CLOSING OF BUSINESS IN

INDIA

DEVELOPMENTS IN LEGAL & ADMINISTRATIVE FRAMEWORK

1

LEGAL FRAMEWORK

• Present conceptual and procedural framework –

– Laid out by 3 major legislations

• Companies Act, 1956• Sick Industrial Companies (Special Provisions) Act 1985, (SICA)• Securitization and Reconstruction of Financial Assets and Enforcement of of Security Interest

Act 2002 (SARFAESI)

– Several other special provisions

• Implementation and supervision by 4 major agencies -

– High Courts – Company Law Board (CLB)– Board for Industrial and Financial Reconstruction (BIFR)– Debt Recovery Tribunals (DRTs)

2

CORPORATE RESCUE PROCESSES

UNDER VARIOUS LAWS

3

FORMAL CORPORATE RESCUE PROCESS

• Available under the Companies Act

• By making arrangements with creditors and members and reducing capital, if necessary

• Application before Court

• Elaborate Court procedures apply

• Court has discretion to sanction such arrangement or to refuse.

INFORMAL RESCUE PROCESS

• Direct negotiations, voluntary arrangements, standstill agreements etc.

• Ineffective if threat of litigation from different creditors brings pressure on negotiations

COMPANIES ACT,1956

4

• Basically and predominantly remedial and ameliorative

• Only ‘industrial companies’ covered

• Meaning of ‘sick industrial company’ (SIC)

– Complete erosion of ‘net worth’

• Board required to make reference to the BIFR

• BIFR empowered for

– measures for revival and rehabilitation of potentially viable SICs or

– recommend liquidation of non-viable SICs to Court

• Practical difficulties faced by lenders

• Companies not covered by SICA may resort to provisions of Companies Act for revival

• Misuse of SICA in large scale by unscrupulous promoters

SICK INDUSTRIAL COMPANIES ACT (SICA)

5

• Provides enforcement of security interests (NPAs) in movable and immovable propertieswithout intervention of Court

• A secured creditor may issue notice to borrower to discharge (NPA) dues within 60 days

• On failure of borrower, secured creditor may– enforce possession of secured assets– take over management by appointing a manager

• Consent of 75% secured creditors mandatory in case of co-financed assets

• Aggrieved person may file an appeal before DRT and thereafter before DRAT

• However, right to appeal only after depositing 75% of claim

• Statutory protection granted to secured creditors against legal actions

• Jurisdiction of civil courts ousted

• In effect, only banks and public financial institutions notified as ‘financial institutions’ by govt.leaving aside private financial institutions

SECURITISATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT 2002

(SARFAESI)

6

• Under a frame work laid down by RBI who is also the banking regulator

• For banks and Financial Institutions registered with RBI

• Requires consent of 75% of creditors in value and 60% in number

• Powers with regard to asset classification; provisioning for first restructuring,

norms relating to turn around period, minimum sacrifice and funds infusion by

promoters, banks, Financial Institutions

• OTS included as a part of CDR mechanism to make exit option flexible

• Disclosures in balance sheet

7

CORPORATE DEBT RESTRUCTURING-RBI

SPECIAL LAWS

AND

ENFORCEMENT OF SECURITY

8

• SFC can apply to Court for order of sale of secured property, enforcement of any surety, transfer of management and for injunctive reliefs

• Summary mode of trial and is not in the nature of suit proceedings

• Court cannot confer reliefs to co-lenders and separate recovery suits by them required

• Areas of overlap with winding up proceedings.

• Controversial as it denies opportunity for corporate rescue/turnaround

STATE FINANCIAL CORPORATION ACT 1951(SFCA)

9

• Provides swift process of appraisal, validation and recovery of claims of Financial Institutions and Banks

• Recovery granted primarily via liquidation of assets

• Overrides other regulations in jurisdiction, preference and priority of claims

RECOVERY OF DEBT DUE TO BANKS AND FINANCIAL

INSTITUTIONS ACT 1993 (RDDBFI)

10

WINDING UP OF COMPANIES

11

MODES OF WINDING UP

Three ways -

• Winding up by Court

• Voluntary Winding Up

– Members’ Voluntary Winding Up

– Creditors’ Voluntary Winding Up

• Winding Up subject to Supervision of Court

12

• On an order of winding-up by the Court , the administration and the affairs of the company are entrusted to the Official Liquidator, who is a Central Govt. functionary placed at the disposal of the Court (In voluntary winding up the liquidator is appointed by members or creditors)

• A winding-up order stays all actions against the company indefinitely

• Once the Court/ Tribunal takes over assets of the company under its control, or has passed an order for winding up, proceedings may be started or continued against the company only with the permission of the winding –up court.

• The liquidation of the company and distribution of proceeds to the creditors is carried out under the directions and supervision of the Court

OVERRIDING EFFECTS OF WINDING -UP PROVISIONS

13

DIFFICULTIES IN WINDING UP

• Time taken too long (average 10years)

• Recovery is low (12-13%)

• Costly

14

REFORM SCENARIO

15

THE COMPANIES (SECOND AMENDMENT) ACT, 2002

• Provides for setting up National Company Law Tribunal (NCLT) & Appellate Tribunal as a single window to deal with corporate rescue, restructuring and winding up.

• A composite law to deal with reorganization & liquidation

• NCLT will have:

– Power to consider revival and rehabilitation

– Jurisdiction & power relating to winding up of companies

– Jurisdiction & power exercised by Company Law Board

• Seeks to improve standards by specifying specialized qualifications for appointment of

members of NCLT and a transparent process for their selection and appointment

• Commencement of Restructuring Proceedings

– Easy, convenient, inexpensive & quick access with safeguards against misuse by defaulting and dishonest debtors as experienced under SICA

– Board of SICs to make reference to NCLT and submit scheme for revival

• Inquiry by NCLT and declaration of sickness

16

• NCLT to sanction scheme for revival.

• In absence of consent to scheme, NCLT may order for winding up or take other appropriate

measures

• Once sanctioned, the scheme becomes binding on all by operation of law

• A scheme may be modified in Implementation process

• An aggrieved person may appeal before NCLAT and then to Supreme Court

• NCLT empowered to recommend winding up of SIC where it concludes that the net worth

cannot be turned positive within reasonable time and it is just and equitable

• No suspension of legal proceedings and Contracts unlike the provision under SICA

• Misfeasance proceedings – NCLT empowered to fix liability

• Formation of Rehabilitation and Revival Fund

THE COMPANIES (SECOND AMENDMENT) ACT, 2002

17

Challenge to NCLT

• The proposed framework could not be implemented due to a legal

challenges

• Issues at challenge relate to the changes in jurisdiction and powers of the

High Courts with regard to Company matters

• Special Leave Petition before the Supreme Court

• Refer to Constitution Bench

• Matter heard, reserved for orders

18

Rehabilitation & Revival Fund

• A fund to be formed for the purpose of rehabilitation or revival or

protection of assets of a sick industrial company.

• Fund to be found by levying a cess of not less than .005% and not

more than .1% on the value of annual turnover of every company.

• Fund shall be applied by the tribunal for the purpose of

– making interim payment of workman's dues

– Protection of assets of sick industrial company

– Revival and rehabilitation of sick industrial company

19

Private Liquidators

• Liquidators can be appointed; a panel

– From professionals firms of Chartered Accountant, Advocates,

Company Secretaries, Cost & works Accountants

– A body corporate of such professionals as may be approved by

the Central Government

– A whole time or part time officers appointed by the Central

Government

• Panel of Professionals shall be prepared by the Central

Government for the Tribunal for appointment as liquidators

20

A Critique

• Objectives are well founded –

– to provide an orderly exit mechanism for failed enterprises, ending unproductive uses of business assets and transferring them to more efficient market participants.

• Seeks to provide effective mechanism along with SARFAESI

• However, falls short of expediting and simplifying insolvency procedures

• Need to introduce moratorium / stand still provisions for seeking alternate solutions

• Companies only - comprehensive bankruptcy/insolvency code required

• Fails to provide framework for cross-border insolvencies

• Need for an effective out-of-court restructuring mechanism

• Although enacted, yet to be implemented.

THE COMPANIES (SECOND AMENDMENT) ACT, 2002

21

• J J Irani Committee on Company Reforms was set up on 02.12.2004 to Review the Companies Act of 1956

Recommended

• Establishment of NCLT having non intrusive and supervisory role with a commercial approach to insolvency observing the established legal principles of fairness in the process

• Insolvency code to be based on UNCITRAL Guide

• Suitable framework for Cross Border Insolvency which provides for rules of jurisdiction, recognitions of foreign judgments, co-operation and assistance among courts in different countries and choice of law is required

• The Government may consider adoption of UNCITRAL Model Law on Cross Border Insolvency with suitable modifications at an appropriate time

JJ IRANI COMMITTEE RECOMMENDATIONS

22

• Also recommended that

– Corporate insolvency may be addressed through Companies Act itself

– Adoption of an insolvency code covering rehabilitation and winding up

– A definitive and predictable time frame for the conduct of the insolvency process

– A time bound opportunity for revival/rehabilitation before winding up

– Debtors seeking rehabilitation should approach Tribunal only with a draft scheme

– Creditors being at least 3/4th in value may also file scheme.

– A limited standstill period for genuine business restructuring

JJ IRANI COMMITTEE RECOMMENDATIONS

23

Insolvency Fund

• Provisions relating to rehabilitation cess should be replaced by the concept of Insolvency Fund with optional contributions by companies and grants from Government

• Provide incentives to encourage contributions by companies to the Fund

• Companies which make contributions to the Fund should be entitled to certain drawing rights to meet insolvency costs and other liabilities in the event of insolvency

• Administration of the Fund should be by an Independent Administrator and it should not be linked/credited to Consolidated Fund of India

24

FUTURE REFORM

• Enactment of Companies Bill 2009

• Constitution of a single forum to address corporate rescue, restructuring and winding up

• Cross Border Insolvency

• Framework for private insolvency professionals

• Reform of the Institution of official Liquidators

• E-Governance in Liquidation proceedings

• Comprehensive Insolvency Law for Corporate and Individual Insolvency

25

THANK YOU

26