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Bankruptcy Code will be a game-changer, workmen to benefit

The Insolvency and Bankruptcy Code will come as a relief to banks battling $100 billion in bad debt. But it will need the approval of the houses of the Parliament. As a lifeline for creditors, the code is a path-breaking legislation, says Harsh Pais, Partner, Corp Practice, Trilegal, adding that it will greatly help banks restructure and recover assets. It is a game-changer, he said, speaking with CNBC-TV18.


One of the provisions of the code sets out to improve conditions for unsecured creditors. For blue-collar workers who have been left unpaid for the defaulting company, this code will be a godsend as their salaries will be paid, said Lalit Kumar, Partner, JSA.
 
This code takes the dues outstanding to workmen for two years dating back from the time insolvency proceedings are initiated against the defaulting company, he said.


Another provision of the code covers overseas assets of defaulting companies as well, which is positive, feels Pais. But the law is yet to develop on this.


Regarding transfer of cases, Kumar said there is a mechanism. Individual and partnership cases will go to the Debt Recovery Tribunal. There is a complete mechanism for this. Corporate cases will go to the National Company Law Tribunal.

Below is the transcript of Harsh Pais and Lalit Kumar’s interview with CNBC-TV18’s Saurabhi Upadhyay and Ronojoy Banerjee.

Surabhi: Several very interesting features coming in, in the latest version of the bill that is coming out. There is some talk about perhaps creditors reaching out to overseas assets of those entities that have gone into default. There is a lot of emphasis on protecting workers and employees and their salaries and their interests as well. So, I want to start with a very broad opening question, looking at the code in its current form how effective an instrument or a weapon do you think this will be?

Pais: I think it is going to be an effective code and it is going to achieve its purposes. This is one of the path breaking legislations that we have had in recent times. I think it will clearly help achieve both restructuring as well as recovery from assets that can’t be restructured. So, I do believe it is a game changer.

Ronojoy: We have seen how the Kingfisher Airlines saga has unfolded over the last few months. While Vijay Mallya or his company may have defaulted on loans of upto Rs 9000 crore, he still owes about Rs 300 crore to about 3000 odd employees. Not much attention has been focused on the plight of the erstwhile employees of Kingfisher Airlines. Given the fact that now this 30 member joint committee has proposed  that the dues of employees will be put at par with those of the secured creditors, in that case if this code was already in place, would we have seen a different outcome or a different sort of flow of events as far as Kingfisher Airlines episode is concerned?

Kumar: I would not specifically comment on the Kingfisher and Vijay Mallya’s case going on. I can generally talk about the provision which are now brought in as far as the workmen dues are concerned. Primarily this is to do with the blue collar employees, somebody who is actually a workmen under the Industrial Disputes Act. What this bill now or the code now does is, first, it takes the due instead of 12 months it will take the dues for two years which is 24 months.

As far as the question is concerned to make it at par with the secured creditors, if you read the fine prints of the report and the recommendations it does not actually make it over and above in priority to the secured creditors. What it does say is that they will still rank equally in rank with the secured creditors. However if you see the placement, there is a very specific remark which the relevant clause 53 as it deals with it, specifically says that in terms of putting it in the provision it will be put above the secured creditors. However then the clause that both the provisions come under with respect to the secured creditors and workmen dues, the main provision says that they will rank equally. So, I don’t think that other than the change with respect to making the dues which are outstanding for one year to make it for two years there is any priority over the secured  creditors.

However the committee has given due regard to the fact that the workmen should be protected in a case of bankruptcy and insolvency proceedings. The important thing is that the white collar employees as in the current employees that has not been changed, that still continues to be 12 months. It is only the blue collar – the workmen as in manufacturing units and in the industrial units, they are the ones who are covered in cases of insolvency proceedings to get their dues paid for last two years from the date the proceedings are initiated.

Surabhi: Let me ask you about another fine print that has been introduced about giving this piece of legislation some teeth with respect to overseas assets and we all know why that has become such a huge issue in the last couple of weeks. However if I look at some of the finer details it seems to suggest that the adjudicating authority would write a letter of request to a court or an authority  of the country in question. So, doesn’t this really sort of dilute  the extent to which the authority can actually go after these assets, is this only on paper and in effect it will all fall down to  cross country treaties, bilateral treaties and the diplomatic channel if bankers and the authorities is to lay their hands on these overseas assets?

Pais: I think the coverage of overseas assets in general is a positive development. In this India is not unique or will not be unique when this code comes in. The laws of other jurisdictions including  for instance the US or the UK also have provisions that have extraterritorial applicability. The question really is how will those kind of orders be enforced. You are right in saying that ultimately it may require some sorts of  treaties covering cross border insolvencies. However there is already some amount of precedence for insolvencies from countries outside India which have assets in other countries which could also include India. So, I think the law will have to develop on this. It may well be that the law, in fact it is that in some cases the laws in those countries will take into account the mechanisms of third party countries such as India and those kind of orders passed in India will be given some kind of special status.

So, I think it is a positive development. Clearly there will need to be some more details in terms of exactly how those will be enforced but there is precedent for it and they should be good basis to proceed on that basis.

Ronojoy: So when this code comes into force will this be only meant for prospective cases or will it also take into account cases of the past in which case immediately there will be 70,000 backlog?

Kumar: There is a complete mechanism for this as far as the cases are pending before the Board of Industrial and Financial Reconstruction (BIFR), the cases are pending before the Courts, the Debt Recovery Tribunals though. The way the code is providing is as far as the individuals and the partnership firms are concerned the cases will be with the Debt Recovery Tribunal (DRT) and as far as in the corporate it will go to the National Company Law Tribunal, so actually the movement of the cases and the transfer of the cases will happen for the corporate from wherever they are presently and they will move to the National Company Law Tribunal. Now there is a specific provision in to the Companies Act under section 434 which provides for all the cases that will go to the National Company Law Tribunal. This Court specifically overrules and repeals that provision and says that all the cases which are with the Courts, with BIFR they will abate. For all other matters whether it’s at the other institutions and bodies and regulatories they will move to the National Company Law Tribunal, so there is a clear provision regarding that, but how it will effective, that will come through the delegated legislation and the rule making, so far as the transfer of cases are concerned, for example the cases which are with the BIFR, the Board of Industrial and Financial Reconstruction, Sick Industrial Companies Act (SICA). The Court provides that they will abate and they will not because the benchmarks and the thresholds to determine the insolvency are different as far as SICA is concerned and as far as this code is concerned.

So, while SICA talks about networth, this talks about the insolvency in terms of inability to pay the creditors. So, if there is a company where the proceedings are with Board for Industrial and Financial Reconstruction (BIFR) but then it is a negative networth company but at the same time it is able to pay funds it would not require the case to be transferred to National Company Law Tribunal (NCLT) unless and until that company is also unable to pay its debt. So, because of the shift of the threshold limits the provision of law applicable to what determines insolvency , many cases will abate and many cases would move on. So, the provisions are quite clear in this regard in the new code.