If one observes the sickness syndrome in India, he would conclude that there are many failures. The experience is resolution of failure. There is a need for a sophisticated institutional framework through which the labour and capital embedded in failed firms can be rapidly deployed into more productive uses.
This question is also valid for the establishment of creditor’s rights. The mechanism must be flexible enough, to enable creditors to obtain the residual value of failed firms. The rights of creditors will be established if they can realise their dues through speedy recovery from the distressed assets either through sale or through better uses.
The current tendencies have shown, even after so much institutional arrangements, Banks and other Creditors have failed to exercise control over distressed assets even in the case of willful default.
Image Source: securityaffairs.co
ADVERTISEMENTS:
On 21st June 2002, the President promulgated an ordinance “The Securitisation, Reconstruction, of Financial Assets and Enforcement of Security Interest Ordinance 2002. The ordinance gives power to banks and financial Institutions to enforce their claims on collateral for delinquent secured credit, without going through cumbersome judicial process.
The ordinance was passed in parliament on 21st November 2002. The ordinance provides a legal framework for securitisation of financial assets and asset reconstruction. Once the asset reconstruction company has acquired an asset, it has the same power, for enforcement of securities as the original lender. Banks or Financial Institution also in the case of non- performing debts can serve notice to the borrower to discharge their liabilities within 60 days.
Failing to discharge the liabilities in the stipulated time will enable the banks to fake possession of secured assets, take over management of assets, and appoint any person to manage the assets.
ADVERTISEMENTS:
The above step is related to interest of creditors which have a narrower dimension but broadly a greater attempt has been made by the companies (Second Amendment) Act 2002. It is a more key step for improving the mechanism for the “resolution of failure.” The Act provides for the constitution of a National Company Law Tribunal (NCLT).
The functions that are handled by Company Law Board (dispute resolution and compliance) BIFR (revival and rehabilitation of sick companies) and High Courts (Winding up of Companies) will now be handled by the NCLT, Once Sick Industrial Companies Act is repealed. The new law has several advantages and flexibility over SICA.
The NCLT will be the single forum for companies replacing the existing three forums. There will be replacement of BIFR by NCLT. The Board is now playing major role in the “resolution of failure.” From May 1987 (Year when BIFR was created) to Oct. 2002, BIFR has received 5762 cases which include 273 PSUs (Public Sector Undertakings) also. Out of 5762 references, 988 references were dismissed as non-maintainable and 1057 companies were recommended to be wound up. In all 321 companies were described as no longer sick, as their net worth turned positive. The Board also recommended for 91 merger cases.
The recent steps on industrial sickness by the government follow from Dr. Omkar Goswami Committee’s report on industrial sickness in 1993. The Report recommended for five “fast track” winding up tribunals in major cities, setting up recovery tribunals for recovering debts, sick company’s own reference to BIFR should be made voluntary not mandatory, sickness can be detected at incipient stage and remedial measures may be adopted through single point facilitation.
ADVERTISEMENTS:
The CBDT should remove all tax- compulsions so that Financial Institutions and Banks can write off some debt against equity. The Goswami Committee also feels secured creditors and should have right to management change, in case of recurring debt default.
Following Goswami Committees recommendations it was only in 2002, The Companies (Second Amendment) Act changed the actions to be taken for “resolution of failure”. The sickness has been redefined, a revival and rehabilitation fund has been created, and protection from creditor has been withdrawn.
Above all, the BIFR will be abolished, which has caused tremendous delay in deciding the late of the sick companies. Nursing a sickness requires “a stitch in time saves nine principle”; other wise there will be more corporate failures in the years to come.