BANKRUPTCY SYSTEM IN INDIA

Bankruptcy is a legally declared inability of an individual or organization to pay their creditors. Filing bankruptcy can make it possible to eliminate the legal obligation to pay most of debts. PURPOSE OF BANKRUPTCY : To give an honest start to debtor’s life, by reliving him from most of the debts. To repay creditors in an orderly manner to the extent that the debtor has the means available for payment.

Insolvency is a word used often in the business or corporate sector for any business or company that has failed and is in debt. When the cash inflow of the company freezes and is not able to meet its required financial commitments to continue its proper functioning, the company is called to be suffering from insolvency.

Liquidation Liquidation or winding up, refers to a process whereby the assets of a business are converted to money. The person legally put in charge of the implementation of liquidation is called liquidator. There are 2 forms of it : Compulsory- court ordered, Voluntary

History of Bankruptcy This word is formed from the ancient Latin bancus (a bench or table), & ruptus (broken). When a banker failed, he broke his bank, to advertise to the public that the person to whom bank belonged was no longer in a condition to continue his business.

Corporate Bankruptcy law in India There is no single comprehensive & integrated policy on corporate bankruptcy in India. As a result, 4 different agencies have overlapping jurisdiction. The High courts, The Company law board, The Board for Industrial & Financial Reconstruction (BIFR) and The Debt recovery tribunals (DRTs)

PROVISIONS Companies Act, 1956 Under this act, liquidation of a co. facing distress can be accomplished via 2 modes, voluntary or involuntary. In the first & the more efficient case, shareholders vote for liquidation & hand over the control of the process to secured creditors, who then hire a private or an official liquidator to oversee the asset sales & distribution of proceeds. In the second case, a creditor after giving 3 weeks notice to the debtor, can petition the court for involuntary liquidation.

Sick Industrial Companies (SIC) Act, 1985 This act estd. a quasi-judicial body, the Board for Industrial & Financial Reconstruction, to secure timely detection of “sick” industrial companies & to provide the appropriate type of intervention. Co. must be registered for more than five years & have accumulated losses at the end of any year greater than their net worth. BOD of the co. is required to file an application with the BIFR within 60 days “ from the finalisation of the audited accounts of the year in which the co. has fallen sick”.

Alternatives to BIFR Recommend liquidation to the court Rehabilitation in public interest Approve a plan requiring major concessions & “sacrifices” from the various parties including subsidies from the govt.

Implication of the current system Liquidation or reorganization is time consuming & very costly. It creates “incentives for the managers by taking actions that sometimes generate private benefits at the expense of firm value”.

Time bound restructuring or liquidation guidelines STEP 1 :- Referral to the Tribunal within 180 days of coming to know “of the relevant facts” OR within 60 days of final adoption of accounts, whichever is earlier. The Tribunal assigns a panel of auditors to see whether the sick co. has met the criteria's or not.

STEP 2:- Tribunal appoints an Operating Agency to conduct an initial exploration to see whether sick company should be restructured or not. A Director is appointed to see the day-2-day operations of the co. STEP 3:- Management, Creditors, Operating agency, Director report would give info. whether it needs to be restructured or needs time to get in order.

STEP 4:- Operating agency prepares a restructuring plan. (co STEP 4:- Operating agency prepares a restructuring plan. (co. & creditors can also do so) STEP 5:- Tribunal has the power to make modifications.