1. Base insolvency law on Viswanathan committee report

Base insolvency law on Viswanathan committee report

The proposed bankruptcy law must protect unsecured creditors’ interests as well

Published: March 2, 2015 2:29 AM

We are ranked 137 out of 189 countries in resolving insolvencies—a number not many Indians will be proud of.

In August 2014, the Department of Economic Affairs set up a committee on bankruptcy law reform under the chairmanship of TK Viswanathan (former secretary general, Lok Sabha, and former Union law secretary). The committee released its interim report last month. With this report and the relevant Budget announcement on Saturday, India has moved closer to a bankruptcy law. The report, which may form the base for setting up the new legislation, aims to strengthen the hands of the creditors, and improve the corporate insolvency regime of the country.

The first important suggestion is the one which allows any secured creditor to initiate rescue proceedings if the debtor company fails to pay a single undisputed debt owed to such secured creditor exceeding a prescribed value within 30 days of demand or fails to secure or compound such debt to the reasonable satisfaction of such creditor. As per the current provision of the Companies Act, 2013, the secured creditor can initiate rescue proceedings with the National Company Law Tribunal (NCLT) for getting the company declared as a ‘sick company’ if the default is for 50% or more of the outstanding amount.

The committee reasons this by stating that waiting for the stage where the company has already defaulted on 50% of its outstanding debt is likely going to be a stage where it would be difficult to rescue such a company effectively. In short, the message is for early intervention for rescue. Further, the report argues that while any creditor may file a winding-up petition if the company is unable to repay a single undisputed debt exceeding R1 lakh, an application for rescue can be made by a secured creditor only after the company has defaulted on majority of its debt, which may be counter-intuitive. Hence the recommendation.

The second important aspect dealt with by the report is the role of unsecured creditors. As per the suggestion made by the committee, unsecured creditors representing 25% of the unsecured debt can now initiate rescue proceedings if the company defaults in the payment of its debt. As per the current provisions of the Companies Act, unsecured creditors are not permitted to initiate rescue proceedings. The current provision under the Companies Act, however, gave 25% of the unsecured credit by value for sanctioning a scheme of revival.

This is a welcome move for building a stronger corporate bond markets. Though most of the lending in India comes from banks and is protected by legislation such as the Sarfaesi Act, there was nothing much for the unsecured lenders in India. They were left more or less on their own. This recommendation, if implemented, will encourage investors investing in companies by subscribing to debentures to take further risk as well as take part in the funding process along with banks.

The report also seeks to give creditors a say in determining its sickness. It states that an interim administrator can be appointed sooner (within seven days of the first application for rescue being filed) for the limited purpose of convening a meeting of creditors and submitting a report to the NCLT on the viability of the business. The committee reasons this by stating that viability should be the most important consideration for allowing a company to be rescued. As per the current provisions of the Companies Act, the viability of the business can be considered by a committee of creditors only after a company has been declared sick, which itself will take 60 days for determination after receipt of initial application by the NCLT.

The NCLT will have the discretion to grant, refuse or lift a moratorium to a company if it feels that the business seems viable and needs to be protected from piecemeal sale of liquidation. However, moratorium can be granted only if 75% of the secured creditors by value (or 75% of all the creditors by value where there is no secured debt in the company) agree for grant of a moratorium.

Once the company has been declared sick, 75% of the secured creditors in value (or 75% of all creditors by value, if there is no secured debt in the company) should be able to appoint a company administrator directly (after a company has been declared sick). This power was established with the NCLT under the Companies Act and not with the creditors. As per the committee, the creditors are likely to be in a better position and most incentivised to find a suitable administrator. As per the report, in order to safeguard the company’s interest, such an appointment can be petitioned for removal or replacement.

The NCLT has also been given the power to direct the company administrator to take over the management or assets by the company administrator, suo motu, or on an application made by 75% of the secured creditors in value (or 75% of all the creditors by value if there is no secured debt in the company).

With a number of suggestions being made by the committee in the report which has an inter-play with the existing provisions of the Companies Act, amendments and modifications to the existing provisions of the Act will have to be done in order to make them operational. Further, there is now far more burden on the NCLT, which brings us to the burning question of doing the right things to speed up judicial reforms in the country.

The report is a move in the right direction. One can now hope that the reforms suggested by the report are implemented swiftly and India finally moves up the ladder in resolving insolvency issues.

By Sidharrth Shankar
The author is partner with J Sagar Associates, Advocates and Solicitors. Views are personal

(Assisted by Rajat Mittal, associate)

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