Background

Background

Introduction

The start of December 2016 saw major developments regarding ease of doing business in India:

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

UPDATE

THE INSOLVENCY AND BANKRUPTCY CODE, 2016 - NEW ROAD AND NEW CHALLENGES

25 May 2016

Introduction

Background and need

From the Justice Eradi Committee report of 1999 to the Department of Financial Services’ indicator of October 2015, the pendency of winding-up cases in India has been piling up to reach an alarmingly high level of backlog [see end note 1]. The World Bank has ranked India on the 130^th position among 189 economies as it takes more than four years on an average to resolve insolvency in India [see end note 2].

The three-Judge Bench of the Supreme Court of India in the case of Madura Coats Limited (“the Appellant”) vs.

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

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.