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Corporate restructuring and insolvency
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Restructuring & Insolvencyin 53 jurisdictions worldwideContributing editor: Bruce Leonard 2012
®
Published by Getting the Deal Through
in association with:Andreas Neocleous & Co LLC
Bloomfield – Advocates & SolicitorsBofill Mir & Alvarez Jana
Bowman GilfillanCassels Brock & Blackwell LLP
Chancery ChambersCharles Adams Ritchie & Duckworth
Clasis LawDundas & Wilson
Felsberg, Pedretti e Mannrich Advogados e Consultores Legais
Freshfields Bruckhaus Deringer LLPGraham Thompson & Co
Headrick Rizik Alvarez & FernándezHoet Peláez Castillo & Duque
Jorge Avendaño & Forsyth AbogadosKinstellar
Kleyr Grasso AssociésLaw Firm Glimstedt
Lipman KarasLogos Legal Services
Mamic Peric Reberski Rimac Law FirmMotieka & Audzevicius
O’Melveny & MyersOscós Abogados
Osei-Ofei Swabi & CoPatton Moreno & Asvat
Paul, Weiss, Rifkind, Wharton & Garrison LLPPotamitisVekris
Qays H Zu’bi Attorneys & Legal ConsultantsRui Pena, Arnaut & Associados – Sociedade de Advogados RL
Sarie-Eldin & PartnersSCP Miriana Mircov Relicons SPRL
SetterwallsSyCip Salazar Hernandez & Gatmaitan
Walder Wyss LtdWardynski & Partners
Waselius & WistWeerawong, Chinnavat & Peangpanor Ltd
WongPartnership LLPYoon & Yang LLC
Zaid Ibrahim & Co
Contents
www.gettingthedealthrough.com
®
Restructuring & Insolvency 2012Contributing editor Bruce Leonard Cassels Brock & Blackwell LLP
Business development managers Alan Lee George Ingledew Robyn Hetherington Dan White
Marketing managers Ellie Notley Alice HazardMarketing assistants William Bentley Zosia Demkowicz
Subscriptions manager Rachel Nurse [email protected]
Assistant editor Adam MyersEditorial assistant Lydia Gerges
Senior production editor Jonathan Cowie
Chief subeditor Jonathan AllenProduction editor John HarrisSubeditors Davet Hyland Caroline Rawson
Editor-in-chief Callum CampbellPublisher Richard Davey
Restructuring & Insolvency 2012 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910© Law Business Research Ltd 2011No photocopying: copyright licences do not apply.First published 1999 Thirteenth edition 2011 ISSN 1468-3180
The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of December 2011, be advised that this is a developing area.
Printed and distributed by Encompass Print Solutions Tel: 0844 2480 112
LawBusinessResearch
Global Overview James Watson Freshfields Bruckhaus Deringer LLP and 3 Alan W Kornberg Paul, Weiss, Rifkind, Wharton & Garrison LLP
AFRICABotswana Kwadwo Osei-Ofei Osei-Ofei Swabi & Co 56Nigeria Dayo Adu Bloomfield – Advocates & Solicitors 329South Africa Claire van Zuylen Bowman Gilfillan 427AMERICASBrazil Thomas Benes Felsberg and Paulo Fernando Campana Filho 61
Felsberg, Pedretti e Mannrich Advogados e Consultores Legais
Canada E Bruce Leonard, David S Ward and Larry C Ellis Cassels Brock & Blackwell LLP 72Chile Octavio Bofill, Jorge Lembeye and Edder Cifuentes Bofill Mir & Alvarez Jana 88Mexico Darío U Oscós C and Darío A Oscós Rueda Oscós Abogados 309Peru Guilhermo Auler and Michelle Barclay Jorge Avendaño & Forsyth Abogados 343United States Alan W Kornberg and Claudia R Tobler Paul, Weiss, Rifkind, Wharton & Garrison LLP 480Venezuela Carlos Dominguez Hoet Peláez Castillo & Duque 488ASIA-PACIFICAustralia Scott Foreman and Lucas Arnold Lipman Karas 4China Melissa Thomas and Christian Zeppezauer Freshfields Bruckhaus Deringer LLP 96India Sakate Khaitan, Sangeeta Jhunjhunwala and Mahrukh Umrigar Clasis Law 230Japan Kazuki Okada, Takahiko Itoh and Mariko Inoue Freshfields Bruckhaus Deringer 253Korea Sang Goo Han, Hyung Bae Park and Yoori Choi Yoon & Yang LLC 267Malaysia Peh Lee Kheng, Khoo Kay Ping and Effendy bin Othman Zaid Ibrahim & Co 296Philippines Ricardo Ma PG Ongkiko and Russel L Rodriguez SyCip Salazar Hernandez & Gatmaitan 351Thailand Chinnawat Thongpakdee, Suntus Kirdsinsap and Bongkarn Jiraboonsri 465
Weerawong, Chinnavat & Peangpanor Ltd
EUROPE AND MIDDLE EASTAustria Friedrich Jergitsch, Michael Raninger and Florian Knotzer Freshfields Bruckhaus Deringer LLP 15Bahrain Harnek S Shoker Freshfields Bruckhaus Deringer LLP and 33
Grahame Nelson Qays H Zu’bi Attorneys & Legal Consultants
Belgium Charles-Antoine Leunen and Jan-Willem Geeroms Freshfields Bruckhaus Deringer LLP 45Croatia Vladimir Mamic and Goran Jujnovic Lucic Mamic Peric Reberski Rimac Law Firm 104Cyprus Maria Kyriacou and Elias Neocleous Andreas Neocleous & Co LLC 110Czech Republic Ružena Trojánková and Tomáš Osicka Kinstellar 118Egypt Motaz El-Dreny Sarie-Eldin & Partners 133England & Wales Ken Baird, Anne Sharp, Victoria Cromwell and Kathryn Bruce Freshfields Bruckhaus Deringer LLP 140Estonia Indrek Leppik, Martti Peetsalu and Olga Harlamova Law Firm Glimstedt 156European Union Catherine Balmond, Victoria Cromwell and Wolf Harlfinger Freshfields Bruckhaus Deringer LLP 164Finland Lauri Peltola and Timo Lehtimäki Waselius & Wist 175France Alan Mason, Nicolas Morelli and Alexandra Szekely Freshfields Bruckhaus Deringer LLP 181Germany Franz Aleth and Wolf Harlfinger Freshfields Bruckhaus Deringer LLP 190Greece Stathis Potamitis, Ioannis Kontoulas and Eleana Nounou PotamitisVekris 204Iceland Erlendur Gíslason, Ólafur Eiríksson, Heiðar Ásberg Atlason and Heiðar Örn Stefánsson Logos Legal Services 221Italy Raffaele Lener and Giovanna Vigliotti Freshfields Bruckhaus Deringer LLP 239Lithuania Emil Radzihovsky, Giedrius Kolesnikovas and Beata Kozubovska Motieka & Audzevicius 275Luxembourg Marc Kleyr Kleyr Grasso Associés 285Netherlands Michael Broeders and Thijs Flokstra Freshfields Bruckhaus Deringer LLP 319Poland Michał Barłowski Wardynski & Partners 362Portugal Nuno Pena, Joaquim Shearman de Macedo and Andreia Moreira 374
Rui Pena, Arnaut & Associados – Sociedade de Advogados RL
Romania Lavinia Olivia Iancu SCP Miriana Mircov Relicons SPRL 384Russia Dmitry Surikov, Maria Zaitseva and Svetlana Tolstoukhova Freshfields Bruckhaus Deringer LLP 393Scotland Claire Massie Dundas & Wilson 406Spain Eduard Arruga and Natalia Gómez Freshfields Bruckhaus Deringer LLP 437Sweden Odd Swarting and Niklas Körling Setterwalls 446Switzerland Christoph Stäubli Walder Wyss Ltd 453United Arab Emirates Pervez Akhtar, Tarek El-Assra and William Coleman Freshfields Bruckhaus Deringer LLP 471OFFSHOREBahamas Leif G Farquharson Graham Thompson & Co 24Barbados Trevor Carmichael and Lauren McIntosh Chancery Chambers 40Cayman Islands Graham F Ritchie QC and Rebecca Hume Charles Adams Ritchie & Duckworth 79Dominican Republic Mary Fernández and Hipólito García Headrick Rizik Alvarez & Fernández 127Hong Kong Mark Fairbairn, Ashley Bell and Bronwen May O’Melveny & Myers 213Panama Ivette E Martínez S Patton Moreno & Asvat 335Singapore Sean Yu Chou, Manoj Pillay Sandrasegara and Mark Choy WongPartnership LLP 420
Quick Reference Tables 495
IndIa Clasis Law
230 Getting the Deal Through – Restructuring & Insolvency 2012
IndiaSakate Khaitan, Sangeeta Jhunjhunwala and Mahrukh Umrigar
Clasis Law
1 LegislationWhat legislation is applicable to bankruptcies and reorganisations?
BankruptcyPersonal insolvency (individuals and partnership firms):• ProvisionalInsolvencyAct1920;and• PresidencyTownsInsolvencyAct1908(applicableinBombay,
Madras and Calcutta).
Corporate insolvency legislation:• CompaniesAct1956;and• SickIndustrialCompaniesAct1985.
Inthecontextofcorporatelaws,theword‘bankruptcy’hasneitherbeenusednordefined.However,undersection433(e)oftheIndianCompaniesAct1956(theCompaniesAct)oneofthegroundsforwinding-upofacompanyistheinabilityofthecompanytopaydebts,ie,insolvency(whichissynonymouswithbankruptcyinIndia).TheCompaniesActprovidesfortwotypesofwinding-up:
• winding-upbythecourt;and• voluntary(members’andcreditors’)winding-up.
Bankingcompaniesandnon-bankingfinancialcompanieshavetocomplywithadditionalrequirementsundertheBankingRegulationsActandReserveBankofIndia(RBI)Guidelinesforcompletingthewinding-upprocess.TheBoardforIndustrialandFinancialReconstruction(BIFR),
whichhasbeenconstitutedundertheSickIndustrialCompaniesAct1985(SICA),alsohasthepowertoreferaninsolventcompanytothecourtforwinding-up.Inthischapterwehaveassumedthatallthequestionsrelateto
companies.
ReorganisationAcompanycanbereorganisedthroughaschemeofamalgamationundersections391to394oftheCompaniesAct.Asickcompany,ie,acompanywhichhasbeeninexistencefor
notlessthanfiveyearsandwhoseliabilitiesequalorexceededitsnetworthinthepreviousfinancialyear,canberevived(financialreorganisation)undertheprovisionsofSICA.Itisalsopossibleforcompanies(ie,banksandfinancialinstitu-
tions)toavailthemselvesoftheproceduresstipulatedbytheRBIforcorporatedebtrestructuring(CDR).
2 Excluded entitiesWhat entities are excluded from general bankruptcy proceedings and
what legislation applies to them?
Governmentcompanies,undersection620oftheCompaniesAct,maybeexcludedfromtheprovisionsoftheCompaniesAct,includ-ingtheprovisionsrelatingtowinding-up,ifsostipulatedinanotifi-cationbythecentralgovernment.
StatutorycorporationsmayalsobeexcludedfromtheprovisionsoftheCompaniesAct,includingtheprovisionsrelatingtowinding-up,providedthatthestatuteunderwhichtheyareformedspecificallystipulatesthatthecompanywillnotbegovernedbythewinding-upprovisionsoftheCompaniesAct.Special state specific legislation, such as the BombayRelief
UndertakingAct1958,mayalsoprovideacloakofprotectiontodebtorcompaniesfromclaimsbythecreditorunderexpressnotifica-tions from the government.
3 Secured lending and credit (immoveables)What principal types of security are taken on immoveable (real)
property?
SecurityonimmoveablepropertyinIndiaisprincipallygovernedbytheTransferofPropertyAct1882.Inaddition,whenthereisaforeignexchangecomponentattachedtotheloan,orthelender/borrowerisapersonresidentoutsideIndia,therulesandregulationnotifiedundertheForeignExchangeManagementAct1999(FEMA)needtobecompliedwith.Amortgageoveranimmoveablepropertyisusuallystructured
asasimplemortgageorequitablemortgage,ie,bydepositoftitledeeds.TheotherkindsofmortgagesgenerallyrecognisedinIndiaincludethefollowing:• mortgagebyconditionalsale;• usufructorymortgage;• Englishmortgage;and• anomalousmortgage.
4 Secured lending and credit (moveables)What principal types of security are taken on moveable (personal)
property?
SecurityinterestsovermoveablepropertyareregulatedbytheTrans-ferofPropertyAct1882,theSaleofGoodsAct1930andrulesandregulationnotifiedunderFEMA.Thevarioustypesofsecurityinter-estsinrelationtomoveablepropertyare,interalia,pledge,charge,hypothecation,lien,andassignment(actionableclaims).
5 Unsecured creditWhat remedies are available to unsecured creditors? Are the
processes difficult or time-consuming? Are pre-judgment attachments
available? Do any special procedures apply to foreign creditors?
Therightsofunsecuredcreditorsareregulated,interalia,bytheIndianContractAct1872,CompaniesAct1956,TransferofProp-ertyAct1882,SaleofGoodsAct1930,CivilProcedureCode1908(CPC)andLimitationAct1963.Furthermore,therightsofbanksandfinancialinstitutionsmak-
ingsecuredandunsecured lendingareregulatedunder theStateFinancialCorporationsAct1951(SFCA)andtheRecoveryofDebtsDuetoBanksandFinancialInstitutionsAct1993.
Clasis Law IndIa
www.gettingthedealthrough.com 231
ThefollowingremediesareavailabletounsecuredcreditorsinIndia:• applyforwinding-upofthecompany;• sueforrecoveryofthedebtbyinstitutingsummaryproceedingsundereitherorderXXXVIIoftheCPCortherelevanthighcourtrules(ifany);
• suefordebtanddamagesundertheCPCandthereafterobtainadecreeandexecuteitunderorderXXIrule31;
• banks,financialinstitutionsorconsortiumsofbanksorfinancialinstitutionscanapproachtheDebtRecoveryTribunal,undertheprovisionsoftheRecoveryofDebtsDuetoBanksandFinancialInstitutionsAct1993ifthedebtamountis10lakhrupees(1million) or more.
• assumingthereisanarbitrationagreementinplace, institutearbitrationproceedings;and
• takeovermanagementofthedebtorasperrightsconferredtostatefinancialcorporationsundersection29oftheSFCA.
Further,pursuanttosection94andorderXXXVIIIoftheCPC,propertycanbeattachedinsupplementalproceedings,beforethepassingofjudgment,inordertopreventtheendsofjusticefrombeingdefeated.TheCompaniesActdoesnotdifferentiatebetweendomesticand
foreigncreditors.However,aforeigncreditormayhavetotakenec-essaryapprovalsfromRBIforremittingtheproceedsoutofIndia.Itispossibleinanysuitforrecoverythatthecourtmayaska
lender for security for costs under order XXV of the CPC.
6 CourtsWhat courts are involved in the bankruptcy process? Are there
restrictions on the matters that the courts may deal with?
Thehighcourtwheretheregisteredofficeofthecompanyissituatedwouldhavejurisdictionoverthewinding-upproceedingsofsuchacompany.Thehighcourtmay,atitsdiscretion,transfertheproceed-ings to a district court or another high court.TheBIFRistheappropriateforumundertheSICAincasesrelating
tosickcompanies.ItispertinenttopointoutthatthegovernmenthassoughttorepealSICAbyenactingtheSickIndustrialCompanies(Spe-cialProvisions)RepealAct2003(SICRA)andtheCompanies(SecondAmendment)Act2002.Asperthislegislation,thegovernmentispro-posingtodissolvetheBIFRanditsappellateauthorityandentrusttherevivalandrehabilitationofcompaniestotheNationalCompanyLawTribunal(NCLT)andtheNationalCompanyLawAppellateTribunal(NCLAT).However,bothenactmentsareyettobenotifiedandthushavenotyetcomeintoforce.Accordingly,SICAcontinuestobethemain legislation governing reorganisations of companies.PartIoftheCPCprovidesprovisionsrelatingtocourtjurisdic-
tionsand,morespecifically,sections15to20providefortheplaceofjurisdictioninaparticularmatter.Referenceshouldbemadetotheseprovisionsbeforeinstitutingasuitinaparticularcourt.
7 Voluntary liquidationsWhat are the requirements for a debtor commencing a voluntary
liquidation and what are the effects?
Acompanycanbevoluntarilywoundupiftheperiodfixedfordura-tion of the company or the event specified has occurred and on the occurrenceofwhichthearticlesprovidethatthecompanywillbedissolved,andthecompanyinageneralmeetingpassesaresolu-tionrequiringthecompanytobewoundupvoluntarily,orifthecompanypassesaspecialresolutionthatthecompanybewoundup voluntarily.
EffectsFromthecommencementofthewinding-up,thecompanyisrequiredtoceasetocarryonitsbusiness,exceptsofarasmayberequired
forthebeneficialwinding-upofthebusiness.However,thecorpo-ratestateandcorporatepowersofthecompanycontinueuntilitisdissolved.
8 Involuntary liquidationsWhat are the requirements for creditors placing a debtor in involuntary
liquidation and what are the effects?
Creditorscanapplytothecourttoplaceadebtorcompanyininvol-untaryliquidationifthecompanyowesthecreditorasumexceeding1lakhrupees,thecreditorhasservedanoticetothecompanyforpayment of the sum due and the company has neglected to pay the sumforthreeweeksthereafter,orifanexecutionorotherprocessinfavourofthecreditorisunsatisfied,inwholeorinpart.Ifthecourtissatisfiedthatthecompanyisunabletopayitsdebts,itcanpassanorderforwinding-up,andappointanofficialliquidatorforcarryingoutthewinding-upprocessanddistributingtheassets.InadditiontotherightsundertheCompaniesAct,theSecuriti-
sationandReconstructionofFinancialAssetsandEnforcementofSecurityInterestsAct2002(SARFAESI)andSFCAgivepowerstospecifiedfinancialinstitutionsondefaultofpaymentofdebttotakepossession of the security and sell the same and also permit such specifiedfinancialinstitutionstotakeovermanagementandcontrolofthedebtorcompany.
9 Voluntary reorganisationsWhat are the requirements for a debtor commencing a financial
reorganisation and what are the effects?
Adebtorcancommencefinancialreorganisationundersections391to394oftheCompaniesActbypresentingareorganisationschemetothecourt.Thecourtwillthenorderameetingofthecreditorsandmembersofthedebtorcompany.Ifathree-quartersmajorityofthecreditorsandmemberspresentatthemeetingapprovethescheme,thenthecourt,ifitthinksfit,willsanctionthescheme.Duringthependencyofanysuchproceedingincourt,thecourthasthepowerto stay the commencement or continuation of any suit or proceeding against the company until the application is disposed off.UnderSICA,theBIFRisempoweredtotakeappropriatemeas-
uresforrevivalandrehabilitationofpotentiallysickindustrialunder-takingsandforliquidationofnon-viablecompanies.Acompany’sboardofdirectorshastomakereferencetotheBIFRwithin60daysof the date of finalisation of the accounts in the financial year in whichithasbecomesick,fordeterminationofthemeasuresthatneedtobeadoptedtorevivethecompany.UndertheCDRsystem,theconcernedcorporate,inaccordance
withthedebtor-creditoragreementandtheinter-creditoragreement,ifsupportedbythesecuredlenderswhohaveaminimumof20percentshareineitherworkingcapitalortermfinance,canapproachtheCDRcellforrestructuringofthecorporatedebt.Itisalsopertinenttonotethatforfinancialreorganisation,adebtorhastoproviderationalgroundsofadversebusinessconditionsonaccountofwhichthecompanywasunabletomeetitspaymentandrepaymentobliga-tionstocreditorstoavailitselfofdebtrestructuringofitsexistingdebt,includingthefundedinterestofthedebt.
EffectsAttheconclusionofthecourtproceedingsrelatedtothereorganisa-tionundertheCompaniesAct,ifthecourtagreestothescheme,theprocessofmerger,demerger,amalgamation,etcisinitiatedbythecompanyandcompletedasperdirectionsissuedbythecourts.UnderSICA,iftheBIFR,afterinquiry,isoftheopinionthatitis
practicableforthecompany’snetworthtoexceeditslosses,itwillpassanorderappointinganoperatingagency,withdirectionstoformulateaplanforrevivalofthecompany,includingitsfinancialreconstruction.Ontheotherhand,iftheBIFRisnotconvincedabouttheschemeandisofthebeliefthatthecompanycannotberevived,it
IndIa Clasis Law
232 Getting the Deal Through – Restructuring & Insolvency 2012
willreferthecasetotheappropriatecourttocommencewinding-upproceedings.UnderCDR,inthecaseofsubstandardaccounts,if75percent
ofthecreditorsbyvalueand60percentofthecreditorsbynumberareoftheopinionthatsuchaccountsarelikelytobecomefunc-tionalafterintroductionoftheCDRpackage,allothercreditorsareexpectedtoparticipateintheentireCDRpackage,includingmakingavailableagreedadditionalfinancing,ifany.Inthecaseofdoubtfulaccounts,ifaminimumof75percent(byvalue)and60percent(bynumber)ofthelenderssatisfythemselvesoftheviabilityofthepackage,thenconsentforsuchrestructuringissubjecttonolendersbeingboundtotakeupadditionalfinancingunderthedebtrestructuringpackage.
10 Involuntary reorganisationsWhat are the requirements for creditors commencing an involuntary
reorganisation and what are the effects?
AcreditorcanalsocommencereorganisationundertheCompaniesActbypresentingareorganisationschemetothecourt.Thecourtwillthenorderameetingofthecreditorsandmembersofthedebtorcompany.Ifathree-quartersmajorityofthecreditorsandmemberspresentatthemeetingagreetoit, thenthecourt, if it thinksfit,sanctionsthescheme.Duringthependencyofanysuchproceedinginthecourt,thecourthasthepowertostaythecommencementorcontinuation of any suit or proceeding against the company until the application is disposed off.UnderSICA,thereisnoprovisiondealingwithinvoluntaryreor-
ganisationcommencedbycreditors.UndertheCDRscheme,thesecuredlenderswhohaveamini-
mumof20percentshareineitherworkingcapitalortermfinancecanapproachtheCDRcellforrestructuringofthecorporatedebt.Inthecaseofsubstandardaccounts,allothercreditorsareexpectedtoparticipateintheentireCDRpackage,includingtheagreedaddi-tionalfinancing,ifany,onlyif75percentofthecreditorsbyvalueand60percentofthecreditorsbynumberareoftheopinionthatsuchaccountsarelikelytobecomefunctionalafterintroductionoftheCDRpackage.Similarly,inthecaseofdoubtfulaccounts,ifaminimumof75percent(byvalue)and60percent(bynumber)ofthelenderssatisfythemselvesoftheviabilityofthepackage,thenconsentforsuchrestructuringissubjecttotheconditionsthatlend-ersarenotobligedtotakeupadditionalfinancingunderthedebtrestructuringpackage.
11 Mandatory commencement of insolvency proceedingsAre companies required to commence insolvency proceedings in
particular circumstances? If proceedings are not commenced, what
liabilities can result?
ThereisnomandatoryrequirementperseundertheCompaniesActfor a company to commence insolvency proceedings in circumstances statedabove,ie,toavoidpersonalliabilitytodirectorsandofficersorotherwise.Usuallywhenthecompanydoesnotonitsowninitiatethewinding-upproceedings,thecreditorsmayinitiatethewinding-upiftheyareseekingtorecovertheirlegitimatedebts.TheCompaniesActprovidesthatacompanymaybewoundupbycourt:• ifthecompanybyspecialresolutionhasresolvedtobewoundup;
• ifdefaultismadeindeliveringthestatutoryreporttotheregistrarorholdingthestatutorymeeting;
• ifthecompany,withinoneyearfromitsincorporation,doesnotcommencebusiness,orsuspendsbusinessforawholeyear;
• ifthenumberofmembersisreducedbelowthestatutorylimit;• ifthecompanyisunabletopayitsdebts;• ifthecourtfeelsitisjustandequitabletoorderthewinding-up;• ifthecompanyhasmadeafaultinfilingthedocumentswiththeregistrarforanyfiveconsecutiveyears;
• ifthecompanyhasactedagainstthenationalinterest,publicorder,,decencyormorality;or
• ifthecourtisoftheopinionthatthecompanyshouldbewoundup.
InIndia,sincethereisnoobligationonthepartofthedirectorstocommencewinding-up,usuallynopersonalliabilitiestodirectorsandofficerscanarisefornon-commencementofproceedings.Theaboveisontheassumptionthatthereisnoevidencetosuggestthatanactionoromissionbythedirectorwasmalafideorundertakentoperpetrate a fraud against the company or its employees.
12 Doing business in reorganisationsUnder what conditions can the debtor carry on business during a
reorganisation? What conditions apply to the use of assets and to
creditors who supply goods or services after the filing? What are
the roles of the creditors and the court in supervising the debtor’s
business activities?
UndertheCompaniesAct,afterthecommencementofthewinding-upprocess,notransferofpropertyincludingactionableclaimscanbedonewithoutthepermissionofthesupervisingcourt.Duringthecontinuanceofwinding-upproceedingstheincumbentmanagementisusuallypermittedtocontinuetooperatethecompany.However,onawinding-uporderbeingmadethemanagementandcontrolofthecompanyshiftstotheofficialliquidator.Theofficialliquidatoracts under directions of the court.UnderSICA,thedebtorcompanycancarryonitsbusinessonly
withtheapprovalandunderthedirectionsoftheBIFR.Thecredi-torsandcourthavenotbeenempoweredtosupervisethedebtor’sbusinessactivities,duringreorganisation,buttheBIFRhastherighttosupervisethebusinessactivities,anddetermineiftheschemeofrevivalisworking.Thebanksandfinancialinstitutionsthatprovidefinancialassistancefortherevivalofthesickindustrialcompanyintheformofloans,guarantees,etc,havethefirstchargeduringrecov-ery,ifsoprovidedintheschemesanctionedbytheBIFR.UndertheCDRsystem,also,thecreditorswhoprovideaddi-
tionalfinancehavepreferencetothecashflowsofthedebtorduringrecovery. RightsofspecifiedfinancialinstitutionsunderSARFAESIand
SFCApermitsuchspecifiedfinancialinstitutionstotakeoverman-agementandcontrolofthedebtorcompanyondefaultbysuchcom-panyinpaymentofdebt.Accordingly,thespecifiedinstitutionshavea statutory right of running the company once the company has defaultedonitsdebtobligations.
13 Rejection and disclaimer of contracts in reorganisations Can a debtor undergoing a reorganisation reject or disclaim an
unfavourable contract? Are there contracts that may not be rejected?
What procedure is followed to reject a contract and what is the effect
of rejection on the other party?
InareorganisationundertheCompaniesActthecompanycannotrejectordisclaimanycontracts,andhastohonourallthecontractsenteredinto.However,onawinding-uporderbeingmade,theliq-uidatormay,withtheapprovalofthesupervisingcourt,disclaimonerouscontractsandpropertiesforjustifiablereasons.Iftheofficialliquidatordesirestorejectordisclaimanunfavourablecontracthewillneedtoapplytothesupervisingcourtfordirections.Thecourtwouldusuallygivethecounterpartyachancetopresentitscaseand,afterhearingbothsides,eitherpermitrejectionorrefuseit.Ondis-claimerbeingpermitted,thecontractasfromthedateofdisclaimeroperatestodeterminerights,interestsandliabilitiesofthecompanyandthepropertyofthecompanybutshallnot,exceptinsofarasitisnecessaryforreleasingthecompany/property,affecttherightsandliabilitiesofanyotherperson.
Clasis Law IndIa
www.gettingthedealthrough.com 233
WhenaschemeunderSICAisgoingon,nosuitfortherecoveryof money or for the enforcement of any security against the industrial companyorofanyguaranteeinrespectofanyloans,oradvancegrantedtotheindustrialcompany,shalllieorbeproceededwith,exceptwiththeconsentoftheBIFRor,asthecasemaybe,theappro-priateappellatetribunal.TheBIFRhastheauthoritytosuspendtheoperation of any contract during the time a matter is under its con-sideration.Suchasuspensioncanbemadeforamaximumperiodofsevenyears.Ontheexpiryofdeclarationallcontractssosuspendedarerevivedandenforceable.UndertheCDRsystem,thedebtorandcreditorscan,intheir
agreements,inserta‘standstill’clause,accordingtowhich,afteraref-erenceismadetotheCDRcell,thepartiescannotinstitutesuitsagainsteachother,ie,cannotenforcethecontractspreviouslyenteredintoinacourtoflaw,butthecontractisnotrejected,merelyputonhold.
14 Sale of assetsIn reorganisations and liquidations, what provisions apply to the sale
of specific assets out of the ordinary course of business and to the
sale of the entire business of the debtor? Does the purchaser acquire
the assets ‘free and clear’ of claims or do some liabilities pass with
the assets? In practice, does your system allow for ‘stalking horse’
bids in sale procedures and does your system permit credit bidding in
sales?
UndertheCompaniesAct,anofficialliquidatorwhoisappointedisgiventhepowertoselltheassetsofthecompany,fortheprocessofwinding-up.Hehasthepowertoselltheimmoveableandmove-ableassetsofthecompanybypublicauctionorprivatecontract.Healsohasthepowertosellthewholeoftheundertakingasagoingconcern.UndertheSICA,theBIFRmay,byanorderinwriting,direct
thesickindustrialcompanynottodisposeofanyofitsassetsdur-ing the period of preparation or consideration of the scheme under section18;andduringtheperiodbeginningwiththerecordingoftheopinionbytheBIFRforthewinding-upofthecompanyuptocommencementoftheproceedingsrelatingtothewinding-upbeforethe relevant high court.TransfersunderSARFAESIandSFCAvestinthetransfereeall
rightsinortothepropertytransferredasifthetransferhadbeenmadebytheowneroftheproperty.InIndia,salethroughcourtauctionorunderSICA,SARFAESI
andSFCAisusually‘freeandclear’ofclaims.However,therehavebeeninstanceswherethesaleismadeonan‘asiswhereis’basis.Insuchinstancethepurchaserdoesnotacquireassets‘freeandclear’of claims.Whilestalkinghorsebidsandcreditbiddingarenotpopularin
theIndiancontext,theliquidatorandtheBIFRhavetherighttoenterintoanytransactionforthepurposeofeffectingthewinding-uporreconstruction.
15 Stays of proceedings and moratoriaWhat prohibitions against the continuation of legal proceedings or
the enforcement of claims by creditors apply in liquidations and
reorganisations? In what circumstances may creditors obtain relief
from such prohibitions?
Afterthecourthaspassedanorderforwinding-up,andbeforeanofficialliquidatorisappointed,alllegalproceedingsagainstthecom-panyaresuspended,andallattachmentsandexecutionsagainstthecompanyputintoforceafterthecommencementofwinding-uparevoid.After a schemeof compromise, arrangement, amalgamation
or reconstruction is applied for and until the application is finally disposedoff,thecourtcan,undertheCompaniesAct,staythecom-mencement or continuation of any suit or proceeding against the companyonsuchtermsasthecourtthinksfit.
WhenaproceedingisgoingonintheBIFR,oraschemesanc-tionedbyitisunderway,noproceedingsforthewinding-upoftheindustrialcompanyorforexecution,distressorthelikeagainstanyof the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company orofanyguaranteeinrespectofanyloans,oradvancegrantedtotheindustrialcompany,shalllieorbeproceededwithfurther,exceptwiththeconsentoftheBIFR.UndertheCDRsystem,oneofthemostimportantprovisionsin
thedebtor-creditoragreementandtheinter-creditoragreementisthe‘standstill’provision,wherebythedebtorandlender(s)agreethattheywillnotcommenceorproceedwithany(civil)legalactionorproceedingagainsteachotherandobserveastand-stillpositionafterareferenceismadetotheCDRcellandduringtheperiodtheschemeisunderpreparationandimplementation.ThisprovisionenablestheCDRsystemtoundertakethenecessarydebtrestructuringexercisewithoutanyoutsideintervention,judicialorotherwise.Underalloftheabovethecreditorcangetreliefwithspecial
sanctionofthecourtortheBIFR.Ingrantingreliefthecourtwillweighthebalanceofconvenienceandconsiderirreparableharmifthe dispensation sought is not made.
16 Arbitration processes in bankruptcyHow frequently is arbitration used in insolvency proceedings? What
limitations are there on the availability of arbitration in insolvency
cases? Will the court allow arbitration proceedings to continue after
an insolvency case is opened?
SincetheCompaniesActspecificallyprovidesforamechanismforinsolvency-relatedissues,arbitrationisnotusedininsolvency-relatedproceedings.Determinationofinsolvencyandwinding-upproceed-ingsareamongthoseissuesandcanonlybesettledbycivilcourts.Arbitralprocedure,subjecttothecontractbetweenthecompanyandthecounterparty,maybeusedtodeterminedisputeswithrespecttotherights,liabilitiesandclaimsbetweensuchparties.However,therecoveryoftheclaimsifthecompanybecomesinsolventcanonlybedonebythecivilcourtsinaccordancewiththeprovisionsoftheCompaniesAct.
17 Set-off and nettingTo what extent are creditors able to exercise rights of set-off or netting
in a liquidation or in a reorganisation? Can creditors be deprived of
the right of set-off either temporarily or permanently?
Set-offisallowedininsolvencyproceedingsundertheCompaniesAct,inthesamewayasundertheProvincialInsolvencyActandPresidencyTownsInsolvencyAct, if theclaimsare ‘mutual’and‘commensurable’.However,set-offisnotallowedforclaimsthatarenoteasilyascertainable.Anexceptiontothisruleofset-offisthatadebtowedbyacompanytoitsdirectorcannotbesetoffagainstanycontributionheisliabletomaketothecompany’sassets.
18 Intellectual property assets in insolvenciesMay an IP licensor or owner terminate the debtor’s right to use it
when an insolvency case is opened? To what extent may an insolvency
administrator continue to use IP rights granted under an agreement
with the debtor? May an insolvency representative terminate a
debtor’s agreement with a licensor or owner and continue to use the
IP for the benefit of the estate?
Anofficialliquidatorhasthepowertocarryonthebusinessofthecompanyasfarasnecessaryforthebeneficialwinding-upofthecompany.Further,asmentionedabove,onceaschemeisbeingframedorisunderconsiderationorbeingimplemented,theBIFRmaydirectthatallrightsagainstthecompanyandobligationsofthecompanystandsuspended.Accordingly,aviewcanbetakenthatonthemaking
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234 Getting the Deal Through – Restructuring & Insolvency 2012
ofthewinding-uporderorfilingofanapplicationbeforetheBIFRanIPlicensordoesnothavetherighttoterminatethedebtor’suse,theliquidator/operatingagencyappointedbytheBIFRcancontinuetousetheIPwithoutanypaymenttotheIPlicensor.Further,withthesanctionofthecourtitisalsopossiblethattheliquidatorterminatesthedebtor’sagreementwiththelicensorandcontinuestousetheIPforthebenefitoftheestate.
19 Post-filing creditMay a debtor in a liquidation or reorganisation obtain secured or
unsecured loans or credit? What priority is given to such loans or
credit?
UndertheCompaniesAct,theliquidatorhasspecificauthoritytoobtainsecuredcreditandabroadpowertodoallthatisnecessaryforwindingupthecompany,whichinourviewwouldincludeobtainingunsecured credit and giving priority to such loans and credit.UndertheSICA,theschememayprovideforfinancialassistance
bywayofloans,advancesorguaranteesorreliefsorconcessionsorsacrificesfromthecentralgovernment,stategovernment,anysched-uledbankorotherbank,apublicfinancialinstitutionorstate-levelinstitutionoranyinstitutionorotherauthoritytothesickindustrialcompanythatisthedebtor.Similarly,theCDRschemedoescontemplateadditionalfinancial
assistance.UsuallyunderSICAandCDRfinancialassistanceintherehabili-
tationofthecompanywillstandinprioritytoexistingdebt.
20 Successful reorganisationsWhat features are mandatory in a reorganisation plan? How are
creditors classified for purposes of a plan and how is the plan
approved? Can a reorganisation plan release non-debtor parties from
liability, and, if so, in what circumstances?
ThefollowingarethesalientfeaturesofareorganisationplanundertheCompaniesActandSICA:• employee’sbenefit;• capitalstructure;• mainobjectiveofareorganisedentity;• directorsandofficersofthereorganisedentity;• contractsofthereorganisedentity;and• intellectualpropertyrightsofthereorganisedentity.
Creditors are classified as secured and unsecured for the purposes of the reorganisation plan.UndertheCompaniesAct,theplanisapprovedbythecourtif
three-quartersofthemembers,orclassofmembers,orcreditorsorclass of creditors approve of the scheme. UnderSICAthereareseveraldetailsthatarerequiredtobepro-
videdbytheoperatingagencyappointedbytheBIFRtodrawupaschemeforreorganisation,whichincludemethodofsaleoftheassetsofthecompany,thechangeintheinterestsandrightsofsharehold-ers,etc.TheBIFRsanctionstheschemeafterconsideringtheviewsofallstakeholders.UsuallyschemessanctionedbythecourtortheBIFRwillnot
releasenon-debtorparties.UnderaCDRscheme,thecreditorsareclassifiedasthosewho
aretheoriginal lendersandthosewhohaveprovidedadditionalfinancingundertheCDRpackage,andthelatterwillbegivenpref-erenceduringrecovery.TheplanhastobeapprovedbytheCDRempoweredgroup,whichcomprisestheexecutivedirector-levelrep-resentativesofIDBI,ICICIandSBIasstandingmembersandtheexecutivedirector-levelrepresentativesoffinancialinstitutionsandbanksthathaveanexposureintheconcernedcompanywhosedebtrestructuringisunderconsideration.Theempoweredgroupdecidestheindividualcorporatedebtrestructuringcasesandtheacceptableviabilityoftheconcernedborrowerbasedonthereturnoncapital
employed,debtservicecoverageratio,gapbetweentheinternalrateofreturnandthecostoffundandextentofsacrificestobemadebythelenders.TheCDRschemedoesnotcontemplatereleaseofnon-debtorparties.
21 Expedited reorganisationsDo procedures exist for expedited reorganisations?
ThereisnoprocedureunderIndianlawforexpeditedreorganisations.
22 Unsuccessful reorganisationsHow is a proposed reorganisation defeated and what is the effect of the
plan not being approved? What if the debtor fails to perform a plan?
Aproposedreorganisation,undertheCompaniesAct,isdefeatedifitdoesnotreceivethevotesofathree-quartersmajorityofthemembersandcreditorspresentatthemeeting,orifthecourtdoesnotapproveofthescheme.Ifdefeatedtheproposedplancannotbeimplemented.Ifuponsanctionoftheplanthedebtorfailstoperform,thedebtorcanbeheldresponsibleforcontemptofcourtorders.UnderSICA,iftheBIFRdoesnotbelievethatthecompanycan
berevivedorrehabilitatedanddoesnotapproveoftheplansubmit-tedbytheoperatingagency,itcanmodifyit.Butifadebtorfailstoperformtheplanofrevival(reorganisation),theBIFRcanpassanorderforwinding-upthedebtorcompany.Furthermore,personsinchargeoftheconductofbusinessofthecompanywillbeliabletobeimprisoned and fined. Under the CDR system, a proposed reorganisation can be
defeated if theCDRempoweredgroupdoesnotaccept it,or iftherequisitenumberofcreditorsisnotoftheopinionthat,aftertheintroductionofthescheme/package,theaccountsarelikelytobecomefunctional.Ifthedebtorrefusedtoperform,itwouldbeinbreachoftheagreementsexecutedandaccordingly,thedebtorcouldbesuedforbreachthereof.
23 Bankruptcy processesDuring a bankruptcy case, what notices are given to creditors? What
meetings are held? How are meetings called? What information
regarding the administration of the estate, its assets and the claims
against it is available to creditors or creditors’ committees? What are
insolvency administrators’ reporting obligations? May creditors pursue
the estate’s remedies against third parties?
Asmentionedabove,theterm‘bankruptcy’isnotfoundinIndianlaw.Thesynonymoustermis‘winding-up’.Inthisquestionwehavelimitedouranswertovoluntarywinding-up.
On the company passing a special resolution for voluntary winding-up,suchresolutionispublishedintheOfficialGazetteandinatleastonenewspaperinthedistrictoftheregisteredofficeofthecompany.Atthemeetingoftheboardofdirectors,themajorityofthedirectorsofthecompanyarerequiredtogiveadeclarationofsolvencyverifiedbyanaffidavitandappointaliquidator.Ifatanytimetheliquidatorisoftheopinionthatthecompanyisunabletopayitsdebts,theliquidatorisrequiredtocallameetingofthecreditorsandlaybeforethemeetingastatementofassetsandliabilitiesofthecompany.Intheeventofthewinding-upcontinuingformorethanoneyear,theliquidatorisrequiredtocallameetingofthecreditorsat the end of the first year and every succeeding year thereafter and laybeforethemeetinghisacts,dealingsandpositionofthewinding-up.Onthecompanybeingfullywoundup,theliquidatorisrequiredto call for a meeting of the company and its creditors for laying the accountsbeforethemeetings.NoticeofsuchmeetingsisrequiredtobepublishedintheOfficialGazetteandsomenewspaperscirculatinginthedistrictwheretheregisteredofficeofthecompanyislocated.Withinoneweekofthemeetingtheliquidatorisrequiredtofilesuchaccountsandareturnofthemeetingwiththeofficialliquidatorandregistrarofcompanies.Creditorsatanytimehavetheabilityto
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requirethatthewinding-upbeconductedundercourtsupervisionandapplytothecourtfordeterminationof,interalia,questionsarisinginthewinding-up.
Creditors are not permitted to pursue remedies of the estate directly.
24 Creditor representationWhat committees can be formed and what powers or responsibilities
do they have? How are they selected and appointed? May they retain
advisers and how are their expenses funded?
Thecreditorsatageneralmeetingcanappointacommitteeofinspec-tion,whichhastherighttoinspecttheaccountsoftheliquidator.Thecommitteeofnotmorethanfivemembersisappointedatthemeetingofthecreditors,afteraresolutionofvoluntarywinding-upispassedbythecompany,oranymeetingthereafter.Creditorshavebeengiventherighttoresolvethatapersonsoappointedoughtnottobeamember.Thecourthasthepowertooverturnsuchresolutionofthecreditors.Costsproperlyincurredarepayableoutoftheassetsofthecompanyinprioritytoallotherclaims.TheCompaniesActdoesnotspecificallypermittheappointmentofadvisers.However,iftheappointmentisnecessarytheninourviewsuchcostswillhavebeenproperlyincurredandarethereforereimbursable.UnderSICA,thecreditorsdonothavethepowertoformany
committees.TheCDRsystemisavoluntarysystembasedontheDCAand
theICA,wherethecreditorscometogethertoformaconsortiumforthepurposeoffinancialrestructuringofthecompany.Thereisnoprovision for a group representing the interests of the creditors under CDR,sincetheythemselvesundertakethereorganisation.
25 Insolvency of corporate groupsIn insolvency proceedings involving a corporate group, are the
proceedings by the parent and its subsidiaries combined for
administrative purposes? May the assets and liabilities of the
companies be pooled for distribution purposes? May assets be
transferred from an administration in your country to an administration
in another country?
Inordinarycircumstances,thewinding-upandliquidationproceed-ingsarelimitedtotheparticularcorporateentitybeingwoundup,ie,therelevantcompanyinquestion,andthereisnopoolingofassetsofthesubsidiariesorparentcompanies.
26 Modifying creditors’ rightsMay the court change the rank of a creditor’s claim? If so, what are
the grounds for doing so and how frequently does this occur?
TheCompaniesActspecifiestheranks,mannerandpriorities inwhichthecreditors’claimshavetobesettled;however,thecourthascertaindiscretionarypowerstogiveprioritytoaparticularcreditor’sclaimonacase-by-casebasis.Section446(2)(d)oftheCompaniesActfurtherempowersthecourttodecideanyquestiononprioritynotwithstandinganythingcontainedinanyotherlaw.
Certain grounds for priority payment are:• wheretheassetsofthecompanyareinsufficient,paymentcanbemadeinrateableproportionstothecreditorsandworkers;
• mutualunderstandingbetweenthedebtorandcreditor;and• pressure by the creditor for filing a suit and attachment of
property.
27 Enforcement of estate’s rightsIf the insolvency administrator has no assets to pursue a claim, may
the creditors pursue the estate’s remedies? If so, to whom do the
fruits of the remedies belong?
UndertheCompaniesAct,onliquidationtheassetsofthecompanyhavetobedistributedparipassuamongallthecreditors.Ifacreditorwantstodisposeofthecompany’sassetsthatconstitutedhissecurity,hehastoobtainpermissionofthecourtandassociatetheofficialliquidatorwiththeprocessofsale.Itispossibleforthecreditorstoseekpermissionfromthecourt
topursuetheestate’sremediesandseekordersthatthefruitsbefirstdistributedtothecreditors.Thecourthasthediscretiontomakesuchorders as it deems fit and proper.
28 Claims and appealsHow is a creditor’s claim submitted and what are the time limits?
How are claims disallowed and how does a creditor appeal? Are there
provisions on the transfer of claims? Must transfers be disclosed
and are there any restrictions on transferred claims? Can claims
for contingent or unliquidated amounts be recognised? How are the
amounts of such claims determined?
Inacreditors’winding-up,thecreditorwillmakeapetitiontothecourttocommencewinding-upproceedingsifthecompanyhasbeengivennoticeofthedebtduetohimandthedebthasremainedunpaidforthreeweeksfromthedateofthenotice.Thereisnospecificpro-cedurefordisallowingcreditors’claims.Noristhereanyprovisionrelatedtothetransferofclaims.Anunsecuredcreditor,underIndianlaw,hastoprovehisclaimandsuchaclaimhastobedefinite(notcontingentorunliquidated).Itcannotbeaclaimthathastobedeter-minedbyacourtprocess.ThegeneralperiodoflimitationunderIndianlawisthreeyears;incertainspecificcasesitislonger.Aclaimisdisallowedifnotproved.Appealliestotheappellatebenchofthecourthearingthewinding-uppetitionandisrequiredtobemadeinthe same manner as any other appeal from an order of such court. Priortothemakingofthewinding-uporderthereisnorestrictiononthetransferofclaims.Itis,however,pertinenttomentionthatcham-pertyandmaintenanceareusuallynotpermittedunderIndianlaw.Onacompanybeingwoundupundersupervisionofthecourt
(inthecaseofvoluntarywinding-up)orbeingorderedtobewoundupbythecourt,therelevantcourtthatiswindingupthecompanyhasthejurisdictiontodetermineallclaimsbyoragainstthecompanyandanysuitbyoragainstthecompany.Furthermore,onmakinganorderforwinding-upnosuitcanbecommencedorproceededwith,exceptbyleaveoftherelevantcourt.Inawinding-upproceedingallclaimsincludingcontingentand
unliquidatedclaimsaretoberecognisedandajustestimateofsuchclaims made.
29 Priority claimsApart from employee-related claims, what are the major privileged and
priority claims in liquidations and reorganisations? Which have priority
over secured creditors?
Inliquidations,apartfromemployee-relatedclaims,revenues,taxes,cesses and rates due to the government have priority over secured creditors.Except for the above, no claims have priority over secured
creditors.Theclaimsofworkmen,however,areequatedtothoseofsecuredcreditorsbyoperationoflaw.InreorganisationsunderSICAandCDR,thelendersproviding
additional financing shall have a preferential claim over the provid-ersofexistingfinancewithrespecttothecashflowsoftheborrowerfor their recoveries.
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236 Getting the Deal Through – Restructuring & Insolvency 2012
30 Employment-related liabilities in restructuringsWhat employee claims arise where employees are terminated during a
restructuring or liquidation? What are the procedures for termination?
Employeesareentitledtotheircontractualandstatutoryduesuponterminationofemploymentirrespectiveofwhethertheterminationiseffectedduringrestructuringorliquidationorotherwise.Liquidationand restructuring do not per se affect the procedure of termination of employees,excepttotheextentofthemannerofsettlementofdues.UndertheCompaniesAct,duringliquidationworkmen’sclaims
aregivenpriorityoverallclaimsandbyoperationoflawtheyareequatedtosecuredcreditorsandhaveaparipassuchargeoversecu-rityheldbysecuredcreditors.Theirdues includewages,gratuities, compensationawarded
undertheEmployees’CompensationAct,etc.Duringwinding-up,allsumsduetoemployeesfromsalaries,
wages,providentfunds,pensionfunds,gratuityfundsoranyotherfundforthewelfareoftheemployeesarealsotobepaid.ArestructuringundertheCompaniesActshouldsafeguardthe
interestsof theexistingemployeesof thecompaniesundergoingrestructuring.Iftheirinterestsarenotsafeguarded,theycanobjecttothescheme’simplementation.UnderSICAthereisnospecificprovisioninrespectofemployee
claims and they form a part of the revival scheme.TheCDRsystemdoesnotspecificallydealwithemployee-related
liabilities.
31 Liabilities that survive insolvency proceedingsDo any liabilities of a debtor survive an insolvency or a reorganisation?
Attheendofawinding-upproceeding,thecompanyisdissolvedandnoneofitsliabilitiessurvivesit.Ontheotherhand,inareor-ganisation,undertheCompaniesActandSICAtheliabilitieswillbedeterminedinaccordancewiththereorganisationscheme.
32 DistributionsHow and when are distributions made to creditors in liquidations and
reorganisations?
Duringliquidation,theassetsofacompanyaredistributedamongthe secured creditors pari passu and to the unsecured creditors on proof of their claim.Onceareorganisationprocess(underSICAortheCDRsystem)
issuccessfullycompleted,distributionsaremadefromthedebtor’scashflow.Thecreditorswhocontributedtothereorganisationofthecompanyhavethefirstchargeonsuchproperty,andstandinfrontoftheothercreditorsofthecompany,whosedebtswouldberepaidsubsequently.
33 Transactions that may be annulledWhat transactions can be annulled or set aside in liquidations and
reorganisations and what are the grounds? What is the result of a
transaction being annulled?
UndertheCompaniesAct,duringwinding-up,anytransactionuptosixmonthsbeforethedateofcommencementofthewinding-upprocess,iffoundtobefraudulentlypreferentialtoanyoneofthecreditors,indetrimenttoallothers,isheldtobeinvalid.Theburdenofproofinthiscaseliesonthepartywhoimpugnsit.Voluntarytransfersmadeoneyearpriortopresentationofthepetitionormak-ingoftheresolutionarevoidasagainsttheliquidator.Further,anytransfertotrusteesforthebenefitofthecreditorsisalsovoid.Ifatransactionisthusheldvoid,orannulled,themoneycanbe
recoveredbytheliquidator,whothenholdsitintrustforthegeneralbodyofthecreditors.
Where an application for reorganisation is made under the CompaniesAct, the courtmay, at its discretion, stay anyother
proceedings against the company on such terms as it deems necessary.WhereanapplicationismadetotheBIFRunderSICA(until
thetimetheschemeunderSICAisinprogress)thereisatemporarysuspensionoftheproceedings.TheconsentoftheBIFRorAAIFRismandatory for proceedings against industrial companies.UnderCDR,oneoftheclausesundertheICAandDCAisthe
stand-stillclause,accordingtowhichthepartiestotheagreementcannotcommenceorproceedwithanylegalactionorproceedingagainsteachotherandobserveastand-stillpositionafterareferenceismadetotheCDRcellandduringtheperiodtheschemeisunderpreparation and implementation.Thus,althoughthereisnoannulmentofproceedingsinreor-
ganisations,thereistemporarysetting-asideorpostponementoflegalproceedings.
34 Proceedings to annul transactionsDoes your country use the concept of a ‘suspect period’ in
determining whether to annul a transaction by an insolvent debtor?
May voidable transactions be attacked by creditors or only by a
liquidator or trustee? May they be attacked in a reorganisation or a
suspension of payments or only in a liquidation?
Theconceptof ‘suspectperiod’doesnotexistunderIndianlaw.However,undertheCompaniesAct,anytransferofpropertymadebyacompanywithinaperiodofoneyearbeforethepresentationofapetitionforwinding-upbyorsubjecttothesupervisionofthecourtorthepassingofaresolutionforvoluntarywinding-upofthecompany,shallbevoidagainsttheliquidatorifthetransferisnotmadeintheordinarycourseofitsbusinessoriftransferwaswith-outconsiderationorthattheconsiderationwassoinadequateastoraisepresumptionofwantofgoodfaith.Itmaybenotedthatthetransactionisvoidonlyagainsttheliquidatorandisvalidagainstallothers.Transactionsmayonlybeattackedinliquidationsandnototherwise.
35 Directors and officersAre corporate officers and directors liable for their corporation’s
obligations? Are they liable for pre-bankruptcy actions by their
companies? Can they be subject to sanctions for other reasons?
UndertheCompaniesAct,adirectororofficer(namely,managingdirectors,full-timedirectors,managers,secretaries,anypersononwhosedirectionsandinstructionstheboardofdirectorsacts,anypersonchargedbytheboardofdirectorstoberesponsibleinthisbehalf,oranydirectorspecifiedbytheboardofdirectorsinthisbehalf)indefaultofacompanyispunishablewithimprisonmentuptotwoyearsaswellasafine,ifheorshe,interalia:• inducesapersontogivecredittoacompanyunderfalsepre-tencesorunderafraud;or
• transfersthepropertyofthecompanywithintenttodefraudthecreditors;or
• concealsthepropertyofthecompanyfromthecreditors.
Further,aslongasdirectorsorofficershaveactedinutmostduedili-gencewhilecarryingontheoperationsofthecompany,haveactedingoodfaithandtothebestoftheirknowledgehavenotinitiatedanyactiontocauseanyharmtothecompany,theycannotbeheldpersonallyliable.However,itispertinenttonotethatatanypointoftimeifthe
numberofmembersofthecompanyisreducedbelowthestatutorylimitandthecompanycarriesonbusinessformorethansixmonthswhilethenumberissoreduced,everypersonwhoisamemberofthecompanyduringthetimeitcarriesonbusinessafterthosesixmonthsandiscognisantofsuchfactshallbeseverallyliableforthepaymentoftheentiredebtsofthecompanycontractedduringthattimeandmaybeseverallysuedtherefor.
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www.gettingthedealthrough.com 237
36 Creditors’ enforcementAre there processes by which some or all of the assets of a business
may be seized outside of court proceedings? How are these
processes carried out?
Yes,under theprovisionsofSARFAESIandSFCA,asdiscussedabove.ProceedingsunderSARFAESIcanonlybeinitiatedbybanksand
financialinstitutions.ThetermsbanksandfinancialinstitutionshavebeendefinedinSARFAESIanddonotincludeforeignbanks.ProceedingsunderSFCAcanonlybeinitiatedbyfinancialcor-
porations,asdefinedtherein.Thetermfinancialcorporationdoesnotincludeforeignbanks.Under both acts the creditors have the right to transfer the
securedasset.Creditorsunderboththeaboveactsalsohavetherighttoapproachtherelevantcourtandseekingappropriateorders.
37 Corporate proceduresAre there corporate procedures for the liquidation or dissolution of
a corporation? How do such processes contrast with bankruptcy
proceedings?
Yes.Asmentionedabove,winding-upcanbe initiatedvoluntar-ily.Themajorwaysinwhichwinding-upproceedingsbythecourt(involuntarywinding-up)differfromvoluntarywinding-upbythecompany are that • theformerisconductedbythecourtwhilethelattermayormaynotbeconductedunderthesupervisionofthecourt;
• intheformer,onordersforwinding-upbeingmade,theofficialliquidatorisappointed,whileinthelatterthecompanyappointsaliquidator;
• intheformertherearelimitedgroundsforinstitutingproceed-ings,whileinthelatteraslongasthecompanyissolventthereisnorestriction;and
• theformerisnotinstitutedbythecompany,thelattermaybeinstitutedbythecompany.
38 Conclusion of caseHow are liquidation and reorganisation cases formally concluded?
Liquidationcasesareformallyconcludedbyanorderofthehighcourt,ie,thehighcourtofthatstateinwhichtheregisteredofficeof the company is situatedhas jurisdiction for suchwinding-upproceedings. ReorganisationcasesundertheCompaniesActareconcluded
bythecourtapprovingtheschemeofreorganisationpreparedbythecompany,whichhasreceivedtheassentofathree-quartersmajor-ityofthecompany’smembersandcreditors,andunderSICAthey
areconcludedbytheBIFRapprovingtheschemeofreconstructiondrawnupbytheoperatingagencies.ReorganisationcasesunderCDRareconcludedonimplementa-
tionofthedirectionsoftheCDRempoweredgroup.
39 International casesWhat recognition or relief is available concerning an insolvency
proceeding in another country? How are foreign creditors dealt with
in liquidations and reorganisations? Are foreign judgments or orders
recognised and in what circumstances? Is your country a signatory
to a treaty on international insolvency or on the recognition of foreign
judgments? Has the UNCITRAL Model Law on Cross-Border Insolvency
been adopted or is it under consideration in your country?
UndertheCPC,section44AdealswiththeenforcementbyIndiancourts of decrees passed by courts in ‘reciprocating territories’.Anotheroptionavailabletoaforeigncreditorwithaforeignjudg-mentistobringasuitinanIndiancourtupontheoriginalcauseofactionbasedonthesaidjudgment.Thisoptionisexercisedmostlyincaseswherethejudgmentisgrantedbyacourtotherthanthatofa reciprocating territory.TheCompaniesActdealswith the liquidationofcompanies
incorporatedinIndia.However,theIndianbusinessofacompanyincorporatedoutsideIndiacanalsobewoundupundertheCompa-niesActbytreatingtheIndianbusinessasanunregisteredcompany.Inotherwords,ifaforeigncompanyisbeingliquidatedoutsideIndiaitsIndianbusinesscanbewoundupinIndiaonthebasisoftheliquidationorderorotherorderpassedbytheforeigncourt,basedonwhichtheIndiancourtcanformanopinionthatitis‘justandequitable’thattheIndianbusiness(company)bewoundup.IndianlawmakesnodistinctionbetweenanIndiancreditorand
aforeigncreditorandeithercancommencewinding-upproceedingsinthecaseofinsolvency.ThoughthereisnospecificprovisionintheCompaniesActtodealwithforeigncreditorsandtheirclaimorcauseofactionarisingoutsideIndia,ithasbeenheldbytheSupremeCourtofIndiainRajah of Vizianagaram v Official Receiver,AIR1962SC500,thattheforeigncreditorsandcontributoriescanbringanactionandfileclaimundertheCompaniesAct.TheUNCITRALModelLawonCross-BorderInsolvencywas
consideredin1999bytheWorkingCommitteeonLawrelatingtoInsolvencyofCompaniesunderShriJusticeVBalakrishnaEradi,whichwasappointedbytheMinistryofCompanyAffairs.ThiscommitteesubmitteditsrecommendationtoamendpartVIIoftheCompaniesAct(winding-up)tocorrespondtotheprovisionsoftheUNCITRALModelLawandin2001DrNLMitrasubmittedthereportoftheAdvisoryGrouponBankruptcyLaws,butnootheractionhasbeentakensincethen.
Sakate Khaitan [email protected] Sangeeta Jhunjhunwala [email protected] Mahrukh Umrigar [email protected]
1202B One Indiabulls Centre, Tower 2B, Floor 12B Tel: +91 22 491 00000
841 Senapati Bapat Marg, Elphinstone Road Fax: +91 22 491 00099
Mumbai 400 013 www.clasislaw.com
India
IndIa Clasis Law
238 Getting the Deal Through – Restructuring & Insolvency 2012
40 Cross-border cooperationDoes your country’s system allow cooperation between domestic and
foreign courts and domestic and foreign insolvency administrators in
cross-border insolvencies and restructurings?
NotapplicableinIndia.
41 Cross-border insolvency protocols and joint court hearingsIn cross-border cases, have the courts in your country entered into
cross-border insolvency protocols or other arrangements to coordinate
proceedings with courts in other countries? Have courts in your
country communicated or held joint hearings with courts in other
countries in cross-border cases? If so, with which other countries?
Indiaisnotpartytoanycross-borderinsolvencyprotocols,andnoprecedentsofjointcourthearingshavetakenplacetodate.
The government passed the Companies (Second Amendment) Act 2002 (Amendment Act) on 13 January 2003. The act proposed setting up the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), a forum for reorganisation of sick companies. Subsequently, parliament passed the Sick Industrial Companies (Special Provisions) Repeal Act 2003 (SICRA) repealing the existing statute on sick companies. The Amendment Act and the SICRA are pending notification and will come into force only after being notified.
Also it is pertinent to note that the Companies Bill 2009 (Companies Bill) was introduced in August 2009. The Companies Bill, along with certain significant changes to the existing Companies Act, inter alia includes specific provisions with respect to NCLT. However, the Companies Bill has not yet been placed before parliament and information available in the public domain seems to indicate that in all probability this may be laid before parliament in the forthcoming winter session. Once the Companies Bill has been approved in parliament and notified it will become law.
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