A government panel on Tuesday suggested changes in laws for developing an effective corporate insolvency regime, to improve India’s rank in the ease of doing business index.
The T K Viswanathan committee, constituted by the finance ministry, gave its report on Tuesday, paving the path for the replacement of the Board of Industrial and Financial Reconstruction (BIFR). The report will be the first step in revamping the bankruptcy law.
The panel was set up to find ways to ensure early detection and resolution of financial distress in companies and protect stakeholder interest, among others.
The report suggested changes in various pieces of legislation and said developing an insolvency code and operationalising it would require more time as there were multiplicity of laws and adjudicatory forums governing insolvency matters in India. However, sources in the finance ministry did not rule out tabling a code in the coming Budget session of Parliament.
The panel pointed out the discretionary powers proposed for the National Company Law Tribunal (NCLT) under various provisions of the new Companies Act. While making recommendations, the government-appointed panel recounted the 120 days of moratorium granted in the new Companies Act and stated it is the NCLT’s discretion to grant, refuse or lift a moratorium but should be guided by evidence. For example, it said the moratorium might not be granted if there is any evidence of fraud or if the secured creditors dissent to the grant of moratorium. The Companies Act, 2013 provides for a moratorium on enforcement proceedings to be granted on an application to the NCLT, and for a fixed duration of 120 days. Moratorium is temporary suspension of legal proceedings if a company fails to honour its debt.
The committee recommended that NCLT can ask company administrator - appointed at the time of initiation of rescue or winding up - to take over the management or assets of the said company or 75 per cent of creditors vote in favour of the proceedings after the company has been declared as sick. “Moreover, the creditors should determine the terms and conditions for such appointment including the fee, subject to post facto confirmation by the NCLT.”
The finance ministry has invited comments from the industry on the report by February 20.
The committee also pointed out that unrestricted power was given to NCLT when it comes to determining the “sickness” of a company.
As a result, it said the sections of the new Companies Act should be redrafted to ensure that the viability of a company is taken into account, while determining its sickness and enabling the creditors to have a say in such determination.
A petition has been filed in the Madras High Court against the powers given to NCLT and the ministry of corporate affairs (MCA) have moved the Supreme Court, seeking that it should be allowed to start the process of setting up NCLT.
Another crucial suggestion by the committee was to reform the personal insolvency regime keeping in mind the micro, small and medium enterprises (MSMEs). Majority of MSMEs are of sole proprietorship in nature and legally inseparable from the individual who owns the proprietorship. The committee has noted that a key concern among MSMEs under financial distress is that the banks are too quick to initiate recovery proceedings against MSMEs in the event of a default, irrespective of the viability of the entity.
Therefore, the committee has proposed an administrative mechanism for rehabilitation of viable MSMEs under financial distress and that it should be given a statutory status. The finance minister in the previous Budget had stated the need for a revamped bankruptcy code for SMEs. The new code is likely to be introduced in the coming Budget session.