Introduction
Questions around the interplay between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, the Sick Industrial Companies (Special Provisions) Act 1985, the Recovery of Debts Due to Banks and Financial Institutions Act 1993 and the Companies Act 1956 have frequently arisen in various high courts and the Supreme Court.
The upper house of Parliament (the Rajya Sabha) passed the Insolvency and Bankruptcy Code 2016 on May 11 2016.
The Insolvency and Bankruptcy Code passed by the Parliament is a welcome overhaul of the existing framework dealing with insolvency of corporates, individuals, partnerships and other entities. It paves the way for much needed reforms while focussing on creditor driven insolvency resolution.
BACKGROUND
Presently, prior to a listed Indian company filing a scheme (Scheme) before the High Court for merger/de-merger/amalgamation/reduction of capital (Reconstruction) under the Companies Act, 1956 (Companies Act), it is required to first submit the Scheme to the stock exchange for approval. Upon successful completion of the Reconstruction, the company must ensure that at least 25% of its post-issue capital is offered and allotted to the public.
Provisions under Companies Act , 1956
Chapter V of Part VI: Management and Administration of the Indian Companies Act, 1956 [hereinafter referred to as the ‘Act’] regulates Arbitration, Compromises, Arrangements and Reconstructions as covered under Section 390-396A of the said Act. Section 390 of the Act provides interpretation of Sections 391 and 393 as under:
390. INTERPRETATION OF SECTIONS 391 AND 393
In sections 391 and 393, -
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: