Interim Report of the Bankruptcy Law Reform Committee
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__________________________________________________ Interim Report of The Bankruptcy Law Reform Committee February 2015 1 Contents 1. INTRODUCTION ................................................................................................................................ 5 1.1. MANDATE................................................................................................................................ 5 1.2. WORKING PROCESS OF THE COMMITTEE ................................................................................ 7 1.3. STRUCTURE OF THE REPORT ................................................................................................... 7 2. EXECUTIVE SUMMARY .................................................................................................................... 8 2.1. THE LEGAL LANDSCAPE ......................................................................................................... 8 A. LEGISLATIVE COMPETENCE ........................................................................................................ 8 B. REVIVAL AND REHABILITATION OF SICK COMPANIES ............................................................... 8 C. DEBT RESTRUCTURING UNDER SCHEMES OF ARRANGEMENT .................................................... 9 D. LIQUIDATION/WINDING-UP OF COMPANIES ................................................................................ 9 E. INSOLVENCY RESOLUTION OF INDIVIDUALS AND PARTNERSHIPS .............................................. 9 F. INSOLVENCY RESOLUTION OF CO-OPERATIVE SOCIETIES ........................................................ 10 G. ASSET RECONSTRUCTION UNDER THE SARFAESI ACT ........................................................... 10 H. DEBT ENFORCEMENT/ RECOVERY ............................................................................................ 10 I. THE NON-STATUTORY FRAMEWORK PRESCRIBED BY THE RBI ................................................ 11 J. STATE RELIEF UNDERTAKING ACTS ......................................................................................... 12 K. THE INDUSTRIES DEVELOPMENT AND REGULATION ACT, 1951 .............................................. 12 2.2. POLICY OBJECTIVES AND INGREDIENTS OF AN EFFECTIVE SYSTEM .................................... 12 2.3. FAILURE OF THE INDIAN CORPORATE INSOLVENCY REGIME ............................................... 12 2.4. SUMMARY OF ISSUES AND RECOMMENDATIONS .................................................................. 14 A. CORPORATE RESCUE ................................................................................................................. 14 B. LIQUIDATION OF COMPANIES ON THE GROUND OF INSOLVENCY ............................................. 25 C. ISSUES RELEVANT FOR BOTH RESCUE AND LIQUIDATION ....................................................... 28 D. SAFE HARBOURS ....................................................................................................................... 31 E. INSOLVENCY RESOLUTION OF MSMES .................................................................................... 31 3. POLICY OBJECTIVES AND INGREDIENTS OF AN EFFICIENT SYSTEM ............................................. 32 3.1. POLICY OBJECTIVES .............................................................................................................. 32 A. CREDITOR PROTECTION ............................................................................................................ 33 B. PROMOTING ECONOMIC GROWTH ............................................................................................ 33 C. PROMOTING CORPORATE BOND MARKETS .............................................................................. 34 D. PROMOTING CREDIT MARKETS IN GENERAL ............................................................................. 34 E. PROTECTING OTHER STAKEHOLDERS ....................................................................................... 36 A. PROMOTERS/SHAREHOLDERS ................................................................................................... 36 B. EMPLOYEES ............................................................................................................................... 36 F. ENHANCING INVESTOR CONFIDENCE........................................................................................ 37 3.2. INGREDIENTS OF AN EFFECTIVE SYSTEM .............................................................................. 37 2 4. CORPORATE RESCUE ..................................................................................................................... 39 4.1. SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 ....................................... 39 A. THE FAILURE OF THE SICA REGIME ......................................................................................... 39 B. NEW EVIDENCE ON FAILURE .................................................................................................... 42 4.2. SCHEMES OF ARRANGEMENT FOR DEBT RESTRUCTURING UNDER THE COMPANIES ACT, 1956 .............................................................................................................................................. 44 4.3. COMPANIES ACT, 2013 - RECOMMENDATIONS FOR REFORM AND QUESTIONS FOR CONSIDERATION................................................................................................................................ 46 A. DETERMINING WHEN CORPORATE REVIVAL AND REHABILITATION IS TO BE INITIATED BY THE SECURED CREDITORS OR THE DEBTOR COMPANY .................................................................... 47 B. ALLOWING UNSECURED CREDITORS TO INITIATE RESCUE PROCEEDINGS ............................... 50 C. RELEVANCE OF VIABILITY AND REDUCTION OF TIME-LINES FOR DETERMINING WHETHER TO RESCUE OR LIQUIDATE ..................................................................................................................... 51 D. MORATORIUM ........................................................................................................................... 53 E. DIRECT APPOINTMENT OF THE COMPANY ADMINISTRATOR BY SECURED CREDITORS ......... 57 F. TAKEOVER OF MANAGEMENT OR ASSETS BY THE ADMINISTRATOR ....................................... 60 G. POWERS AND FUNCTIONS OF THE COMPANY ADMINISTRATOR ................................................ 66 H. SCHEME OF REHABILITATION .................................................................................................... 68 I. RESCUE FINANCING AND GRANT OF SUPER-PRIORITY ............................................................. 70 J. INTERACTION WITH DEBT ENFORCEMENT UNDER THE SARFAESI ACT .................................. 76 K. DEBT RESTRUCTURING UNDER SCHEMES OF ARRANGEMENT.................................................. 77 5. LIQUIDATION OF COMPANIES ON THE GROUND OF INSOLVENCY ................................................. 80 5.1. COMPANIES ACT, 1956.......................................................................................................... 80 A. THE LAW IN PRACTICE .............................................................................................................. 80 B. NEW EVIDENCE ON FAILURE .................................................................................................... 81 5.2. COMPANIES ACT, 2013 - RECOMMENDATIONS FOR REFORM AND QUESTIONS FOR CONSIDERATION................................................................................................................................ 84 A. DEVELOPING APPROPRIATE CRITERIA FOR DETERMINING WHEN A COMPANY IS ‘UNABLE TO PAY DEBTS’ FOR THE PURPOSES OF WINDING UP ........................................................................... 84 B. PRIORITY OF PAYMENTS ............................................................................................................ 93 A. PRIORITY RIGHTS OF SECURED CREDITORS .......................................................................... 93 B. PRIORITY FOR GOVERNMENT DEBTS (CROWN DEBTS) OVER UNSECURED CREDITORS ....... 96 C. STRENGTHENING PROVISIONS ON AVOIDANCE OF CERTAIN TRANSACTIONS IN WINDING UP... .................................................................................................................................................. 97 A. AVOIDANCE OF TRANSFERS NOT IN GOOD FAITH .................................................................. 98 B. INCLUSION OF A PROVISION VOIDING TRANSACTIONS DEFRAUDING CREDITORS ................. 98 C. TRANSACTIONS WITH RELATED PARTIES .............................................................................. 99 D. IMPROVING THE EFFECTIVENESS OF THE AVOIDANCE PROVISIONS ...................................... 99 D. STRENGTHENING MANAGERIAL ACCOUNTABILITY PROVISIONS IN WINDING UP ................... 100 3 A. INTRODUCING THE WRONGFUL TRADING PROVISION ........................................................ 101 6. ISSUES RELEVANT FOR BOTH RESCUE AND LIQUIDATION ......................................................... 105 6.1. FORUM ................................................................................................................................ 105 A. IMPACT OF THE SUPREME COURT RULINGS ON THE NATIONAL COMPANY LAW TRIBUNAL AND THE NATIONAL TAX TRIBUNAL ...................................................................................................... 105 6.2. PRACTICE AND PROCEDURE ................................................................................................ 111 6.3.