THIRD SHOT he Insolvency And Bankruptcy Act is the latest attempt by the governmentgovernm to make the bankruptcy and liquidationuidation process faster and more effective.effect The existing laws — SICA (Sick Industrial Companies Act) and the SARFAESI Ac

lot of things, including market conditions. If a company’s assets are not getting the right value, how can you force someone to sell them within a stipulated time?” Low threshold: The minimum single default for starting insolvency proceedings is just `1 lakh. This can be an irritant as any employee or small vendor will be able to initiate insolvency proceedings even if the default is small. Tyagi says the committee deliberately kept the threshold low to empower even employees and small vendors. In the US, three or more creditors can start insolvency proceedings against a company if the latter owes them more than $12,300 (just over `8 lakh as per the current exchange rates). Creditor democracy: While experts have welcomed the shift in the balance of power in favour of creditors, a section believes that not allowing promoters to run the company during the resolution period can be a recipe for disaster. They cite the US model, where debtors remain in control of operations till the start of the liquidation process. However, in the UK, the control of the company is passed on to insolvency practitioners.

Kumar Saurabh Singh, Partner, Khaitan & Co, says there is not enough evidence that putting the entire faith in creditors will speed up the process or improve chances of efficient restructuring. “By cutting off equity holders from decision making, you are not creating enough stake in the game for them to be supportive of a viable resolution,” he says.

There is also no certainty that 75 per cent creditors will agree to the resolution plan. In corporate debt restructuring, a group of creditors is allowed to take a decision on restruc-turing, but here all financial creditors will be part of the process. “You are leaving a lot of room for people to punch holes in the system,” says Singh.

But asset reconstruction companies, or ARCs, are not complaining. As aggregators of debt, they will automatically qualify as creditors. Siby Antony, Managing Director and CEO, Edelweiss ARC, says, “The law provides for takeover by the creditors’ committee and the resolution professional. We take over loans of large financial creditors. If the value of the loan (taken over by the ARC) is more than 75 per cent, the ARC will be able to run the company along with the resolution professional, which is not so under the SARFAESI Act.” Under the SARFAESI Act, ARCs can take over only assets charged to them.

Some experts say that while the law is replacing the board with a resolution professional, it is not giving the latter enough power. The professional will have to seek approval from the creditors’ committee for almost everything — raising interim finance, changing the capital structure, undertaking affiliated/ related party transaction(s), disposing of shares of a big shareholder, or making any change in the management.

Tyagi of the Department of Economic Affairs justifies the decision to give control to creditors and resolution professionals. “The US is a mature market where, unlike in India, the ownership of companies is not concentrated. As corporate governance improves, the law might be changed in future.” Antony of Edelweiss has a different take on this. “The management or promoter who puts the company in a mess has no right to run it,” he says. He cites the example of Satyam Computers, which he says was the only company revived under the Companies Law. “The board was suspended. Professionals revived it. The same thing will be done now,” he says.

It is only when the system rolls out that we will know if it has the kind of impact its admirers are expecting. As they say, the proof of the pudding is in the eating. ~ creditors (by value) the resolution plan. This, say legal experts, will not be easy