The Companies Bill, 2011 attempts orderly closing down

It's a new year but we haven't forgotten our old muse- the Companies Bill, 2011 and we doggedly continue our analysis of teh new provisions in that Bill. Today is the turn of going sick- a painful, laborious processs that for most Indian companies often ends in death. So does the Companies Bill, 2011 offer a more contemporary bankruptcy process? Payaswini Upadhyay finds out

Chrysler- 41days
General Motors- 30 days
MF global- 44 days

It took exactly this much time for these giants to revive after filing for Chapter 11 bankruptcy in the United States.

In India, the timelines have stretched to years in most cases. Currently, sick companies either approach the Board for Industrial and Financial Reconstruction for a revival plan or resort to the non-statutory provisions of Corporate Debt Restructuring.

Bhavesh Parekh
MD, Whitewater Corporate Advisory
Former Director- Restructuring Services, KPMG

"You have a high Court, we have BIFR- different, different bodies handling sick company situations and with the involvement of a new Act, we'll have a single Act, we'll have new body NCLT which will take care of winding up petitions, revival and reconstruction which is done by BIFR."

Besides consolidating the process, the Companies Bill, 2011 proposes to change the who and how of the sickness provisions. The Sick Industrial Companies Act, 1985 applies only to industrial units. The Companies Bill, 2011 proposes doing away with the sector specification. Under SICA, a company can be declared sick if its networth is completely eroded. The Companies Bill, 2011 says a company can be declared sick if it fails to pay 50% or more of its outstanding debt within 30 days of notice and the secured creditor moves the Tribunal against it.

Rajinder Sharma
Director Corporation Affairs & General Counsel - South Asia
Dupont

"The whole change and the shift is that a company, rather than determining itself whether it is sick and its networth is eroded, has shifted from the hands of the company to that of the  banks and financial institutions- so the say and discretion of these financial institutions will tremendously increase- whether that is necessarily required or not is highly debatable because a promoter or stakeholder or shareholder of the company would see that merely because on a temporary regime, where the financial health of the company is not conducive to the banker's need or requirement in that 30 day notice which they're liable to be given now under the new provisions, the whole control goes and vests into the hands of the bankers."

Sanjay Asher
Partner, Crawford Bailey

"There should be a provision whereby all the stakeholders do have a say in the revival- the creditors, both secured and unsecured, the statutory payments and the shareholders."

So if the provisions come in as is, the unsecured creditors will have to knock the doors of Debt Recovery Tribunals or courts. But once the revival plan is in place, the Bill promises time bound relief to both secured and unsecured creditors- something which is lacking under the BIFR provisions. For instance cases dating back to 1987 are still being heard by the BIFR. The Companies Bill, 2011 proposes a one year time period for the finalization of the rehabilitation plan. The plan can be prepared by the company, its secured creditors or a Tribunal appointed administrator. If the company does not submit a revival plan, the Tribunal can allow the interim administrator to take over the management of the company.

Bhavesh Parekh
MD, Whitewater Corporate Advisory
Former Director- Restructuring Services, KPMG

"In the US, as far as Chapter 11 is concerned, it's done through a trustee route where the existing creditors walk in the capacity of a trustee and run the business or through the experts appointed by them. In India, we are engaging the administrators who be doing that role and they would, not necessarily, be directed by the creditors in terms of day-to- day operations. Also, during the currency of this time, the priority funding is made available in Chapter 11 and that provision has not come in. We have observed the same situation in CDR situations and we'll be happy to see that in the Act."

Sanjay Asher
Partner, Crawford Bailey

"The Tribunal has been imposed with so many other duties as well and revival of sick companies is one of the duties and so the question which comes to mind is where will the Tribunal get the time to comply with all what is required to be done by it."

The legislature says India's new insolvency regime mirrors the principles recommended by the United Nations Commission on International Trade Law. The principles may be but eventually it's the implementation that would be the key because if like the BIFR, the time taken to revive sick companies from the word go is going to stretch infinitely, there is a good chance that lenders may still choose a quicker CDR process.

In Mumbai, Payaswini Upadhyay