Vol 8 (2011) - Issue 2

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Bankruptcy Laws in India: Time for Change

Introduction

India has often been in the limelight for archaic laws in relation to bankruptcy and the processes involved in the same. The special legislation entitled Sick Industrial Companies (Special Provisions) Act, 1985 ('SICA') was enacted to take preventive or remedial measures for sick companies.

The Board for Industrial and Financial Reconstruction was set up under SICA to deal with revival and rehabilitation of sick industrial companies. However, the whole process was lengthy with poor enforcement mechanism. SICA was increasingly used as a shelter by defaulting borrowers who did not want to pay the legitimate dues of the creditors.

This had a great impact on the economy, credit processes, rates of interest and credibility of companies.

Bankruptcy laws outside India focus on the revival of a business. The idea is to provide the debtor with various mechanisms to restructure and revive its business, be it acquiring finance on favorable terms or providing a stay on litigation.

New Companies Bill

The provisions relating to revival and rehabilitation of sick companies have been reviewed and an attempt to modify them has been made by the Companies Bill, 2009 which will amend the Indian Companies Act, 1956. There are numerous amendments proposed in the Bill but the key changes in relation to bankruptcy laws are listed below:



(a) Definition of a sick company

To qualify as sick, the company would previously have to be registered for a minimum period of five years in which at the end of any financial year, the accumulated losses had to be equal to or exceed its entire net worth. These requirements have been done away with and sickness has been linked to the event of default of payment by the company to its creditors or on demand by a secured creditor representing 50% or more of the debt of the company. A secured credit or a company may suo moto apply for determination of sickness to the National Company Law Tribunal (the 'Tribunal').



(b) Power and jurisdiction of the tribunal

All powers of SICA would be transferred to the Tribunal, which will have the powers of the Company Law Board, the Board for Industrial and Financial Reconstruction, the Appellate Authority for Industrial and Financial Reconstruction and the High Court relating to company law matters including winding up. The application to the Tribunal is to be accompanied by a certified copy of accounts audited by the body of auditors prepared by the Tribunal and not by the board of directors (as provided in SICA), thus removing the scope for manipulation of accounts by the directors of the company and thereby preventing them from abusing the provisions.



(c) Process of revival

(i) The Tribunal shall determine whether or not a company is a sick company within 60 days of the date of reference.

(ii) Once the Tribunal determines the company is sick, the secured creditor or the company itself can apply for the determination of the measures that may be adopted with respect to revival and rehabilitation of the company.