News
The Companies (Second Amendment) Act 2002 (India's
new corporate insolvency law) is now operational
and the Sick Industrial Companies (Special Provisions)
Act 1985 has been repealed by the Sick Industrial
Companies (Special Provisions) Repeal Act 2003.
- Companies Act 1956 as amended
by the Companies (Second Amendment)
Act 2002.
-
Securitisation and Reconstruction of
Financial Assets and Enforcement of
Security Interest Act 2002 (SARFAESI)
With the passing of the Second Amendment,
a new National Company Law Tribunal (NCLT)
has been established. The Tribunal will
be empowered:
- To consider revival and rehabilitation
of companies.
- With jurisdiction relating to the
winding up of companies.
The Tribunal
stands
in the stead of the High Court
and pending liquidation applications
are
being transferred
from the High Court to the Tribunal.
- The jurisdiction previously exercised
by the Company Law
Board. The Board
has been abolished.
In India now, procedures for the reorganization
and liquidation of companies are contained
in the same Act. The Second Amendment
is an attempt to create a balance between
reorganization and liquidation.
The Second Amendment seeks to provide
a quick, convenient and timely procedure
for dealing with the affairs of a sick
industrial company. A sick industrial
company is defined as an industrial company
that has, at the end of a financial year,
accumulated losses equal to 50% of the
average net worth of the company in the
four preceding financial years, or which
has been unable to pay creditors as debts
have fallen due in three consecutive
quarters.
The Board of Directors apply to the
NCLT and prepare a scheme for the revival
and rehabilitation of the company. The
application and scheme must be accompanied
by a statement by the company's auditor.
The NCLT may make inquiries about the
financial state of the company and its
prospects. They may require an Operating
Agency (a group of experts) to assist.
The NCLT can make an order putting a
scheme in place or ordering that the
company be liquidated. Creditors may
also put forward a scheme.
Approval of a scheme requires consent
by all parties providing financial assistance
within 60 days. However, a non-reply
is taken as a consent. Every party providing
financial assistance has a right of veto.
This right of veto cannot be overridden
by a Court.
In a rehabilitation, the debtor remains
in possession of the entity.
Where the NCLT comes to the conclusion
that the sick industrial company cannot
be revived and that it is just and equitable
for the company to be wound up, the Tribunal
shall order the winding-up of the company.
A levy is charged on each company to
establish a rehabilitation and revival
fund for sick industrial companies.
SARFAESI provides for the enforcement
of security interests in movable (tangible
and intangible, including accounts receivable)
and immovable property without the intervention
of the court and by way of a simple,
expeditious and cost effective process.
SARFAESI also enables the establishment
of asset reconstruction companies.
Role
played by Government
Given that the Second Amendment now allows the
emergence of a private sector insolvency profession
in India, the Government bureaucracy is looking
at ways of regulating this profession.
Role
played by private sector practitioners
Under the 1956 Act as it was before the passing
of the Second Amendment, an Official Liquidator
was attached to every High Court. This court officer
undertook all liquidations. The Second Amendment
allows for private sector practitioners to be appointed
from a panel of Chartered Accountants, Cost Accountants,
Lawyers and Company Secretaries. Thus, a private
sector insolvency profession is just starting to
emerge in India.
Role
played by the Court
With the passing of the Second Amendment, the
National Company Law Tribunal (NCLT) has been established
to deal with reorganization and liquidation of
sick industrial companies. The Tribunal consists
of a President and not more than 62 Judicial and
Technical members. The President of the NCLT is
to be a former judge or a person qualified for
appointment as a High court judge. Benches of the
tribunal dealing with reorganization and liquidation
matters will consist of three members, including
one judicial member and one technical member. Judicial
members are judges or lawyers (of at least 15 years
standing) and the technical members are accountants.
There is also a National Company Law Appellate
Tribunal (NCLAT) that hears appeals from orders
made by the NCLT.
Does
the insolvency system in India allow
for:
1.
|
Different
procedures for the insolvency of individuals
and the insolvency of companies? |
|
 |
2.
|
Creditors
to accept an arrangement outside of formal
bankruptcy/liquidation proceedings? |
|
|
3.
|
Priority
payment for employee creditors? |
|
|
4.
|
Priority
payment for taxation debts? |
|
|
5.
|
Automatic
disqualification of directors of failed companies
from managing other companies? |
|
|
6.
|
Recognition
of insolvency proceedings being conducted
in another jurisdiction? |
|
|
7.
|
A
government agency to undertake insolvency
administration work? |
|
|
8.
|
Some
form of licensing of private sector practitioners? |
|
|
9.
|
A
review of the remuneration claimed by an
insolvency practitioner by either a court
or other government regulator? |
|
|
10.
|
A
mandatory scale of fees applicable to insolvency
practitioner remuneration? |
|
|
11.
|
Surveillance
of the work of private sector practitioners
by a government regulator? |
|
|
12.
|
Collation
of insolvency statistics by a government
regulator? |
|
|
|
