Bankruptcy Law Reforms: Has the Committee got it right?
BLRC has a limited mandate and so its recommendations have to dovetail into a larger reform to be effective. Its not going to be easy
Finance Minister Arun Jaitley has promised the introduction of comprehensive bankruptcy code of global standards to induce legal certainty and speed in recovery, in his Budget of FY-2016. This means the interim report of Bankruptcy Law Reform Committee (BLRC) released in February 2015 must lead us to the desired bankruptcy code. Has the interim report diagnosed the legal infirmities, and proposed effective remedies to design the promised bankruptcy code?
The BLRC has limited itself only to proposing amendments in the sections in Companies Act, 2013 (CA-2013) relating to revival or liquidation of borrowing entities. National Company Law Tribunal (NCLT) will handle execution of these sections. With this, the Board for Industrial and Financial Reconstruction (BIFR), which has failed in rescue / liquidation mandate under CA-1956, for three decades will be wound up. Major recommendations of the BLRC include:
“Insolvent / distressed but viable companies” should be referred to court/ tribunal driven “out-of-court” collective rescue process. The collective rescue process is considered as a panacea for separate debt enforcement actions of the lenders who are “over-collaterised”.
Section 253 of the CA-2013 should be amended to facilitate initiation of rescue proceedings by any creditor whose debt instalment of at least Rs1 lakh is unpaid for 30 days, as against the proposed provision of 50% creditors by value referring to NCLT for initiation of rescue proceedings. Unsecured creditors have also been proposed to be given the same right.
Redrafting of sections 253 and 258 should be done to ensure that the viability of a company is taken into account while determining its sickness and enabling the creditors to have a say in the decision. Towards this end, the committee of creditors will be required to submit report on company’s viability to the NCLT which would examine the company’s sickness at the time of examining viability. The decision on the rescue or winding up has been proposed to be made within two months of filing of the initial application instead of five months prescribed now, and 75% of the creditors must support rescue or liquidation of the company.
Viability should be the most important consideration for the company to be rescued. Unviable insolvent companies cannot be allowed to function for extraneous considerations. Hence the liquidation should be done fast.
To facilitate sale of business on a going concern basis, moratorium on the enforcement proceedings under Recover of debt due to Banks and Financial Institutions (RDDBFI) and The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act for a maximum non-extendable period of 30 days. 
Debt restructuring under scheme of arrangement has been described as “effective tool for debt restructuring”. Under such arrangement, the sale of the business prior to initiation of insolvency proceedings has been suggested under the supervision of NCLT.
For resolving financial distress of Micro, Small and Medium Enterprises (MSMEs), a statutory administrative mechanism for rehabilitation of distressed but viable MSMEs have been proposed. This is considered necessary given the crippling costs of handling courts/ tribunals. Such administrative mechanism is expected to be useful even after the Insolvency Code is operationalised.
Cognizance has been taken of the delay tactics adopted by the defaulters and leniency shown to the defaulters by the courts. In particular, it has been recognized that BIFR failed to resolve the cases also due to reversal of BIFR orders on winding up by high courts. In order to eradicate delays that rendered BIFR ineffective, it has been suggested that NCLT should ensure pass winding up orders only in exceptional circumstances. Besides, it has been suggested that (i) the relationship between the NCLT and the superior courts should be closely monitored and subject to ongoing review, and (ii) the judiciary should be sensitised about (a) the economic costs of delays in liquidation and rescue proceedings, (b) benefits of insulating the NCLT and the NCLAT from a review on merits.
The defaulters have always used BIFR as a strategy to delay the legal process ad-infinitum. The lenders, therefore, rely on SARFAESI Act which has precedence over Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) or BIFR. Notwithstanding BLRC’s description of SARFAESI as “fairly successful”, the act has also not cured the malady going by huge backlog of SARFAESI section 17 applications of the defaulters in tardy DRTs. 
Banks adopt liquidation through SARFAESI Act as a last resort when the restructuring fails. Hence once the borrower’s business is determined as unviable, and the account turns NPA, the banks would prefer SARFAESI Act except when NCLT is known to deliver speedy adjudication and liquidation. The banks would also prefer a speedy NCLT to CDR owing to effective legal sanctity of NCLT. Evidently the borrowers would rush to NCLT to frustrate SARFAESI action by the lenders. CA-2013 allows SARFAESI to have precedence over NCLT with support of 75% or more of the creditors by value. 
Debt recovery legislations have failed so far more due to judicial inefficiency than legislative inadequacies. The interim report has proposed remedies to fix judicial inadequacies that had rendered SICA / BIFR ineffective, through amendments in CA-2013. It has also made broad suggestions for efficient organization and management of the NCLT. It has not included other legislations which impede recovery by the creditors. The BLRC has suggested adoption of section 15 of SARFAESI Act for change of management, but has failed to suggest any provision for sacrifice by defaulting promoters. What is the scene elsewhere?
In the US, the distressed firms that are subjected to out of court or Chapter 11 restructuring see turnover or replacement of over 90% chief executives (CEOs) and 70% of other key managers over two to four years period. Such personnel are not employed by public traded firms for three subsequent years. The key feature of the debt restructuring in the US is a substantial change in the ownership of the borrowing firm. Study shows that as high as 80% of the equity capital of the restructured firm is distributed to the creditors, with the banks receiving upto 36% of such firms’ equity. Similar results of bankruptcy are seen in many other countries. To induce discipline, the Indian bankruptcy code will have to ensure commensurate sacrifice by the sponsors as well. 
Determination of potential viability entails expertise in corporate finance, not law. Hence BRLC’s suggestion that the viability should be examined by a committee of creditors is the right approach. The liquidation can be piecemeal or wholesale, and the assets can be put to better economic use if the liquidation process is speedy. The report supports speedy liquidation of unviable units which again is the right approach. 
Enabling and rejuvenation of the NCLT is welcome, but can it improve the banks’ recovery process? A few examples of the dilatory tactics adopted by defaulters will highlight the challenges. 
ABC Ltd defaulted to a financial institution (FI) in 1996. The FI moved Delhi Debts Recovery Tribunal (DRT) and received receive recovery certificate (RC) in late 1998. Undeterred, a relative of the defaulters moved the High Court seeking permanent and mandatory injunction under the plea that he had claim on one third share in the mortgaged property pursuant to family settlement, and hence the auction of the assets by the FI should be stayed. In January 2000, the Court granted stay and transferred the case to Tis Hazari Court due to pecuniary jurisdiction. The stay continues for the last 15 years, with application of SARFAESI Act rendered ineffective.
XYZ Ltd defaulted to a bank in 2004. The bank took action under SAEFAESI Act and despite delaying tactics of the promoters, got the defaulters’ plea under section 17 of SARFAESI Act dismissed in 2005. The defaulters managed to link the matter to resolution of company petition of 1981, and got the stay from high court. The company petition which is unresolved for 34 years is standstill and the bank’s efforts to liquidate the assets under SARFAESI have been thwarted with no end in sight.
PQR Pvt Ltd defaulted to a FI in 2007. The FI adopted SARFAESI route. The promoters claimed encumbrance of the mortgaged property on the basis of tenancy, and got stay from city Civil Court against SARFAESI action. The FI filed writ petition in high court. The matter continues to drag.
There are countless such examples where the defaulting promoters indulge in collusive and third party suits under the provisions of Specific Performance Act, 1965 coupled with Civil Procedure Code (CPC), in an attempt to falsify the security and delay the recovery process ad-infinitum, only to exploit and strip the assets with impunity. The lower courts exacerbate matters often by exceeding the jurisdiction. While the bankruptcy code is in the offing, it is advisable that provisions for heavy costs are introduced on losing defaulters and for seeking adjournments so that such frivolous suits are eradicated.
For the bankruptcy code to become effective there will have to be unification of NCLT’s mandate under CA-2013, with (i) suits for tenancy, partitions, temporary and permanent injunctions, and (ii) RDDBFI Act so that liquidation process is unified. Besides, the NCLT will have to be made equivalent to high court. The aggrieved parties can approach Appellate Tribunal of NCLT, and thereafter to the Supreme Court for final remedy. The government will have to set up adequate benches of NCLT and NCLAT across the country to ensure that the disposal is speedy, and the defaulters desist from treating NCLT as an instrument of ceaseless hearings. The Supreme Court will also have to add adequate benches to ensure speedy justice.
NCLT though proposed 12 years back has not been adopted so far. Hence, if bankruptcy code has to be evolved through unification of relevant laws, the government has to move very fast. 
If a unified bankruptcy code executed through NCLT or any other body delivers speedy adjudication and liquidation, SARFAESI will become irrelevant. Till this marvel is achieved, the government will have to continue with SARFAESI and even strengthening by requisite amendments and adequately staffed DRT benches.
(Rajendra M Ganatra is Managing Director & CEO of India SME Asset Reconstruction Co Ltd-ISARC. He had over 25 years of experience in project finance, asset reconstruction and financial restructuring. The views expressed in above article are personal.)
8 years ago
8 years ago
Attention needs to be drawn to the latest on the subject legislation, wherein a grave doubt/concern has been raised against the constitutional validity / 'vires' thereof;


The bankruptcy code, not a money bill, was introduced in Lok Sabha as one. Is this the first of a new trend?

Ramesh Kubde
9 years ago
The author has rightly brought out the operational issues involved in implementation of various legislations enacted by the Govt.of India. The borrowers are taking advantage of the loopholes in the system and the wide discretions available to various forums/courts in deciding the matters. This is very much evident from the rising NPAs of all commercial banks.
The intent of the interim report appears to be good and it envisages wider consultation before final report is brought out. I,however, expect stricter legislative measures to be incorporated in the final report, which would not allow the defaulting borrowers to abuse the legal system.
Ramesh Kubde
9 years ago
Bankruptcy Law Reforms: Has the Committee got it right?-Government is keen to work for BUSINESS community but never ever for a conman people because what will be financial gain to Government ? monitory nothing.there r 1000th companies disappeared from the market with crores of rupees what were hard earned invested to get conman benefited as a share holder./thanks
9 years ago
Law reforms do not happen because there are too many vested interests in maintaining the status quo ante. Apart from the Judges and the Lawyers who have already understood the futility of law in achieving what they want but continue to sonorously and sanctimoniously intone the various contradictions that constitute it. To begin with the Government of India Act (1935) was plagiarized and made into the Indian Constitution by enshrining inequality under law making a mockery of the term "democracy" apart from the unctuous self proclamation of "secularism" (presumably, Indira Gandhi was not under Holy Orders when she so proclaimed). Further, the plagiarized Constitution was fabricated to exalt the "Many Nations" Theory and exceptions to the rule of Law making the notion of India as a Nation an absurdity. This is the leit motif of India. Untruth, conveniently re-fabricated History, plagiarism and laws manufactured with the same lack of integrity by the neo aristocracy of India comprising those who titillate by dancing on celluloid, hitting balls or looting the nation that renders them the best law makers to subvert the resources of the Nation to their personal pleasure, pomp, pelf, perpetuation and perversions. For such convenience, in the very image of the Constitution are India's laws made. Will these Orwellian Pigs commit suicide by making good laws? Just recently I had the misfortune to see a High Court Judge proclaim in open court that, "This is India, not UK or US", to quash a criminal case in utter disregard of evidence and law to protect a group of wealthy and influential rogues. It is unlikely that anything will change until: (1) Inequality under law and exceptions to the rule of law are expurgated from the Constitution and laws of India. (2) Bribe Taking is defined as criminal extortion or treason and made a capital offense with special rules of evidence and special courts with summary powers (akin to a Military Court Martial). (3) All court proceedings are video graphed and archived for public viewing and can be used as evidence to prosecute Judges and Magistrates at all levels under special laws and special courts with summary powers akin to a military Court Martial, for insouciance, negligence, tardiness, disregard for law and propriety, behaviour unbecoming of a Judge such as lack of etiquette and manners, (4) every job on the "Public" i.e. Government Pay Roll has specific and unique Key Responsibility Areas, Key Performance Parameters and Objectives for which they are held accountable on pain of summary dismissal for non-performance or life imprisonment for treason for sabotage under special laws and special courts with summary powers akin to a military Court Martial and (5) India creates an Ombudsman Service of reemployed and retrained military officers (Colonel and Below, JCOs and NCOs) who retire before 50 to serve as presiding officers, investigating/prosecuting and enforcement officers at the afore mentioned "Special Courts", one for every taluk with powers to arrest, incarcerate, try and punish any and all from the President of India to a peon in accordance with the Special Laws framed therefor.
Rajendra M Ganatra
Replied to SuchindranathAiyerS comment 9 years ago
I applaud your scholarly, incisive, and factual observations. However, there is no case for continuing judicial flippancy lest the rogues take over this country.

Let's see if bankruptcy code does emerge in FY-2016.
9 years ago
Good Article. Thank You. YPRao, & BankAuctions.IN
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