Proposed changes to Bankruptcy Laws – A Step in the Right Direction
Prashant Kataria December 2, 2015
“Capitalism without bankruptcy is like Christianity without hell”- Frank Borman
Earlier this month the Bankruptcy Laws Reforms Committee (“Committee”) submitted its final report to the Ministry of Finance with recommendations for some sweeping changes. The report contains both the findings and recommendations of the Committee and the draft Insolvency and Bankruptcy Code (“Code”). This final report has been submitted after an interim report was submitted in 2013, which was considerably limited in its scope and recommendations when compared to the Code. While bankruptcy laws have been well developed and codified in other developed jurisdictions, the same could not have been said of India where a plethora of laws existed ranging from the Companies Act, 2013 (“CA”), Sick Industrial Companies (Special Provisions) Act, 1985 and Securitisation and the Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which had their own shortcomings owing in some cases to their vintage and in others to their inefficient enforcement and inordinate court delays. This blog aims to highlight some significant provisions/recommendations of the Committee in relation to corporate insolvency.
Thankfully, the proposed law does not aim to govern only certain types of entities and covers insolvencies of “corporate persons”, including companies, limited liability partnerships, and all other entities having limited liability along with individuals, firms etc.
A positive step proposed is the setting up of the Insolvency and Bankruptcy Board of India, whose primary functions would be registration of insolvency professionals (including the administrators and liquidators playing a role in both pre and post liquidation stages) and information utilities (organizations tasked with the storage of financial information like security interests, defaults, etc.), to provide guidelines with respect to the conduct of bankruptcy resolution, amongst other functions. In addition, the Code also specifies the National Company Law Tribunal (“NCLT”) as the Adjudicating Authority (the primary quasi-judicial body presiding over the entire process of bankruptcy) in case of corporate persons and Debt Recovery Tribunal in case of any other persons.
While not delving into the details, a big positive step in ensuring speedy resolution has been the Code requiring that the insolvency resolution process be completed within a mandatory 180 day period (from the date of admission of an insolvency application). During this period of 180 days, a mandatory moratorium is imposed during which creditor actions remain suspended. It may be pertinent to note that there is no provision for automatic moratorium under the CA and only the NCLT has the discretion to grant a moratorium of up to 120 days. However, it has also been provided in the Code that in case the creditors’ committee resolves to approve the liquidation of the entity before the expiry of the aforementioned 180 day period, then the moratorium will cease to have effect. If the resolution plan is rejected, then the company in question goes into liquidation based on the recommendations of the resolution plan, or failure to submit the plan within the maximum time period permitted, or based on a vote of the creditors’ committee.
Provision has also been made for a fast track corporate insolvency resolution process which is supposed to be completed within a period of 90 days. The Code provides such fast track process to corporate debtors having assets or income up to such level as may be notified by the Central Government or such other category of corporate person as may be notified by the Central Government.
Additionally, voluntary liquidation has also been covered by the Code in detail to ensure it comes under the umbrella of the Code (considering how long and painful it currently is to wind-up a company in India). Under the Code a company, after providing a declaration from its directors about its solvency and other matters and documents as mentioned in the Code, may have a special resolution passed to liquidate itself. In case the company in question has any debtors, it needs to be shown that creditors representing two-thirds in value of the debt have also supported the shareholders’ resolution.
Another point of significance of the Code is its insistence on a timely completion of the liquidation process as well. Considering that most delays take place due to matters getting stretched before the adjudicating authorities, the Code tries to put some sort of rein on NCLT and National Company Law Appellate Tribunal (“NCLAT”) about timely disposal of matters by requiring them to dispose of the matters within the time limits, failing which the forum shall be required to record the reasons for not doing so and the President of NCLT or the Chairperson of NCLAT, as the case may be, may extend the period by a maximum of 5 days. Though not technically a stick, this should put some onus on the NCLT and the NCLAT to dispose of the matters expeditiously.
To sum up, the Code does aim to drastically improve the legal framework surrounding bankruptcy in India and as aptly put by the RBI Governor Raghuram Rajan, a new bankruptcy code will help bring pure capitalism back where aiming to make borrowers accountable to their loan contracts with banks.
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