The Supreme Court of India ("SC") has held that in the event of liquidation of a company, claims of employees have to be considered by the Official Liquidator of the company and not by the Debt Recovery Tribunal ("DRT"). The SC made this decision in the case of Bank of Maharashtra v. Pandurang Keshav Gorwardkar & Ors.¹, and laid down certain rules for deciding employee claims.

FACTS

The rapid growth of global economy has led to widespread international trade and this expansion in international trade has brought with it increasing possibilities of cross border insolvency proceedings. In its simplest form, Cross Border Insolvency may involve insolvency proceedings in one country with its creditors located in another country/countries on the other hand in the most complex of cases it may involve subsidiaries, assets, operations and creditors in dozens of nations.

Section 530 under the Chapter V of Part VII of the Companies Act, 1956 provides for the sequence of the payments which shall be made in the course of winding up of a company. However, Section 529A is an exception to Section 530 which starts with a notwithstanding clause providing for the overriding preferential payments. Section 529A was introduced in the Companies Act, 1956 by the Companies (Amendment) Act, 1985 in order to provide a protection to the workmen and the secured lenders of the Companies.

The International Monetary Fund recently stated that Indian corporate entities are among the highest leveraged entities in the Asia Pacific region. Recent data show that non-performing assets (NPAs) have risen alarmingly from 2.2% to 3.8% of the total loan

portfolio of Indian lenders, and greater difficulties are predicted in the medium term, owing to factors such as rising interest rates, margin retention, foreign exchange costs and a perceived policy “stasis”, all of which have slowed growth and made repayment more expensive.

Introduction

No single umbrella legislation governs insolvency and bankruptcy proceedings in India. Instead, there is a slew of legislation governing the legal framework, including:

The Supreme Court of India, with respect to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (“SARFAESI Act”), has held that powers under the Companies Act cannot be wielded by the Company courts to interfere with proceedings by a secured creditor to realize its secured interests in terms of the provisions of the SARFAESI Act

What is this all about?

India is proposing a new insolvency and bankruptcy code. It’s all part of the “Make In India” campaign by Narendra Modi’s government who are trying to attract businesses to India.

Current law

It does not appear that there has been a single separate law for bankruptcy legislation in the country’s history. Currently / historically the following have been used for insolvency purposes:

Delhi High Court has rejected the plea that the Company Court must exercise its jurisdiction to supervise the Scheme of Arrangements, to evict tenants of premises which are not owned by the company. Winding up proceedings were initiated against the company and with a view to realize assets Scheme of Arrangements was accepted by the court. During the pendency of the winding up proceedings and before the sanctioning of the Scheme by the Court, dues of all creditors were settled.

Proposed Swiss International Insolvency Law Reforms

In October 2015, the Swiss Federal Department of Justice and Police (Eidgenössisches Justiz- und Polizeidepartement) published a preliminary draft of reforms to title 11 of the Swiss Private International Law Act (“SPILA”), which governs insolvency proceedings and compensation proceedings (Articles 166–175 rev-SPILA), together with an explanatory report. The consultation procedure for the proposed reforms culminated on February 5, 2016.

The court has to classify creditors or members if there are such classes and before sanctioning the scheme, to see that their respective interest are taken care of.¹