THE BANKRUPTCY LAW REFORMS COMMITTEE SUMMARY (2015)

A) REVIVAL AND REHABILITATION OF SICK COMPANIES-

The BLRC report stated that The Sick Industrial Companies (Special Provisions) Act, 1985
(“SICA”) remains to date (till 2015) the only central corporate rescue law in force (although, it
applies to industrial companies only). This is because other legislative attempts to overhaul the
corporate rescue regime in India have not been made operational till then. Chapter XIX of
Companies Act 2013 which provides for a broader and more balanced corporate rescue
procedure, applicable to all companies, has not been notified for commencement. The changes
made in the older companies legislation, the Companies Act, 1956 (“CA 1956”) have also not
entered into force: Chapter VIA of the CA 1956, inserted by the Companies (Second
Amendment) Act, 2002, which provided for the National Company Law Tribunal (“NCLT”) to
exercise powers in relation to sick industrial companies could not be notified for commencement
because the operationalization of the NCLT remained entangled in litigation. Consequently, the
accompanying repealing legislation, the Sick Industrial Companies (Special Provisions) Repeal
Act, 2003 could also not be notified. Therefore, as of today, all aspects of rehabilitation of
sick/potentially sick industrial companies continue to be governed by SICA and there is no
similar statutory rescue mechanism for other categories of companies (other than mechanisms
under certain statutes applicable to banking companies and some State Relief Undertaking Acts).

B) DEBT RESTRUCTURING UNDER SCHEMES OF ARRANGEMENT

Chapter V of the Companies Act 1956 (or Chapter XV of CA 2013) provides for a mechanism
by which corporate revival and rehabilitation may be undertaken (at least in theory). Section 391
of CA 1956 provides for a court-supervised process by which a company can enter into a scheme
of arrangement or a compromise with its creditors and/or members. The nature of the scheme or
compromise that can be proposed under this provision is very wide: it includes schemes or
compromises that may be proposed to restore the company to profitability. Further, such a
scheme may be proposed at any stage, including during the pendency of insolvency proceedings
against the company. There is no requirement of proof of insolvency or impending insolvency.
 Thus, the company’s management can act at the early signs of financial distress and collaborate
with the creditors to rescue the company. Further, unlike the SICA, all companies, and not just
industrial companies, are covered within the ambit of Section 391. However, unlike SICA,
provisions for debt restructuring under Chapter V of CA 1956 or Chapter XV of CA 2013 do not
provide for an automatic moratorium. It may be noted that schemes of arrangement for
companies governed under certain special Acts (like the Banking Regulation Act, 1949 for
banking companies) are governed by such Acts.

C) INSOLVENCY RESOLUTION OF INDIVIDUALS AND PARTNERSHIPS

(i)Personal insolvency is primarily governed under two Acts in India: the Presidency Towns
Insolvency Act, 1909 (for the erstwhile Presidency towns, i.e. Kolkata, Mumbai and Chennai)
and the Provincial Insolvency Act, 1920 (for the rest of India). Though these are central laws, it
should be noted that both these Acts have a number of state specific amendments. The
substantive provisions under the two Acts are largely similar. There have not been any
substantial changes to this regime over the years and it has proved to be largely ineffective in
practice. (ii)The Limited Liability Partnership Act, 2008 (“LLP Act”) includes provisions not
only related to winding up and dissolution of a limited liability partnership8 (“LLP”) but also for
compromise, arrangement or reconstruction of an LLP. These provisions are similar to the ones
in the CA 2013. In addition, the Limited Liability Partnership (Winding up and Dissolution)
Rules, 2012 contain detailed provisions regarding the procedure of winding up and dissolution of
an LLP in various circumstances, including insolvency. However, unlike the CA 2013, there are
no provisions for the rehabilitation or revival of sick LLPs. Most aspects of insolvency resolution
of other partnerships (established under the Indian Partnership Act, 1932) are governed under the
personal insolvency law.

D) INSOLVENCY RESOLUTION OF CO-OPERATIVE SOCIETIES

Co-operative societies fall under the State List in the Constitution and there are State specific
legislations for co-operative societies which often include provisions relating to winding up. In
addition, the Co-operative Societies Act, 1912 and the Multi-State Co-operative Societies Act,
2002, which are both central acts, also include provisions for the dissolution and winding up of
 co-operative societies registered under them. However, these Acts do not provide for the
rehabilitation or revival of sick co-operative societies.

E) ASSET RECONSTRUCTION UNDER THE SARFAESI ACT-

The SARFAESI Act envisages specialised resolution agencies in the form of Asset
Reconstruction Companies (“ARCs”) to resolve Non-performing Assets (“NPAs”) and other
specified bank loans under distress. ARCs are seen as vehicles to increase the liquidity of banks
which can divest themselves of bad loans by transferring them to the ARCs. But given their
powers to resort to several measures (which includes taking over the management and
conversion of debt into equity among others) for recovering the value underlying those loans,
ARCs can (at least in theory) also help in insolvency resolution of a company. The banks are
required to hold exposure in the sold loans through subscription to security receipts issued by the
special purpose vehicle holding the assets under consideration. Such offloaded assets are
generally held in trusts that issue security receipts and are managed by the ARCs in their
capacity as trustees. It may be noted that an ARC can takeover the management of the borrower
only for the purpose of ‘realization of dues’. The management of the company has to be restored
back to the borrower after realisation of the dues. Therefore, this mechanism is largely seen as a
debt recovery tool and not an insolvency resolution tool (i.e., it does not facilitate rescue in
practice).

F) DEBT ENFORCEMENT/ RECOVERY a. The RDDBI Act set up the framework for the
establishment of Debt Recovery Tribunals (“DRTs”) and the Debt Recovery Appellate Tribunals
(“DRATs”) in India. The primary objective of RDDBFI Act was to ensure speedy adjudication
of cases concerning recovery of debts due to banks and notified financial institutions. Cases
pending before the civil courts where the debt amount exceeded Rs 10,00,000 were
automatically transferred to DRTs. There are some key differences between DRTs and ordinary
civil courts. First, differences in procedure: ordinary civil courts are bound to follow the
procedural rules set out in the Code of Civil Procedure, 1908 (“CPC”), whereas DRTs adopt a
summary procedure based on the rules of natural justice. Second, in DRTs, there is a more
restricted scope for hearing arguments over the procedural lapses of the creditor. Third, DRTs
fall within the purview of the Ministry of Finance, unlike civil courts, which are part of the
judicial hierarchy under the supervision of the respective High Court. Appeals from orders of the
DRT lie to the relevant DRAT.