[aaykarbhavan] SOURCE BUSINESS STANDARD

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Fixing bankruptcy, insolvency laws

SUDIPTO DEY The Bankruptcy Law Reforms Committee ( BLRC), while submitting its report to the government earlier this month, had recommended the need for a single code to resolve insolvency for all companies, limited liability partnerships, partnership firms and individuals. " In order to ensure legal clarity, the Committee recommends that provisions in all existing law that deals with insolvency of registered entities be removed and replaced by this Code," the committee said in its report. However the suggested draft Insolvency and Bankruptcy Code (IBC) prepared by the committee (The Insolvency and Bankruptcy Bill, 2015) does not subsume all the existing bankruptcy and insolvency related laws. Section 234 of the draft code said that the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 – both of which deal with individual insolvency — would get repealed. Section 235 of the draft code suggested certain amendments in the Companies Act, 2013 that related to revival and rehabilitation and windingup of companies. " The draft Code suggests that chapters 19 and 20 of the Companies Act will be repealed and replaced by IBC provisions," said Richa Roy, senior associate at law firm AZB & Partners. Further, the draft Code goes on to suggest amendments in certain provisions of the Sick Industrial Companies ( Special Provisions) Repeal Act, 2003, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest ( SARFAESI) Act, 2002, Limited Liability Partnerships Act 2008, Recovery of Debts Due to Banks and Financial Institutions Act, and the Indian Partnership Act, 1932. "The ultimate objective of drafting the Insolvency and Bankruptcy Code was to have one consolidated law for insolvency and bankruptcy. In the ideal situation we should have only one Code to minimise complexity," said Ajay Shah, professor, National Institute of Public Finance and Policy, and a member of BLRC. However, keeping in view the existing plethora of laws that guide and influence any bankruptcy or insolvency proceedings, the BLRC reviewed some key laws that need to be amended or repealed to achieve this objective. Legal experts have said the task of subsuming key bankruptcy and insolvency related laws to arrive at a unified code was still an on- going work in progress. "The IBC is just a suggested draft Bill. In what sequence the law will be brought it and old laws transitioned, is the prerogative of the government. Accordingly, the existing laws could be amended, repealed or overridden," said Shah. While the insolvency Code would continue to interface with multiple laws, the BLRC envisage that the National Company Law Tribunal ( NCLT) will be the exclusive forum for firm insolvency and liquidation adjudication, points out Mritunjay Kapur, Partner and Head of Risk Consulting, KPMG in India. "Similarly, the Debt Recovery Tribunal is envisaged as an exclusive forum for individual insolvency and bankruptcy adjudication," adds Kapur. The BLRC report recognises that the current state of the bankruptcy process for firms is a highly fragmented framework. " Powers of the creditor and the debtor under insolvency are provided for under different Acts," the report noted. Moreover these laws are implemented in different judicial fora. The BLRC report noted that having "all the provisions in one Code will allow for higher legal clarity when there arises any question of insolvency or bankruptcy. Further, a common insolvency and bankruptcy framework for individual and enterprise will enable more coherent policies when the two interact, the report said. It points out that it is acommon business practice for banks to take a personal guarantee from the firm's promoter when they enter into a loan with the firm. " At present, there are a separate set of provisions that guide recovery on the loan to the firm and on the personal guarantee to the promoter. Under a common Code, the resolution can be synchronous, less costly and help more efficient recovery," the report added. Legal experts are not sure if the proposed draft code will be in a position to deliver that stated objective unless there is careful review of all laws in this space. " If these laws are not repealed there must at least be a clear demarcation of when these laws would apply and of overriding provisions in cases of conflict with the Code," said Rohit Mahajan, partner and head, forensic, financial advisory, Deloitte in India. The BLRC report notes that globally in most countries bankruptcy laws undergo significant changes over the period of two decades or more. In the UK, for instance, the insolvency resolution framework was governed by the Insolvency Act of 1986. This has been substantially modified with the Insolvency Act of 2000, and the Enterprise Act of 2002. Similarly, the United States too has periodically updated its bankruptcy and insolvency laws over the years, even as it currently looks at making significant changes in its laws. Legal experts say the BLRC report is just a starting point for India to undertake more regular reviews of its insolvency and bankruptcy laws. To arrive at a unified code, many existing laws would need to be amended, repealed or overridden |Adjudication is by the National Company Law Tribunal. However this chapter is yet to be notified |Companies Act, 1956 – deals with windingup of companies |No separate provisions for restructuring except for through mergers & acquisitions (M& A) and voluntary compromise |Adjudication is under the jurisdiction of the high court |SICA, 1985 – deals with restructuring of distressed " industrial" firms |Under this Act, the Board of Industrial and Financial Reconstruction assesses the viability of the industrial company, and refers an unviable company to the high court for liquidation |SICA 1985 stands repealed, but the repealing enactment is yet to be notified Source: The report of Bankruptcy Law Reforms Committee Kingfisher Airlines Over the past four years, the grounded airlines' key creditors – a clutch of financial institutions and banks – have looked at a debt recast package, put the airlines' brand on the block, proceeded to take possession of promoter Vijay Mallya's Goa mansion and other properties. They have barely managed to recover asmall fraction of ₹ 7,400- crore loans given to the ailing airline Zoom Developers banks for realty projects abroad. The Enforcement Directorate has attached 1,280 acres of land in the US, worth ₹ 1,000 crore

 

BRIEF CASEN M J ANTONY Disparity in computing compensation The discretion of the court to award compensation for loss or injury suffered by a person is guided by some criteria, but often the decision can defy logic. In an order passed by the Supreme Court last month, an agricultural labourer suffered compound fracture of the right leg in a road accident. The motor accident compensation tribunal granted him ₹ 10,000. He appealed to the Supreme Court, which felt that the amount " appears to be on the lower side." It raised the compensation to ₹ 35,000 maintaining that it was reasonable " looking at the fact that he is an agricultural labourer and he has to use his legs for doing work in the fields." He was not given even the cost of the litigation up to the Supreme Court. This judgment, Kantharaju vs Cholamandalam General Insurance Co, contrasts with another recent decision in S Nihal Ahmed vs Dean, in which candidates for professional colleges who lost one year due to the negligence of the authorities were awarded ₹ 3 lakh each. In March this year the court ordered the Maharashtra government to pay candidates in a similar position to pay ₹ 20 lakh each. While Kantharajus pittance will be paid by the insurance company, the students bonanza will come from taxpayers.  Conflicting high court views resolved The Supreme Court last week resolved conflicting judgments delivered by various high courts regarding the tax liability of banks while dealing with bills of exchange. In 25 appeals moved by banks and the revenue authorities, supporting and opposing the high court verdicts which went against them, the court granted relief to the banks in the leading judgment, State Bank of Patiala vs CIT. The facts in all the cases were similar. The bank makes purchases of bills of exchange from its customers and charges commission for services rendered by it. The discounted bills so purchased are then presented to the parties concerned for realisation. If on presentation the bill is realised within time, no charges are levied by the bank. In case the bills are not realised in time but the other party pays the value of the bill beyond the stipulated time, a certain amount in the form of interest is charged by the bank on a fixed percentage basis for everyday of default. This amount is credited by the bank in its interest account. The question before the court was whether such payment of compensation to banks is " interest" liable to tax under the Interest Tax Act. The judgment stated that " the Interest Act, unlike the Income Tax Act, has focused only on a very narrow taxable event which does not include within its ken interest payable on default in payment of amounts due under a discounted bill of exchange."  Importer wins 30- year litigation A three- decade- old litigation between NRC Ltd and the customs authorities ended with the Supreme Court ruling that the company which imported caprolactum for manufacturing nylon tyre cord was eligible for the benefit of the Karvivadh Samadhan Scheme 1998. The authorities had issued show cause notice demanding additional duty. The scheme came into force while the litigation over this was pending in the Bombay High Court. The issue was whether the company could invoke the scheme. The high court said no. Overruling it, the Supreme Court stated that "in those cases where show cause notice has been issued or notice of demand of indirect tax has been issued, it is permissible for the firm to claim benefit of the scheme."  Tax relief for garment manufacturers The Supreme Court has dismissed the appeal of the commissioner of central excise and service tax against the order of the appellate tribunal which had granted duty exemption to textile articles of three prominent firms: Aditya Birla Nuvo Ltd, Levi Strauss ( India) Ltd and Arvind Clothing Ltd. These companies had assigned work to job workers and they supplied the material back to the assessee companies after completing several intermediate processes. According to the 2003 exemption notification, exemption was available to textile articles to any one or more of such processes, ' subsequent to purchase'. The question was whether the processes were after purchase. The commissioner maintained that these firms were not eligible for the exemption as it was not subsequent to purchase. Materials were given to the job workers and they were returned to the companies after fabrication. The tribunal rejected that contention, against which the revenue authorities appealed to the Supreme Court. It upheld the tribunal's view and stated that in these transactions, the companies had bought processed fabric from the job workers and therefore there was purchase making them eligible for the benefit.  SAIL snubbed in arbitration case The Delhi high court last week dismissed the writ petition of Steel Authority of India in an arbitration case against Great Eastern Shipping Ltd, commenting that the public sector steel major had tried to obstruct arbitration proceedings and its conduct was " less than fair and an abuse of process of this court." According to the charter party agreement between the two, the shipping company was to transport coking coal from Australia to three ports in India. Disputes arose over discharge of cargo at Vizag port. The matter was referred to arbitration in which the award went against the shipping company. It moved the high court that held the tribunal had gone wrong. Thereafter, the shipping company wrote to Indian Council of Arbitration to start the process of arbitration according to its Maritime Arbitration Rules. SAIL delayed replies to the letters seeking arbitration and contended that the disputes have already been decided once by arbitration. The council then constituted an arbitration tribunal on its own. SAIL therefore moved the high court against the council. The court held that under the scheme of the Arbitration and Conciliation Act, it would not interfere in arbitration. The objection should be raised before the tribunal, the judgment said. The court indicted SAIL for trying to " resile from its contractual agreement for resolution of disputes through arbitration." HDFC to pay for negligence The National Consumer Disputes Commission last week ruled that HDFC Bank was negligent by not verifying the signatures on applications for net banking and electronic money transfer, leading to siphoning of money from the salary account of one Swapan Kumar. According to his complaint, bank officials conniving with a former security guard of the bank, forged his signatures on applications. Ordering compensation, the commission observed that " had the concerned bank manager been careful, he would have rejected the applications… The official at least on noting the difference in signatures was expected to contact the complainant to verify them." A weekly selection of key court orders

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A.Rengarajan
Practising  Company  Secretary
Chennai

Mobile 93810  11200

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Posted by: CS A Rengarajan <csarengarajan@gmail.com>

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