Ex­e­cu­tion will be Key to Bankruptcy Law’s Suc­cess

The Economic Times - - Money & Banking - SRIDHAR RA­MACHAN­DRAN

T he buzz­word now is the “bankruptcy law”. It is seen as a panacea for the prob­lem of non­per­form­ing loans, but it is a lot more than that pro­vided the ex­e­cu­tion matches the in­tent.

That work­ers’ claim is above the dues to state and any du­bi­ous trans­ac­tion two years prior to bankruptcy with re­lated par­ties and one year in case of other con­tracts can be scrapped should of­fer pro­tec­tion to debtors.

Oncea­cor­po­rat­edebtorde­faults,acor­po­rate in­sol­vency res­o­lu­tion process (CIRP) can be ini­ti­ated through the Na­tional Com­pany Law Tri­bunal (NCLT). The CIRP should be com­pleted within 180 days from the date of ad­mis­sion and can be ex­tended by a max­i­mum of 90 days. This way all stake­hold­ers come to an agree­ment to re­struc­ture the bal­ance sheet with write-offs and pro­vide an op­por­tu­nity for thedebtor­to­turnaround­with­out­goin­gun­der the ham­mer. This is dif­fer­ent to CDR, where only the debt re­pay­ment is de­ferred.

NCLT shall de­clare a mora­to­rium un­til com­ple­tion of the res­o­lu­tion process, or a liq­ui­da­tion or­der that pro­hibits all le­gal ac­tions, in­clud­ing un­der the SAR­FAESI Act.

On ap­point­ment of a res­o­lu­tion pro­fes­sional (RP), the pow­ers of the board of di­rec­tors will be sus­pended and the man­age­ment shall vest with the RP. A com­mit­tee of cred­i­tors, con­sist­ing of only fi­nan­cial cred­i­tors, shall be formed with vot­ing share de­ter­mined based on ex­po­sure. In case there are only op­er­a­tional cred­i­tors, such cred­i­tors shall form the com­mit­tee. Each de­ci­sion shall be taken with the sup­port of not less than 75% of vot­ing share of the com­mit­tee of cred­i­tors.

The RP shall sub­mit the res­o­lu­tion plan ap­proved by the com­mit­tee to NCLT. Once ap­proved by the NCLT, the plan shall be bind­ing on the cor­po­rate debtor, em­ploy­ees, cred­i­tors, guar­an­tors and other stake­hold­ers, af­ter which the erst­while board of di­rec­tors shall re­sume its po­si­tion. If NCLT finds the plan not in ac­cor­dance with the Act or not sub­mit- ted within the time frame, it shall or­der liq­ui­da­tion. The RP can per­form the role of the liq­uida­tor. The se­cured lenders have the op­tion of en­forc­ing their se­cu­rity to re­alise the debt or re­lin­quish their se­cu­rity in­ter­est for re­cov­ery from the sale of as­sets. Any short­fall in di­rect en­force­ment of se­cu­rity would rank along with un­se­cured cred­i­tors.

In­ter­est­ingly, 12 months’ work­men wages rank equal with se­cured cred­i­tors, while statu­tory or state dues rank be­low fi­nan­cial debts of un­se­cured cred­i­tors. Pref­er­en­tial, un­der­val­ued and ex­tor­tion­ate credit trans­ac­tions: If the RP iden­ti­fies such trans­ac­tions to be within two years pri­or­tothecom­mence­mentof CIRPin­caseof re­lated par­ties and one year in other cases, then the NCLT can can­cel such trans­ac­tions.

Pe­nal pro­vi­sions: The bill pro­poses se­vere penalty, from prison term rang­ing from one year to five years, to fine of up to ₹ 1 crore for di­rec­tors and of­fi­cers, be­sides their per­sonal li­a­bil­ity to com­pen­sate, for ac­tions such as:

Ini­ti­at­ing in­sol­vency or liq­ui­da­tion pro­ceed­ings with fraud­u­lent or ma­li­cious in­tent;

Fraud­u­lent or wrong­ful trad­ing — di­rec­tors knew or ought to have known that there was no rea­son­able prospect of avoid­ing com­mence­ment of CIRP and did not ex­er­cise due dili­gence to min­imis­ing the loss to cred­i­tors.

Mis­con­duct dur­ing CIRP Will­ful omis­sion, false rep­re­sen­ta­tion to cred­i­tors

Con­tra­ven­tion of mora­to­rium Some of the pe­nal pro­vi­sions equally ap­ply to cred­i­tors and RP to en­sure fair process. Though de­vel­op­ing an ecosys­tem would take a few months, the fact re­mains that the law is im­mi­nent. Scep­tics in­clude some bankers and ARCs who be­lieve the law can­not be en­forced suc­cess­fully in In­dia. Well, time would tell that. How­ever, it is im­por­tant that cor­po­rates re­view their cash flow and bal­ance sheet and avoid knee-jerk ac­tions that may prove detri­men­tal not only to the pro­mot­ers and di­rec­tors but also to of­fi­cers.

Banks and other cred­i­tors may have to gear up their sys­tems and most im­por­tantly train their em­ploy­ees to ad­here to the pro­posed law and avoid ac­tions that may com­pro­mise their se­cu­rity and re­cov­ery. Be­yond job op­por­tu­ni­ties as res­o­lu­tion pro­fes­sion­als and turn­around spe­cial­ists, hedge funds and vul­ture funds may also come on to the scene.

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