Fast-track restructuring is even in lenders' interest

Like an animate person, the health of a corporate is also subject to innumerable bacteria and viruses. However, the Sick Industrial Companies (Special Provisions) Act 1985 (SICA) which provides for revival and rehabilitation of sick companies, have been quite ineffective. The BIFR setup under SICA has virtually become a boon for defaulting borrowers.

The SICA has in fact been misused by the defaulting borrowers to get immunity from legal action. The liquidation procedure under the Companies Act, 1956 also has not helped in expediting the process of quick death and release of national resources getting blocked in liquidation.

Debt Recovery Tribunals also could not expedite the process.

The Securitisation and Reconstruction of Financial Assets
and Enforcement of Securities Act, 2002 (SRFESI)was
a bold step and it addressed the problem of banks
and financial institutions in recovering their debts
but could not deal with issue of reviving the health
of the corporate affected by bacteria or virus.

I think the new modern bankruptcy code being contemplated
by the government of India is a step in the right direction.
This bankruptcy law proposes to provide for a mechanism
of diagnosis and treatment. Obviously, a time period has to
be provided for during which such exercise would be carried out.
During this period, the right of the lenders under the SRFESI
Act to take possession of the assets of a defaulting borrower
has to be suspended.

The objective of bankruptcy law is to revive the health
of the corporate and during this treatment everyone
concerned including the lenders have to co-operate.
If during this process of revival, the secured lenders
take away the secured assets, the treatment in the
form of restructuring can’t continue. Suspension of this
right of the secured lenders is not going to adversely
the lenders. In any case, even if restructuring is not found feasible,
fast-track liquidation under the proposed bankruptcy law will
ensure that the secured lenders get hold of the assets secured to them.

The new bankruptcy law should be structured in a manner
so that it is litigation free. Further, as the trigger of the
bankruptcy code is pressed, the entire assets and management
of the corporate should vest in a trust. The process of diagnosis
and treatment should be managed through professionals.

Vesting of entire assets and the management in the hands
of a trust comprising of professionals will ensure avoidance of
any misuse of the provisions of bankruptcy law or diversion of
any asset to the detriment of the lenders. Such bankruptcy law
will go a long way in ensuring that the national resources do
not get unnecessarily locked up and are put back in use at the
earliest. To safeguard the interest of the secured lenders and to
ensure efficiency of the new set-up, a period of not more
than a year be allowed for restructuring or revival and in case
of failure, the secured lenders should get back the right to take
possession of assets secured to it.

Satyam and Maytas Infra are two live examples
that demonstrate how quick diagnosis can help in
reviving the health of corporates infected by deadly
viruses. A strong, effective and efficient bankruptcy law
is vital to the growth of the economy.

*(Institute of Chartered Accountants of India)