accounting, competition law, taxation etc. Thus, these tribunals could expedite the process compared to the regular courts. The Bill also provides specific time frame for rehabilitation and provides for a special insolvency process in the event of failure of rehabilitation.
The Bill makes provisions for justice delivery system, which is quick, efficient and effective. The Bill seeks to reduce the scope of appeal against orders passed by the Tribunal. Thus, final settlement arrived at would be quicker. As these tribunals shall have experts as their members, the decision shall be efficient too. Speedier disposal shall pave the way for quicker follow up action too.
Some strong voices, however, are also being heard against the Bill. One of the most conspicuous arguments in opposition is that the judgment, delivered by the members, might be lacking judicial experience and hence, erroneous. However, the argument seems to be baseless, since all the tribunals are to be designed to comprise representatives of the judiciary also. Amalgamation of people from diverse fields will help in reaching at an amicable solution. Also, the system of NCLT could be a solution to the problem of different legal interpretations of the same issue by different High Courts. This will promote uniformity in decisions and will secure the faith of the investors.
The concern shown by the judiciary is that the ruling political party might appoint members of their choice, thus, interfering unnecessarily in the impartial functioning of these bodies. However, this confrontation can be avoided by adopting the system of periodical evaluation of the tribunal’s performance. It is also noteworthy that the members of the proposed tribunals are to be selected by a panel, headed by the CJI or his nominee. Thus, the screening must be largely foolproof even at the initial stage.
There is no doubt that the amendments, if implemented, would pave way for a new efficient, quick and effective insolvency system, which is more professional and responsive to the present day market condition, incorporating international best practices based on the models suggested by the United Nations Commissions on International Trade Law, commonly known as UNCITRAL. The whole corporate sector of India and in turn, Indian economy will get benefited by the Bill, as it secures composite law for the regulation of the revival, rehabilitation as well as the winding up of the companies.
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