Fixing bankruptcy, insolvency laws

The Bankruptcy Law Reforms Committee (BLRC), while submitting its report to the government earlier this month, had recommended the need for a single code to resolve insolvency for all companies, limited liability partnerships, partnership firms and individuals. "In order to ensure legal clarity, the Committee recommends that provisions in all existing law that deals with insolvency of registered entities be removed and replaced by this Code," the committee said in its report.

However the suggested draft Insolvency and Bankruptcy Code (IBC) prepared by the committee (The Insolvency and Bankruptcy Bill, 2015) does not subsume all the existing bankruptcy and insolvency related laws. Section 234 of the draft code said that the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 - both of which deal with individual insolvency - would get repealed. Section 235 of the draft code suggested certain amendments in the Companies Act, 2013 that related to revival and rehabilitation and winding-up of companies. "The draft Code suggests that chapters 19 and 20 of the Companies Act will be repealed and replaced by IBC provisions," said Richa Roy, senior associate at law firm AZB & Partners. Further, the draft Code goes on to suggest amendments in certain provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, Limited Liability Partnerships Act 2008, Recovery of Debts Due to Banks and Financial Institutions Act, and the Indian Partnership Act, 1932.

"The ultimate objective of drafting the Insolvency and Bankruptcy Code was to have one consolidated law for insolvency and bankruptcy. In the ideal situation we should have only one Code to minimise complexity," said Ajay Shah, professor, National Institute of Public Finance and Policy, and a member of BLRC. However, keeping in view the existing plethora of laws that guide and influence any bankruptcy or insolvency proceedings, the BLRC reviewed some key laws that need to be amended or repealed to achieve this objective. Legal experts have said the task of subsuming key bankruptcy and insolvency related laws to arrive at a unified code was still an on-going work in progress.

"The IBC is just a suggested draft Bill. In what sequence the law will be brought it and old laws transitioned, is the prerogative of the government. Accordingly, the existing laws could be amended, repealed or overridden," said Shah.

While the insolvency Code would continue to interface with multiple laws, the BLRC envisage that the National Company Law Tribunal (NCLT) will be the exclusive forum for firm insolvency and liquidation adjudication, points out Mritunjay Kapur, Partner and Head of Risk Consulting, KPMG in India. "Similarly, the Debt Recovery Tribunal is envisaged as an exclusive forum for individual insolvency and bankruptcy adjudication," adds Kapur.

The BLRC report recognises that the current state of the bankruptcy process for firms is a highly fragmented framework. "Powers of the creditor and the debtor under insolvency are provided for under different Acts," the report noted. Moreover these laws are implemented in different judicial fora.

The BLRC report noted that having "all the provisions in one Code will allow for higher legal clarity when there arises any question of insolvency or bankruptcy. Further, a common insolvency and bankruptcy framework for individual and enterprise will enable more coherent policies when the two interact, the report said. It points out that it is a common business practice for banks to take a personal guarantee from the firm's promoter when they enter into a loan with the firm. "At present, there are a separate set of provisions that guide recovery on the loan to the firm and on the personal guarantee to the promoter. Under a common Code, the resolution can be synchronous, less costly and help more efficient recovery," the report added.

Legal experts are not sure if the proposed draft code will be in a position to deliver that stated objective unless there is careful review of all laws in this space. "If these laws are not repealed there must at least be a clear demarcation of when these laws would apply and of overriding provisions in cases of conflict with the Code," said Rohit Mahajan, partner and head, forensic, financial advisory, Deloitte in India.

The BLRC report notes that globally in most countries bankruptcy laws undergo significant changes over the period of two decades or more. In the UK, for instance, the insolvency resolution framework was governed by the Insolvency Act of 1986. This has been substantially modified with the Insolvency Act of 2000, and the Enterprise Act of 2002. Similarly, the United States too has periodically updated its bankruptcy and insolvency laws over the years, even as it currently looks at making significant changes in its laws.

Legal experts say the BLRC report is just a starting point for India to undertake more regular reviews of its insolvency and bankruptcy laws.

Individual bankruptcy and insolvency is legislated under two Acts:
  • The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920

  • High courts have the jurisdiction over insolvency related matters in the erstwhile Presidency towns of Chennai, Kolkata and Mumbai. Subordinate courts hear cases of individual insolvency in all other areas, with the district court being the court of appeal
Corporate bankruptcy and insolvency are covered in a complex of multiple laws, some for collective action and some for debt recovery. These are:
  • Companies Act, 2013 - Chapter on collective insolvency resolution by way of restructuring, rehabilitation, or re-organisation of entities registered under the Act

  • Adjudication is by the National Company Law Tribunal. However this chapter is yet to be notified

  • Companies Act, 1956 - deals with winding-up of companies

  • No separate provisions for restructuring except for through mergers & acquisitions (M&A) and voluntary compromise

  • Adjudication is under the jurisdiction of the high court

  • SICA, 1985 - deals with restructuring of distressed "industrial" firms

  • Under this Act, the Board of Industrial and Financial Reconstruction assesses the viability of the industrial company, and refers an unviable company to the high court for liquidation

  • SICA 1985 stands repealed, but the repealing enactment is yet to be notified
Source: The report of Bankruptcy Law Reforms Committee


Some instances of creditor-action against defaulting debtors

Zoom Developers

Considered one of the biggest bank loan frauds in the country, Vijay Chaudhary-promoted Zoom Developers had taken loans of around Rs 2,200 crore from various banks for realty projects abroad. The Enforcement Directorate has attached 1,280 acres of land in the US, worth Rs 1,000 crore

Kingfisher Airlines

Over the past four years, the grounded airlines' key creditors - a clutch of financial institutions and banks - have looked at a debt recast package, put the airlines' brand on the block, proceeded to take possession of promoter Vijay Mallya's Goa mansion and other properties. They have barely managed to recover a small fraction of Rs 7,400-crore loans given to the ailing airline

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