Corporate Insolvency - National Company Law Tribunal

On November 25 2016, the provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA Repealing Act) were notified with effect from 1 December 2016. This means that the Sick Industrial Companies (Special Provisions) Act 1985 stands repealed and consequently, the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (Appellate Authority) are dissolved. On the same day, Section 4(b) of the SICA Repealing Act, as substituted by the Eighth Schedule of the Insolvency and Bankruptcy Code 2016 (Code), was also notified with effect from 1 December 2016. It seems that as a corollary to these notifications and possibly to avoid creating a vacuum in the legal process, the Government of India decided to notify substantive parts of the Code relating to corporate insolvency resolution process on 30 November 2016, effective from 1 December 2016.

In our Ergo Newsflash of 25 November 2016 we had outlined that the Code was being notified in phases and that the provisions dealing with intermediaries had been notified into law on 27 November 2016. In May 2016, we had shared our thoughts on the broad contours of the Code with you. In addition to these, we provide below in FAQ format (i) a brief outline of what has been notified; and (ii) the implication of notifying the SICA Repealing Act on the Code.

The Code is here; long live the Code

What provisions of the Code have been notified?

Per the latest notification issued on 30 November 2016, the provisions relating to corporate insolvency have been notified into law, namely:

Sections 4 to 32: These deal with the substantive as well as procedural aspects of initiating a corporate insolvency resolution process, moratorium, constitution of the committee of creditors, and appointing of insolvency professionals, etc.;

Sections 60 to 77: These deal with offences and penalties for various actions;

Section 198: This allows the National Company Law Tribunal (NCLT) to condone any delay by the Board for reasons recorded in writing;

Section 231: The section bars the jurisdiction of civil courts in respect of any matter which the NCLT is empowered to pass orders on;

Sections 236 to 238: These sections (i) empower the special courts created under the Companies Act 2013 to try offences under the Code; (ii) empower the High Court to hear appeals and revisions from the special court; and (iii) make clear that the Code overrides all other laws in India;

Sections 239(2)(a) to (f): These sections empower the Central Government to make rules for various purposes; and

Sections 246 to 248 and 250 to 255: These sections amend various other laws and were notified prior to 1 December 2016.

In addition, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 were also notified with effect from 1 December 2016. These regulations are substantive guidelines which outline how a corporate insolvency resolution process can be triggered, what constitutes proof of claim, the governance of the committee of creditors, and the power of the insolvency professional, amongst other things.

Impact of the notification of the SICA Repealing Act

What does notifying the SICA Repealing Act and, inter alia, Part II (Chapter 1 and 2) of the Code (both effective from today, 1 December 2016) mean for pending cases under the erstwhile SICA?

Section 252 of the Code, notified on 1 November 2016, amended the SICA Repealing Act by substituting Section 4(b) therein with the Eighth Schedule of the Code. This was later followed by the notification on 25 November 2016 notifying the SICA Repealing Act itself with effect from 1 December 2016. The net effect of this is that BIFR and the Appellate Authority are, as of today functus officio (ie defunct). In terms of the Eighth Schedule of the Code, it means that any appeal preferred to the Appellate Authority or any reference made to the BIFR or any inquiry pending before the BIFR or any other authority or any proceeding of whatever nature pending before the Appellate Authority or the BIFR immediately before the commencement of the SICA Repealing Act stand abated. Any company in respect of which such an appeal or reference or inquiry stands abated has been given an option to make an application to the NCLT under the Code within 180 (One hundred and eighty) days from the commencement of the Code in accordance with the provisions therein. The provisions of the Code giving such an option have come into force from 1 December 2016.

What is the impact of the SICA Repealing Act on the orders passed either under Section 22 of SICA or scheme sanctioning order or any other order affecting the rights of the parties therein?

As stated above, the SICA Repealing Act read together with Section 252 of the Code, does state that all proceedings pending before the BIFR or Appellate Authority, shall stand abated with effect from 1 December 2016. However, the SICA Repealing Act also contains a "savings" section. The way this section is drafted, it intends to "save" any rights and obligations which have vested in a party under SICA upon its repeal. Given the substantive nature of the above orders passed under SICA, it may be argued by some that these orders are saved. Having said this, considering that the criteria for reference to NCLT and declaration of moratorium under the Code are substantively different from what was prescribed under SICA, it remains to be seen if such an interpretation is maintainable and merits a clarification from the Government to remove ambiguity.

Do the notified provisions of the Code apply to all companies (and not just industrial companies)? What is the test for "sickness" under the Code?

The Code is a significant change from the erstwhile SICA regime, particularly on this point. As a remedy, the Code is available for and against all companies and partnerships in India, but as of now only against companies and limited liability partnerships. Further, as a remedy it is available not just to scheduled commercial banks in India but to all financial creditors (ie lenders or beneficiaries of corporate guarantees) and operational creditors (ie trade creditors).

Furthermore, the balance sheet test under SICA for determination of "sickness" has been replaced with a low threshold cash flow test. Where a corporate debtor has committed a default of INR 100,000 (Indian Rupees One lakh) or more, an operational creditor or a financial creditor or corporate applicant itself may initiate a corporate insolvency resolution process.

Source: http://www.mondaq.com/india/x/549680/Corporate+Commercial+Law/India+Steps+Into+A+New+Era+For+Corporate+Rescue+And+Insolvency

Way to protect sick industrial undertaking

The alternative legal route to meet the above objectives i.e. revival/rehabilitation of the sick units or the liquidation of the company are incidental to industrialisation. Time has come that an institutional network and procedures must be evolved for the revival/rehabilitation of sick and potentially sick industries. In Bangladesh we do not have similar act as are in vogue in India, Pakistan and other SAARC countries. Since there exists multiplicity of laws which resulted in delays and as a consequences the desired assistance whether financial or otherwise could not reach the sick unit in time. Because the major problem was lack of coordination amongst the different agencies involved in the rehabilitation process of the unit. This created sufficient grounds to enact a suitable legislation in 'public-interest' to provide for:

Timely detection of sickness.

Expeditious determination by body of experts of the preventive, ameliorative, remedial and other measures which would need to be adopted with respect to such sick and potentially sick industries.

Enforcement of the measures considered appropriate:

The government of India and the Reserve Bank of India have initiated a number of measures to keep the sickness under control. The Reserve Bank of India had been issuing direction to various commercial banks the guidelines over the past as follows: 

The banks have been asked to adopt an approach of single window for lending under Consortium arrangements both for the sick and weak units in respect of the disbursements of working capital and the term-loans (Rehabilational term-loans).

They have been asked to tone-up their organisational machinery to detect the sickness in time so that there is possibility of revival of the unit.

SEBI has been set up in 1992 to protect the interest of the investors and promote the development of the capital market in India. It will serve dual purpose. It would help entrepreneurs to raise desired capital from the public and also infuse confidence in the investors.

In August 1991, the Government issued a directive to all the Stock Exchanges to ensure transparency in the transaction of the securities for the benefit of investing public and stricter regulations in the specified group of shares, timely settlement of the transactions and broad-basing the governing bodies of the Stock Exchanges.

Revised guidelines for good and bad delivery of shares have been issued by SEBI. 

The listing agreement has been modified to provide for greater disclosure for the investor's protection and to provide half yearly results.

A scheme has been worked out by the Stock Exchanges for the purpose of market makers. 

All the restrictions on interest rates on public sector bonds other than, tax-free bonds were removed in august 1991. it was felt that the interest rates should be governed by the market forces but the companies are required to take credit rating before floating such instruments. The ratings would be optional for the public sector bonds and NCD's upto Rs. 5 crores for private placements and convertible debentures into equity shares within 18 months of allotment.

In respect of units of industrial groups becoming sick, banks have been asked to impress upon the group to come forward with concrete proposals to assist the units where the sickness is on account of internal factors. In such cases infusion of additional resources should be insisted upon by the healthy units of group.

It was re-emphasized that the banks will also participate in the rehabilitation package. This has been made a mandatory requirement.

If on account of any reason the bank is not able to 'discount' its debt within the RBI laid parameters the bank will be required to take up its share. If any member bank is not able to take up its share the bank's consortium would reserve the right to refer the repayment of dues to it under the package.

The Indian parliament, therefore, enacted the Sick Industrial Companies (Special Provisions) Act, 1985. This piece of legislation marks the beginning of a new era in resolving the industrial sickness by providing remedial measures for sick companies as well as for potentially viable sick companies.

To come with the definition of the term "industrial company" it is necessary that the company shall have 50 or more workers are engaged where the company could not establish that 50 or more workers are engaged it would not be an 'industrial company" within the meaning of the Act.

However where a reference has been made to BIFR and subsequently the number of employees has fallen below 50, the reference cannot be struck down on the ground that the sick company is not longer an 'industrial company'.

Sickness as per Act prior to Amendment Act, 1993.

Prior to the amendments made by the Sick Industrial Companies (Special Provisions) Amendment Act, 1993 (w.e.f. 1-2-1994) a unit could be declared sick:

if it was registered for 7 years.

If it had accumulated losses which were equal to the net worth of the company, and ;

If it had incurred cash losses during the financial year in which the reference to Board was made and the year proceeding the financial year. Thus the occurrence of cash loss i.e. loss after deducting depreciation had to be for 2 years.

Suggestions for enactment:

A. The long-term success of Bangladesh economic reform process depends upon sustained growth in industrial out put and investment. Without this there cannot be a genuinely competitive industrial base from where we can launch an export drive to systematically reduce its debt service obligations over time.

The focus should now be on rapid industrial sector reform. This is not just eliminating licensing other barriers to entry. It requires giving signals to potential entrepreneurs about the scope for operational flexibility in the choice of out put, of markets and in the use of labour and capital industrial restructuring involves commercially reorganising ailing but economically viable companies facilitating the withdrawal of unviable ones. It is obvious that the presence of various barriers to industrial and cooperate restructuring serve no economic goal. There are mainly two reasons for restructuring. First, except for occasional scale effects there is no basic difference in economic, commercial and legal principles between reorganizing the affairs of a private sector firms and a public sector company. The distinction lies in political will particularly the ability to create a consensus that shapes and will. Secondly, industrial sickness and the need for restructuring, reorganisation and strategic withdrawal of financial penalty clauses will help ensure GDP growth and unemployment reduction.

B. Sick Industry Definition :

A company which is registered for a period not less than 5 years, whose accumulated losses are equal to the sum of paid up capital and free reserve. Incur cash losses for two consecutive years including the current year and have cumulative losses that wipe out its net worth may fall under this category.

C. Cause of Sickness : Industrial sickness arises out of bad financial structure and/or chronically inefficient use of factors of production and/or poor market positioning. Its out come is the locking up scarce investible fund in sub-optional activities. 

Giving this outcome an appropriate way looking at sickness is to examine the amount of out standing credit locked up in sick industrial units.

D. Preparation of Reorganization Schemes : Financial reconstruction of the sick industrial company provided this is economically flexible and commercially viable. 

Interest on term loans to be reduced.

All penalties e.g penal interest and damages for non-repayment must be waived. 

Unrealized normal interest may be waived to the extent of at least 75% to 50% on case to case basis and the balance interest can be funded or capitalised at a subsidised rate subject to review from time to time. The total interest rate can be 2% higher than financial institutions cost of fund rate in exceptional cases. The normal repayment of funded interest should be 5 to 6 years extendable up to 7 years. 

The irregular component of a firm's cash flow other than unadjusted interest which is funded must be converted in to a working capital. On this subsidized interest may be charged. 

Cash losses of a company consists not only of irregularities in cash credit account but also of non-payment of workers and other statutory dues and over dues to creditors. The latter liabilities are supposed to be shared between the participating banks and the institutions on a 50-50 basis. Anticipating cash losses during the rehabilitation period are to be borne by the financial institutions who are also supposed to provide the margin money for additional working capital.

Additional assistance for working capital is on commercial rates, which may be reduced as per Government decision. The cost of rationalising the creditors is met by financial institutions and banks on a 50-50 basis.

Waiver of compound interest rate on entire amount of working capital and term loan amount. 

Income tax relief for the period of rehabilitation.

On a study of the Business Guide to the Uruguay Round published by International Trade Centre of UNCTAD/WTO and in response to unfair trade practices: rules on the use of countervailing and anti-dumping duties. Bangladesh Government is permitted to levy such anti-dumping duties on such products which are being produced in Bangladesh. 

The GATT rules deal with two types of "unfair" trade practices, which distort conditions of competition. First, the competition may be unfair if the exported goods benefit from subsidies. Second, the conditions of competition may be distorted if the exported goods are dumped in foreign markets.

In common parlance, it is usual to designate all low-cost imports as dumped imports. The Agreement on Anti-dumping Practices (ADP), however, lays down strict criteria for determining when "a product is to be considered as being dumped". In general, a product is considered to be dumped if the export price is less than the price charged for the like product in the exporting country. A product is also considered to be dumped if it is sold for less than its cost of production.

The Agreement on Anti-dumping Practices and on Subsidies and Countervailing Measures (SCM) authorise countries to levy compensatory duties on imports of products that are benefiting from unfair trade practices. However, an importing country can levy countervailing duties on subsidised imports and anti-dumping duties on dumped imports only if it is established on the basis of investigations carried out by it that such imports are causing "material injury" to a domestic industry. Investigations for the imposition of such duties should ordinarily be initiated on the basis of a petition made by or on behalf of an industry, alleging that imports are causing it injury.

The two Agreements lay down similar criteria for determining injury. The producers for carrying out investigations of petitions for the levy of anti-dumping and countervailing duties are likewise similar.

The government of Bangladesh can take safeguarding measures to restrict imports in order to assist the domestic industries, which is being injured by a sudden and sharp increase in import.

Experience shows that the traders who are also importers continue to import similar items which are being produced by the local industries of Bangladesh. These local industries are therefore facing stiff competition from the imported goods dumped in the country.

It is most respectfully suggested to study the following aspects of GATT LAW.

1. The concept of dumping as embodied in GATT Law;

2. The rules and procedures that countries must follow in levying anti-dumping and countervailing duties.

Source: http://nation.ittefaq.com/issues/2008/07/02/news0333.htn