Country report on_corporate_insolvency_laws (1)
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    Country report on_corporate_insolvency_laws (1) Country report on_corporate_insolvency_laws (1) Document Transcript

    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSCHAPTER I: GENERAL FRAMEWORK OF INSOLVENCY LAWS IN INDIAThe need for an insolvency law in India was first articulated in the three Presidency-towns ofHISTORICAL BACKGROUND 1 P0F PCalcutta, Bombay and Madras. The earliest rudiments of insolvency legislation can be tracedto sections 23 and 24 of the Government of India Act, 1800, which conferred insolvencyjurisdiction on the Supreme Court at Fort William and Madras and the Recorders Court atBombay. These Courts were empowered to make rules and order for granting reliefs toinsolvent debtors on the lines intended by the Act of the British Parliament called the LordsAct passed in 1759. 2The passing of Statute 9 in 1828 (Geo. IV. c. 73), can be said to be the beginning of the P1F Pspecial insolvency legislation in India. Under this Act, the first insolvency courts for relief ofinsolvent debtors were established in the Presidency-towns. Although the insolvency Courtwas presided over by a judge of the Supreme Court, it had a distinct and separate existence.The Insolvency Court was to sit and dispose of insolvency matters as often as wasnecessary. But the Court at Calcutta was to sit at least once a month. The Act of 1828 wasoriginally intended to remain in force for a period of four years, but subsequent legislationextended its duration upto 1843 and also made certain amendments therein. 3A further step in the development of Insolvency Law was taken when the law in 1848 (11 & 12 P 2FViet.c.21) was passed. The Act presumed the distinction between traders and non-traders incertain respects on the lines of the corresponding Bankruptcy statutes, then in force inEngland. It continued the Courts for the relief of insolvent debtors established by the Act of 1828in the Presidency towns and in their place the present High Courts were set up. The insolvencyjurisdiction in the Presidency towns was thus transferred from the Supreme Court to the HighCourt.The Provisions of the Indian Insolvency Act, 1848, were, however, found to be inadequate tomeet the changing conditions. In the eighteen seventies Sir James Fitzjames Stephen proposedan Insolvency Bill for the whole of India modeled on the Bankruptcy Law then in force in1 Prepared in the Directorate of Academics and Professional Development, the ICSI2 J P S Sirohi, Law of Insolvency(1985)3 See Mulla Law of Insolvency in India(1958), P.16 1
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSEngland. But this proposal was dropped, as the conditions in India in general were notfavourable for a compulsive legislation on the subject. The Act of 1848 continued in force inthe Presidency-towns until the enactment in 1909 of the present Presidency-towns InsolvencyAct, 1909.While there was special insolvency legislation for the Presidency-towns, there was noinsolvency law in the rural areas. The main reason for this difference was the absence of anyflourishing trade and commerce therein. In the rural areas for a considerable period the ordinaryprinciple of distributing the sale proceeds pronotes among decree-holders after satisfaction infull of the amount due to the attaching decree holder seems to have prevailed. The firstattempt to introduce insolvency law in the rural areas was made in 1877. Some rules wereincorporated in Chapter 20 of the Code of Civil Procedure, 1877, which conferred jurisdictionon the district Courts to entertain insolvency petitions and grant orders of discharge, theserules were re-enacted with certain modifications in Chapter 20 of the Code of Civil Procedure,1882.The Provisions in the Civil Procedure Code of 1859 were described 4 as the "germ and nothingmore than a germ of an insolvency law." The provisions were limited to cases in which legal P3 F Pproceedings were instituted and judgment obtained. Creditors of a debtor were not entitledto file an insolvency petition. These defects were removed by the provincial Insolvency Act,1907. This Act created a special Insolvency Jurisdiction laying down the conditions underwhich a debtor could be adjudicated on his own petition or on a petition by a creditor. TheAct of 1907 was repealed by the provincial Insolvency Act, 1920 which is the Act now inforce in the areas other than the Presidency towns.CENTRAL AND STATE LEGISLATIONSOn January 26, 1950 the Constitution of India came into force. The Laws/Acts enacted after itsadoption are called the Central Laws/Acts. For Example the Companies Act, 1956, LimitedLiability Partnership Act, 2008 (LLP) etc, (this contains the detailed process for the winding upof the corporate entities). These are called the Central Acts, wherein the Companies/LLPs are4 See Mulla Law of Insolvency in India (1958), P.16. 2
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSrequired to get themselves registered with the Central Registry known as the Registrar ofCompanies /LLP in order to become corporate entities.However, before the adoption of the Constitution of India, many laws/Acts governing theinsolvency procedures were in operation like the Provisional Insolvency Act, 1920, and thePresidency Towns Insolvency Act, 1908. Government of India saved these Acts so that they donot get repealed and allowed for State Amendments wherein the entities provided for underthose Acts are regulated by different States and the States were given the authority to modifyor make provisions in these Acts. Since, the personal insolvency is a subject matter of State Listover which laws can be made by the State Legislation. Hence any amendment in these Acts willrequire acceptance or assent, from all the States or the States can individually amend theselaws/Acts.CURRENT SCHEME OF INSOLVENCY LAWS IN INDIAThe stream of insolvency laws can be segregated chiefly under two heads: Personal Insolvency,which deals with individuals and partnership firms governed by Provisional Insolvency Act,1920 and Presidency Towns Insolvency Act, 1908 and Corporate Insolvency, whoseconsequence is winding up of the company under the Companies Act, 1956.In context of corporate laws, the word "insolvency" has neither been used nor defined in India.However, Section 433 (e) of the Companies Act, 1956 covers a company, which is "unable topay its debts", and thus constitutes a ground for winding up of the company. Inability to pay itsdebts would be a case where, a companys entire capital is lost in heavy losses and no accountsare prepared and filed and no business is done for one year. In such circumstances, theRegistrar of Companies makes out a case of inability to pay debts. These debts however, wouldonly include debts, incurred after the legal incorporation of the Company. Inability to pay debtshas even been amplified in Section 434 of the Companies Act, 1956 wherein, a creditor with adue of Rs. 500 or more serves a demand by registered post and the company neglects to pay,secure or compound the same in three weeks, in cases where the execution of a decreereturned unsatisfied and also where the Court is otherwise satisfied that the company is unableto pay its debts. 5 P4F *******5 Sourced from: 3
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER II: A FRAMEWORK FOR REHABILITATION OF COMPANIESIndia started her quest for industrial development after independence in 1947. The industrialINTRODUCTIONpolicy resolution of 1948 marked the beginning of the evolution of the Indian Industrial Policy;and thereafter with the economic and social development there has been shift in the industrialpolicy from the directed and regulated economy in the 1948 and 1956 Policy Resolution, to thefree market economy in 1991. During the initial years, there was also the problem of industrialsickness entailing social costs in terms of loss of production and un-employment and waste ofcapital assets. The problem of industrial sickness and its consequential fall out on the nation’seconomy and also the problem faced by financial institutions (which have invested much of thepublic funds in such industries) in the matter of recovery of their dues and the rehabilitation ofthe sick industrial company led to enactment of the Sick Industrial Companies (SpecialProvisions) Act, 1985. 6 P5FThe [I (D & R) A] is an important piece of legislation for the development and regulation ofINDUSTRIES DEVELOPMENT AND REGULATION ACT [I (D & R) A], 1951certain industries. It contains provisions for the regulation of industries to prevent industrialundertakings from falling sick and consequently hampering the production of materialsnecessary for the economic development of the country. 7 P6FThe two Acts i.e.; the [I (D & R) A] and SICA operate in different fields though they wouldSICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA) AND [I (D & R) A]appear to be overlapping. The [I (D & R) A] was enacted for the development and the regulationof certain industries. The [I (D & R) A] applies to industries mentioned in the schedule to theAct and the SICA is applicable to those very companies having industries as mentioned in theschedule to the [I (D & R) A].Chapter III of the [I (D & R) A] contains provisions for the regulation of the industries. The Actis more of preventive nature so that the industrial undertakings do not fall sick. Section 15 of6 Taxman’s new law relating to Sick Companies by D.P. Mittal 2003 edition7 Taxman’s new law relating to Sick Companies by D.P. Mittal 2003 edition 4
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSthe Act gives power to the Central Government to move to the High Court for permission tomake or cause to be made investigation into a company which is to be wound up for thepurpose of running or restraining an industrial undertaking in the interest of the general publicand, in particular, in the interest of production, supply or distribution of articles or classes ofarticles relatable to the concerned Scheduled Industry. Under section 16, the CentralGovernment has been authorized to issue directions to the industrial undertaking afterinvestigation had been made under section 15 of the Act.Chapter III A deals with the power of the Central Government to assume management orcontrol of the industrial undertaking in certain cases where the industrial undertaking to whichdirections have been issued in pursuance of section 16 of the Act has failed to comply with suchdirections, or the industrial undertaking in respect of which an investigation has been madeunder section 15 of the Act, is being managed in a manner highly detrimental to the ScheduledIndustry concerned or to the public interest.Under sub-section (2) of section 18A of the Act, a time limit is prescribed within which themanagement of the industrial undertaking can be taken over by any person or body of personsso authorized. There is no such limitation for any scheme under SICA containing measures forthe proper management of the sick industrial company by change or takeover of themanagement. 8 P7FChapter III AC of the [I (D & R) A] dealing with liquidation or reconstruction of companiesLIQUIDATION OR RECONSTRUCTION OF COMPANIES UNDER [I (D & R) A]requires the Central Government after the takeover of management of the industrialundertaking or part thereof, to ensure that the purpose of the takeover is being achieved. It isfor this reason that section 18FC of the Act confers powers on the Central Government to callupon the authorized person to submit a report on the affairs and working of the industrialundertaking whose management or control has been taken over under Section 18A, 18AA, or18FA of the Act.Section 18FD of the Act provides two alternatives to the Central Government in respect ofreceipt of the report from the authorized person. The Central Government can either decide to8 Taxman’s new law relating to Sick Companies by D.P. Mittal 2003 edition 5
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSsell the undertaking as a running concern or it may decide to prepare scheme forreconstruction of the company.The decision to sell undertaking as a running concern may be taken by the Central Governmenton being satisfied that; In the case of the company owning the industrial undertaking, which is not being wound up by the High Court, its financial conditions and other circumstances are such that it is• not in a position to meet the current liabilities out of its assets and the interest of the general public makes it expedient to sell the undertaking as a running concern and also proceedings for winding up of the company by the High Court should be started simultaneously; In the case of the undertaking concerned owned by a company and is being wound up by the High Court, its assets and liabilities are such that in the interests of its creditors • and contributories, the industrial undertaking should be sold as running concern.In terms of sub-section 2 of section 18FD of the Act the decision to prepare a scheme ofreconstruction of the company owning the industrial undertaking may be ordered by theCentral Government, if it is satisfied that; It is in the interest of the general public, or It is in the interest of the shareholders, or • Such a course of action is necessary to secure the proper management of the company • owning the industrial undertaking. •In case the scheme of reconstruction is to be prepared in relation to an undertaking owned by acompany being wound up by or under the supervision of the High Court, prior permission ofthe High Court is to be obtained. 9 P8FA sick industrial company means an industrial company (being a company registered for notSICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA)less than five years and employing fifty or above workmen), which has at the end of anyfinancial year accumulated losses equal to or exceeding its entire net worth. Net worth hasbeen defined as the sum total of the paid up capital and free reserves.9 ICSI Module on Economic and Labour Laws. 6
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSThe scheme of the Act deals with establishment of the Board for Industrial and FinancialReconstruction (BIFR) by the Central Government to exercise the jurisdiction and powers anddischarge the functions and duties conferred or imposed thereon by or under the provisions ofthe Act. Section 5 of the Act envisages constitution of an Appellate Authority to be called“Appellate Authority for Industrial and Financial Reconstruction” for hearing appeal against theorders of the BIFR. Section 14 of the Act pronounces that the proceedings before the BIFR orthe Appellate Authority are deemed to be judicial proceedings. 10SICA requires that when an industrial company has become a sick industrial company, the P9FBoard of Directors of the said company shall, within sixty days from the date of finalisation ofthe duly audited accounts of the company for the financial year as at the end of which acompany has become a sick industrial company, make a reference to the BIFR fordetermination of the measures to be adopted with respect to the company. If the Board ofDirectors has sufficient reasons even before finalisation of accounts to form an opinion that thecompany has become a sick industrial company, it shall, within sixty days after it has formedsuch an opinion, make a reference to the BIFR.SICA is predominantly remedial and ameliorative in so far as it empowers the quasi judicialbody, BIFR to make appropriate measures for revival and rehabilitation of potentially viablesick industrial companies and for liquidation of non-viable companies. But, where the BIFRcomes to the conclusion that it is not possible to revive the company and that it is just andequitable that the company should be wound up, it shall record and forward its opinion to theconcerned High Court, on the basis of which the Court, may order winding up of the companyand may proceed and cause to proceed with the winding up of the sick industrial company inaccordance with the provisions of the Companies Act, 1956.Reserve Bank of India (RBI) has issued policy guidelines for revival of sick industrial companiesand the role to be played by lead institutions or Operating Agencies appointed for revival ofindustries declared to be sick under SICA. 11 P10F10 Taxman’s new law relating to Sick Companies by D.P. Mittal 2003 edition11 7
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSThe functioning of SICA has not been found to be satisfactory as many issues have beenISSUES ARISING OUT OF IMPLEMENTATION OF SICAidentified during its implementation. Some of the deficiencies were restrictive definition of“sickness” under the Act and belated cognizance thereof by BIFR, slow pace of BIFRintervention, excessive protection to sick industries under Section 22 of the Act providing forautomatic stay of all legal proceedings, necessity of consensus amongst secured creditorsbefore finalisation of revival scheme, lack of monitoring of sanctioned revival schemes, anddelay in winding up of sick companies. Apart from these, frequent appeal to High Courts againstthe decisions/ orders of the BIFR was also one of the factors responsible for delay in timelydisposal of the cases.There are inherent defects both, procedural and legal in proceedings before BIFR. The BIFRPROCEDURAL DELAYStakes substantial time to determine whether a company is sick and thereafter, to formulate arevival strategy. Consideration of the same also takes substantial time since banks and financialinstitutions have their own hierarchy in decision making, leading to avoidable delays. Thedecisions by the banks are also neither transparent, nor subject to judicial review. By the timedecisions are taken and communicated, the plan, which had been conceived, loses its viabilityresulting in failure of revival schemes even after sanction.Under the existing law, a company can approach the BIFR for adopting steps for its revival, onLACK OF TIMELY COMMENCEMENT OF PROCEEDINGSerosion of its entire net worth. The erosion of entire net worth is too late a stage to attemptrestructuring as by the time the net worth is completely eroded the company is too sick to berevived and loses its resilience to restructure and revival.Under SICA, an automatic stay operates against all kind of recovery and distress proceedingsMISUSE OF PROTECTION AGAINST RECOVERY PROCEEDINGSagainst all creditors once the reference filed by the company is registered. This is the principaldrawback of the existing legislation as this has led the BIFR to become a haven for defaultingcompanies. Erring debtors have misused SICA to seek protection and moratorium fromrecovery proceedings. The companies are able to enter easily into the reference, sometimes bymanipulating their accounts to reflect net worth erosion and then able to attract immunity 8
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSagainst the recovery action by the creditors and this benefit is then attempted to beperpetuated.This problem arises due to the fact that unscrupulous promoters enter into the process ofrehabilitation by manipulating sickness; take undue benefits arising out of delay in decisionmaking of BIFR. If the reference is rejected, a fresh reference is filed with respect to accountsfor the next year and the cycle goes on endlessly. There is no fear of reprisal or punitive actionagainst the companies indulging in this malpractice. 12 P11F[Year Wise Performance of the BIFR as on 31.12.2009 is placed at Annexure A]. 13 P12F *******12 9
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER III: ASSET RECONSTRUCTION: SARFAESI ACT, 2002With an aim to provide a structured platform to the Banking sector for managing its mounting BACKGROUND4TNon-Performing Assets (NPAs) stocks and to keep pace with international financialinstitutions, the Securitisation and Reconstruction of Financial Assets and Enforcement ofSecurity Interest (SARFAESI) Act, 2002 was put in place to allow banks and FinancialInstitutions (FIs) to take possession of securities and sell them. As stated in the Act, it has“enabled banks and FIs to realise long-term assets, manage problems of liquidity, asset-liabilitymismatches and improve recovery by taking possession of securities and selling them andreducing their NPAs by adopting measures for recovery or reconstruction.”Prior to the Act, the legal framework relating to commercial transactions lagged behind therapidly changing commercial practices and financial sector reforms, which led to slow recoveryof defaulting loans and mounting levels of NPAs of banks and FIs. 14 After the enactment of theSRFAESI Act, 2002 borrowers have become the first applicants before the Debts Recovery P13F PTribunal (DRT). Earlier only lenders were the applicants. 15This new Act empowered the lenders to take into their possession the secured assets of their P14Fborrowers just by giving them notices, and by not going through the rigors of Court procedure.Initially this brought in a lot of compliance from borrowers and many defaulters coughed upthe Bank dues. However the tougher ones punched whole in the new Act too. This led SupremeCourt to strike down certain provisions of the Act and allowed the borrowers to have anadjudicatory forum, before their properties could be taken over by the lenders. Theadjudicatory forums were the DRT.The DRT deals with extraordinary complex commercial laws. Over the years the DRTs haveevolved into fine bodies with lots of expertise. There is a plethora of judgments from theSupreme Court as well as the various High Courts which have paved the way for the DRT to14 Sourced from: Sourced from: 10
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSchart their courses. The Debts Recovery Tribunal of India have become model institutions formany a country to follow. 16 P15FASSET RECONSTRUCTION COMPANIES (ARCs)Asset Reconstruction Companies (ARCs) are established under SARFAESI Act, 2002 asORIGIN OF ARCSspecialized entities for NPAs resolution. These ARCs are established to acquire, manage andrecover illiquid or NPAs from Banks / FIs. This process relieves the banking system of theburden of NPAs and allows them to focus better on their core function of financing anddevelopment of new business opportunities so as to further strengthen the economy. The ARCswould maximize recovery value with optimal costs through their innovative NPA resolutionmethods.ASSET RECONSTRUCTION COMPANIES It is the first Asset Reconstruction Company in the country to commence business of 1. Arcil resolution of NPAs upon acquisition from Indian banks and FIs. It commenced business immediately after enactment of the SARFAESI Act, 2002. As the premier ARC, Arcil has been playing the pioneering role in setting standards for the industry in India. Arcil has recently launched retail NPAs resolution initiative through Arcil-Arms (a division of Arcil). ARCIL is promoted by ICICI Bank, State Bank of India and IDBI. 17 5T 5T P16F It is the countrys first ARC supported by a large number of public sector banks and 2. India SME Asset Reconstruction Company Ltd (ISARC) undertakings. It strives for a speedier resolution of NPAs with a focus on Micro Small and Medium Enterprises (MSME) sector. ISARC endeavors to unlock the idle NPA assets for productive purposes which facilitates greater and easier flow of credit from the banking sector to the MSMEs. 18 P17F16 11
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS Reliance Asset Reconstruction Company Limited (Reliance ARC) is a premier asset 3. Reliance Asset Reconstruction Company Limited reconstruction company, the principal sponsor / shareholder of which is the Reliance ADA group (through Reliance Capital Limited). The other sponsors / shareholders are Corporation Bank, Indian Bank, GIC of India, Dace croft and Blue Ridge. Reliance ARC has adopted a buyer driven model for acquisition of NPAs (individual as well as portfolio cases) in cash (if selling banks choose to remain invested, they will have the option to subscribe to the Security Receipts). 19 P18F *******19 Sourced from: 12
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER IV: CORPORATE DEBT RESTRUCTURINGCorporate Debt Restructuring (CDR) means the reorganization of a companys outstandingINTRODUCTIONobligations, by reducing the burden of the debts on the company, by decreasing the rates paidand increasing the time by which the company has to pay its obligation back. This allows acompany to increase its ability to meet the obligations. Also, some of the debt may be forgivenby creditors in exchange for an equity position in the company. The need for a CDR often ariseswhen a company is going through financial hardship and is having difficulty in meeting itsobligations. If the troubles are enough to pose a high risk of the company going bankrupt, it cannegotiate with its creditors to reduce these burdens and increase its chances of avoidingbankruptcyCDR, which was set up in 2002-03, is a mechanism for faster disposal of restructuring casesinvolving multiple lenders, however foreign banks are yet to join the platform. In August 2008The Reserve Bank of India (RBI) had revamped the norms for restructuring advances, includingnon-industrial credit. Now, the non-industrial companies can also use CDR mechanism.Reserve Bank of India’s (RBI’s) revised norms harmonise the prudential norms across all debtrestructuring mechanisms. While banks work on cases with the hope of recovery, ratingagencies consider cases referred for restructuring as weak assets.A number of companies are now taking a good look at business debt restructuring to resolveSTEPS IN CORPORATE DEBT RESTRUCTURINGtheir unmet financial obligations. This is often a preferable solution to bankruptcy probablybecause it is less expensive and more discreet. But just like bankruptcy, CDR also involves asystematic process.The Steps involved in CDR are as follows;As business debt restructuring is nothing but an aggregate loan agreement, the lender seeks a • The Consultation Processseries of consultation sessions with the borrower. During these meetings, the lender assessesthe companys overall financial situation. It is at this point that all the companys financial 13
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSobligations are evaluated against the expected regular cash flow. Primarily because of this,small business debt restructuring works differently than that of big corporate restructurings.Once the assessment procedure is finished, the lender then settles an agreement with all the • The Negotiation Processborrowers creditors and vendors. The main idea is to arrive at a solution that is acceptable toall the parties involved. When that is achieved, the lender can proceed to implement thesolution as agreed upon.The liquidation of the businesss assets is the next step in the process, if found to be necessary • The liquidation of assetsby all parties concerned. In some cases, restructuring the existing debt may require a largeamount of up front money to be paid. If the lender is not able to cover that, there is no otherchoice but to liquidate some of the assets. But most of the time, the liquidation strategy is onlyused to get the profitability of the business back.This is the step where the contract is signed and the agreement is enforced. The borrower, and • The restructuring processin this case the business, agree to the aggregate loan amount and to other details including themonthly payment obligation, the interest rate, and the term of payment. After everything isaccounted for, the business which officially under a debt-restructuring program is expected tomake payments as stipulated. This is the last level of debt help available to the business beforea filing for bankruptcy. CDR is a process that has to be critically evaluated to ensure theultimate fate of the business involved. 20 P19F *******20 Sourced from: 14
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER V: ENFORCING CREDITORS’ RIGHTBanks and financial institutions have been experiencing considerable difficulties in recoveringRECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993loans and enforcement of securities charged with them. The procedure for recovery of debtsdue to the banks and financial institutions, which was being followed, resulted in a significantportion of the funds being blocked. The Committee on the Financial System considered thesetting upon the Special Tribunals with special powers for adjudication of such matters andspeedy recovery as critical to the successful implementation of the financial sector reforms.An urgent need was, therefore, felt to work out suitable mechanism through which the dues, tothe banks and financial institutions could be realised. In 1981 a committee had examined thelegal and other difficulties, faced by banks and financial institutions and suggested remedialmeasures including changes in law. This committee also suggested setting up of SpecialTribunals for recovery of dues of the banks and financial institutions by following a summaryprocedure. Keeping in view the recommendations of the above Committees, the Recovery ofDebts due to Bank and Financial Institutions Bill, 1993 was introduced in the Parliament andafter which it was enacted as the Recovery of Debts Due To Banks and Financial InstitutionsAct, 1993. 21The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is almost more than a P20Fdecade old. As with any legislation breaking new ground, the Act has been challenged invarious fora including the High Courts for its summary nature, the ousting of the jurisdiction ofthe Civil Courts, the provisions which allow borrowers to proceed against the bank or financialinstitution in the Debt Recovery Tribunals (DRT) and the latest challenge to the constitutionalvalidity of the Act. Whatever may be, the Act of 1993 was a welcome step taken by thelegislature in ensuring speedy recovery of bank dues.Section 34 of the Act states that the "Act to have overriding effect” i.e. –Overriding effect of the Act21 Sourced from: 15
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.(2) The provisions of this Act or the rules made there under shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948, the State financial Corporations Act, 1951, the Unit Trust of India Act, 1963, the Industrial Reconstruction Bank of India Act, 1984 and the Sick Industrial Companies (special provisions) Act, 1985."The Act has thus an overriding effect over all other legislations except for the ones mentionedin sub-clause (2),The non obstante clause in the Act and the non obstante clause in the Companies Act wereTHE NON-OBSTANTE CLAUSEconsidered in Industrial Credit and Investment Corporation of India Ltd v. Vanjinad Leathers 22where the court opined that Section 18 of the Act creates a bar on jurisdiction of other P21F Pauthorities and courts except the Supreme Court and High Courts under Articles 226 and 227of the Constitution. The court also stated that the Act and the Companies Act is speciallegislation. However since the Act was enacted after the Companies Act, 1956, the Parliamentwould have certainly in mind the provisions in the earlier special law namely the CompaniesAct. Therefore the latter special law will prevail over the former. 23P22FThe Debt Recovery Tribunal (DRT) is governed by provisions of the Recovery of Debt Due toDEBT RECOVERY TRIBUNALBanks and Financial Institutions Act, 1993. The object of the DRT is to receive claimapplications from banks and Financial Institutions against their defaulting borrowers. For thispurpose, the Debt Recovery Tribunal (Procedure) Rules 1993 have also been framed.Keeping in line with the international trends on helping financial institutions recover their baddebt quickly and efficiently, the Government of India has constituted thirty three DebtRecovery Tribunals and five Debt Recovery Appellate Tribunals across the country. 24 P23F22 AIR 1997 Kerala 27323 Sourced from: Sourced from: 16
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSThe Debts Recovery Tribunal deals with two different Acts, namely the RDBFI Act as well as theSARFAESI Act. While the aim of both the Acts is one and the same, but their approach isdifferent.In matters of Recovery of Debts to Due to Banks and Financial Institutions, the DRT enjoys farTHE DRTS HAVE MORE POWERS THAN THE CIVIL COURTS: SUPREME COURTgreater powers than do the civil courts. The Recovery Officer of a DRT has even more powers toissue a variety of orders for enforcing the Recovery Certificate.In a case the Supreme Court has held that the powers of Debts Recovery Tribunal are far widerthan those of a civil court. The Debts Recovery Tribunal can pass interim as well as adinterimorders, with or without hearing the opposite parties. The only fetter on Debts RecoveryTribunals is that they should follow the Principles of Natural Justice. Rule 18 of the DRT Actempowers the Tribunals to pass other kinds of orders in the interest of justice. 25 P24FWhile initially the DRT did perform well and helped the Banks and Financial InstitutionsLAWS AND PROCEDURE OF DRT IN INDIArecover substantially large parts of their non performing assets, or their bad debts, but theirprogress was stunned when it came to large and powerful borrowers. These borrowers wereable to stall the progress in the DRTs on various grounds, primarily on the ground that theirclaims against the lenders were pending in the civil courts, and if the DRT adjudicate the matterand auction off their properties irreparable damage would occur to them. 26P25F *******25 Sourced from: Sourced from: 17
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER VI: WINDING UP OF COMPANIESWinding up of a company is defined as a process by which the life of a company is brought to an MEANING4Tend and its property administered for the benefit of its members and creditors. Anadministrator, called the liquidator, is appointed and he takes control of the company, collectsits assets, pays debts and finally distributes any surplus among the members in accordancewith their rights. At the end of winding up, the company will have no assets or liabilities. Whenthe affairs of a company are completely wound up, the dissolution of the company takes place.On dissolution, the companys name is struck off the register of the companies and its legalpersonality as a corporation comes to an end.The Companies Act, 1956 lays down the provisions and the procedures for winding upoperations leading to the dissolution of the company. Winding-up is different from insolvencyand dissolution.There are three ways, in which a company may be wound up. They are:MODES OF WINDING UP 1. Winding up by the court. 2. Voluntary winding up, Members’ Voluntary winding up. Creditors’ Voluntary winding up. o 3. Winding up subject to supervision of the court oSection 433 of the Act, lays down the circumstances by which a company may be wound up byWINDING UP BY THE COURTthe Court.Note: 1. Till the Tribunal is constituted the powers in this regard are vested with the Courts. Here, the court means "High Court". 2. Jurisdiction of Court: the Court having jurisdiction in relation to the place where registered office of the company concerned is situated will be authority in respect of ordering winding up. 18
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSThe following are the grounds for Compulsory Winding Up or Winding up by the Court 27 a. If the company has, by a Special Resolution, resolved that the company be wound up by P26F P the Court. b. If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting. c. If the company fails to commence its business within one year of its incorporation, or suspends its business for a whole year. d. If the number of members is reduced below the statutory minimum e. If the company is unable to pay its debts. f. If the Court is of the opinion that it is just and equitable that the company should be wound up. g. If the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive financial years. h. If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality. i. It the Court is of the opinion that the company should be wound up under the circumstances specified in section 424(G) of the Act, i.e. winding up of Sick Industrial Company.Note: The clauses g, h and i have been added by the Companies (Second Amendment) Act, 2002.At any time after presentation of a winding up petition and before a winding up order is made,Power of Court to Stay or Restrain Proceedings against Company [Section 442]the company, or any creditor or contributory, may- Where any suit or proceeding against the company is pending in the Supreme Court or in any High Court, apply to the Court in which the suit or proceeding is pending for a • stay of proceedings therein; and27 Section 433 of the Companies Act, 1956 19
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS Where any suit or proceeding is pending against the company in any other Court, apply to the Court having jurisdiction to wind up the company, to restrain further proceedings • therein.The Court to which the application is so made may stay or restrain the proceedingsaccordingly, on such terms as it thinks fit.The court may pass any one of the following orders on hearing the winding up petition.ORDERS OF THE COURT (SECTION 443) 1. Dismiss it, with or without costs 2. Adjourn the hearing conditionally or unconditionally 3. Make any interim order, as it thinks fit, or 4. Pass an order for winding up of the company with or without costs, or any other order that it thinks fit.An Official Liquidator (OL) appointed by the Government, is attached to each High Court. TheTHE OFFICIAL LIQUIDATORCourt, after passing the winding up order, appoints the liquidator. In situations of compulsorywinding up, by virtue of his office and the order of the Court, the Official Liquidator becomesthe liquidator of the Company. He then takes charge of the affairs of the company and caries outthe process of winding up in accordance with the provisions of section 444 of the Act. He mayhowever apply to the Court for directions if any required with regard to any matter relating towinding up.The Official Liquidators are officers appointed by the Central Government under Section 448 ofCONTROL OF CENTRAL GOVERNMENT/COURTS OVER THE LIQUIDATORthe Companies Act, 1956 and are attached to various High Courts. The Central Government mayalso attach one or more deputy or assistant Official Liquidators to assist the Official Liquidator.The Central Government has the responsibility under Section 463 of the Act of exercisingoverall control over the Official Liquidators to ensure that they faithfully perform their dutiesand duly observe all the requirements imposed on them under the Act or the Rules there under.Organizationally, the Official Liquidators are under the administrative charge of the respectiveRegional Directors, who are senior field functionaries under the Ministry of Corporate Affairs 20
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSand who supervise the functioning of Official Liquidators on behalf of the Central Government.In the conduct of winding-up of affairs of the companies, however, Official Liquidators actunder the directions of the High Courts. Thus, once the winding up order is passed by the Courtand the OL appointed as Liquidator for a company under liquidation, further process, as alsothe actions of the OL in pursuance of the same with regard to the Company, take place underthe supervision and the orders of the Court.When a company is wound up by any mode, its liabilities shall be discharged in accordanceDisposal of assets and settlement of claimswith the priorities provided in section 529A and 530 of the Act. The order of priority asprovided in the Act is as under: 1. Workmans dues. 2. Debts due to secured creditors. 3. All taxes, cesses and rates due from the company to the Central Government or a State Government. 4. All wages and salary of any employee due within four months. 5. All accrued holiday remuneration becoming payable to any employee. All such debts shall be paid in full. If assets are insufficient to meet them, they shallabate in equal proportions.The court shall order dissolution of the company, when:Dissolution of Company [Section 481] 1. the affairs of the company are completely wound up, or 2. the official liquidator is unable to carry on the winding up procedure for want of funds.An appeal from the decision of Court will lie before that Court, before whom, appeals lie fromAppeal: [SECTION 483]any order or decision of the former Court in cases within its ordinary jurisdiction.Such order or decision, however, must be a judicial and not an administrative or a proceduralone. All administrative orders would be an order, which is directed to the regulation orsupervision of matters as distinguished from an order which decides the rights of parties orconfers or refuses to confer rights to property, which are the subject of adjudication before theCourt. 21
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS2. WINDING UP SUBJECT TO SUPERVISION OF COURT*Winding up subject to supervision of court, is different from "Winding up by court." Here thecourt only supervises the winding up procedure. Resolution for winding up is passed bymembers in the general meeting. It is only for some specific reasons, that court may supervisethe winding up proceedings. The court may put up some special terms and conditions also.However, liberty is granted to creditors, contributories or other to apply to court for somerelief [Section 522].The court may also appoint liquidators, in addition to those already appointed, or remove anysuch liquidator. The court may also appoint the Official Liquidator as a liquidator to fill up anyvacancy. The liquidator is entitled to do all such things and acts as he thinks best in the interestof the company. He enjoys the same powers as if the company is being wound-up voluntarily.The court also may exercise powers to enforce calls made by the liquidators, and such otherpowers as if an order has been made under section 526 of the Act for winding up the companyaltogether by court.The object of the supervision order is to safeguard the interest of the company, shareholdersand creditors. When an order is made for winding up subject to supervision, the Court may, bythat or any subsequent order, appoint an additional liquidator or liquidators.* Note: Omitted by the Companies (Second Amendment) Act, 2002Apart from a company registered under the Companies Act, 1956 there are other companies asWINDING UP OF UN-REGISTERED COMPANIESwell the winding up procedure for which is different from a company registered underCompanies Act, 1956.These companies are:- In simple words, an unregistered company is a company which is not registered or 1. Unregistered Companies [ Section 583] covered under provisions of the Companies Act, 1956 [section 582]. An unregistered company cannot be wound up voluntarily, or, subject to super vision of court. 22
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS However, the circumstances, in which unregistered company may be wound up, are as follows: If the company, is dissolved, or has ceased to carry on business, or is carrying on business only for the purposes of winding up, its affairs, o If the company is unable to pay its debt If the court is of opinion, that it is just and equitable, that the company should be o wound up. o A foreign company, carrying on business in India, which has been dissolved, may be wound up, as unregistered company. A foreign company is a company which is incorporated outside India, and having a place2. FOREIGN COMPANIES [SECTION 584] of business in India. Winding up of such companies is only limited to the extent of its assets in India. In respect of assets and business carried outside India, Indian courts have no jurisdiction. Winding up of a foreign company can only be made through Court. Even if the company had been dissolved or ceased to exist in the country of its incorporation, the winding up order can be made in India. Even if a foreign company has been wound up according to foreign law, the courts in India still protect the Indian Creditors. The surplus assets, after paying the creditors, should be distributed among the shareholders equally in the same proportion, as the assets to the total issued and paid up capital. Pendency of a foreign liquidation does not affect the jurisdiction to make winding up order. The Assets can be of any nature and do not take to be in the ownership of the company and can come from any source [(1944) 2 All.E.R. 556] Section 617 of the Companies Act, 1956 defines a Government Company as any3. GOVERNMENT COMPANY company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments. A subsidiary of a Government company is also treated as a Government Company. 23
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS Winding up procedure for a Government Company registered under the companies Act, 1956, is nearly similar to normal winding up procedure. However, Courts, take public interest into consideration, and gives priority to them, as the main function of a government company is to provide services to them.A company may voluntarily wind up its affairs either by passing an ordinary resolution whereVOLUNTARY WINDING UPthe purpose for which the company was formed has been achieved; or the time period, forwhich the company was formed, has expired; or by way of special resolution if it is unable tomeet its financial obligations. A company may voluntarily wind itself up in the following twomodes: a. Members voluntary winding up b. Creditors voluntary winding upBoth types of resolutions must be passed in the general meeting of the company as providedunder section 484 of the Act. Once the resolution for voluntarily winding up is passed thecompany may be wound up, either through members’ voluntary winding up or creditors’voluntary winding up. In case of members’ voluntary winding up, the board of directors hasalso to make a declaration to the effect that either the company has no debts or the company issolvent in terms of provisions of section 488 of the Act. Where the board of directors is not in aposition to give a declaration as to the solvency of company, the process of creditors windingup would be initiated.Once voluntary winding up commences, the company is required to appoint one or moreLiquidators and fix his/their remuneration in a general meeting of the shareholders. On theappointment of the Liquidator, all the powers of the board of directors come to an end exceptwhere the company or the Liquidator sanctions them to continue.Once appointed, the Liquidator takes necessary steps to liquidate the company and dispose ofits business or property by sale or any other arrangement approved by a special resolution ofthe company. 24
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSOnce the company is fully wound up and assets of the company are sold or distributed, theDistribution of Property upon Voluntarily Winding Upproceeds collected are utilized to pay off the liabilities. The proceeds so collected shall beutilized to pay off the creditors in equal proportion. Thereafter any money or property left maybe distributed among members according to their rights and interests in the company.Distribution of the companies in liquidation by their mode of winding up during1.04.2008 to 31.03.2009 (Sourced: 52 nd Annual Report of the Ministry of Corporate Affairs for P Pthe year ending 31.03.2009)Sl No. Subject Pending as Received Total (Col Disposed Pending as on 1.04.2008 during the 3+4) during on to period the 31.03.2009 31.03.2009 1.04.2008 to period 31.03.2009 1. Members 1254 61 1315 33 1282 1 2 3 4 5 6 7 Voluntary winding up 2. Creditors 112 - 112 - 112 Voluntary winding up 3. Winding up 4764 135 4899 141 4758 by Court 4. Winding up 03 - 3 - 03 subject to supervision of Court Total 6133 196 6329 174 6155 ******* 25
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER VII: DEALING WITH DEFUNCT COMPANIESA defunct company means a company which never commenced business or which is notMEANINGcarrying on business and has either no assets or has such assets as shall not be sufficient tomeet the cost of liquidation. A company is, however, not considered defunct if the cessation ofbusiness is due to the conduct of winding up.The policy which is followed with regard to weeding out the defunct companies is that where itappears from the latest available balance sheet of a defunct company that it has adequaterealisable assets, steps are taken to take the company into compulsory liquidation. It is onlywhere the latest available balance sheet shows that the company has no assets or has suchassets as would not be sufficient to meet the cost of liquidations; steps are taken to strike itsname off the register of companies under section 560 of the Companies Act, 1956.Also sub-section (5) of section 3 introduced by the Companies (Amendment) Act, 2000 statesthat if a company, private or public, has failed to meet the paid-up capital norm, it shall bedeemed to be a defunct company and the Registrar of Companies (ROC) shall strike off thename of the company from the register.PROCESS FOR DISSOLUTION OF A DEFUNCT COMPANY (SECTION 560)Section 560 of the Act, provides for the dissolution of the defunct companies. The process fordissolution is as follows; Where the registrar has reasonable cause to believe that a company is not carrying on business or in operation, he shall send to the company by post a letter inquiring • whether the company is carrying on business or is it in operation. If the Registrar does not within one month of sending the letter receive any answer thereto, he shall within fourteen days after the expiry of the month, send to the • company by registered post a letter referring to the first letter, and stating that no answer thereto has been received and that, if an answer is not received to the second letter within one month from the date thereof, a notice will be published in the Official Gazette with a view to striking the name of the company off the register. 26
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS If the Registrar either receives an answer from the company to the effect that is not carrying on business or in operation, or does not within one month after sending the • second letter receives any answer, he may publish in the Official Gazette, and send to the company by registered post, a notice that at the expiration of three months from the date of that notice, the name of the company mentioned therein will unless cause is shown to the contrary, be struck off the register and the company will be dissolved.EFFECTS OF THE DISSOLUTIONSuspended AnimationUpon dissolution, the corporate status of an entity ceases to subsist; functionality stops and forall practical purposes corporate activities come to an end. Under Section 559, the Court canorder the dissolved companys revivification in the prescribed circumstances within a period oftwo years of the date of dissolution, whereas under sub- section 6 of section 560 of the Act thisperiod is twenty years. For a company dissolved under section 560 of the Act, the alternativeremedy for resuscitation is also under section 559 of the Act. A distinction between a rebirthunder section 559 and sub- section 6 of section 560 of the Act, is that in the former the Courthas been granted a discretion to make an order as it may think fit, while in the later the Courthas been empowered to issue directions and make orders to place the Company and all otherpersons in the same position as nearly as they were while the name was struck off. Again therationale behind the distinction is that the Company, which is being revived was proclaimeddissolved by administrative functions of the Registrar without involvement of a third party andthere was neither winding up nor the superintendence of the Liquidator therein. Hence, theposition has been desired by the Legislature.The company too could be one of those who may apply for its name to be restored to theEmphasis underlinedRegister of Companies. This clearly indicates that a company in that situation has an existenceat least for that purpose. Thus it is not a state of complete extinction but that of a suspendedanimation. 28 P27F28 Sourced from: 27
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS APPLICATIONS CONSIDERED AND DISPOSED OF BY THE REGIONAL DIRECTORS AND REGISTRAR OF COMPANIES UNDER SECTION 560 OF THE COMPANIES ACT 1956 (Sourced: 52 nd Annual Report of the Ministry of Corporate Affairs for the year ending 31.03.2009) P P Sl Section of the Companies Considered during Disposed off Pending as No Act and the subject matter the year (1.04.2008 to during the on 31.3.2009 of the application 31.03.2009) year 1 Section 560 striking of 50127 18249 31878. name of the companies in the Register maintained by ROC ******* 28
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER VIII: REFORMS IN INSOLVENCY LAWS AFFECTING THE CORPORATE SECTORI. COMPANIES (SECOND AMENDMENT) ACT, 2002The main purpose of SICA (as mentioned before) was timely detection of sickness andBRIEF HISTORYexpeditious determination of remedial measures for its removal. It was, however, found to beineffective by reasons of enormous delays in the disposal of cases and also its misuse by somecompanies with intent of avoiding creditors.On the recommendation of Justice Eradi Committee, The Companies Act, 1956 was amended byComparison between Part VI A of the Companies Act and SICAthe Companies (Second Amendment) Act, 2002 and Part VI A was incorporated. This partcontaining provisions relating to revival, rehabilitation and winding up of the sick industrialcompanies draw heavily from the relevant provisions of the SICA. However there is a markeddistinction between the provisions under SICA and provisions under newly inserted Part VIA.The insertion of Part VI A in the Companies Act, 1956 through Companies (SecondCompanies (Second Amendment) Act, 2002Amendment) Act, 2002 and repeal of Sick Industrial Companies ( Special Provisions) Act, 1985mark a new era in the restructuring of sick industrial companies and is certainly a right step inthe direction of revival and rehabilitation of sick industrial companies. The problem ofindustrial sickness in the public and private sector is one of the major problems before theIndian economy in the post independence era and so it is a matter of deep and grave concernbefore the Government primarily because of its adverse impact on the entire Indian economyin the form of loss of production, shortage of industrial goods and services, loss of employment,and its potential threat to stability and peace of society in the form of labor unrest, strikes, lock-outs, etc. 29P28F29 Sourced from: 29
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSThe main object of the Companies (Second Amendment) Act, 2002 is to facilitate or expediterevival/rehabilitation of sick industrial companies and to protect worker’s interest and wherenecessary to wind up the companies. The main salient feature of the Act is the provision ofconsolidation of fora, i.e. the constitution of the National Company Law Tribunal (NCLT). Thepowers and jurisdiction presently being exercised by various bodies, viz; the Company LawBoard (CLB) or the Board of Industrial and Financial Reconstruction (BIFR), High Court willnow be consolidated and entrusted to the Tribunal. Thus multiplicity of litigation beforevarious Courts or Quasi judicial bodies or forums regarding revival of or rehabilitation ormerger or amalgamation or winding up will be avoided as all these matters will be heard anddecided by the proposed NCLT.Moreover any person aggrieved by an order or decision of the Tribunal may prefer an appeal tothe Appellate Tribunal called the National Company Law Appellate Tribunal (NCLAT) undersection 10FQ of the Act.Section 10GF provides that any person aggrieved by any order or decision of the AppellateAPPEAL TO SUPREME COURTTribunal may file an appeal to the Supreme Court within sixty days (which can be furtherextended by the Supreme Court on showing sufficient cause) on any question of law arising outof such decision or order.The Part VI A of the Companies Act, 1956, incorporated by the Companies (SecondCONCLUSIONAmendment) Act, 2002 (the date of commencement of which is yet to be notified; so far onlySections 2 and 6 have been notified) aims to provide for a new, efficient and time boundmechanism for both revival/rehabilitation as well as winding up of sick industrial companywithin a reasonable period of time.The creation of rehabilitation fund for taking care of the workers of sick industrial companiesand the investors as per the global standards, inclusion of experts and specialists in operatingagency, NCLT to act as winding up authority in contrast to BIFR, doing away with Section 22 ofSICA, etc, would make the new provisions more effective and rational and would provide bettermechanism for handling industrial sickness in the country which is one of the biggest problemsplaguing the Indian Economy. But the successful implementation of Part VI A will be the 30
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSresponsibility of not only the Tribunal and its Appellate Authority but also of the Governments,creditors, lenders, financial institutions, banks and all those concerned with restructuring andrehabilitation of sick industrial companies.As a matter of caution, it must be remembered that BIFR was not the only body responsible forslow and poor implementation of SICA, but creditors, debtors Governments, banks andfinancial institutions were equally responsible as evident from the submissions made beforeJustice Eradi Committee. Although the new provisions marked a departure from the oldprovisions under SICA as well as are improvement over SICA and it appears to be verypromising. This new provisions under part VI A certainly appear to be a step in right directionand it is hoped that deficiencies noted in the operation of SICA would be taken care of underthis new mechanism. 30 P29FII. LIMITED LIABILITY PARTNERSHIP ACT, 2008INTRODUCTIONKeeping in mind the need for the corporate growth regularities, the Government of Indiaintroduced Limited Liability Partnership (LLP) Act, 2008. LLP is a blend of a generalPartnership and a Company. As an LLP is a corporate entity with liability limited to the extentof contribution by Partners, the structure of LLP is that of the limited company. However, interms of conduct of internal affairs, the LLP format provides the flexibility and low complianceregime of a partnership.REVIVAL UNDER LLPLLP Act and its Rules contain detailed provisions for revival and rehabilitation of LLPsincluding appointment of LLP Administrator, preparing and obtaining approvals forrehabilitation schemes etc. Moreover specific time limits are also prescribed for the completionof the scheme of revival which makes it effective and efficient.30 Sourced from: 31
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONSDRAFT RULES FOR WINDING UP OF LLPSection 65 of the LLP Act empowers the Central Government to make Rules for the Provisions(to be approved by parliament)in relation to winding up and dissolution of LLP. The Draft LLP winding up Rules have already been placed before the Parliament which will be notified shortly. • The Draft Rules are based on International best practises models suggested by the United Nations Commission on International Trade Law (UNCITRAL). • Concept of ‘Insolvency Practitioners’ is also recognised. Moreover there is emphasis and efforts for, in the first instance, on the revival and rehabilitation of LLP’s through LLP • Administrator. The best efforts are made in the Draft Rules to overcome the weaknesses of winding up process in other Laws. • In voluntary winding up intervention of Official Liquidator is dispensed with. If Tribunal is satisfied that winding up process is duly followed, then orders for • dissolution are to be passed by the Tribunal within sixty days of the receipt of the • application from the Liquidator. All cost of winding up including Liquidator’s fees shall be subject to right of secured creditors, workmen dues and priority claims. • Monitoring of LLP Liquidator by the creditors or the partners/ Tribunal and fixed time limit within which all the duties are to be completed. • Statement of Affairs of LLP shall be prepared and filed with Liquidator within 21 days from the commencement of voluntary winding up and within 21 days or extended time • not exceeding two months from the date of the appointment of Official Liquidator by Tribunal or from the order of winding up. Order/interim order/ appointment of Liquidator/ dismissal of petition/ any other order to be passed by the Tribunal within ninety days from the date of presentation of • winding up petition. Designated partners and officer in-charge will be responsible to complete the accounts within sixty days from the date of winding up order by the Tribunal. • 32
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS The proposed Draft intends to complete the winding up process within one year. There is a provision for Professional approach both in voluntary winding up and winding up • by the Tribunal. If affairs of LLP have not been wound up within one year from the date of winding up order, the Liquidator shall file an application before the Tribunal explaining the reasons • and seeking appropriate direction. Upon hearing the application of the Liquidator, the Tribunal may order for resolution including deposit of balance if any in the Liquidation Account and in the Public Account • of India. Dissolution may be effective from the date of filing the dissolution order by Liquidator with Registrar. • III. COMPANIES BILL, 2009The Companies Act, 1956 is the principal landmark legislation that governs companies in India.INTRODUCTIONThe Act prescribes provisions for protection of the interests of the investors, creditors andpublic at large. However over the years, the functioning and operation of the Act brought tolight several lacunae and defects in its provisions. In order to remove these defects, the Act wasamended from time to time, comprehensively. But, despite these extensive amendments andalterations, the Act continues to comprise of certain deficiencies.The Companies Bill, 2009 which is divided in 28 Chapters consisting of 426 Sections, inter alia,incorporates a new framework for mergers and amalgamations of companies and provides anextensive Insolvency Code based on the latest principles recommended by the United NationsCommission on International Trade Law (UNCITRAL). 31 P30F To revise and modify the Companies Act, 1956 in consonance with the changes inThe main objectives of the Companies Bill, 2009 are as follows – the national and international economy; • To bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects; •31 Lega l Ser vi c e In di a. com 33
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS To re-write various provisions of the Act to enable easy interpretation; and To delink the procedural aspects from the substantive law and provide greater • flexibility in rule making to enable adaptation to the changing economic and • technical environment. 32 A revised framework for regulation of insolvency, including rehabilitation, winding P31 F up and liquidation of companies with the process to be completed in a time bound • manner. Incorporates international best practices based on the models suggested by the United Nations Commission on International Trade Law (UNCITRAL). Consolidation of fora for dealing with rehabilitation of companies, their liquidation and winding up in the single forum of National Company Law Tribunal (NCLT) with • appeal to National Company Law Appellate Tribunal (NCLAT). The nature of the Rehabilitation and Revival Fund proposed in the Companies (Second Amendment) Act, 2002 to be replaced by Insolvency Fund with voluntary contributions linked to entitlements to draw money in a situation of insolvency.The Companies Bill, 2009, on its enactment, would allow the country to have a modern CONCLUSION4Tlegislation for growth and regulation of corporate sector. Various reformatory andcontemporary provisions have been proposed in the Companies Bill, 2009. Moreover certainstringent provisions have also been introduced to fill the lacunae under the existing CompaniesAct, 1956. *******32 34
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS ANNEXURE A: YEAR WISE PERFORMANCE OF THE BOARD FOR INDUSTRIAL & FINANCIAL RECONSTRUCTION (As on 31.12.2009) Total Cases Cases Disposed off during the YearYear Regd. during the Year Cases under Cases Revived Winding up Dismissed Revival Recommended1 2 3a 3b 3c 3d1987 311 0 0 0 81988 298 0 1 12 291989 202 0 1 31 771990 151 1 3 42 451991 155 1 5 47 271992 177 3 7 30 431993 152 3 13 63 591994 193 2 38 77 481995 115 6 25 61 291996 97 7 92 83 251997 233 2 34 81 211998 370 5 21 49 361999 413 5 11 61 72 35
    • EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS2000 429 14 37 143 1572001 463 20 47 109 1202002 559 30 33 106 2142003 430 17 40 98 1952004 399 11 29 51 682005 180 55 69 19 1792006 118 120 83 18 2902007 78 174 76 16 2022008 57 194 59 11 1292009 64 725 77 19 123TOTAL 5644 1396 801 1227 2196 Note - 1. Format earlier adopted was indicating cases revived in the year of registration. As a company normally takes 5/7 years to be revived, the new format indicates companies revived in the year in which Net Worth become positive and companies were discharged from the purview of SICA 2. Figures of Companies revived after the successful implementation of scheme as well as those where Net Worth become positive at the inquiry stage itself have been clubbed together. 3. Above figures are according to Calendar year. ******* 36