Professional Documents
Culture Documents
Company Profile....2
Insolvency..14
Review of Literature...........................18
Data Analysis
Objectives.20
Research Methodology.....21
Discussion: Insolvency laws of India...22
Insolvency of Non-Corporates....................30
Companies Act 2013.............................................................................32
Governing Bodies..33
Bankruptcy Law of U.S....................................37
Comparative Analysis....40
Case of Suzlon Energy........48
Conclusion..50
Recommendations........................................................................................................53
Appendix..55
References......................................................................................................................71
1
Chapter 1: Introduction
The Ministry of Corporate Affairs is primarily concerned with administration
of the Companies Act 2013, the Companies Act 1956, the Limited Liability
Partnership Act, 2008 & other allied Acts and rules & regulations framed
there-under mainly for regulating the functioning of the corporate sector in
accordance with law.
The Ministry is also responsible for administering the Competition Act, 2002
to prevent practices having adverse effect on competition, to promote and
sustain competition in markets, to protect the interests of consumers through
the commission set up under the Act.
The Ministry also has the responsibility of carrying out the functions of the
Central Government relating to administration of Partnership Act, 1932, the
Companies (Donations to National Funds) Act, 1951 and Societies Registration
Act, 1980.
2
Objectives of MCA
Functions of MCA
3
Build systems for early detection of irregularities in corporate
functioning.
Undertaking investor education and awareness programmes.
To undertake investigation of serious frauds through the Serious Fraud
Investigation Office.
Administration of the cadre of Indian Corporate Law Service.
Administrative Structure
The Ministry has a three tier organizational structure with, the Headquarters
at New Delhi, seven offices of Regional Directors at Ahmedabad, Chennai,
Guwahati (presently functioning at Shillong), Hyderabad, Kolkata, Mumbai,
and NOIDA, fifteen Registrars of Companies, fourteen Official Liquidators and
nine Registrar of Companies-cum-Official Liquidators in States and Union
Territories. The Official Liquidators, function under the overall administrative
control of the Ministry, and are attached to corresponding High Courts.
2. The provisions of the Companies Act are dealt with by various sections
under the supervision of concerned Joint Secretaries. A brief description of
major activities of these Sections is given below:
4
4. Company Law II Section deals with examination of inspection reports,
investigation reports and technical scrutiny reports received from field
offices. After examination of these reports, prosecutions are ordered. In
addition, this section deals with the examination and issue of directions of
Special Audit Reports, complaints relating to misuse and diversion of funds,
and mismanagement of companies etc. under the provisions of the Companies
Act.
5. Company Law III Section deals with raising of capital (further issue,
conversion of loans and debentures) or reduction of Share Capital, payment of
dividends, form and contents of Balance Sheets and Profit & Loss Accounts,
Amalgamation and Merger of Government Companies, Accounts of Foreign
companies, references received from RDs/ ROCs for approval of names of
companies, alteration of Memorandum and Articles of Association etc.
6. Company Law - IV (Legal) Section deals with default cases under various
Sections of the Companies Act, 2013 and Companies Act, 1956 and rules made
thereunder leading to prosecution. It also examines applications/ petitions
made to the Central Government seeking authorization for filing application
for prevention / alleged acts of mismanagement and oppression under Section
399(4) of the Companies Act, 1956. The draft reply/ affidavits to be filed by
ROCs/RDs/OLs and other attached offices of the Ministry are vetted by this
Section. Apart from the above, this Section tenders legal advice to other
Sections of the Ministry as well as to other Ministries.
5
It also deals with declaration of institutions as Public Financial Institutions;
issue relating to Capital Market, SEBI, Foreign Direct Investments, Anti Money
Laundering, combating the financing of terrorism in India. Accounting
standards/Convergence with IFRS. It issues clarification/simplification of
various rules and procedures prescribed under the provisions of the
Companies Act, 2013, Companies Act, 1956 and LLP Act, 2008. The Division is
also responsible for launching various schemes to aid in the implementation
of corporate laws, e-Governance forms, coordinating the framing of guidelines
for ensuing uniformity of practices by all field offices, and change in the venue
for holding the Annual General Body Meetings of Government Companies.
10. Cost Audit Branch under Section 148 of the Companies Act, 2013,
formulates & notifies rules in relation to (i) maintenance of Cost Accounting
6
Records by certain class of companies and; (ii) the audit of Cost Records for
certain class of companies. It also monitors the compliance of the rules under
Section 148 and various other provisions of the Companies Act, 2013. It also
conducts studies to analyze the Cost Audit Reports and informs the relevant
Departments/ Organizations/Regulatory bodies about the observations from
such studies.
12. CSR Cell was constituted on 09.05.2014 and is entrusted with the
responsibility of issuing clarifications regarding Corporate Social
Responsibility (CSR) provisions, Schedule VII of the Companies Act, 2013 and
Companies (CSR Policy) Rules; examining references from stakeholders
seeking clarification related to CSR; coordinating with various agencies such
7
as industry associations, professional institutes, International bodies and IICA
on policy issues related to CSR; and to interact with other
Ministries/Departments on CSR issues.
13. Research & Analysis Division is responsible for compilation, editing and
publication of: (i) the Annual Report of the Ministry, (ii) the Annual Report on
the Working and Administration of the Companies Act, and (iii) Monthly
Newsletter on the activities of the Ministry. The Division provides economic
input on issues relating to Corporate Performance, Capital Market reforms,
Disinvestment and Foreign Direct Investment at the macro level.
8
16. RTI Monitoring Cell, apart from being a repository of all RTI related
information, also functions as a conduit between the applicant/ appellant and
the CPIO/ Appellate Authority. The Cell is also responsible for implementing
various Sections of the RTI Act, where an obligation has been cast on the
Public Authority. The Cell also monitors the progress of all RTI applications
and appeals to ensure their disposal within the prescribed time limits.
17. Gender Budget Cell (GBC) was set up with the objective of facilitating the
integration of gender analysis into Government budgeting. The GBC of MCA
has initiated steps to build up an information/ database system on gender
representation in MCA, various branches of the Ministry as well as field
offices, and attached offices and professional institutes.
9
employees alleged for involvement in corruption. It also makes effort to
streamline the existing procedures so as to minimize the scope of corruption.
22. Administration-III Section deals with all policy issues related to Serious
Fraud Investigation Office (SFIO) and; establishment, personnel and financial
matters relating to SFIO which requires approval of Central Government.
10
23. Administration-IV Section deals with establishment, personnel and
financial matters relating to Company Law Board (CLB), National Company
Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT)
which requires approval of Central Government.
11
having an adverse effect on competition, promoting and sustaining
competition, protecting the interest of consumers and ensuring freedom of
trade in India.
The Institute (IICA) has been established as a think tank, action research,
service delivery and capacity-building institute to serve as a one-stop-shop
12
providing a platform for value-adding partnerships between government,
corporate entities and other stakeholders. Since its establishment as a Society
in September, 2008, the Institute has taken many steps to fulfil its mandate,
viz. (i) Its five Schools and four Centers have become operational. (ii) Indian
Corporate Law Service Academy has become functional and is imparting
training to officers of the Indian Corporate Law Service since 2010. (iii) The
Institute has emerged as an important Institute for conducting various
courses, seminars, workshops etc. on issues of relevance to the corporate
sector such as corporate social responsibility, corporate governance, role of
company directors, independent directors, competition issues etc. The IICA is
headed by a Director General and Chief Executive Officer.
Professional Institutes
13
Insolvency is the time when an individual, corporation, or other organization
cannot meet its financial obligations for paying debts as they are expected.
Insolvency can occur when certain things happen, some of which may include:
poor cash management, increase in costs, or decrease in cash flow.
14
re-organizes the former to the extent feasible and liquidates the latter
(before any significant depletion in the value of the business),
minimizing losses for all stakeholders in the process.
An ideal insolvency regime needs to strike the right balance between the
interests of all the stakeholders by a reasonable allocation of risks among
them.
The main reasons behind insolvency are primarily poor management and
financial constraints. This is much more predominant in smaller companies.
Specifically, the reasons are:
Finance loss of long term finance, over gearing or lack of cash flow
It is however observed that the larger the company, the better the chance of
survival and of receiving remedial treatment and of paying creditors.
15
Insolvency Laws
16
Bankruptcy
17
Chapter 2: Review of Literature
The chief aim of every system of bankruptcy law should be to combine
and regulate two great objects; firstly the distribution of effects of
debtor in the most expeditious and equal note and secondly the
liberation of the person from the demands of creditors when he has
made a full surrender of his property (Henley, 1832).
Bankruptcy laws which prevailed in the earlier times were a species of
criminal law and bankrupts under that law were regarded as criminal
offenders. The treatment to which they were subjected was cruel and
inhuman. The present bankruptcy laws are far more humane and by the
end privileges are not only conferred by creditors but also the bankrupt
or debtor (Blackstone et.al)
Thomas Jackson and Douglas Baird (1984; 1990) in their individual and
collaborative papers advanced the proposition that the US system of
corporate insolvency law was primarily aiming towards the
maximization of creditors returns.
Put very shortly: Jackson (1982; 1986) argued that insolvency law was
no more than a collective debt collection mechanism.
According to C.F.Pratten (1991), a company can fail due to internal or
external deficiencies. However it should not be assumed that single
causes or single patterns of causes are to be encountered when failures
are analyzed. Collapses generally result from operation of number of
causes that involves both external pressures and as well as internal
failings (Vanessa Finch 2002).
18
Sir Kenneth Cork (1982) in his report was of the philosophy that
existing insolvency law dealt with individual bankrupts in an
excessively punitive and stigmatic manner, but he was determined to
amend the laws perceived leniency in dealing with directors who
abused the privilege of limited liability. As for rehabilitation he aimed to
device an insolvency regime that would facilitate rescues rather than
just process failures.
According to Kedarnath and Amulyaratan (1942) an Official Assignee
that is assigned to carry out insolvency proceedings for the purpose of
affidavits, verifying proofs, petitions or other proceedings in insolvency,
possess judicial powers in enquiring into proof of debts. For that
purpose he can be regarded as the Court under Cr Pc, but not when he is
presiding a meeting of creditors.
As per the Tanjore v Nataraja Sastrial (1923), the local government
appointed Official Receivers to be Receivers under the Provincial
Insolvency Act. In absence of any exceptional reasons such as personal
disqualification affecting the Official Receivers he alone should be
appointed Receiver.
19
Chapter 3: Data Analysis
Objectives
To analyze the prevailing Insolvency Laws in India and U.S. and its effect
on their economies respectively.
To make few recommendations about the areas which India has to focus
to meet the International Standards of Insolvency.
20
Research Methodology
The present study is based on Secondary data (the essential information is
only Government approved and can't be gathered in individual, due to the
above reasons we need to depend only on the auxiliary source).
Keeping in view the above mentioned objectives, we have discussed the paper
with help of the Corporate Law and its Acts, indicators proposed by the World
Bank.
Exploratory research is research conducted for a problem that has not been
clearly defined. It often occurs before we know enough to make conceptual
distinctions or posit an explanatory relationship. Exploratory research often
relies on secondary research such as reviewing available literature and/or
data, or qualitative approaches.
21
Discussion
The stream of insolvency laws can be segregated chiefly under two heads:
Under the Constitution of India Bankruptcy & Insolvency is Entry 9 in List III
- Concurrent List, (Article 246 Seventh Schedule to the Constitution)1 i.e.
both Center and State Governments can make laws relating to this subject.
In context of corporate laws, the word "insolvency" has neither been utilized
nor characterized as a part of India. Be that as it may, Section 433 (e)2 of the
Companies Act, 1956 covers a company, which is "not able to pay its debts",
and hence constitutes a ground for winding up of the company.
22
opportunity to undertake any industrial activity, but there is no freedom to
exit.
Companies Act 1956 (Relevant sections under Companies Act 2013 are
not yet implemented)
Sick Industrial Companies (Special Provisions) Act, 1985 [SICA]
Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act (SARFAESI) Act, 2002 otherwise called the
Securitization Act.
Recovery of Debts due to Banks and Financial Institutions Act, 1993
(RDB Act) [Debt Recovery Tribunals are set up under this Act].
23
In the first and the more effective instance of voluntary liquidation,
shareholders vote in favor of liquidation and hand over control of the
liquidation process to secured creditors, who then employ a private or an
official liquidator to supervise the asset sales and distribution; In the second
case, a creditor with a minimum amount of 500 of unpaid and undisputed
debt, in the wake of giving three weeks notification to the debtor, can appeal
to the court for automatic liquidation, in which case, the court will focus on
the legitimacy of the claim and the sensibility of the request before ordering
liquidation. Then again, the courts actions are absolutely discretionary and
the court may decline to hold the company insolvent on different
contemplations including that of public interest. Amid the time it takes for
the courts to decide upon a case, the debtor stays possessing the advantages,
but once the winding-up has been ordered by the court, an official liquidator
(government personnel) is designated who then takes responsibility of the
whole process from claiming and selling assets, recovering uncalled capital
from contributories and paying off the companys liabilities. In settling the
claims, the highest priority is accorded pari passu (where everyone is equal in
front of the law) to secured creditors and workers dues, followed by
preferential status of government and administrative claims (personnel
severance pay and accrued insurance and pension benefits), with the residual
going towards settling the claims of unsecured creditors and equity holders.
Fraudulent and preferential transfers that occur within six months of the
liquidation petition are dealt with as in the US Bankruptcy code. An intriguing
feature of this provision is the nonappearance of a programmed stay then
period between documenting of the request and a decision by the court, and
24
this interim period, which can last up to a year, is typically described by a free
for all of claims by a wide range of petitioners and in some cases sale of
collateral in possession of creditors. Restructuring under this Act is restricted
to either a merger & acquisition strategy or a voluntary compromise
arrangement between the company and the creditors if an adjustment in the
capital structure (changing debt for equity or reducing equity) is justifies as a
major part of the compromise. The compromise arrangement can be proposed
by any party (creditors, management, government, official liquidator) yet it
has to be approved by creditors (majority in numbers and three-fourth in
value) and affirmed by the court, which has the power to administer the
implementation of the compromise. There is no provision similar to a cram-
down, which would make the compromise binding without the approval of
the essential square of creditors. Likewise, the liquidation and reorganization
petitions here are not so much sequential and either proceeding can trigger
the other whenever until an order for liquidation is passed.
25
industrial company led to enactment of the Sick Industrial Companies
(Special Provisions) Act, 1985.
Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and [IDRA]
The two Acts i.e.; the [IDRA] and SICA work in different fields however they
would appear to be overlapping. The [IDRA] was enacted for the development
and the regulation of certain industries. The [IDRA] applies to industries
specified in the schedule to the Act and the SICA is applicable to those
exceptional companies having industries as mentioned in the schedule to the
[IDRA].
26
the sum of paid up capital and free reserves; free reserves include all
reserves from profits and share premium account but not from revaluation of
assets, depreciation write-offs or amalgamation) and have no less than 50
laborers on any day in preceding 12 months and also have a factory license.
Once an application for intervention has been filed, the BIFR has three choices.
It can
In the choices 2 and 3, the BIFR appoints an operating agency (OA), usually
the largest secured lender (a bank or financial institution), to determine the
viability of the company and propose a turnaround arrangement. In this case,
an automatic stay against all claims, suits and legal proceedings against the
sick company is granted as soon as the case is registered with the BIFR but
the debtor remains in possession of the assets. Any action recommended by
27
the BIFR can be challenged before the courts by the management or the
creditors, and often the courts refer the case back to the BIFR for further
review causing an interminable circle of postponements.
Albeit in fact, SIC Act has been repealed by the Sick Industrial Companies
(Special Provisions) Repeal Act 2003 (the Repealing Act), which still has not
yet come into force.
1. taking possession
2. selling and leasing the assets underlying the security interests such as
movable property (tangible or intangible, including accounts
receivables)
3. Immovable property without intervention of the courts.
The SARFAESIA is not accessible to secured creditors, which are not Indian
Banks or Financial Institutions notified by government of India.
28
Therefore, this mechanism is largely seen as a debt recovery tool and not an
Insolvency resolution tool because it doesnt ease rescue in practice.
I.4 Recovery of Debts due to Banks and Financial Institutions Act, 1993
(RDDBFI Act)7
29
II. Insolvency of Non- Corporates8
The Companies Act 2013 and other acts like SICA, SARFAESIA, RDDBFIA and
even the past Companies Act 1956 just administer the insolvency proceedings
of corporates. Insolvency proceedings of Non-corporates like Individuals or
Sole Proprietors, Partnerships and Co-operatives are described below-
The Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act,
1920 are two noteworthy establishments that deal with personal insolvency
and have parallel provisions and their substantial content is also similar but
the two vary in respect of their state specific jurisdiction. While Presidency
Towns Insolvency Act, 1909 applies in Presidency towns namely, Kolkata,
Mumbai and Chennai, Provincial Insolvency Act, 1920 applies to all provinces
of India. The Presidency Towns Insolvency Act, 1909 consists of 127 sections
and 2 schedules. The Provincial Insolvency Act, 1920 consists of 83 sections
and 2 schedules. These two Acts are applicable to individuals as well as to sole
proprietorships and partnership firms and are not applicable to corporations
or against any association or company registered under any enactment.
The owner of a sole proprietorship is not a separate legal entity from the
business of the sole proprietorship. So the laws governing bankrupt
individuals also oversee insolvent sole proprietorships. Individuals can file a
petition for their own bankruptcy or a court may proclaim them bankrupt on
the off chance that they are unable to pay their debts.
30
INSOLVENCY OF PARTNERSHIP FIRM
Each of the partners is jointly and severally liable for the debts of the
partnership. On dissolution of a partnership, the assets of the partnership
must be first applied towards the repayment of debts of the partnership to
third parties. If the assets are not sufficient to repay the debts, the creditors
may take proceedings against the partners. According to Section 41 of the
Indian Partnership Act, 1932 a partnership will be dissolved if all but one of
the partners becomes insolvent9.
Cooperative Societies fall under the State List in Constitution & there are state
specific legislations for their winding up. In addition, the Co-operative
Societies Act, 191211 & the Multi- State Co-operative Societies Act, 2002, which
are both central acts. Be that as it may, these acts does not accommodate for
rehabilitation & revival of sick co-operative societies12.
31
III. Companies Act 201313
The Companies Act 2013 provides for a new comprehensive regime for
revival and rehabilitation of companies not all like SICA which is applicable to
some specified industrial companies only, the Companies Act 2013 for
corporate rescue is applicable to all companies. The rescue related provisions
of new Companies Act 2013 made a few upgrades over the old regime.
32
IV. Governing Bodies
Under the Companies Act 1956, there was always a mechanism for resolution
of disputes. Till 2002 amendments to Companies Act 1956, Company
Court/High Court and Company Law Board are the two bodies which had the
power for dispute resolution mechanism. With object of building up a
particular dispute resolution mechanism at one place and without running to
different forms for various issues, a National Company Law Tribunal (NCLT)
was proposed to be constituted under Section 10FB of Companies Act 1956
(which is yet to be established).
33
For closing, continuing & transferring suit or proceeding
Calling for annual general meeting of creditors in case of voluntary
winding up.
The Company Law Board is an autonomous semi-legal body in India which has
powers to disregard the conduct of companies within the Company Law. The
idea of Company Law Board in its present structure was introduced through
an amendment to the Companies Act 1956 in the year 1988. Company Law
Board is additionally dispute resolution mechanism constituted under section
10E16 of the Companies Act 1956 and it is directed by Company Law Board
Regulations, 1991. It is a specific forum and exercises vital functions which
has effects on the corporate world. It has powers to entertain applications
34
under Sections 397/398. It controls the undertakings of companies and
prevents the illicit activities by a group in the company. The Company Law
Board will be succeeded over by the National Company Law Tribunal (NCLT),
which will govern all companies under the Companies Act, 2013.
35
IV.5 National Company Law Tribunal (NCLT) & National Company Law
Appellate Tribunal (NCLAT)
36
V. Bankruptcy Law of U.S.A
37
The second territory offers a debtor or creditor specific sorts of relief. It
incorporates chapter 7, 9, 11, 13 of the code.
Chapter 7
Chapter 9
Chapter 11
Chapter 13
38
Chapter 13 Bankruptcy accommodates adjustment of debts of Small
Businesses and Individuals. It is utilized by individual consumers to
reorganize their financial affairs under a repayment plan that must be
completed within three to five years. To be eligible for chapter 13 relief, a
consumer must have consistent pay and may not have more than a
predetermined amount of debt.
The largest bankruptcy in U.S. history occurred on September 15, 2008, when
Lehman Brothers Holdings Inc. filed for Chapter 11 protection with more than
$639 billion in assets.
39
VI. The Comparative Analysis between Indias and United States
Insolvencies
The word bankruptcy often calls on negative associations and its results can
deter potential entrepreneurs from starting a new business venture. While
reducing the stigma associated with bankruptcy, policy makers can minimize
the negative impacts of business failures and boost their constructive
outcomes by embracing efficient and well-functioning bankruptcy laws.
Bankruptcy laws advance predictability for both creditors and entrepreneurs-
by establishing the rules for the worst case scenario. They permit
entrepreneurs to determine the maximum risk associated with the field
venture.
Time
Time for creditors to recover their credit is recorded in calendar years. The
reference span of time is from the companys default until the installment of
some or greater part of the money owed to the bank. Potential delays are
looked into.
Cost
40
charges and government duties, fees of insolvency administrators,
auctioneers, assessors and lawyers, and various charges and expenses.
Outcome
Recovery rate
41
4. Creditor Participation Index.
According to the World Banks Doing Business Report, India ranked 137 (of
189 economies) in Resolving Insolvency in 2015. In comparison to 2014, its
position dropped by 2 points.
In India, resolving insolvency takes 4.3 years on average and costs 9% of the
debtors estate with the most likely outcome being that the company will be
sold as piecemeal seal. The average recovery rate is 25.7 cents on the dollar.
The strength of insolvency framework index takes the value of 6 for India. In
2009 India made resolving insolvency easier by increasing the effectiveness of
the processes and thereby reducing the time required (Doing Business 2015).
On the contrary, according to World Banks Doing Business Report U.S. ranked
4 (of 189 economies) in Resolving Insolvency in 2015. In comparison to
2014, its position remained the same.
In U.S., resolving insolvency takes 1.5 years on average and costs 8.2% of
debtors estate with most likely outcome being that the company sold as a
going concern. The average recovery rate is 81.5 cents on the dollar. The
strength of insolvency framework index takes the value of 15 for U.S.
42
Table 1: Resolving Insolvency India U.S.
Economy Year Resolving Insolvency
43
Recovery rate (cents on the dollar)- U.S.
82
81
80
79
78
76
75
74
73
2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure: 1
27
26
25
22
21
20
2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure: 2
44
The Doing business Statistics depicts a below average profile for India
compared to U.S in terms of resolving Insolvency. India scores under the U.S.
in terms of recovery rate, cost of recovery and strength of insolvency
framework whereas it surpasses the U.S. mark regarding the time of
Insolvency. India has a very low recovery arte compared to U.S. due to
excessive length of insolvency procedure and by the piecemeal liquidation
because the recovery rates are lower in this kind of sales as compared to
going concern sales.
45
Receivership: it includes secured creditor taking over the operation of
the debtors company to protect its collateral, the business may
continue operating as a going concern.
Foreclosure: It augments the enthusiasm of secured creditors but dont
permit the continuation of the business & disregard the concerns of
unsecured creditors.
Economies with good bankruptcy procedures are those that augment the total
estimation of recovered debt at low cost. India needs to increase the recovery
rate in order to determine creditors to reinvest in viable firms and to
continue lending by diminishing the time and cost to resolve insolvency and
by selling in going concern, taking into consideration the fact that recovery
rates are higher in going concern sales than in piecemeal liquidation. By
taking these activities India will, have more developed credit markets.
46
restructuring & reorganization reduce both failure rates & liquidation of
profitable businesses. There is a bound together global goo- rehearse
standard on creditor & debtor regimes & insolvency put forward by the World
Bank & the United Nations Commission on International Trade Law
(UNCITRAL). Good practices in many economies are aimed for enhancing both
the efficiency & the outcome of insolvency proceedings. These incorporate
streamlining insolvency procedures, setting up viable reorganization
proceedings & strengthening creditors rights.
From the last few years many countries are transforming their insolvency
frameworks. These changes have diverse purposes & objectives & can be
classified into 2 categories:
47
Case of Suzlon Energy
Suzlon is a vertically integrated wind power company. Suzlon makes and
installs windmills. The company manufactures blades, generators, panels, and
towers in-house and large or offshore turbines through its subsidiary Senvion
(German wind Turbine Company).
Suzlon Energy Limited, was ranked as the worlds fifth largest wind turbine
supplier, in terms of cumulative installed capacity and market share, at the
end of 2013. In India, Suzlon has been the market leader for 15 consecutive
years, with more than 8,600 MW of installed capacity, and progressive
addition of new capacity every month.
Suzlon Energy Ltd fell into bad times during the global economic crisis and
had been struggling ever since. There were many reasons for its fall from
grace. As demand raced ahead of supply in the days before the financial crisis,
Suzlon had started building wind blades without waiting for orders. However,
inventory piled up as orders shrank. The Wall Street Journal reported in
August 2008 that Suzlon had recalled 1,251 blades fitted on its top-of-the-line
turbines sold to Edison Mission Energy, a US-based wind power firm. Edison
told the US Securities and Exchange Commission that the 144ft blades had
begun to split at its three sites. Suzlon spent $25 million to change the blades
that had developed cracksnot a massive amount, but a setback given the
context.
In the biggest convertible FCCB default in India, Suzlon failed to pay interest
on $209 million of debt on 11 October 2012, after bondholders rejected its
48
request for a four-month extension. Suzlon launched a turnaround
programme, code-named Project Transformation. On 24 January 2013, its
19 lenders agreed to recast Rs.9, 500 crore of debt and convert the interest
payable for two years into 32.1% equity. They also agreed to enhance working
capital loans by Rs.1, 800 crore and a 10-year deferred repayment plan. The
promoters brought in equity and Suzlon sold bonds to refinance its existing
loan with the help of lenders to improve cash flows. The company started
making turbines only on receiving orders. After 18 months of talking to
bondholders around the world, Suzlon on 3 May 2014 announced a cashless
restructuring of $485 million worth of foreign currency convertible bonds for
five years. These bonds will mature in 2019-20. This was the last piece in a
comprehensive liability management programme at Suzlon. The company sold
assets worth Rs.700 crore (Stake sale in Chinese subsidiary and US wind farm
in FY14), cut staff to 3,200 and reduced fixed operation expenditure by 31%.
It also raised volumes to 723 megawatts (MW) in 2013-14 from 251MW in the
previous fiscal year, a 188% growth year-on-year.
Besides all these debt reducing programmes there was a huge infusion of Rs.
1, 800 crore into the company by Dilip Shanghvi Family and Associates (DSA)
in February 2015 which is also equal to 23% stake in the Business. Tulsi Tanti
also sold Senvion, which was the main contributor to company's revenues of
Rs. 20, 212 cr (FY14) for 1 billion euro and additional 50 million euro subject
to certain conditions.
49
Chapter 4: Conclusion
It should be noted that as long as failing company remains economically viable
it should be first subject to reorganization or rescue process & not liquidation.
The business could also be sold on a going concern basis followed by
liquidation of residual entity.
Moreover the dual laws require the segregation of personal insolvency and
corporate bankruptcy. But in practice such a distinction is difficult to make.
50
The insolvency procedures in India under Companies Act 1956 appear not
just dysfunctional but near defunct. It is important to note that most secured
creditor now prefer enforcing their security interests under SARFAESI Act
instead of initiating liquidation proceedings under Companies Act 1956, this
goes against the main objective of corporate insolvency law- preservation of
going concern value by preventing piecemeal liquidation.
51
formed under the leadership of T.K.Viswanathan to study the current
insolvency framework and suggest possible improvements.
The above discussion points out the loopholes or areas that needs to be
strengthened in the Indian Insolvency Framework. A Single Insolvency
Regime helps in overcoming the drawbacks of Dual Insolvency Laws.
52
Chapter 5: Recommendations
Following measures can be undertaken for enhancing the efficiency of the
insolvency process:
53
The committee on the proposed bankruptcy code set up by the finance
ministry under the former law secretary T.K. Vishwanathan has been tasked
to find ways for early detection & resolution of financial distress in companies
& protection of stakeholder interest among others. The report, which may
form base for setting up the new legislation, aims to strengthen the hands of
the creditors, & improve the corporate insolvency regime of the country.
Suggestions by the committee involves:
54
Appendix
1. List III Concurrent list, entry 9 Bankruptcy and Insolvency
2. Section 433 (e) circumstances in which company may be wound up by
tribunal.
A company may be wound up by the Tribunal
(e) If the company is unable to pay its debts.
55
(1) If the Central Government is of opinion that there are possibilities of
running or re-starting an industrial undertaking, in relation to which an
investigation has been made under section 15A, and that such industrial
undertaking should be run or re-started, as the case may be, for
maintaining or increasing the production, supply or distribution of
articles or class of articles relatable to the scheduled industry, needed
by the General public, that Government may make an application to the
High Court praying for permission to appoint any person or body of
persons to take over the management of the industrial undertaking or to
exercise in respect of the whole or any part of the industrial
undertaking such functions of control as may be specified in the
application.
(2) Where an application is made under sub-section (1), the High Court
shall made an order empowering the Central Government to authorise
any person or body of persons (hereinafter referred to as the A
authorised person@) to take over the management of the industrial
undertaking or to exercise functions of control in relation to the
whole or any part of the industrial undertaking (hereinafter referred to
as the A concerned part@) for a period not exceeding five years:
Provided that if the Central Government is of opinion that it is expedient
in the interests of the general public that the authorised person should
continue to manage the industrial undertaking, or continue to exercise
functions of control in relation to the concerned part, as the case may
be, after the expiry of the period of five years aforesaid, it may make an
application to the High Court for the continuance of such management
56
or functions of control, for such period not exceeding two years at a
time, as may be specified in the application and thereupon the High
Court may make an order permitting the authorised person to continue
to manage the industrial undertaking or to exercise functions of control
in relation to the concerned part:
Provided further that the total period of such continuance (after the
expiry of the initial period of five years) shall not, in any case, be
permitted to exceed twelve years.
(3) Where an order has been made by the High Court under sub-section
(2), the High Court shall direct the Official Liquidator or any other
person having, for the time being, charge of the management or control
of the industrial undertaking, whether by or under the orders of any
court, or any contract or instrument or otherwise, to make over the
management of such undertaking or the concerned part, as the case may
be, to the authorised person and thereupon the authorised person shall
be deemed to be the Official Liquidator in respect of the industrial
undertaking or the concerned part, as the case may be.
(4) Before making over the possession of the industrial undertaking or
the concerned part to the authorised person, the Official Liquidator shall
make a complete inventory of all the assets and liabilities of the
industrial undertaking or the concerned part, as the case may be, in the
manner specified in section 18FG and deliver a copy of such inventory
to the authorised person, who shall, after verifying the correctness
thereof, sign on the duplicate copy thereof as evidence of the receipt of
the inventory by him.
57
(5) On taking over the management of the industrial undertaking, or on
the commencement of the exercise of functions of control in relation to
the concerned part, the authorised person shall take immediate steps to
so run the industrial undertaking or the concerned part as to ensure the
maintenance of production.
(6) The authorised person may, on such terms and conditions and
subject to such limitations or restrictions as may be prescribed, raise
any loan for the purpose of running the industrial undertaking or the
concerned part, and may, for that purpose, create a floating charge on
the current assets of the industrial undertaking or the concerned part,
as the case may be.
(7) Where the authorised person is of opinion that the replacement or
repair of any machinery of the industrial undertaking or the concerned
part is necessary for the purpose of efficient running the industrial
undertaking or such part, he shall, on such terms and conditions and
subject to such limitations or restrictions as may be prescribed, make
such replacement or repair, as the case may be.
(8) The loan obtained by the authorised person shall be recovered from
the assets of the industrial undertaking or the concerned part, in such
manner and subject to such conditions as may be prescribed.
(9) For the purpose of running the industrial undertaking, or exercising
functions of control in relation to the concerned part, the authorised
person may employ such of the former employees of the industrial
undertaking whose services became discharged by reason of the
winding up of the company owning such undertaking and every such
58
person employed by the authorised person shall be deemed to have
entered into a fresh contract of service with the company.
(10) The proceedings in the winding up of the company in so far as they
relate to -
(a) the industrial undertaking, the management of which has been taken
over by the authorised person under this section, or
(b) the concerned part in relation to which any function of control is
exercised by the authorised person under this section,
shall, during the period of such management or control, remain stayed,
and, in computing the period of limitation for the enforcement of any
right, privilege, obligation or liability in relation to such undertaking or
the concerned part, the period during which such proceedings remained
stayed shall be excluded.
59
ability, integrity and standing who have special knowledge of, and
professional experience of not less than fifteen years in science,
technology, economics, banking industry, law, labour matters, industrial
finance, industrial management, industrial reconstruction,
administration, investment, accountancy, marketing or any other
matter, the special knowledge of, or professional experience in which,
would in the opinion of the Central Government be useful to the Board.
Section 5. Constitution of Appellate Authority-
(1) The Central Government may, by notification, constitute, with effect
from such date as may be specified therein, an appellate authority to be
called the Appellate Authority for Industrial and Financial
Reconstruction consisting of a Chairman and not more than three other
Members, to be appointed by that Government, for hearing appeals
against the orders of the Board under this Act.
(2) The Chairman shall be a person who is or has been a Judge of the
Supreme Court or who is or has been a Judge of a High Court for not less
than five years.
(3) A Member of the Appellate Authority shall be a person who is or has
been a Judge of a High Court or who is or has been an officer not below
the rank of a Secretary to the Government of India or who is or has been
a Member of the Board for not less than three years.
60
5. Qualifications for appointment as Presiding Officer
6. Term of Office
7. Staff of Tribunal
8. Establishment of Appellate Tribunal
9. Composition of Appellate Tribunal
10. Qualifications for appointment as Chairperson of the Appellate
Tribunal.
11. Term of Office
12. Staff of the Appellate Tribunal
13. Salary and allowances and other terms and conditions of service
of Presiding Officers
14. Filling up of vacancies
15. Resignation and removal
16. Orders constituting Tribunal or an Appellate Tribunal to be final
and not to invalidate its proceedings
Chapter III - Jurisdiction, Powers and Authority of Tribunals
17. Jurisdiction, powers and authority of Tribunals.
17A. Power of Chairperson of Appellate Tribunal
18. Bar of Jurisdiction
Chapter IV - Procedure of Tribunals
19. Application to the Tribunal
20. Appeal to the Appellate Tribunal
21. Deposit of amount of debt due, on filing appeal
22. Tribunal
23. Right to legal representation and Presenting Officer
61
24. Limitation
Chapter V - Recovery of Debt Determined by Tribunal
25. Modes of recovery of debts
26. Validity of certificate and amendment thereof
27. Stay of proceedings under certificate and amendment or
withdrawal thereof
28. Other modes of recovery
29. Application of certain provisions of Income-tax Act
30. Appeal against the order of Recovery Officer
62
which makes it unlawful for the business of the firm to be carried on or
for the partners to carry it on in partnership: Provided that, where more
than one separate adventure or undertaking is carried on by the firm,
the illegality of one or more shall not of itself cause the dissolution of
the firm in respect of its lawful adventures and undertakings.
10. Chapter XIII Winding Up and Dissolution
63. The winding up LLP may be either voluntary or by Tribunal and LLP,
so wound up may be dissolved.
64. LLP may be wound by the Tribunal, -
(a) If the LLP decides that LLP be wound by the Tribunal;
(b) If, for a period of more than 6 months, the number of partners of LLP
is reduced below two;
(c) If LLP is unable to pay its debts
(d) If LLP has acted against the interest of sovereignty and integrity of
India, the security of the state or public order;
(e) If LLP has made a default in filing with the registrar the statement of
account and solvency or annual return for any five consecutive financial
years; or
(f) If the Tribunal is of the opinion that it is just and equitable that LLP
be wound up.
65. The Central Government may make rules for the provisions in
relation to winding up and dissolution of LLPs.
63
(1) If the Registrar, after an inquiry has been held under Sec. 35 or after
an inspection has been made under Sec. 36 or on receipt of an
application made by three-fourths of the members of a registered
society, is of opinion that the society ought to be dissolved, he may
cancel the registration of the society.
(2) Any member of a society may, within two months from the date of
an order made under sub-section (1), appeal from such order.
(3) Where no appeal is presented within two months from the making
of an order cancelling the registration of a society, the order Shan take
effect on the expiry of that period.
(4) Where an appeal is presented within two months, the order shall not
take effect until the appellate authority confirms it.
(5) The authority to which appeals under this section shall lie Shan be
the l State Government]:
Provided that the 1[State Government) may by notification in the
2[official Gazette] direct that appeals shall lie to such Revenue authority
as may be specified in the notification.
40. Cancellation of registration of society. -Where it is a condition of the
registration of a society that it should consist of at least ten members,
the Registrar may, by order in writing, cancel the registration of the
society if at any time it is proved to his satisfaction that the number of
the members has been reduced to less than ten.
41. Effect of cancellation of registration. -Where the registration of a
society is cancelled, the society shall cease to exist as a corporate body
64
(a) In the case of cancellation in accordance with the provisions of Sec.
39, from the date the order of cancellation takes effect;
(b) In the case of cancellation in accordance with the provisions of Sec.
40, from the date of the order.
42. Winding up. -
(1) Where the registration of a society is cancelled under Sec. 39 or Sec.
40, the Registrar may appoint a competent person to be liquidator of the
society.
(2) (a) Liquidator appointed under sub-section (1) shall have power (a)
to institute and defend suits and other legal proceedings on behalf of the
society by his name of office;
(b) To determine the contribution to be made by the members and past
members of the society respectively to the assets of the society.
(c) To investigate all claims against the society and, subject to the
provisions of this Act, to decide questions of priority arising between
claimants;
(d) To determine by what persons and in what proportions the costs of
the liquidation are to be borne; and
(e) To give such directions in regard to the collection and distribution of
the assets of the society, as may appear to him to be necessary for
winding up the affairs of the society.
(3) Subject to any rules, a liquidator appointed under this section shall
in so far as such powers are necessary for carrying out the purposes of
this section, have power to summon and enforce the attendance of
witnesses and to compel the production of documents, by the same
65
means and (so far as may be) in the same manner as is provided in the
case of a Civil Court under the Code of Civil Procedure, 1908 (5 of 1908).
(4) Where an appeal from any order made by a liquidator under this
section is provided for by the rules, it shall He to the Court of the District
Judge.2 -
66
93. Power of Central Registrar to cancel registration of a multi-state
cooperative society.
67
(3) Where any party against whom an interim order, whether by way of
injunction or stay or in any other manner, is made on, or in any
proceedings relating to, a petition under clause (1), without
(a) furnishing to such party copies of such petition and all documents in
support of the plea for such interim order; and
(b) giving such party an opportunity of being heard, makes an
application to the High Court for the vacation of such order and
furnishes a copy of such application to the party in whose favor such
order has been made or the counsel of such party, the High Court shall
dispose of the application within a period of two weeks from the date on
which it is received or from the date on which the copy of such
application is so furnished, whichever is later, or where the High Court
is closed on the last day of that period, before the expiry of the next day
afterwards on which the High Court is open; and if the application is not
so disposed of, the interim order shall, on the expiry of that period, or,
as the case may be, the expiry of the aid next day, stand vacated.
(4) The power conferred on a High Court by this article shall not be in
derogation of the power conferred on the Supreme Court by clause (2)
of Article 32.
68
date of passing of the order, cause intimation thereof to be sent to the
Official Liquidator and the Registrar. Substituted by the Companies
(Second Amendment) Act, 2002 (w.e.f. a date yet to be notified). Prior to
its substitution, section 444 read as under:
Consequences of winding up order - 444. Order for winding up to be
communicated to Official Liquidator and Registrar. - Where the Court
makes an order for the winding up of a company, the Court shall
forthwith cause intimation thereof to be sent to the Official Liquidator
and the Registrar.
(2) The Central Government shall also specify, in the notification referred
to in sub-section (1), the areas within which the Tribunal may exercise
jurisdiction for entertaining and deciding the applications filed before it.
69
19. Part IB - National Company Law Tribunal
10FB. Constitution of National Company Law Tribunal.- The Central
Government shall, by notification in the Official Gazette, constitute a
Tribunal to be known as the National Company Law Tribunal to exercise
and discharge such powers and functions as are, or may be, conferred
on it by or under this Act or any other law for the time being in force.
10FC. Composition of Tribunal - The Tribunal shall consist of a
President and such number of Judicial and Technical Members not
exceeding sixty- two, as the Central Government deems fit, to be
appointed by that Government, by notification in the Official Gazette.
70
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