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In this article, an attempt has been made by the author to study the broad provisions of the Code (as defined hereinunder) and also examine the status of the cases pending under Sick Industrial Companies Act, 1985, in light of the recent judgement passed by the Hon’ble National Company Law Tribunal, Mumbai Bench (“NCLT” or “Tribunal”) in the case of SM Dyechem Limited (“Judgment”).
Introduction and basics of Code:
One of the key factors that holds back the credit market is the mechanism of resolving insolvency or failure of a borrower to make good the promise made to the lenders. The structure of the bankruptcy and insolvency process in India before the enactment of the Insolvency and Bankruptcy Code, 2016 (“Code”) was elaborative, multi-layered, scrappy and complex. The legislative process was covered over various multiple laws and so the adjudication took place in multiple flora. The Presidency Towns Insolvency Act, 1909 covered the insolvency of individuals, partnership firms and association of individuals in three erstwhile presidency towns of Chennai, Kolkata and Mumbai and whereas The Provincial Insolvency Act, 1920 was the Insolvency laws for areas other than the aforesaid presidency towns. The laws covering corporate insolvency were (i) The Companies Act, 1956; (winding-up & Strike-off of Companies) (ii) Sick Industrial Companies Act, 1985 (“SICA”) (that focused solely on restructuring of sick industrial companies); (iii) Recovery of Debts due to Banks and Financial Institution Act, 1993; and (iv) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
The above list of the Insolvency framework is only illustrative and not exhaustive as there were various other attempts made in this regard, for example: the Reserve Bank of India (“RBI”) had set up the following three mechanisms to allow banks to recover their due from corporate borrowers:-
The case of BHEL v/s Arunachalam Sugar Mills the Hon’ble Madras High Court in 2011 observed a textbook example of multiplicity of laws, parallel proceedings and conflicts. In the said instance, Arunachalam Sugar Mills and its sister concern defaulted on the credit facilities advanced and that gave rise to several akin proceedings by secured and unsecured creditors. Some of the proceedings included:
A bank (being the main secured creditor) filed an application for debt recovery with Debt Recovery Tribunal;
One of the other secured creditor entered into a memorandum of understanding with the bank, for the bank to sell the debtor’s properties and pay the secured creditor its due from the proceeds;
Another creditor filed a petition for winding-up of the Company;
The company that had leased machinery initiated proceedings invoking the arbitration clause in the agreement and simultaneously filed an application in the high court restraining the debtor from selling and/or transferring its assets;
The secured creditors of the Arunachalam Sugar Mills sister concern initiated proceedings under SARFAESI Act and not only took possession of its assets but also sold the same through an auction;
The unsecured creditor that had supplied boilers filed a civil suit for recovery of money due, by sale of immovable properties.
To add to the above list, application were filed to the Board of Industrial and Financial Restructuring (“BIFR” or “Board”) and a simultaneously application by creditor for winding-up / under SARFAESI.
Apart from consolidating the multiplicity of laws, parallel proceedings and conflicts, various other factors that complimented in support of the new framework (i.e. the Code) were the problems of (i) delay in disposal insolvency and bankruptcy cases; (ii) substantial reduction in the value of the assets of the debtor; (iii) difficulty in the exit route thereby affecting foreign investments; and (iv) various other legal and economic issues including the mounting non-performing assets plaguing the Indian banking system. The beleaguered ranking in ‘Doing Business in India’ on the Insolvency parameters also played its role in the process.
Before we move ahead to understand the corporate insolvency resolution process under the new code and analyze the aforesaid order of the NCLT let us first briefly run through the rehabilitation process under SICA.
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