Administrative measures to aid legislation on insolvency

Written by Ronojoy Banerjee | Ronojoy Banerjee | Nistula Hebbar | Nistula Hebbar | New Delhi | Updated: Nov 21 2011, 07:20am hrs
The new Company Law taking shape envisages increased efficiency in insolvency detection and resolution, but for that process to be practical, concomitant administrative systems need to be put in place. Realising this, the ministry of corporate affairs (MCA) is working on a set of measures to strengthen rules and the procedures governing insolvency and bankruptcy cases in the country.

Some of the measures under consideration include setting aside a definite time period for financial settlement of cases, e-auctioning assets of companies undergoing restructuring or liquidation by the court-appointed administrator and allowing private accountants to value the assets of an ailing firm.

The move is aimed at expediting the liquidation process and putting a proper mechanism in place to safeguard interests of creditors, although government sources are anxious to dismiss any connection of the move to crisis faced by Kingfisher Airlines.

The essential difference between the current norms for liquidation/winding-up of companies and the what is envisaged in the Companies Bill now before Parliament is that in the former, the proceedings can be initiated only after the net worth of the firm turned negative, while a single default in payment of principal/interest can trigger the proceedings in the proposed system.

Government sources privy to the plans said once the changes are implemented, it would usher in a new era in bankruptcy-related matters in the country. As the economy develops, there would unfortunately be a handful of companies that may not be able to compete and in the process become bankrupt. We must ensure that we have the requisite laws in place to ensure that investors, creditors and promoters all get a fair deal at the end of the day, a senior MCA official told FE.

Corporate affairs minister Veerappa Moily declined to comment on the issue, saying anything he says would be linked to the Kingfisher issue.

As per existing practice, a bankrupt company moves the Board for Industrial and Financial Reconstruction (BIFR) only after its net worth becomes negative. Thereafter, its assets are put up for auction as per the directives of BIFR which often takes years. E-auctioning would ensure that not only the pool of prospective buyers increase but it would also reduce the possibility of manipulation in the process, the government source said.

However, government sources warned that little progress would be made if the notification of the National Company Law Tribunal (NCLT) gets indefinitely delayed. The two are interlinked because only the NCLT can order restructuring of a company in the event of bankruptcy. Once functional, the NCLT would amalgamate within itself the Company Law Board and the BIFR as well.

The issue of instituting a proper insolvency framework dates back to the JJ Irani committee which had proposed a liquidity-based test for evaluating the financial health of a firm. Following this, the government sought to address the current lacuna in the insolvency provisions in the Companies Bill.

Delhi-based corporate lawyer Sumant Batra who specialises in insolvency matters said: Bankruptcy and insolvency-related matters have become very important today. Often, in India, creditors are taken by complete surprise when a company gets bankrupt, he said. He said the law must ensure that a company must convene a meeting even it feels that it could default on interest payment. E-auctioning and a fixed time period should strengthen the insolvency provisions in the country considerably.