India

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corporate insolvency law) is now operational and the Sick Industrial Companies (Special Provisions) Act 1985 has been repealed by the Sick Industrial Companies (Special Provisions) Repeal Act 2003.

Key Legislation

• 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)

Insolvency Procedures

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.

Roles

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.

At a Glance

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?