In this blogpost, Prerna R Saraf, Property Lawyer, Bangalore, writes about, national bankruptcy law, law Present until now for Insolvent Companies, conflict in the laws governing bankruptcy/insolvency, direction given by the Supreme Court and the institutions which need to be set up.
National Bankruptcy Law
India finally passed the much-awaited national bankruptcy law in order to allow banks to recover their debts in a timely manner from insolvent companies.
Law Present until now for Insolvent Companies
Until now, Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was one of the laws that came to the rescue of industrial companies. The Act defines sick company under Section 3(o) as ‘Any industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.’
However, the Act was ineffective due to its inefficient enforcement and court delays.
There were also other laws such as the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
However, this multiplicity of laws itself was a problem as banks failed to recover loans. There is a heavy backlog of cases under each of this law. For instance, Rs. 4 trillion worth of cases are pending before Debts Recovery Tribunal (DRT). In the last three years, only 20% of the cases taken up by DRTs, SARFAESI and Lok Adalats have been resolved.
Conflict in the laws governing bankruptcy/insolvency
In fact, the provisions of the legislations were contrasting bringing up new questions of law leading to further delay in proceedings. For example, in M/S Madras Petrochem Ltd v BIFR, the question that was brought up before the Supreme Court was, whether ‘the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act override the Sick Industrial Companies (Special Provisions) Act.’
This is because SARFAESI Act refers to creditor’s interest and SICA refers to the ‘interest of the debtor company.’ In such cases, the court held that SARFAESI Act would override SICA. It would be unhindered by Section 22 of SICA that provides for the suspension of legal proceedings, contracts etc.
Supreme Court Direction and the Ineffectiveness
In May 2002, an amendment was suggested to the Companies Act, 1956 that entailed the establishment of National Company Law Tribunal. (NCLT) The aim was to allow the rehabilitation process to start much before the company reached the difficult to redeem stage. Also, to make rehabilitation, liquidation or winding up a quicker and time bound process.
NCLT was to replace Board for Industrial and Financial Restructuring (BIFR) that administered Sick Industrial Companies Act. Since, the BIFR-SICA regime, allowed companies misuse the law in order to avoid repayment of debts.
However, much to the dismay of the creditors, the establishment of NCLT was challenged before the Supreme Court. The court upheld the constitutional validity of NCLT. It directed that transfer of powers from the corporate benches of high court and company law board to the tribunal could only be made after rectifying certain defects.
The direction was not incorporated in either the 1956 Act or the 2013 Act. Hence, NCLT is not established yet, and sick industrial companies continue to be governed under SICA-BIFR.
National Bankruptcy Law
The aggravated focus on the debt worth $1.3 billion created by the collapse of Vijay Mallya’s Kingfisher Airlines and the tormenting effect it has had on the Indian Banking system has paved the way for the new law.
The new Bankruptcy Code aims to make the winding-up process faster. As of now the process in India typically takes 4 years, twice as much as time taken in China or Russia.
With the suggestion of the Committee headed by former law secretary, T.K.Vishwanathan, a timeline of 180 days has been provided to resolve cases of bankruptcy or insolvency which is extendable by 90 days.
Debt Recovery Tribunal is the adjudicatory authority over individuals and unlimited liability partnership firms. National Company Law Tribunal is the adjudicatory authority over companies and limited liability partnerships.
The new law would mean timely resolve of bankruptcy cases in the absence of continuous delays in hearings. However, it will take some time before the process is as effective as the provisions lay down. This is because the Code provides for various institutions to be established in order to create a favourable and systematic infrastructure.
Some of the institutions to be set up are
- Insolvency Professionals to conduct insolvency resolution process, take over the management of the company, assist creditors and manage the liquidation process.
- Insolvency Professional Agencies who will examine and certify these professionals.
- Information Utilities that shall collect information related to debtors.
- Insolvency and Bankruptcy Board of India, a regulator that will oversee all the above entities.
The new bankruptcy code has been welcomed by cheery investors as the legal system till now was heavily in favour of businesses and reviving them for the sake of the workers. Here’s hoping that the Indian legal system succeeds in implementing the new law effectively!