Part - I
Interim Recommendations

Part - II
(Report of the Advisory Group)
Chapter - 1 Constitution and proceedings of the Committee
Chapter - 2 The Present Status Report
Chapter – 3 Comparative Data
Chapter - 4 International Standards and Indian Situation
The UNICTRAL Model Law on Cross-border Insolvency
EC Directive on Finality in Payment and Securities Settlement System

The group has noted that the Government of India is actively considering the implementation of the recommendations of the Justice Eardi Committee by amending some provisions of the Companies Act. This Group had the privilege of studying the Justice Eradi Committee Report, which contains specific analysis of empirical data with respect to functioning of the present winding up/insolvency system. This Group decided that in view of the immediate step that the Govt. of India may take in reforming the law relating to corporate insolvency and restructuring of sick companies and the special mandate that this Group has in studying international bankruptcy practices, especially cross-border insolvency, an interim report shall be submitted immediately so that some of the recommendations which are already formulated by this Group can be brought quickly to the notice of the Government of India. This Group therefore, finalized the following recommendations to be included along with the first four chapters of the Part 1 of the Report of the Advisory Group on Bankruptcy laws.

1. Corporate Bankruptcy

1. This group recommends a specific comprehensive Bankruptcy Code to be introduced to deal with corporate bankruptcy :

1. Bankruptcy law and practice should encompass in itself the corporate restructuring possibilities preceding insolvency and winding up;
2. Bankruptcy proceeding needs to be based on the fundamental objective of asset value maximization and hence the law has to facilitate protection of assets against all risks of further diversion, decay and destruction ;
3. Bankruptcy law and practice should aim to create facilities for reorganization, restructuring on voluntary basis, empowering the stakeholders to agree on a new priority of future contractual obligations;
4. Bankruptcy law and practice, therefore, has to be based not on adversarial process but to create a new ambience to either make a restructuring possible on renegotiations or initiating fast tract insolvency and winding up proceedings. Hence, the same is not to be a part of the Companies Act;
5. Because of the fact that a wholesome Bankruptcy code shall facilitate corporate restructuring and fast track winding up on insolvency, only provisions relating to compromise, arrangement and reconstruction at the instance of creditors (under sections 391 to 395 of the Companies Act) and voluntary winding up by members may be kept under the Companies Act and other provisions relating to the whole of the rest of winding up system need to be transferred to the Bankruptcy code;
6. Bankruptcy code has to deal with restructuring of the companies acceptable to all parties through renegotiations replacing Sick Industrial Companies Act; and
7. In the changing situation of growing cross-border investment, trade and commerce, cross-border insolvency problems are bound to increase both for Indian Companies having cross-boundary entities or ventures as well as foreign entities having Indian subsidiaries and ventures. A comprehensive Bankruptcy code is bound to address such issues taking into consideration international practices.

2. This Group recommends a Special Bankruptcy Bench in each High Court sitting all days as the workload demands, because :

1. In spite of the fact that tribunalisation of justice is now a settled fact especially after L. Chandarkumar {1997 3 SCC, 261}, there is a philosophical debate going on as to the nature, extent, structure and power. Justice Eardi Committee also commented that in order to make National Tribunal able to quicken the dispute resolution, Article 323A & B of the Constitution is to be amended. This Group does not think that such a step, by -passing the judiciary, is necessary or desirable;
2. A special bench of the High Court as a full time Bankruptcy Court shall serve all purposes as well as quickening the issue of the procedure recommended;
3. A special bench of the High Court will be able to bring multidimensional knowledge necessary for restructuring/reorganization and bankruptcy proceedings; and
4. A special bench shall add validity of action in all renegotiated proposals and on the failure of restructuring process, quicken the insolvency proceedings.

3. This Group recommends a Trustee to be appointed by the Court from empanelled professional chartered accountant firms, consultants, financial institutions and law firms for (i) managing the company as a going concern, (ii) initiating the process of negotiation for time based restructuring of the company and (iii) failing which, initiate insolvency proceedings to wind up the company and dissolve its affair. The broad features of the arrangement will be :

1. The remuneration of the Trustee shall be incentive - compatible.
2. Trustee can appoint financial advisers, managers, liquidators, auctioneers etc., to help the Trustee in its functions but the remuneration of these experts are to be borne by the Trustee and not the company.
3. The company shall continue to be responsible to meet its usual business prime cost and other overhead expenses.
4. The trustee shall be empowered to run the affairs and place only periodical reports to the court for further instructions.
5. Any petition objecting any conditions/settlement contained in the Report can only be filed in the court after such periodical report is placed and within the time specified by the court. The court shall settle those disputes on continuous day-to-day hearing within a time frame.
6. The Trustee shall be appointed immediately on the filing of the bankruptcy petition, if it is filed by the Debtor Company itself.
7. If the petition is filed by as creditor or creditors, the petition is allowed on the Prima facie proof that the company failed to meet the claim as stipulated under section 434 of the Companies Act. (Some of the members of the Group preferred the test of Non-Performing Assets i.e., failure to pay two demands consecutively as perthe guideline of the Reserve Bank of India, but most of the members of this Group preferred the test of trigger as laid down in section 433 (e) read with section 434)

4. The road map of the bankruptcy proceedings shall be as follows:

1. Application for initiating bankruptcy proceedings ;
2. Appointment of Trustee : empowerment of the trustee - like power of trustee to supersede the Board; operational and functional independence; accountability to the Court including the power of the court to remove trustee in case of mismanagement; relationship with current management; monitoring or substitution; day-to-day operation etc. -
3. Time bound restructuring/reorganization plan :

• Who should submit;
• Procedure of acceptance : 75% holding and 50% of the number present in the meeting;
• Mechanism to sell off;
• Pro-active initiative of the trustee.

4. Number of time bound attempts for restructuring :
5. Decision to go for insolvency and winding up; and
6. Strategies for realization and distribution.

II. Bankruptcy proceeding for Banks and financial institutions :

1. Bankruptcy proceedings against banks and financial institutions have a very special significance especially for two purposes. Firstly, it affects the domain of the monetary system and management and financial stability, and secondly, they come under the regulatory purview of the Central Bank to protect the integrity, efficiency and soundness of the institutions. The functions of the Central bank to act as the lender of the last resort has also to be kept in view, in respect of these institutions.
2. This special position was discussed in detail and it was also noted that in several developed countries there is a separate bankruptcy code for banks and financial institutions.
3. The separate and distinct responsibility of the Reserve Bank of India as the central bank was discussed in detail. Basically, the bankruptcy proceedings have to start in the case of the Banks and financial institutions only after the statutory moratorium period of six months followed by another six months if that is needed.
4. Protection of depositors' interest is one of the cardinal principles in the core of the commercial banking and hence must be highlighted during the process of the bankruptcy proceedings, as well. The protection of depositor's interest has to be ensured either through deposit insurance protection taken by the banks and financial institutions or by insurance taken by the depositors. It is suggested that deposit insurance premia must be risk-based, which shall give a market signal to the depositors about the credit quality of the banks and financial institutions.
5. After detailed deliberations the Group came to the conclusion that the same law and procedure and the same court system can conveniently handle the bankruptcy proceedings in the case of banks and financial institutions, as well excepting that the Trustee needs to be appointed in consultation with the RBI and form an approved panel prepared in consultation with the RBI. The Trustee shall be responsible of the upkeep of assets and preparation of final list of liabilities during the statuary and declarative moratorium. Besides, the restructuring plans submitted by any party or at the initiative of the Trustee are to be considered in consultation with the RBI. The court shall at all stages consult the RBI for smooth and effective bankruptcy operation.

III. Bankruptcy proceedings of PSU and Government Companies shall also be proceeded under the same procedure and authority mutatis mutandis

IV. This Group also recommends that while drafting the substantive and procedural rule of bankruptcy, international standards for both national and cross-border insolvency must be taken into consideration and based on Indian situation, the same can be suitably incorporated.

1. Introduction

For the sake of convenience, the Volume one of the Report of the Committee is divided into three parts. The first part deals with the constitution of the Advisory Committee on Bankruptcy, the terms of reference of the Committee, and the objects of and the methodology followed by the Committee and summary of the proceedings of the meetings. The second part deals with the work done by the Committee so far. The third part is an annexe that contains some research papers submitted by the members of the Committee. The first four Chapters of the Volume I of the Report of the Advisory Group are included in this Interim Report. The proceedings of all the three meetings of the Advisory Group have been summarised in this Report.

2. Constitution of an Advisory Committee on Bankruptcy:

The Governor of the Reserve Bank of India constituted a Standing Committee on International Financial Standards and Codes with the objectives of identifying and monitoring developments in global standards and codes pertaining to various segments of the financial system, considering all aspects of applicability of such standards and codes to the Indian financial system, chalking out the desirable road map for aligning Indian standards and practices in the light of evolving international practices, periodically reviewing the status and progress with regard to codes and practices, and making available this report to all concerned organisations in public and private sector (Office memorandum of the Governor, RBI dated December 8, 1999). The Standing Committee in its meeting held at New Delhi on January 13, 2000 decided to constitute non official Advisory Groups in ten major subject areas encompassing 43 different standards/codes in this regard one of the subject area identified is 'Bankruptcy Laws'. Accordingly and Advisory Group/Committee was constituted with effect from February 8, 2000 with the following members:

1. Dr. N. L. Mitra, (Chairman), Director, National Law School of India University, Bangalore;
2. Shri. Bimal Kumar Chatterjee, Senior Advocate, Bar-at-Law, Calcutta;
3. Shri. H. Banerjee, Official Liquidator, Government of India, Chennai;
4. Shri. Cyril Shroff, Solicitor, Mumbai;
5. Dr. T.C.A. Anant, Delhi School of Economics, Delhi;
6. Shri. S. Krishnaswamy, FCA, Former Chairman of the Institute of Chartered Accountants, Bangalore;
7. Dr. Shubhashis Gangopadhyay, Indian Statistical Institute, New Delhi;
8. Shri. K. Kanagasabapathy, (Convenor), Advisor in Charge, Monetary Policy Department, Reserve Bank of India; and
9. Dr. R. Kannan, (Convenor), Advisor, Department of Economic Analysis and policy are the convenors of the Advisory Group.

The committee in its first meeting, co-opted Shri. S. H. Bhojani, Deputy Managing Director, ICICI as its member. The committee also requested Shri. N.V. Deshpande, Principal Legal Advisor, Reserve Bank of India to be the special invitee and attend all meetings of the Advisory Group and enrich it with his active participation in the deliberations, which he kindly accepted. The Committee also invited Shri M. S. Verma, Chairman, Telecom Regulatory Authority of India, and Dr. R. H. Patil, National Stock Exchange to participate in its deliberations.

The terms of reference of the Advisory Committee are as follows:

1. To study present status of applicability and relevance and compliance of relevant standards and codes;
2. To review the feasibility of compliance and the time frame over which this could be achieved given the prevailing legal and institutional practices;
3. To compare the levels of adherence in India, vis-à-vis in industrialised and also emerging economies particularly to understand India's position and prioritise actions on some of the important codes and standards;
4. To advise a course of action for achieving the best practices appropriate to us ; and
5. To help sensitise the public opinion on the above matters through the reports.

The relevant codes stated in the first point include:

1. Convention on Insolvency Procedures (European Union, November 1995);
2. UNICTRAL Model Law on Cross Border Insolvency (United Nations Commission on International Trade Law (UNICTRAL), May 1997); and
3. Cross-Border Insolvency Concordat [International Bar Association's Insolvency and Creditors Rights Committee (Committee J)]

4. First meeting of the Committee at Bangalore:

The first meeting of the Committee was held during May 13-14, 2000 spread over two days in four sessions in which the meeting deliberated on the objective of the study, methodology to be followed and allotment of tasks amongst the members, if necessary.

(a) Initial remark of the Deputy Governor: The first meeting of the committee was addressed by Dr. Y.V. Reddy, Deputy Governor, Reserve Bank of India who brought out the background of setting up of the Standing Committee on International Financial Standards and Codes. He, in particular, mentioned the role of G-7 and G-20 meetings and commitments made at the national level to bring about adherence to international best practices and codes in different areas which would ultimately integrate the national system with the international body. He also pointed out that the financial stability forum has identified 43 different codes in which international best practices are proposed so as to bring a standard in the development of national system according to those codes. He emphasised the need for setting up of the expert group to enquire into the consequences of India’s both ongoing reform programme and the need for a consolidated law for bankruptcy to replace the existing laws. He opined that the bankruptcy laws could be studied under two heads: laws existing in India and cross border insolvency issues. The first meeting spread over two days, examined various objective goals and methodology of the study. Among the goals, the committee decided to deal with the whole issue, inter alia, with the following goals in view, viz., develop comprehensive corporate bankruptcy code; introduction of responsive financial restructuring system with establishment of professional corporate doctors; adoption of international accounting standards and transparency; installation of effective liquidation methods; maximisation of values in insolvency proceedings and development of cross- border insolvency in consonance with the UNCITRAL model law. In so far as the methodology is concerned, the Committee decided to resort to, presentation of papers on various aspects by expert members and others; comparative analysis of national, international and some of the developed countries’ law on the issue; critical analysis of case law, national and of other major countries; and case study on various problematic issues.

(b) Objective of the enquiry: Following the broad outline explained by the Deputy Governor, the Committee discussed at length regarding the objective to be achieved by the Committee. The Committee shall highlight the importance of having a whole-some bankruptcy policy of the country which shall be reflected into an efficient bankruptcy law and practice that would facilitate efficient servicing of the need of the corporations requiring timely intervention of restructuring and a very efficient exit system which maximises the protection of the interest of the creditors and the investors with quick liquidation procedure and well laid down game rule for dispensation of the claims. With that aim in view the Committee discussed the following bounds (a) Corporate bankruptcy to be emphasised by the Committee; (b) integrating bankruptcy law with insolvency situation and cross border insolvency; (c) need for following an international accounting standard for achieving transparency; and (d) an efficient liquidation method.

(c) Methodology to be followed: The methodology to be followed by the Committee was deliberated in detail because the Committee wanted to derive the benefit from the reports of the other committees on the issue. It was also discussed that the Committee is also to develop a basic jurisprudence on the system of bankruptcy so that policy issues can be thread-bare compared with the major bankruptcy system of the other countries and can be suitably critiqued and appropriately adapted to suit Indian condition. In their individual responses members reflected upon various issues pertaining to the existing framework amongst which the inadequacies of the present system with respect to the liquidation proceedings were highlighted. An integrated approach that would take into consideration both national and international issues on insolvency in the lines of the UNCITRAL model was suggested. The idea of introducing a professional service as corporate doctors to emerge to deal with various deficiency symptoms and promptly suggesting financial and managerial restructuring necessary for the interest of the corporation. The Committee at this stage looked into various provisions of the Sick Companies (Special Provisions) Act and found the present top-down model of BIFR-focus treatment is absolutely unsuitable for protecting the interest of the investment. Such a top-down bureaucratic model with the present ‘late-treatment syndrome’ only helps unscrupulous promoters. The methodology of the deliberations to be followed was designed as follows: (a) A banking and investment industry based analytical paper is to be prepared by Mr. S.H.Bhojani, Mr. H Banerjee and Mr. N.V.Deshpande following the long tradition of case study method that sensitises the members for formulating and evaluating the basic principles involved; (b) Preparing various comparative analysis of law and practice in major economies and also international standards prescribed by various bodies. Dr.T.C.A.Anant, Professor S.Gangopadhyay, Mr. K Krisnaswamy and Bimal Chatterjee were requested to prepare papers on various issue based concepts. The Chairman was given the power to request experts from outside to either make presentation or submit papers; (c) national seminar/workshop may be organised by the committee in order to generate information about the best practices to be followed in the industry; and (d) publication of occasional papers in print media as also in the Reserve Bank of India web site so that a critique can be obtained from the wider section of the interested people.

(d) Strategy: The committee decided upon formulating a national policy on bankruptcy and draft a comprehensive and illustrative legislation. In view of the fact that another Committee is also looking to the drafting of the law on bankruptcy it would be strategically necessary that certain interim suggestions recommending specific amendments to the provisions of existing bankruptcy laws, which are most urgent and necessary, be made. As such, the meeting discussed about some of the immediate issues in which immediate amendment is needed in related laws. The meeting authorised Mr. Bhojani to place in the next meeting such suggestions so that immediate action can be taken on these suggestions. However, the Committee discussed the following issues for immediate intervention:

1. Most of the delays in settling the claims of the stakeholders can be avoided, if during the winding up proceeding, the company courts perform in the dual role of a civil and company court.
2. It was also proposed that instead of liquidators handling the claims of stakeholders, reputed firms of chartered accountants/auditors can be appointed to decide on and compute the claims of all the stakeholders in a time bound scheme whereas the liquidator may represent the interest of the state and the labour. The firm should submit the final statement to the court and the stakeholders would be permitted to contest only on principal amount and not on computation.
3. The role of the official liquidator who is at present ill-equipped to settle the claims and to judge the restructuring, if any, should be restricted only for the purpose of realising the assets and distributing the same.
4. It was agreed that there should be definite cut-off date for any labour claim. The interest on the claim should also be specified and all the items admissible on different heads of labour law should be brought out on the balance sheet. The claim of the labour should be quantified on that specified cut-off date.
5. The group also discussed and agreed upon the need for inducing more professional inputs to the process of valuation of company's assets specifically in the context of the secured creditor going for the sale of his securities, outside the winding up.

The need for bringing commercial norms, in particular, in public auction, which are ‘incentive compatible’ has been discussed and it was felt that the same be followed in the sale of the assets of the company. With regard to exit policy, the group opined that there must be a well-balanced approach in India towards exit policy. Empowering the official liquidator with more powers was also considered, wherein he would be able to call the stakeholders meeting and to proceed according to the resolution passed in such meetings subject only to the final submission of report to the court. Then, within a very short span of time, say six months, the liquidator would be able to complete the liquidation process. The group discussed exit policy under two heads: the voluntary dimension and the compulsory dimension. Emphasis was also made on the view that the policy should build up confidence and on the basis of voting rules according to stakes. Exit policy, in conclusion, was held to include reconstruction wherever it is possible and quick exit if reconstruction is not possible. The group in general felt that the exit policy should not become an avenue for dishonest persons for siphoning of the money and escaping with the booty.

The second meeting held during August 12-13,2000 first took up matters of immediate importance so that suggestions on those issues could be communicated to the Ministry of Law immediately. As per the decision of the earlier meeting Mr. S.H.Bhojani submitted two papers, one on the rights of stakeholders in winding up proceedings and another on comparison on bankruptcy laws on various countries. Both these papers highlight immediate issues to be considered while considering the New Bill on Companies Act. The Committee considered those papers which are also given in the annexe, and recommended the following to be forwarded to the Ministry of Law and also to the Ministry of Finance immediately :

The meeting also observed that the Chairman may send the suggestions already discussed in the first of the Committee along with the above immediate suggestion to the Ministry of Law. A special reference can also be made of the following points:

1. Section 23 (3) of the SICA should be made inapplicable. One objection raised against this was that the removal of it may not help in preventing the illegal sale of assets. This was countered by arguing that the problems involved in bringing injunction and registration under liquidation mainly because of section 22(3). Finally it was agreed that the section 22(3) of the Act be suspended till SICA is repealed;
2. Section 446 of the Companies Act relating to leave of the court should be made inapplicable. On this point there was an objection on the ground that section 446 is not mandatory one and it is in the nature of permission. Hence, it need not be removed;
3. A provision had to be made in the interim report for restructuring. The objection as to whether the restructuring envisaged in the interim report would lead to the formation of another BIFR was countered by providing for a system of referee in the interim period to deal with liquidation;
4. A professional body of liquidators shall be appointed for the expeditious disposal of winding up cases.

All Papers prepared by the members were then presented and critically discussed. The following issues suggested in the papers were taken up:

1. A separate Bankruptcy Code was suggested for all corporations which has also to include the option and procedure of restructuring in line with the Chapter XI proceedings of the US Code. There may be a need for a separate bankruptcy system for the banking and financial institutions because of the special situations to be faced in such occasion. The Code must have three degree tests and consequential procedure at each step, namely, anticipatory liquidity test, liquidity test and asset test. Based upon the test the procedure and the custody issues are required to be determined. The other alternative tests are ‘going concern’ and ‘non-going concern’ tests. There must be clear indicators for each of these tests. Some members felt that NPA being the burning problem, therefore, bankruptcy should attend to the insolvency issues of corporate debt and an exit policy and there should be an objective liquidity test like asset transformation into NPA on two consecutive defaults. For that reason there must be a requirement of disclosure of quality information. It was also felt necessary to inter-weave all connected laws in the comprehensive Code. The Committee also agreed that the bankruptcy should be viewed in a comprehensive manner and the Committee should recommend repeal of SICA and winding up BIFR and merge into a Comprehensive System.
2. In order to design an efficient Bankruptcy Code the problem of asymmetric information was considered to be addressed by efficient pooling of information and sharing of the same among all stakeholders. Based on the efficiency rule, information must be available to achieve both ex-ante and ex-post efficiency because both were important for the system to provide incentives for restructuring and maximising the value of assets for distribution respectively. It was also argued at this stage that transparent and definite information about labour dues must be made available on the basis of a stipulated definite date.
3. It is necessary to have a separate Bankruptcy Court in each High Court to be presided over by a Judge sufficiently having prior knowledge in the financial sector management. It was discussed at this point that the procedure should not merely be a judicial process but must have the advantage of adversarial system with professionalism.
4. There was a debate between the debtor-friendly and creditor-friendly system. Some members cautioned that due to imperfect market in India, the country must have creditor friendly bankruptcy code in view of the importance of the credit system of India specially at the present context. But it was also argued that a better harmony would be needed in the substantive and procedural prescriptions.
5. The role of criminal elements like frauds and consequential demand for the substitution of management of debtor companies by creditors, were also an issue to be covered in the code. It was agreed that the compensation and punishment should act as deterrents specially referring to deliberate acts. Fraudulent preference has to be covered effectively in the act though financial fraud is an offence beyond the parameter of bankruptcy code.

The Committee decided to prepare a detailed road map on the basis of which the comprehensive code would be drafted. A going concern may first start with a financial problem, which a corporate doctor is quite competent to diagnose. Financial Institutions may be required to act as the certified corporate doctors. Once a corporation faces any financial problem the promoters/management may take the help of the corporate doctor. The incentive for going to corporate doctor at an early stage must be empowering, whereas the punishment for not going to the corporate doctor must be deterrent. At such a stage the restructuring is done with the debtor in the helm of affairs. But once the NPA stage is reached the debtor may not be kept at the control to try for restructuring of the corporation. Finally, as soon as it is apparent that the assets are unable to meet the liability, there must be a fast track of winding up with professional application to maximise the return on selling the assets and maximise the satisfaction of the creditors. An appropriate strict and efficient legal regime has to facilitate the whole process.

6. Third meeting held at Mumbai

The third meeting held on 1^st and 2^nd of December, 2000 at Mumbai deliberated upon the Volume I of the Report of the Advisory Group. Upon a suggestion from a member of the Group in the portion dealing with terminological confusion, in page 14, of the present Status Report the Committee decided to incorporate the conceptual confusion regarding the objective of Bankruptcy. The economic objectives that make Bankruptcy Law distinct, are ‘value maximisation’, ‘facility for renegotiations for restructuring’, and ‘fast track liquidation keeping in view the objective of value maximisation’. It was agreed that these economic objectives would be specially mentioned in the long explanatory title or preamble to the Bankruptcy Code.

While discussing the paper on 'issues in bankruptcy in India', the Group indicated that the value maximisation approach has to be carefully specified keeping in view the 'shareholders’ value maximisation' principle highlighted by Corporate law. Bankruptcy law has to emphasize asset maximisation and maximisation of asset realisation for the interest of the entire society.

The meeting observed that though the establishment of a profession of Corporate Doctor to properly and timely diagnose the corporate ailment is very important but the issue is related to Corporate Governance for which there is another Advisory Group to look into, this Group should not take up this item. However a note on the issue may be referred to the appropriate Group.

The Group had the opportunity and privilege to critically study the Report on Law relating to Insolvency and Winding up of Companies submitted by Justice Eradi Committee. The Group also noted that the Union Government was proposing amendments to Companies Act to legislate on some of the recommendations of the Committee. In that context the Group decided to submit an interim report immediately so that the Government could also be aware that this Group is working on the bankruptcy issue which would have implication on some of the recommendation of the Justice Eradi Committee. Mr. Deshpande was of the view that the first four chapters of the First volume of the Report of the Group along with the immediate recommendations may form part of the Interim Report of the Group. The Group accepted this suggestion. Accordingly it was decided that the first four chapters of the Volume I of the Report with the recommendation finalised so far be incorporated in the Interim recommendation.

The meeting devoted considerable period of time to determine the trigger point for application of procedure of bankruptcy. After thorough discussions the following two were short-listed for trigger situation:

1. Inability to pay debts as stipulated in Section 434 read with Sec.433(e) of the Companies Act; and
2. committing two consecutive defaults in payment as stipulated by the RBI for measuring a Non Performing Asset.

Most of the members were in favour of the principle laid down in Section 434 of the Companies Act.

The Group made a particular reference to para 6.17 of Justice Eradi Committee Report relating to the requirement of recognising the prescribed criteria by IMF for the bankruptcy regime, viz., allocation of risks in a predictable manner and value maximisation. The Group also referred to the recommendations of the Committee in para 7.1 pertaining to the necessity of viewing the whole issue of bankruptcy in the context of Part VII of the Companies Act, relevant provisions of Sick Industrial (Reconstruction) Companies Act (SICA) and the Debt Recovery Tribunal Act (DRT) Act. The Group endorsed the view and proposes that the same be done with a comprehensive Bankruptcy Code.

The meeting proposed some basic principles for determining the forum for the bankruptcy. These are, (1) the proposed forum must be within the framework of the Constitution of India so that no constitutional amendment is required; (2) there shall be a single forum so as to avoid forum shopping and delaying the procedure; (3) the system must be based on more professionalism not necessarily insisting on the multi-disciplinary tribunal; and (4) the system is to be based on voluntarily seeking restructuring and renegotiations.

The Group preferred to have a whole time designated bench in each High Court to operate in a state as the Corporate Bankruptcy Court in a state in the entire bankruptcy proceedings including the stages of renegotiations and restructuring. Involvement of the High Court at each stage shall also strengthen the entire system of renegotiations, restructuring and in the event of need a fast track winding up on account of insolvency. The Group is of opinion that 15 days would be enough to allow the petition for bankruptcy in case the management submits the petition and in the event a creditor/s file the petition 45 days would be enough to scrutinise and allow the petition by the designated Bench of the High Court. The Group is of opinion that the bankruptcy proceedings can have a time frame at each stage.

The debate was on the necessity to have an administrator or trustees to deal with bankruptcy proceedings. In that connection the Group proposed to have the institution of professional trustees who can be appointed by the court to carry through the entire responsibility either directly or through its officials. The Group strongly felt that instead of an Administrator or a liquidator, the asset realisation and maximisation should be left to some professional bodies. Those professional bodies can assume the character of a Trustee. The Group also felt that the powers and functions of the trustee should be well defined by the bankruptcy court itself. When the management of the company approaches the bankruptcy court for preventing the creditors’ action, as a rule, the trustee should be appointed immediately to take charge of the assets and properties of the company and its day to day operation. Dr. Anant felt that the trustee can retain the management at his choice or change the chief executive alone but retaining the Board of Directors or may replace the whole Board with the permission of the Court. If the creditors move the court for the bankruptcy proceedings, the Trustee be appointed as soon as the petition is allowed by the court. A petition wrongly made without any substance in the trigger action is an offence in many states including in US. There is no reason why such an intentional petition made with an objective of harassing the debtor should not be treated as an offence. The meeting suggested such a wrongful act to be treated as an offence.

It was also suggested that there should be time frame as the guideline for conducting the bankruptcy proceedings efficiently to maximise the value of assets. Such a time frame can be used only as a guideline and the court may amend the guideline on case to case basis. The suggested time frame is as follows :

1. In the initiation of the bankruptcy proceedings by the debtor the court shall appoint the Trustee immediately.
2. In the case of creditors moving the petition the court shall decide the Admissibility of the petition on a prima facie evidence of the existence of trigger situation within 45 days.
3. Once the petition is admitted , the court shall appoint the Trustee within 15 days thereafter.
4. If the petition is rejected the court shall decide on the proceeding against the petitioner for the offence committed for intentionally harassing the debtor within 15 days.
5. It shall be the immediate duty of the trustee to take all assets and properties of the company and make a final assessment about the assets and liabilities of the company. The statement of realisable asset and liabilities to be paid is to be submitted before the court within a month after taking the charge of the company.
6. The trustee has to check the option of restructuring on voluntary basis. The debtor, or creditors or any third party may submit the scheme for restructuring or even the trustee himself prepare a scheme and seek support. Such scheme may be submitted within 90 days. The trustee can decide on the scheme and seek approval of the court. The scheme for restructuring be called by way of public notice.
7. If no scheme materialises with in 90 days or such extended time by the court regard being had to the nature of the case, the trustee should take steps within 90 days thereafter for winding up of the company either by sale of the entire company or partly or on the basis of itemized assets and distribute the proceeds to the claimants on the basis of the priority of the claims, piecemeal.
8. The liquidation proceedings should be completed at the earliest by the trustee.

In the second day’s meeting for familiarizing the special invitees, the Chairman explained the previous day’s deliberations and stated that the Group is unanimous in its decision to recommend for a comprehensive and separate Bankruptcy Code to deal with the issues connected with bankruptcy in the corporate sector instead of tinkering with Company Law provisions for winding up. Both restructuring and liquidation are part of the comprehensive bankruptcy code.

Reacting to the discussions, Shri Verma explained the process followed in Korea, which has got a strong element of voluntary restructuring outside the legal framework, and posed the question why the Group has recommended for bringing both the voluntary and legal process within the same legal framework. Dr. Mitra appreciated Mr. Verma's suggestion but, however, observed that though the restructuring is essentially a contractual process, yet it contains an element of legal process also. Dr. Anand pointed out that it is not the court but the trustee who is having expertise in the field, will be leading the restructuring.

The group also felt that the norms of accreditation should also be spelt out and the Registrars of the concerned High Court can keep the list of registered bodies empowered to act as Trustees. The Trustee can be any body corporate or even a firm of professionals like Chartered Accountants. As regards the empowerment of the Trustees the group felt that he should not approach the Court for each and every occasion and he should be given a free hand to proceed with the restructuring if 75% of the stakeholders and simple majority of the members present in the voting are according sanction to the scheme. In that case Trustee should give adequate notice to the parties interested about the meeting. There should also be a provision in the code that any contest on the notice should be registered in the same Court within a fortnight.

The group also felt any challenge to the Trustee’s decision through Court of Law will jeoparadise the functioning of the Trustee. Therefore, there should be only limited grounds for appeal and that should be specified in the code itself. The Trustee should have the powers to appoint financial advisors/managers/assessors/liquidators/auctioneers for his assistance and the payment may be met out of his remuneration.

The group discussed upon the paper presented by Shri Deshpande on bankruptcy laws as applicable to banks. In his paper Shri Deshpande advocated for a separate chapter or even an act in dealing with the bankruptcy of banks. To avoid the depletion of funds in the case of banks, moratorium should be imposed at the first instance. Since DICGC is the body corporate for protecting the interest of the depositors, he felt that DICGC can be appointed as liquidator or trustee. However, the group felt that for banks and financial institutions, bankruptcy related chapter can be included in the bankruptcy code itself giving a separate treatment. They also felt instead of DICGC any other bank or even NBFC which is not having contrary interest can be appointed as Trustee to the bankruptcy proceedings of banks. The group also felt the DICGC premium should be properly priced. The group was of the view that the power of moratorium should be vested with the regulator.

Before the concluding the meeting the group discussed about cross border issues relating to insolvency. The Chairman requested the members to forward their comments as regards the principles/articles contained in J. Committee Report and Unicitral Modal Law with a view to decide its adaptability in the Indian Legal System. The group felt that these principles/articles can be incorporated in our system only after making a conscious choice.

India does not have a comprehensive policy or law on bankruptcy. Individuals are declared insolvent in the event of individuals’ inability to meet his/her total liability. A Corporation may be wound up if it becomes incompetent to pay for its debt. Even in the case of individuals there are two Insolvency Acts, one for the presidency towns and other for the rest of the country, the former is The presidency-Towns Insolvency Act, 1909 and the later is The Provincial Insolvency Act, 1920. As a matter of fact, the first Indian Insolvency Act was promulgated in 1848. It was formulated in the same line as of the contemporary British Act. Thereafter, there were several attempt to amend or replace the Act but nothing did happen before the Provincial Act was passed in 1907 followed by the Presidency-Town Act passed in 1909. The 1907 Act was replaced in 1920. Provisions of both the statutes are similar. Of course, the Presidency-Towns Act contains provision for official assignee, procedure of the court in details and limitation provisions. Both these statutes exclude corporations from insolvency proceedings to be conducted under these statutes (Sec.8 of the Provincial Act and Sec.107 of the Presidency-Towns Act). Bankruptcy and Insolvency is specified in the entry 9 of the List III – Concurrent List of the Seventh Schedule (under Article 246) of the Constitution of India. Both the statutes were amended over a dozen times by Union and State legislatures. Some of the common features of these statutes are, prescription for acts of insolvency (Sec.9 of the 1909 Act, Sec.6 of 1920 Act); petition procedure and adjudication (Sec.10 –29; Sec 90-100 of 1909 Act; Sec 7 – 34 of 1920 Act); administration of properties (Sec 46-76 of 1909 Act; Sec.45-67 of 1920 Act) and discharge of the insolvent (Sec.38-45 of 1909 Act, Sec.41-44 of 1920 Act). Both the statutes prescribed certain offences and attached criminal liability for some acts of the debtor. Offences are: undischarged insolvent obtaining credit, criminal liability after discharge or composition. An insolvent has several disqualifications as well. These provisions are almost identical.

There is a deep- rooted confusion in the meaning and content of several terms used, in this context, sometimes interchangeably. These terms are: bankruptcy, insolvency, liquidation, dissolution. During pre-independent period India never used the word, ‘bankruptcy’ in its legal system. Insolvency was used for denoting an individual or a firm not able to meet the liability. In the case of a company, the system included winding up and dissolution. Bankruptcy and insolvency, both these words are used in the Constitution of India. But there was no statute or regulation legislated upon bankruptcy. If bankruptcy denotes a condition of inability to meet a demand of a creditor, bankruptcy is dependent upon the cash test. If the liquidity position is bad, so much so, that the debtor is unable to meet the call of a creditor, the debtor is said to be bankrupt. That the asset value is sufficient to meet the liability ultimately, is no reasoning to argue against bankruptcy. On the other hand, insolvency is a condition when a person is apparently, unable to meet entirely the liability from the realisation of entire asset. This is therefore, is known as asset test. Presently in the law and practice, there is no such difference in the use of these words. The Article of Dr.N.L.Mitra reproduced in the annex explains clearly such terminological confusions and explained the situation. A wholesome bankruptcy policy and the road-map shall certainly include both the situation and the tests mentioned above. The difference between the two situation is that there is a possibility of reconstitution or restructuring between the two situation and the resultant two tests. The Committee has recognised the confusion prevailing on the economic objectives of Bankruptcy system requires clarity. The economic objective that make bankruptcy law distinct, or 'value maximisation', 'facility for renegotiations for restructuring', and 'fast track liquidation keeping in view of the economic objective of value maximisation'

There is no policy on the corporate bankruptcy system in India. Restructuring is a genuine treatment of corporate financial ailment. The following are the legal provision for corporate restructuring and the manner in which the same is to be made presently:

(a) Reduction of share capital: The need for capital reduction may arise due to many reasons, such as, accumulation of trading losses; incurring heavy capital expenses and assets of reduced or doubtful value, now commonly understood as Non Performing Assets. As a result , the original capital may either have become lost or a company may find that it has more resources than it can profitably employ. In either case a corporate doctor shall advise capital reduction with a view to adjust the relation between capital and assets of the corporation [In re. Indian National Press (Indore) Ltd. (1989) 66 Com.Cases 387, at 392(MP)]. The Supreme Court of India summed up the procedure for such reduction as prescribed in Section 100 –104 of the Companies Act in Punjab Distilleries India Ltd. V. CIT [(1965) 35 Com.Cases 541 at 544 as follows:

1. there is power given in the articles to reduce the capital;

1. there will be a special resolution by the general body of a company for reduction of capital in the manner envisaged in the scheme for reduction;
2. the company will file an application in the court for an order confirming the reduction of the capital;
3. creditors are to be notified about the proposal for reduction and filing of the petition to the court for confirmation and settlement of list of objecting creditors;
4. after the confirmation of the court to the proposal for reduction , it will be registered by the Registrar of the Companies;
5. the Registrar shall certify the substitution of the corresponding part of the memorandum of association; and
6. implementing the scheme of the reduction.

This type of financial restructuring may be difficult because the Court may give an order to include the word 'and reduced' with the name of the company and to continue to provide a standing notice to the public for reducing the capital of the company for the time stipulated in the order through the inclusion of the word as a part of the name.

(b) Compromise or arrangement with the creditors : A company may make a compromise or an arrangement with the creditors under Sec. 391 of the Companies Act. The arrangement contemplated by the section includes a reorganisation of the share capital of the company. The arrangement under that section is very wide and can take a company out of winding up[In re.Vasant Investment Corporation Ltd. (1982) 52 Com.Cases,139(Bom.)]. The pendency of a winding up petition or even passing of a winding up order does not prevent the court from considering any proper scheme for rescuing the company[In re. Calicut Bank Ltd. (1938) 8 Com.Cases 313(Mad.) or a scheme being considered by the creditors independently in usual course [In re. Bengal National Textile Mills Ltd.(1986) 59 Com Cases 956(Cal)]. The procedure for such compromise or arrangement is as follows:

1. an application is to be made by the company, or any creditor or any member of the company to the court for an order to be made by the court for holding a meeting;
2. If a majority in number of three-fourths in value of the creditors or members, as the case may be , present and voting in person or by proxy agree to any compromise or arrangement, the scheme shall be binding;
3. if sanctioned by the court.;
4. a certified copy of the order of the court is to be filed with the Registrar.

Where a High Court makes an order, it shall have the power to supervise the carrying out of the compromise or arrangement. Section 394 provides for facilitating reconstruction and amalgamation of companies.

(c) Restructuring under the Sick Industrial Companies(Special Provisions)Act :

A quasi-judicial body is established to secure timely detection of sick and potentially sick industrial companies, the speedy determination by a board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies. This shows that the Act was passed to provide an alternative to companies contemplating winding up, by providing for a preventive mechanism to check the deterioration which might have set it either due to lack of funds, labour problems or some technical problems. The provision under this special Act is only meant for industrial undertakings and not for any other companies. The procedure of restructuring is as follows:

Finally, a company goes into winding up for financial reasons through several modes. Section 433 specifies the grounds on which a company may be wound up by the court. Clause (e) of the section specifies one such ground namely, when the company is unable to pay its debts. Inability to pay debts is the most common ground for winding up of a company. The meaning of the term 'debt' has been so elaborated by Lindley L.J., "a debt is a sum of money which is now payable or will become payable in the future by reason of present obligation". In another case it was held, "in order to bring the case within the purview of clause (e) the court must be satisfied in the first instance that, there are in fact debts in the sense that there is a liability of the company in presenti". The Court also rejected as too broad a submission the contention that liabilities which may crystallise in future would also be relevant for the purpose of determining whether the company is unable to pay its debts.

The word debt cannot be extended to include unliquidated damages or an unidentified sum incapable of ascertainment immediately, It must be a definite and ascertained sum. A Company is deemed unable to pay a debt if the company is unable to pay the debt exceeding rupees five hundred after expiry of 3 weeks from the date of issuing of the notice claiming the payment by the creditor. Section 434 deals with the position when a company shall be deemed to be unable to pay its debts. The section deals with the following provisions:

(a) Statutory Notice

Firstly, if a creditor to whom the Company owes a sum exceeding Rs. 500 then due, has served on the company a notice demanding payment, and the company neglects to pay or otherwise satisfy him then, such a creditor can approach the court for an order of winding up. The debt must be really due and presently payable. If there is a bona fide and reasonable dispute as to a substantial part of the debt on which the petition is based, winding up will be refused, because, "when a debtor company believes even wrongly that it justified in law to refuse payment, such a refusal cannot be regarded as neglect to pay". Where a petition to wind up a company is to bring pressure upon the company in order to make it pay the petitioner cheaply and expeditiously, when the company desires to dispute the debt in the civil court, the petition is an abuse of the process of the court and is liable to be dismissed.

The effect of a notice under section 434 is to raise a presumption under the statute as to the inability of the company to pay the debt and its consequent insolvency, rendering the company liable to the extreme penalty of losing its existence by being compulsorily wound up by the court. The statutory notice, therefore, is always construed strictly and it must comply with all the requirements of the statute in totality. Here it may be noted that the power of the court to order winding up is discretionary even after the requirements of the notice are complied with. In this connection the following observation of the Supreme Court sums up the law succinctly: ' The wishes of the creditor will be tested on the ground whether the case of the persons opposing the winding up is reasonable. Secondly, whether there are matters which should be inquired into and investigated if a winding up order is made. It is also well settled that a winding up order is not made on a creditor’s petition if it would not benefit him or the company’s creditors generally'.

(b) Decreed debt

A company is deemed as being unable to pay its debts if execution or other process issued on a decree or order of any court in favour of a creditor is returned unsatisfied in whole or in part. This is also a ground on which a creditor can file a petition for winding up. It may be noted here that a creditor may not choose to proceed under this provision and may instead serve a statutory demand under section 434(1)(a).

(c) Commercial insolvency

If it is proved to the court that the company is unable to pay its debts, an order for the winding up of a company may be made. It has been held that for obtaining an order for winding up on this ground it should be shown that the company is, "plainly and commercially insolvent, that is to say that its assets and existing liabilities are much as to make the court fully satisfied that the existing and probable assets would be insufficient to meet the existing liabilities"

Here it may be noted that what has to be ascertained is not whether the assets of the company if converted into cash would be sufficient to meet its liabilities, but whether the company is insolvent in a commercial sense, i.e., a perusal of the balance sheet of the company must show that its assets are not sufficient to meet its liabilities. This however is not a rigid formula and the court may refuse to hold the company insolvent on other considerations including that of public interest. Thus we can see that section 434 splits the concept of inability to pay debts under three sub-headings. This however, does not mean that these clauses are mutually exclusive. It was held in a case that even if a creditor has obtained a decree, he can claim winding up under any of the other grounds and need not confine himself to the category of decree holders only.

Other modes of winding up - There are other modes of winding up which are voluntary and subject to the supervision of the court. Voluntary winding up of a company may be made as under:

1. member's voluntary winding up; and
2. creditors’ voluntary winding up.

(1) Members' voluntary winding up - A company may go for voluntary winding up by passing a special resolution, submitting a statement of solvency and appointing one or more liquidators for such purpose. The liquidator shall forthwith summon a meeting and prepare a statement of assets and liabilities of the company in order to proceed with the task of winding up proceedings.

(2) Creditors' voluntary winding up – If the members of the company resolving to go for voluntary winding up can not submit a certificate of solvency the voluntary winding up procedure is regulated by the creditors with the help of a liquidator or liquidators appointed by the creditors. Both Members' voluntary winding up and creditors’ voluntary winding up are cost and time efficient modes of liquidation.

Striking the name off the register - Apart from the aforesaid procedures of exit, there is another easy way of exit according to the provisions of section 560 of the Companies Act, which provides for striking the name of the company off the register. This section provides that where the Register of Companies has reasonable cause to believe that a company is not carrying on business or in operation, he shall send to the company by post a letter inquiring whether the company is carrying on business or in operation. This letter should be followed by a reminder and if no answer is received the Registrar shall publish a Notice in the Official Gazette with a view to striking the name of the company off the Register. If the Registrar either receives answer from the company to the effect that the company is not carrying on business or in operation or does not within one month after sending the second letter receive any answer, he may publish in the Official Gazette and send to the company by a Registered Post a notice that on the expiration of three months from the date of that notice the name of the company mentioned therein will be struck off the register and the company will be dissolved unless a cause is shown to the contrary.

Further if in any case where a company is being wound up, the Registrar has reasonable cause to believe either that no liquidator is acting or that the affairs of the company have been completely wound up and any returns required to be made by the liquidator have not been made for a period of six consecutive months, the Registrar shall publish in the Official Gazette and send to the company or the liquidator, if any, a like notice as is provided in sub-section (3) of section 560.

At the expiry of the time mentioned in the notice referred to in sub-section (3) or (4) of section 560 the Registrar may, unless cause to the contrary is previously shown by the company, strike its name off the register, and shall publish notice thereof in the Official Gazette and on the publication in the Official Gazette of such notice the company shall stand dissolved.

Winding up by the court - According to section 439 a petition has to be filed for the purposes of winding up by the court. The persons who may file such a petition are the following: (a) the Company; (b) Creditors; (c) Contributories; (d) Registrar and (e) the Central Government. In so far as the first three are concerned the section also says that a petition may be presented by all or any of them, meaning thereby that it is not necessary that petition under section 439 must always be presented by only 'one' of them. All or any of them together may present a joint petition on the prescribed grounds.

Conduct of winding up proceedings - Every winding up, whether it be by the Court or a voluntary winding up, is conducted in accordance with set rules and pattern. One of the first acts undertaken in a winding up is the appointment of a Liquidator, who takes under his charge all of the Company's assets and manages the affairs of the Company in a manner which would prove to be the most beneficial to the interests of the creditors, shareholders and the Company itself. Since a Liquidator is required to take into his charge the assets of the Company, he has the right to apply to the Court for recovery of any property of the Company in possession of other person. One of the most important assets of the Company is the 'uncalled capital' of the Company, because as Section 36(2) specifies, "all money payable by any member to the Company ... shall be a debt due from him to the Company". If some amount remains unpaid on the shares of a member, the Liquidator has the power to make a call on those shares. For this purpose, a Liquidator has to draw up a "list of contributories". A contributory is defined under Section 428 as ' a person liable to contribute to the assets of a Company in the event of winding up and includes the holders of any shares which are fully paid up'. Of these contributories, the Liquidator has to make two lists: List A of the present members and List B of the past members.

Liability of Contributors under List A: List A is drawn up on the basis of the names appearing in the "Register of Members", at the time of commencement of the winding up proceedings. . If a person knowingly allows his name to appear on the register, he is later estopped from denying his liability as a member, i.e., he cannot be permitted to plead that though his name appears on the register he is not in reality a member. Such is the case because, a member’s liability during winding up does not arise ex contracta ( from a contract) but is ex siege ( by virtue of his name appearing on the register). The situation, however, would not be the same if there is a total absence of an element of contract, for example, if shares are allotted to a person without his applying for them. In such situations, the Liquidator cannot place his name on the list of contributories.

Here it is important to note that although a member may owe the Company some money on the face value of his shares, he cannot be forced to pay anything until and unless there is a Court order to that effect and the Liquidator serves a call notice on the member in accordance with the order. Such an order will be passed by the Court only if it is assured that the financial situation of the Company is so bad that unless such a call is made, the liabilities of the Company cannot be discharged [Section 470(1)]. The Liquidator, however, can make a call on the shares without sanction of the court in case the winding up is voluntary.

Once a valid call is made by the Liquidator, the contributories’ liability becomes a statutory debt, i.e., a new liability to pay the unpaid balance commences. In one case, it was observed thus: "It is settled in a long course of decisions that the members of a Company in liquidation are liable in respect of unpaid calls even though the calls were made by the Company before it went into liquidation and the suit of the Company for its realisation had become barred by time. The principle of these decisions is that Section 429 creates a new liability on the shareholders in respect of such calls, which is distinct from and independent of the rights which the Company had against them before the winding up."

Certain other points to be noted in regard with liability of present members:

Liability of Past Members: Under certain specified circumstances even the past members may be held liable as contributories, in accordance with the qualifications and conditions laid down in Section 426 which are the following:

Unlimited Liability of some Officers: This has been dealt with by section 427. Here it is interesting to note the provisions of section 322 which lays down that even in the case of a limited company the directors or managers are to have an unlimited liability if a specific provision to this effect is present in the Memorandum. Such members are not only liable as an ordinary shareholder in winding up proceedings, but are also required to make additional contribution as if they are members of an unlimited Company. The unlimited liability attaches to both present and past officers but in case of past officers qualifications under Section 426 apply.

Payment of Liabilities by Liquidator: Once the Liquidator makes a call, collects the unpaid call money, converts the assets into cash, determines the value of total available assets and the extent of the Company's debts, his primary duty then becomes the paying off of the liabilities of the Company. Any person having a claim against the Company has the right to claim it from the Liquidator. A secured creditor need not go through the usual channels for claiming his debt since he has the right to realise his security in settlement of his claim, but he is required to compensate the Liquidator for expenses incurred by him in preserving the security from being realised by other creditors. But he has been given an option of relinquishing his security and proving his claim like the other unsecured creditors. Previously, under this scheme, a secured creditor could override the claims of all other creditors, including the legitimate claims of the workmen. But since the Amendment Act of 1985, which amended Section 529, workers' claims are now equated with those of the secured creditors, by providing that the security of every creditor shall be subject to a pari passu charge in favour of the workmen, i.e., whenever a secured creditor wants to enforce his security, the Liquidator shall have the power to represent the workmen in order to enforce the presumed charge in their favour. The amendment Act further added section 529-A providing for payment of the workmen's dues in priority of all other dues, and if the available assets are not sufficient to pay off all the liabilities in full, the payment shall abate in equal proportion. Section 530 which provides for 'preferential payments' has also been made subordinate to the provisions of Section 529-A. Once the Liquidator settles the list of claimants, i.e., persons to whom the Company owes money, he or she is required to start making payments to them out of the available assets in hand.

Preferential Payments: Section 530 of the Companies Act specifies certain payments which have to made on a priority basis. This is a very important provision for the purposes of the present discussion as it brings out the pro-creditor and pro-dispensation bias of the Indian law. The payments to be made first are called 'preferential payments'. They have to be paid in priority to all other debts. These are :

After retaining sums necessary for meeting the costs and expenses of winding up, the above debts have to be discharged forthwith to the extent assets are sufficient to meet them. Where the Liquidator carries on business for beneficial winding up, the taxes that become due on the profits are expenses of winding up. The fee payable to a chartered accountant for preparing the statement of affairs is also an expense of winding up. The preferential claims rank equally among themselves and have to be paid in full. But when the assets are Insufficient to meet them, they shall abate in equal proportion. By virtue of the provision in Section 178 of the Income Tax Act, 1961, Income Tax authorities have been claiming preference over other preferential payments. But the Courts have always held that there is nothing in the Income Tax Law which interferes with or abrogates the provisions for priority of debts laid down in Section 530(1)(a) of the Companies Act.

If a Company is being wound up on grounds of insolvency section 529 becomes applicable providing for application of insolvency laws to the payment of debts of the insolvent Company. Section 46 of the Provincial Insolvency Act, 1920 provides that if there have been mutual dealings between the debtor and the insolvent (creditor), only that amount which remains after giving a set-off can be recovered from the debtor. This right of set-off is also available to insolvent companies regardless of the provisions of See. 530. This apparent conflict between Sections 529 and 530 was attempted to be resolved by the Supreme Court which held:

'It is true that section 530 provides for preferential payments, but the provision cannot in any way detract from full effect being given to section 529 and in fact the only way in which these two sections can be reconciled is by reading them together so as to provide that whenever any creditor seeks to prove his debt, the rule enacted in Section 46 of the Provincial Insolvency Act would apply and only that amount which is ultimately found due from him at the foot of the account in respect of mutual dealings should be recoverable from him and not that the amount recoverable from him should be recovered fully while the amount due to him should rank in payment after the preferential payments. We find that the same view has been taken by the English Courts on the interpretation of the corresponding provisions of the English Companies Act, 1948, and since our Companies Act is modelled largely on the English Companies Act, we do not see any reason why we should take a different view, particularly when that view appears fair and just'.

Finally, if any surplus amount is left it is utilised in paying back the shareholders in accordance with their rights, with the 'preference shareholders' being paid off first wherever the articles provide that the preference shareholders would be entitled to their arrears of dividends whether earned, declared or not in the event of winding up. Such a provision would entitle them to claim arrears even if the Company had neither commenced business nor earned any profits. This dividend which is paid to the members is not construed as their income but deemed to be a refund of capital, even in cases where the dividend includes profits earned by the Liquidator [cases where he carries on the Company business for a more beneficial winding up]. If dividends remain unclaimed by either the creditors or contributories for a period of 6 months they should be deposited in the Reserve Bank, from where they can be claimed by any person after obtaining a Court order. If the dividends remain unclaimed for a period bf 15years they merge in the general revenue of the Central Government, but the amount remains available for payment of liabilities which have been subsequently confirmed.

Fraudulent Preference: Under the insolvency laws we have a concept of 'fraudulent transfers' which implies that a transfer or conveyance made by a debtor in favour of some particular creditor with intention to give a preferential treatment to that creditor or to defraud other creditors, such a transfer would be void if made within 3 months of an insolvency petition being presented against him and he is adjudged an insolvent. This concept of 'fraudulent transfers' is present in Company law also under section 531 and states that any transaction with a creditor entered into by a Company in preference of other creditors within six months prior to the date of commencement of winding up is to be deemed a fraudulent preference of its creditors and is accordingly invalid.

But if a Company makes payment to a creditor who is pressurising the Company with a threat of a suit and attachment of property, then such a payment cannot be called 'fraudulent' provided the debt was really due. In the final analysis, whether a transaction is fraudulent or not depends entirely on the 'intention of the debtor' and nothing else. Further, under See. 532 a transfer or assignment by a Company of all its properties to a trust/trustee for the benefit of all its creditors is also void.

Voluntary Transfer: Under See. 531 -A, a transfer of property whether movable or immovable or any delivery of goods by the Company within a period of one year prior to the presentation of a winding up petition is void as against the Liquidator, unless the following conditions are satisfied:

Transfer of Shares: When a Company is undergoing voluntary winding up, any transfer of shares or change in the status of member after commencement of such proceedings is void, unless a prior permission of the Liquidator is taken (See. 536). The same position prevails in case of winding up by Court or under supervision of Court, with the difference that such a transfer is valid if permission of Court is obtained either before or after the making of the transfer. In respect of attachments executions etc., the Liquidator has been given a free hand in deciding what is just, fair or reasonable in all such cases of transfers (either of shares or property ), attachment, distress of property or execution put in force without leave of Court, after commencement of winding up. Such transfers can be avoided (See. 537).

Once a Company goes in for winding up, the Liquidator takes into his charge all the books and papers of the Company. While going through these books, or during the course of his investigation he may come across information about the underhand dealings of some of the officers. These dealings may be either in their self interest or in connivance with the company defrauding the creditors either in general or at least some of the creditors by giving a preferential treatment to one or more creditors. When the Liquidator comes across these instances he has been given the power under various sections of the Act to prosecute these defaulting/delinquent officers and in some instances he can also make them pay back to the company the amount which the Company has lost due to their default (be it intentional or unintentional i.e., through negligence). The basic objective of these provisions seem to be that the Directors and other officers of the Company owe a fiduciary duty towards the Company and hence should be held liable when they fail in their duty by not acting in the best interests of the Company, creditors and shareholders. Since a Liquidator takes the overall charge of the Company on his appointment, he is automatically put in a fiduciary position and so is duty bound to prosecute such officers.

The growth of multinationals, operating through several organs such as branches, agencies, franchises, subsidiaries and other forms of collaboration in more than one country, has given rise to the need to harmonise municipal laws of nations with regard to the consequences of insolvency for the operation of their branches, divisions, subsidiaries or agencies situated within a country’s territory. The globalisation and opening-up of the economy has given added impetus in India to the need to formulate specific legal measures for protecting Indian creditors.

Under common law and as a general concept insolvency law has followed the principle of situs of the assets of the debtor. Differences exist from country to country in the matter of treatment/recognition of assets. Some US states, such as New York, have for this purpose defined assets as including all transactions booked in New York, irrespective of the situs of the counterparty. In most systems the municipal law allows courts within whose jurisdiction the property of the insolvent party is situated to exercise insolvency jurisdiction.

The following observations made by the Supreme Court of India, in the case of Raja of Vizianagaram v. Official Receiver, clearly bring out the legal position of international insolvencies in India:

The question before the Supreme Court of India was whether in a winding-up proceeding initiated in India in respect of the business of a foreign company in India, the foreign creditors of that company could prove their claim. The Indian Supreme Court, after examining various precedents under English Law, held that under the provisions of the Indian Companies Act and the general principles, foreign creditors can prove their claims in the winding-up of unregistered companies in India.

The Indian laws concerning insolvency and winding-up closely follow the principles of English common law. The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 are substantially along the lines of Bankruptcy Act 1914 (repealed). Neither of these two Indian Acts makes any reference to cross-border insolvencies. Thus Indian insolvencies laws do not have any extra-territorial jurisdiction, nor do they recognise the jurisdiction of foreign courts in respect of the branches of foreign banks operating in India. Therefore, if a foreign company is taken into liquidation outside India, its Indian business will be treated as a separate matter and will not be automatically affected unless an application is field before an insolvency court for the winding-up of its branches in India. For example, when BCCI was taken into liquidation and liquidators were appointed by British courts, the Reserve Bank moved the High Court in India to wind up Indian branches of that Bank. The overseas liquidator had filed his claim in respect of BCCI branches in India.

At present, the Committee on Bankruptcy is considering the adoption of UNCITRAL Model Law on Cross-Border Insolvency to equip the Indian law with sufficient provisions to deal with international insolvency. The purpose of the UNCITRAL Model of law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:

1. Co-operation between the courts and other competent authorities of India and foreign States involved in cases of cross-border insolvency;
2. Greater legal certainty for trade and investment;
3. Fair and efficient administration of cross-border insolvency that protects the interests of all creditors and other interested persons, including the debtor;
4. Protection and maximisation of the value of the debtor’s assets; and
5. Facilitation of the rescue of financially troubled business, thereby protecting investment and preserving employment.

This model law, if adopted, will radically change the orientation of Indian law and make it suitable for dealing with the challenges arising from globalisation and increasing integration of Indian economy with the world economy.

Sections 13 and 44A of the Civil Procedure Code, 1908 of India contain statutory provisions under which the judgements delivered by the foreign courts of competent jurisdiction in reciprocating territories are treated as conclusive to any matter in dispute between the same parties. Those provisions, however, contain certain well-recognised exceptions, namely:

1. Where the judgement has not been pronounced by a court of competent jurisdiction;
2. Where it has not been given on the merits of the case;
3. Where it appears, on the face f the proceedings, to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable;
4. Where the proceedings in which the judgement was obtained are opposed to natural justice;
5. Where it has been obtained by fraud; and
6. Where it sustains a claim founded on a branch of any law in force in India.

Such decrees passed by the courts of the reciprocating territories can be executed in the same manner as if they had been passed by a district court in India. The courts within the Commonwealth of Nations and some other countries have been declared as courts of reciprocating territories by the Central Government of India.

The foregoing consideration of the statutory scenario indicates that the observations made by the Supreme Court in Corromandel Pharmaceutical’s case (supra) to the effect that the SICA, 1985 has become out of tune with the economic policies presently pursued in the country and the policy of liberalisation of the economy, and that is not advisable to keep alive inefficient and uneconomic industries alive by injecting public funds, and that the protective umbrella of section 22 with the wide language employed therein is being utilised to encourage unfair practices, have not been taken into consideration in the drafting of SICA, 1997. With the Bill pending consideration in the Lok Sabha, it is the need of the hour that the draftsmen of the statute and the Legislators should attend to the task of removing the lacunae in section 22 in particular, and ensure that the statute is fine-tuned for the purpose it was intended to serve.

International Standards and Indian Situation