A Committee was formed under the Chairmanship of Shri. T.K. Viswanathan, Former Lok Sabha Secretary General and Law Secretary vide Office Order 7/2/2014-FSLRC dated 22.8.2014 to study the corporate bankruptcy legal framework in India.

BLRC has submitted its interim report to the Ministry of Finance on 5thFebruary 2015. The major recommendations of the Committee relating to the provisions on ‘revival/rescue and rehabilitation of sick companies’ and ‘winding up/liquidation’ of companies are as follows:

• Provide a simple liquidity based test for initiating rescue proceedings that facilitates early recognition of financial distress and timely intervention without undermining the interest of the business under consideration;
• Allow unsecured creditors representing a certain value of unsecured debt to initiate rescue proceedings to protect their interests and promote alternative sources of finance;
• Reduce the timelines and streamline the process for assessing the viability of a business for determining whether the company should be rescued or liquidated;
• Make the process of granting and implementing a moratorium during rescue proceedings more objective and less prone to litigation by providing basic grounds to guide the discretion of the National Company Law Tribunal (NCLT);
• Provide for involvement of the secured creditors in the appointment of the company administrator(the insolvency practitioner appointed for coordinating and managing the rescue process) as part of the rescue proceedings to incentivize them to participate in the rescue process and not initiate separate recovery actions that may lead to breaking-up of viable businesses;
• Provide a predictable system for (a) takeover of management or assets by the company administrator as part of the rescue process, and (b) governing the interrelationship between such administrator, the managerial personnel and the shareholders in the event of such takeover.
• Reduce the company administrator’s dependence on the NCLT for basic rescue related functions by providing certain statutory powers in line with international best practices.
• Provide a fair and predictable mechanism for sanctioning a scheme of revival by introducing changes to provide for (a) equal treatment of the creditors of the same class (b) protecting the interests of non-consenting creditors; and prevent diversion of cash flow generated by a business after a scheme has been sanctioned.
• Provide an enabling provision for raising ‘rescue finance’ and granting super-priority to such financers as part of a scheme of revival, subject to approval of the requisite percentage of creditors.
• Re-instate the debt enforcement function of the statutory demand test for winding up a company by clarifying that the such test does not require proof of factual insolvency (in commercial or balance sheet terms) as intended by the lawmakers, while providing appropriate safeguards to prevent misuse of the provision (including criteria for determining whether a debt is disputed or not);
• Uphold the priority rights of secured creditors on their security interests in certain situations, notwithstanding anything to the contrary contained in any state or central law that imposes a tax or revenue payable to the Government by way of a specific statutory provision made as a first charge on the assets of the assesses.
• Strengthen provisions relating to avoidance of transactions and managerial accountability in insolvency in line with international best practices to deter wilful defaults and mismanagement of creditor/public funds.
• Provide a robust framework for regulation of insolvency practitioners (administrators and liquidators), including rules governing conduct and conflict of interest.
• Address issues relating to practice and procedure in insolvency proceedings: (a) the rules for operationalising the NCLT should contain safeguards to ensure that unviable debtor companies are not allowed to take benefit of stays, adjournments and pre-admission processes for extraneous considerations to cause delays; (b) develop a system for on-going training of the NCLT members and insolvency practitioners to ensure that they have complete understanding of (i) the reasons for the failure of the old system and (ii) technical issues in liquidation and rescue cases; (c) the higher judiciary should be sensitised about (i) the economic costs of delays in liquidation and rescue proceedings, (ii) benefits of insulating the NCLT and the National Company Law Appellate Tribunal(NCLAT), from a review on merits; and (d) the NCLT and the NCLAT should be required to record annual statistical data on matters such as the number of pending cases, the number of cases disposed, and the time taken for disposal of cases. This data may be passed on to the Government and the Supreme Court, who can evaluate the data based on standard efficiency parameters and recommend corrective action for tightening of procedural rules as and when required.
• The operationalisation of the rescue and liquidation related provisions of the new Companies Act are contingent on the operationalisation of the NCLT and the NCLAT. The BLRC recommends the following for implementing the new regime:
• Amend provisions relating to the NCLT and the NCLAT in line with the decisions of the Supreme Court in Union of India v Madras Bar Association (“the NCLT case”) and Madras Bar Association v. Union of India (the “National Tax Tribunal case”) and make an appropriate representation before the Supreme Court in the next hearing of the challenge presently pending before the Court for pre-empting any further litigation – the BLRC has identified the specific amendments that need to be carried out to comply with the two judgments.
• The BLRC agrees with the SEBI proposal to amend the Securities Contracts Regulation Act, 1956 to provide for provisions on settlement and netting of transactions in stock exchanges and clearing corporationswhich exempt the relevant financial contracts from the normal operation of insolvency laws in the event of the insolvency of the clearing members and trading members in the interest of settlement finality in the capital markets.
• The BLRC notes that the insolvency resolution of most Micro, Small and Medium Enterprises (“MSMEs”) is largely dependent on personal insolvency laws (which have proved to be very ineffective in practice) and proposes an administrative mechanism for rehabilitation of viable MSMEs under financial distress and recommends that it be given statutory status. The proposed mechanism, if implemented effectively, will provide much needed relief to viable MSMEs under financial distress without involving the crippling costs associated with formal rescue mechanisms involving administrators and courts/tribunals. Such administrative framework will be useful even after the Insolvency Code is operationalised.

We would like to invite your suggestions and comments on the Interim Report of the Bankruptcy Law Reforms Committee.

Interim Report of the Bankruptcy Law Reforms Committee: http://finmin.nic.in/reports/Interim_Report_BLRC.pdf

The last date for submission of your comments is 20th February, 2015.