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The process for rehabilitation, regulated by the Sick Industrial Companies (Special Provisions) Act 1985 through the institutional structure of BIFR is amenable to delays and does not provide a balanced or effective framework for all stakeholders.
The process of liquidation and winding up is costly, inordinately lengthy and results in almost complete erosion of asset value. The Committee noted that a beginning towards reform was made with the enactment of Companies (Second Amendment) Act, 2002, which in addition to significant changes in the restructuring and liquidation provisions provided for the setting up of a new institutional structure in the form of the National Company Law Tribunal (NCLT)/Tribunal and its Appellate Body, the National Company Law Appellate Tribunal (NCLAT).
Such a single, independent Statutory forum, should have the capacity and expertise to deal with the specialized commercial and technical characteristics of the Insolvency Law and the process; make an assessment and decide the course of action (rehabilitation or liquidation) that may need to be adopted at the earliest possible stage while balancing the interests of all stakeholders equitably.
The Committee noted that the Companies (Second Amendment) Act, 2002 had brought about significant changes in the provisions dealing with rehabilitation/winding up / liquidation of companies in the present Act and had also proposed that an institutional structure for the purpose be set up in the form of NCLT/NCLAT.
A Creditors’ Voluntary Liquidation is the liquidation of a company that cannot pay its debts as they fall due.
The framework should seek to preserve estate and maximize the value of assets; recognize inter se rights of creditors and provide equal treatment of similar creditors while dealing with small creditors equitably.
The Committee is of the view that a review of the system for addressing corporate insolvency in the Indian context is urgently called for and recommends the following to the policy planners in India.
Insolvency Law 6.1 An effective insolvency system is an important element of financial system stability.
Liquidation and Rehabilitation 7.1 The Insolvency law should strike a balance between rehabilitation and liquidation.
It should provide an opportunity for genuine effort to explore restructuring/ rehabilitation of potentially viable businesses with consensus of stake holders reasonably arrived at.
World over, insolvency procedures help entrepreneurs close down unviable businesses and start up new ones.