Insolvency Restructuring Article

Restructuring & Insolvencyin 53 jurisdictions worldwideContributing editor: Bruce Leonard 2012

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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

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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

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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


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


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

IndIa Clasis Law


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

Clasis Law IndIa


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.

IndIa Clasis Law


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.

Clasis Law IndIa


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


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.

Update and trends

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