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Restructuring & Insolvency

in 53 jurisdictions worldwide
Contributing editor: Bruce Leonard

2012
Published by Getting the Deal Through in association with:
Andreas Neocleous & Co LLC Bloomfield Advocates & Solicitors Bofill Mir & Alvarez Jana Bowman Gilfillan Cassels Brock & Blackwell LLP Chancery Chambers Charles Adams Ritchie & Duckworth Clasis Law Dundas & Wilson Felsberg, Pedretti e Mannrich Advogados e Consultores Legais Freshfields Bruckhaus Deringer LLP Graham Thompson & Co Headrick Rizik Alvarez & Fernndez Hoet Pelez Castillo & Duque Jorge Avendao & Forsyth Abogados Kinstellar Kleyr Grasso Associs Law Firm Glimstedt Lipman Karas Logos Legal Services Mami c Peri c Reberski Rimac Law Firm Motieka & Audzevicius OMelveny & Myers Oscs Abogados Osei-Ofei Swabi & Co Patton Moreno & Asvat Paul, Weiss, Rifkind, Wharton & Garrison LLP PotamitisVekris Qays H Zubi Attorneys & Legal Consultants Rui Pena, Arnaut & Associados Sociedade de Advogados RL Sarie-Eldin & Partners SCP Miriana Mircov Relicons SPRL Setterwalls SyCip Salazar Hernandez & Gatmaitan Walder Wyss Ltd Wardy nski & Partners Waselius & Wist Weerawong, Chinnavat & Peangpanor Ltd WongPartnership LLP Yoon & Yang LLC Zaid Ibrahim & Co

CONTENTS

Restructuring & Insolvency 2012


Contributing editor Bruce Leonard Cassels Brock & Blackwell LLP Business development managers Alan Lee George Ingledew Robyn Hetherington Dan White Marketing managers Ellie Notley Alice Hazard Marketing assistants William Bentley Zosia Demkowicz Subscriptions manager Rachel Nurse Subscriptions@ GettingTheDealThrough.com Assistant editor Adam Myers Editorial assistant Lydia Gerges Senior production editor Jonathan Cowie Chief subeditor Jonathan Allen Production editor John Harris Subeditors Davet Hyland Caroline Rawson Editor-in-chief Callum Campbell Publisher Richard Davey Restructuring & Insolvency 2012 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 Law Business Research Ltd 2011 No photocopying: copyright licences do not apply. First published 1999 Thirteenth edition 2011 ISSN 1468-3180
The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyerclient relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of December 2011, be advised that this is a developing area.

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Global Overview J  ames Watson Freshfields Bruckhaus Deringer LLP and 3 Alan W Kornberg Paul, Weiss, Rifkind, Wharton & Garrison LLP AFRICA Botswana Kwadwo Osei-Ofei Osei-Ofei Swabi & Co 56 Nigeria Dayo Adu Bloomfield Advocates & Solicitors 329 South Africa Claire van Zuylen Bowman Gilfillan 427 AMERICAS Thomas Benes Felsberg and Paulo Fernando Campana Filho 61 Brazil  Felsberg, Pedretti e Mannrich Advogados e Consultores Legais Canada E Bruce Leonard, David S Ward and Larry C Ellis Cassels Brock & Blackwell LLP 72 Chile Octavio Bofill, Jorge Lembeye and Edder Cifuentes Bofill Mir & Alvarez Jana 88 Mexico Daro U Oscs C and Daro A Oscs Rueda Oscs Abogados 309 Peru Guilhermo Auler and Michelle Barclay Jorge Avendao & Forsyth Abogados 343 United States Alan W Kornberg and Claudia R Tobler Paul, Weiss, Rifkind, Wharton & Garrison LLP 480 Venezuela Carlos Dominguez Hoet Pelez Castillo & Duque 488 ASIA-PACIFIC Australia Scott Foreman and Lucas Arnold Lipman Karas 4 China Melissa Thomas and Christian Zeppezauer Freshfields Bruckhaus Deringer LLP 96 India Sakate Khaitan, Sangeeta Jhunjhunwala and Mahrukh Umrigar Clasis Law 230 Japan Kazuki Okada, Takahiko Itoh and Mariko Inoue Freshfields Bruckhaus Deringer 253 Korea Sang Goo Han, Hyung Bae Park and Yoori Choi Yoon & Yang LLC 267 Malaysia Peh Lee Kheng, Khoo Kay Ping and Effendy bin Othman Zaid Ibrahim & Co 296 Philippines Ricardo Ma PG Ongkiko and Russel L Rodriguez SyCip Salazar Hernandez & Gatmaitan 351 465 Thailand C  hinnawat Thongpakdee, Suntus Kirdsinsap and Bongkarn Jiraboonsri Weerawong, Chinnavat & Peangpanor Ltd EUROPE AND MIDDLE EAST Austria Friedrich Jergitsch, Michael Raninger and Florian Knotzer Freshfields Bruckhaus Deringer LLP 15 Harnek S Shoker Freshfields Bruckhaus Deringer LLP and 33 Bahrain  Grahame Nelson Qays H Zubi Attorneys & Legal Consultants Belgium Charles-Antoine Leunen and Jan-Willem Geeroms Freshfields Bruckhaus Deringer LLP 45 c and Goran Jujnovi c Lu ci c Mami c Peri c Reberski Rimac Law Firm 104 Croatia Vladimir Mami Cyprus Maria Kyriacou and Elias Neocleous Andreas Neocleous & Co LLC 110 uena Trojnkov and Tom Osi cka Kinstellar 118 Czech Republic R Egypt Motaz El-Dreny Sarie-Eldin & Partners 133 England & Wales Ken Baird, Anne Sharp, Victoria Cromwell and Kathryn Bruce Freshfields Bruckhaus Deringer LLP 140 Estonia Indrek Leppik, Martti Peetsalu and Olga Harlamova Law Firm Glimstedt 156 European Union Catherine Balmond, Victoria Cromwell and Wolf Harlfinger Freshfields Bruckhaus Deringer LLP 164 Finland Lauri Peltola and Timo Lehtimki Waselius & Wist 175 France Alan Mason, Nicolas Morelli and Alexandra Szekely Freshfields Bruckhaus Deringer LLP 181 Germany Franz Aleth and Wolf Harlfinger Freshfields Bruckhaus Deringer LLP 190 Greece Stathis Potamitis, Ioannis Kontoulas and Eleana Nounou PotamitisVekris 204 Iceland Erlendur Gslason, lafur Eirksson, Heiar sberg Atlason and Heiar rn Stefnsson Logos Legal Services 221 Italy Raffaele Lener and Giovanna Vigliotti Freshfields Bruckhaus Deringer LLP 239 Lithuania Emil Radzihovsky, Giedrius Kolesnikovas and Beata Kozubovska Motieka & Audzevicius 275 Luxembourg Marc Kleyr Kleyr Grasso Associs 285 Netherlands Michael Broeders and Thijs Flokstra Freshfields Bruckhaus Deringer LLP 319 nski & Partners 362 Poland Micha Barowski Wardy Nuno Pena, Joaquim Shearman de Macedo and Andreia Moreira 374 Portugal  Rui Pena, Arnaut & Associados Sociedade de Advogados RL Romania Lavinia Olivia Iancu SCP Miriana Mircov Relicons SPRL 384 Russia Dmitry Surikov, Maria Zaitseva and Svetlana Tolstoukhova Freshfields Bruckhaus Deringer LLP 393 Scotland Claire Massie Dundas & Wilson 406 Spain Eduard Arruga and Natalia Gmez Freshfields Bruckhaus Deringer LLP 437 Sweden Odd Swarting and Niklas Krling Setterwalls 446 Switzerland Christoph Stubli Walder Wyss Ltd 453 United Arab Emirates Pervez Akhtar, Tarek El-Assra and William Coleman Freshfields Bruckhaus Deringer LLP 471 OFFSHORE Bahamas Leif G Farquharson Graham Thompson & Co 24 Barbados Trevor Carmichael and Lauren McIntosh Chancery Chambers 40 Cayman Islands Graham F Ritchie QC and Rebecca Hume Charles Adams Ritchie & Duckworth 79 Dominican Republic Mary Fernndez and Hiplito Garca Headrick Rizik Alvarez & Fernndez 127 Hong Kong Mark Fairbairn, Ashley Bell and Bronwen May OMelveny & Myers 213 Panama Ivette E Martnez S Patton Moreno & Asvat 335 Singapore Sean Yu Chou, Manoj Pillay Sandrasegara and Mark Choy WongPartnership LLP 420 Quick Reference Tables 495

Law Business Research

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INDiA

Clasis Law

India
Sakate Khaitan, Sangeeta Jhunjhunwala and Mahrukh Umrigar Clasis Law
1 Legislation
What legislation is applicable to bankruptcies and reorganisations?

Bankruptcy

Personal insolvency (individuals and partnership firms): Provisional Insolvency Act 1920; and Presidency Towns Insolvency Act 1908 (applicable in Bombay, Madras and Calcutta). Corporate insolvency legislation: Companies Act 1956; and Sick Industrial Companies Act 1985. In the context of corporate laws, the word bankruptcy has neither been used nor defined. However, under section 433(e) of the Indian Companies Act 1956 (the Companies Act) one of the grounds for winding-up of a company is the inability of the company to pay debts, ie, insolvency (which is synonymous with bankruptcy in India). The Companies Act provides for two types of winding-up: winding-up by the court; and voluntary (members and creditors) winding-up. Banking companies and non-banking financial companies have to comply with additional requirements under the Banking Regulations Act and Reserve Bank of India (RBI) Guidelines for completing the winding-up process. The Board for Industrial and Financial Reconstruction (BIFR), which has been constituted under the Sick Industrial Companies Act 1985 (SICA), also has the power to refer an insolvent company to the court for winding-up. In this chapter we have assumed that all the questions relate to companies.
Reorganisation

Statutory corporations may also be excluded from the provisions of the Companies Act, including the provisions relating to windingup, provided that the statute under which they are formed specifically stipulates that the company will not be governed by the winding-up provisions of the Companies Act. Special state specific legislation, such as the Bombay Relief Undertaking Act 1958, may also provide a cloak of protection to debtor companies from claims by the creditor under express notifications from the government.
3 Secured lending and credit (immoveables)
What principal types of security are taken on immoveable (real) property?

Security on immoveable property in India is principally governed by the Transfer of Property Act 1882. In addition, when there is a foreign exchange component attached to the loan, or the lender/ borrower is a person resident outside India, the rules and regulation notified under the Foreign Exchange Management Act 1999 (FEMA) need to be complied with. A mortgage over an immoveable property is usually structured as a simple mortgage or equitable mortgage, ie, by deposit of title deeds. The other kinds of mortgages generally recognised in India include the following: mortgage by conditional sale; usufructory mortgage; English mortgage; and anomalous mortgage.
4 Secured lending and credit (moveables)
What principal types of security are taken on moveable (personal) property?

A company can be reorganised through a scheme of amalgamation under sections 391 to 394 of the Companies Act. A sick company, ie, a company which has been in existence for not less than five years and whose liabilities equal or exceeded its net worth in the previous financial year, can be revived (financial reorganisation) under the provisions of SICA. It is also possible for companies (ie, banks and financial institutions) to avail themselves of the procedures stipulated by the RBI for corporate debt restructuring (CDR).
2 Excluded entities
What entities are excluded from general bankruptcy proceedings and what legislation applies to them?

Security interests over moveable property are regulated by the Transfer of Property Act 1882, the Sale of Goods Act 1930 and rules and regulation notified under FEMA. The various types of security interests in relation to moveable property are, inter alia, pledge, charge, hypothecation, lien, and assignment (actionable claims).
5 Unsecured credit
What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available? Do any special procedures apply to foreign creditors?

Government companies, under section 620 of the Companies Act, may be excluded from the provisions of the Companies Act, including the provisions relating to winding-up, if so stipulated in a notification by the central government.

The rights of unsecured creditors are regulated, inter alia, by the Indian Contract Act 1872, Companies Act 1956, Transfer of Property Act 1882, Sale of Goods Act 1930, Civil Procedure Code 1908 (CPC) and Limitation Act 1963. Furthermore, the rights of banks and financial institutions making secured and unsecured lending are regulated under the State Financial Corporations Act 1951 (SFCA) and the Recovery of Debts Due to Banks and Financial Institutions Act 1993.
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The following remedies are available to unsecured creditors in India: apply for winding-up of the company; sue for recovery of the debt by instituting summary proceedings under either order XXXVII of the CPC or the relevant high court rules (if any); sue for debt and damages under the CPC and thereafter obtain a decree and execute it under order XXI rule 31; banks, financial institutions or consortiums of banks or financial institutions can approach the Debt Recovery Tribunal, under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act 1993 if the debt amount is 10 lakh rupees (1 million) or more. assuming there is an arbitration agreement in place, institute arbitration proceedings; and take over management of the debtor as per rights conferred to state financial corporations under section 29 of the SFCA. Further, pursuant to section 94 and order XXXVIII of the CPC, property can be attached in supplemental proceedings, before the passing of judgment, in order to prevent the ends of justice from being defeated. The Companies Act does not differentiate between domestic and foreign creditors. However, a foreign creditor may have to take necessary approvals from RBI for remitting the proceeds out of India. It is possible in any suit for recovery that the court may ask a lender for security for costs under order XXV of the CPC.
6 Courts
What courts are involved in the bankruptcy process? Are there restrictions on the matters that the courts may deal with?

INDiA
for the beneficial winding-up of the business. However, the corporate state and corporate powers of the company continue until it is dissolved.
8 Involuntary liquidations
What are the requirements for creditors placing a debtor in involuntary liquidation and what are the effects?

Creditors can apply to the court to place a debtor company in involuntary liquidation if the company owes the creditor a sum exceeding 1 lakh rupees, the creditor has served a notice to the company for payment of the sum due and the company has neglected to pay the sum for three weeks thereafter, or if an execution or other process in favour of the creditor is unsatisfied, in whole or in part. If the court is satisfied that the company is unable to pay its debts, it can pass an order for winding-up, and appoint an official liquidator for carrying out the winding-up process and distributing the assets. In addition to the rights under the Companies Act, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 (SARFAESI) and SFCA give powers to specified financial institutions on default of payment of debt to take possession of the security and sell the same and also permit such specified financial institutions to take over management and control of the debtor company.
9 Voluntary reorganisations
What are the requirements for a debtor commencing a financial reorganisation and what are the effects?

The high court where the registered office of the company is situated would have jurisdiction over the winding-up proceedings of such a company. The high court may, at its discretion, transfer the proceedings to a district court or another high court. The BIFR is the appropriate forum under the SICA in cases relating to sick companies. It is pertinent to point out that the government has sought to repeal SICA by enacting the Sick Industrial Companies (Special Provisions) Repeal Act 2003 (SICRA) and the Companies (Second Amendment) Act 2002. As per this legislation, the government is proposing to dissolve the BIFR and its appellate authority and entrust the revival and rehabilitation of companies to the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). However, both enactments are yet to be notified and thus have not yet come into force. Accordingly, SICA continues to be the main legislation governing reorganisations of companies. Part I of the CPC provides provisions relating to court jurisdictions and, more specifically, sections 15 to 20 provide for the place of jurisdiction in a particular matter. Reference should be made to these provisions before instituting a suit in a particular court.
7 Voluntary liquidations
What are the requirements for a debtor commencing a voluntary liquidation and what are the effects?

A debtor can commence financial reorganisation under sections 391 to 394 of the Companies Act by presenting a reorganisation scheme to the court. The court will then order a meeting of the creditors and members of the debtor company. If a three-quarters majority of the creditors and members present at the meeting approve the scheme, then the court, if it thinks fit, will sanction the scheme. During the pendency of any such proceeding in court, the court has the power to stay the commencement or continuation of any suit or proceeding against the company until the application is disposed off. Under SICA, the BIFR is empowered to take appropriate measures for revival and rehabilitation of potentially sick industrial undertakings and for liquidation of non-viable companies. A companys board of directors has to make reference to the BIFR within 60 days of the date of finalisation of the accounts in the financial year in which it has become sick, for determination of the measures that need to be adopted to revive the company. Under the CDR system, the concerned corporate, in accordance with the debtor-creditor agreement and the inter-creditor agreement, if supported by the secured lenders who have a minimum of 20 per cent share in either working capital or term finance, can approach the CDR cell for restructuring of the corporate debt. It is also pertinent to note that for financial reorganisation, a debtor has to provide rational grounds of adverse business conditions on account of which the company was unable to meet its payment and repayment obligations to creditors to avail itself of debt restructuring of its existing debt, including the funded interest of the debt.
Effects

A company can be voluntarily wound up if the period fixed for duration of the company or the event specified has occurred and on the occurrence of which the articles provide that the company will be dissolved, and the company in a general meeting passes a resolution requiring the company to be wound up voluntarily, or if the company passes a special resolution that the company be wound up voluntarily.
Effects

From the commencement of the winding-up, the company is required to cease to carry on its business, except so far as may be required
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At the conclusion of the court proceedings related to the reorganisation under the Companies Act, if the court agrees to the scheme, the process of merger, demerger, amalgamation, etc is initiated by the company and completed as per directions issued by the courts. Under SICA, if the BIFR, after inquiry, is of the opinion that it is practicable for the companys net worth to exceed its losses, it will pass an order appointing an operating agency, with directions to formulate a plan for revival of the company, including its financial reconstruction. On the other hand, if the BIFR is not convinced about the scheme and is of the belief that the company cannot be revived, it

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will refer the case to the appropriate court to commence winding-up proceedings. Under CDR, in the case of substandard accounts, if 75 per cent of the creditors by value and 60 per cent of the creditors by number are of the opinion that such accounts are likely to become functional after introduction of the CDR package, all other creditors are expected to participate in the entire CDR package, including making available agreed additional financing, if any. In the case of doubtful accounts, if a minimum of 75 per cent (by value) and 60 per cent (by number) of the lenders satisfy themselves of the viability of the package, then consent for such restructuring is subject to no lenders being bound to take up additional financing under the debt restructuring package.
10 Involuntary reorganisations
What are the requirements for creditors commencing an involuntary reorganisation and what are the effects?

Clasis Law
if the company has acted against the national interest, public order,, decency or morality; or if the court is of the opinion that the company should be wound up. In India, since there is no obligation on the part of the directors to commence winding-up, usually no personal liabilities to directors and officers can arise for non-commencement of proceedings. The above is on the assumption that there is no evidence to suggest that an action or omission by the director was mala fide or undertaken to perpetrate a fraud against the company or its employees.
12 Doing business in reorganisations
Under what conditions can the debtor carry on business during a reorganisation? What conditions apply to the use of assets and to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtors business activities?

A creditor can also commence reorganisation under the Companies Act by presenting a reorganisation scheme to the court. The court will then order a meeting of the creditors and members of the debtor company. If a three-quarters majority of the creditors and members present at the meeting agree to it, then the court, if it thinks fit, sanctions the scheme. During the pendency of any such proceeding in the court, the court has the power to stay the commencement or continuation of any suit or proceeding against the company until the application is disposed off. Under SICA, there is no provision dealing with involuntary reorganisation commenced by creditors. Under the CDR scheme, the secured lenders who have a minimum of 20 per cent share in either working capital or term finance can approach the CDR cell for restructuring of the corporate debt. In the case of substandard accounts, all other creditors are expected to participate in the entire CDR package, including the agreed additional financing, if any, only if 75 per cent of the creditors by value and 60 per cent of the creditors by number are of the opinion that such accounts are likely to become functional after introduction of the CDR package. Similarly, in the case of doubtful accounts, if a minimum of 75 per cent (by value) and 60 per cent (by number) of the lenders satisfy themselves of the viability of the package, then consent for such restructuring is subject to the conditions that lenders are not obliged to take up additional financing under the debt restructuring package.
11 Mandatory commencement of insolvency proceedings
Are companies required to commence insolvency proceedings in particular circumstances? If proceedings are not commenced, what liabilities can result?

Under the Companies Act, after the commencement of the windingup process, no transfer of property including actionable claims can be done without the permission of the supervising court. During the continuance of winding-up proceedings the incumbent management is usually permitted to continue to operate the company. However, on a winding-up order being made the management and control of the company shifts to the official liquidator. The official liquidator acts under directions of the court. Under SICA, the debtor company can carry on its business only with the approval and under the directions of the BIFR. The creditors and court have not been empowered to supervise the debtors business activities, during reorganisation, but the BIFR has the right to supervise the business activities, and determine if the scheme of revival is working. The banks and financial institutions that provide financial assistance for the revival of the sick industrial company in the form of loans, guarantees, etc, have the first charge during recovery, if so provided in the scheme sanctioned by the BIFR. Under the CDR system, also, the creditors who provide additional finance have preference to the cashflows of the debtor during recovery. Rights of specified financial institutions under SARFAESI and SFCA permit such specified financial institutions to take over management and control of the debtor company on default by such company in payment of debt. Accordingly, the specified institutions have a statutory right of running the company once the company has defaulted on its debt obligations.
13 Rejection and disclaimer of contracts in reorganisations
Can a debtor undergoing a reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party?

There is no mandatory requirement per se under the Companies Act for a company to commence insolvency proceedings in circumstances stated above, ie, to avoid personal liability to directors and officers or otherwise. Usually when the company does not on its own initiate the winding-up proceedings, the creditors may initiate the winding-up if they are seeking to recover their legitimate debts. The Companies Act provides that a company may be wound up by court: if the company by special resolution has resolved to be wound up; if default is made in delivering the statutory report to the registrar or holding the statutory meeting; if the company, within one year from its incorporation, does not commence business, or suspends business for a whole year; if the number of members is reduced below the statutory limit; if the company is unable to pay its debts; if the court feels it is just and equitable to order the winding-up; if the company has made a fault in filing the documents with the registrar for any five consecutive years;

In a reorganisation under the Companies Act the company cannot reject or disclaim any contracts, and has to honour all the contracts entered into. However, on a winding-up order being made, the liquidator may, with the approval of the supervising court, disclaim onerous contracts and properties for justifiable reasons. If the official liquidator desires to reject or disclaim an unfavourable contract he will need to apply to the supervising court for directions. The court would usually give the counterparty a chance to present its case and, after hearing both sides, either permit rejection or refuse it. On disclaimer being permitted, the contract as from the date of disclaimer operates to determine rights, interests and liabilities of the company and the property of the company but shall not, except in so far as it is necessary for releasing the company/property, affect the rights and liabilities of any other person.

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Clasis Law
When a scheme under SICA is going on, no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company, shall lie or be proceeded with, except with the consent of the BIFR or, as the case may be, the appropriate appellate tribunal. The BIFR has the authority to suspend the operation of any contract during the time a matter is under its consideration. Such a suspension can be made for a maximum period of seven years. On the expiry of declaration all contracts so suspended are revived and enforceable. Under the CDR system, the debtor and creditors can, in their agreements, insert a stand still clause, according to which, after a reference is made to the CDR cell, the parties cannot institute suits against each other, ie, cannot enforce the contracts previously entered into in a court of law, but the contract is not rejected, merely put on hold.
14 Sale of assets
In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets free and clear of claims or do some liabilities pass with the assets? In practice, does your system allow for stalking horse bids in sale procedures and does your system permit credit bidding in sales?

INDiA
When a proceeding is going on in the BIFR, or a scheme sanctioned by it is under way, no proceedings for the winding-up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company, shall lie or be proceeded with further, except with the consent of the BIFR. Under the CDR system, one of the most important provisions in the debtor-creditor agreement and the inter-creditor agreement is the stand still provision, whereby the debtor and lender(s) agree that they will not commence or proceed with any (civil) legal action or proceeding against each other and observe a stand-still position after a reference is made to the CDR cell and during the period the scheme is under preparation and implementation. This provision enables the CDR system to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. Under all of the above the creditor can get relief with special sanction of the court or the BIFR. In granting relief the court will weigh the balance of convenience and consider irreparable harm if the dispensation sought is not made.
16 Arbitration processes in bankruptcy
How frequently is arbitration used in insolvency proceedings? What limitations are there on the availability of arbitration in insolvency cases? Will the court allow arbitration proceedings to continue after an insolvency case is opened?

Under the Companies Act, an official liquidator who is appointed is given the power to sell the assets of the company, for the process of winding-up. He has the power to sell the immoveable and moveable assets of the company by public auction or private contract. He also has the power to sell the whole of the undertaking as a going concern. Under the SICA, the BIFR may, by an order in writing, direct the sick industrial company not to dispose of any of its assets during the period of preparation or consideration of the scheme under section 18; and during the period beginning with the recording of the opinion by the BIFR for the winding-up of the company up to commencement of the proceedings relating to the winding-up before the relevant high court. Transfers under SARFAESI and SFCA vest in the transferee all rights in or to the property transferred as if the transfer had been made by the owner of the property. In India, sale through court auction or under SICA, SARFAESI and SFCA is usually free and clear of claims. However, there have been instances where the sale is made on an as is where is basis. In such instance the purchaser does not acquire assets free and clear of claims. While stalking horse bids and credit bidding are not popular in the Indian context, the liquidator and the BIFR have the right to enter into any transaction for the purpose of effecting the winding-up or reconstruction.
15 Stays of proceedings and moratoria
What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?

Since the Companies Act specifically provides for a mechanism for insolvency-related issues, arbitration is not used in insolvency-related proceedings. Determination of insolvency and winding-up proceedings are among those issues and can only be settled by civil courts. Arbitral procedure, subject to the contract between the company and the counterparty, may be used to determine disputes with respect to the rights, liabilities and claims between such parties. However, the recovery of the claims if the company becomes insolvent can only be done by the civil courts in accordance with the provisions of the Companies Act.
17 Set-off and netting
To what extent are creditors able to exercise rights of set-off or netting in a liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently?

Set-off is allowed in insolvency proceedings under the Companies Act, in the same way as under the Provincial Insolvency Act and Presidency Towns Insolvency Act, if the claims are mutual and commensurable. However, set-off is not allowed for claims that are not easily ascertainable. An exception to this rule of set-off is that a debt owed by a company to its director cannot be set off against any contribution he is liable to make to the companys assets.
18 Intellectual property assets in insolvencies
May an IP licensor or owner terminate the debtors right to use it when an insolvency case is opened? To what extent may an insolvency administrator continue to use IP rights granted under an agreement with the debtor? May an insolvency representative terminate a debtors agreement with a licensor or owner and continue to use the IP for the benefit of the estate?

After the court has passed an order for winding-up, and before an official liquidator is appointed, all legal proceedings against the company are suspended, and all attachments and executions against the company put into force after the commencement of winding-up are void. After a scheme of compromise, arrangement, amalgamation or reconstruction is applied for and until the application is finally disposed off, the court can, under the Companies Act, stay the commencement or continuation of any suit or proceeding against the company on such terms as the court thinks fit.
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An official liquidator has the power to carry on the business of the company as far as necessary for the beneficial winding-up of the company. Further, as mentioned above, once a scheme is being framed or is under consideration or being implemented, the BIFR may direct that all rights against the company and obligations of the company stand suspended. Accordingly, a view can be taken that on the making

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of the winding-up order or filing of an application before the BIFR an IP licensor does not have the right to terminate the debtors use, the liquidator/operating agency appointed by the BIFR can continue to use the IP without any payment to the IP licensor. Further, with the sanction of the court it is also possible that the liquidator terminates the debtors agreement with the licensor and continues to use the IP for the benefit of the estate.
19 Post-filing credit
May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is given to such loans or credit?

Clasis Law
employed, debt service coverage ratio, gap between the internal rate of return and the cost of fund and extent of sacrifices to be made by the lenders. The CDR scheme does not contemplate release of non-debtor parties.
21 Expedited reorganisations
Do procedures exist for expedited reorganisations?

There is no procedure under Indian law for expedited reorganisations.


22 Unsuccessful reorganisations
How is a proposed reorganisation defeated and what is the effect of the plan not being approved? What if the debtor fails to perform a plan?

Under the Companies Act, the liquidator has specific authority to obtain secured credit and a broad power to do all that is necessary for winding up the company, which in our view would include obtaining unsecured credit and giving priority to such loans and credit. Under the SICA, the scheme may provide for financial assistance by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the central government, state government, any scheduled bank or other bank, a public financial institution or state-level institution or any institution or other authority to the sick industrial company that is the debtor. Similarly, the CDR scheme does contemplate additional financial assistance. Usually under SICA and CDR financial assistance in the rehabilitation of the company will stand in priority to existing debt.
20 Successful reorganisations
What features are mandatory in a reorganisation plan? How are creditors classified for purposes of a plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?

A proposed reorganisation, under the Companies Act, is defeated if it does not receive the votes of a three-quarters majority of the members and creditors present at the meeting, or if the court does not approve of the scheme. If defeated the proposed plan cannot be implemented. If upon sanction of the plan the debtor fails to perform, the debtor can be held responsible for contempt of court orders. Under SICA, if the BIFR does not believe that the company can be revived or rehabilitated and does not approve of the plan submitted by the operating agency, it can modify it. But if a debtor fails to perform the plan of revival (reorganisation), the BIFR can pass an order for winding-up the debtor company. Furthermore, persons in charge of the conduct of business of the company will be liable to be imprisoned and fined. Under the CDR system, a proposed reorganisation can be defeated if the CDR empowered group does not accept it, or if the requisite number of creditors is not of the opinion that, after the introduction of the scheme/package, the accounts are likely to become functional. If the debtor refused to perform, it would be in breach of the agreements executed and accordingly, the debtor could be sued for breach thereof.
23 Bankruptcy processes
During a bankruptcy case, what notices are given to creditors? What meetings are held? How are meetings called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors committees? What are insolvency administrators reporting obligations? May creditors pursue the estates remedies against third parties?

The following are the salient features of a reorganisation plan under the Companies Act and SICA: employees benefit; capital structure; main objective of a reorganised entity; directors and officers of the reorganised entity; contracts of the reorganised entity; and intellectual property rights of the reorganised entity. Creditors are classified as secured and unsecured for the purposes of the reorganisation plan. Under the Companies Act, the plan is approved by the court if three-quarters of the members, or class of members, or creditors or class of creditors approve of the scheme. Under SICA there are several details that are required to be provided by the operating agency appointed by the BIFR to draw up a scheme for reorganisation, which include method of sale of the assets of the company, the change in the interests and rights of shareholders, etc. The BIFR sanctions the scheme after considering the views of all stakeholders. Usually schemes sanctioned by the court or the BIFR will not release non-debtor parties. Under a CDR scheme, the creditors are classified as those who are the original lenders and those who have provided additional financing under the CDR package, and the latter will be given preference during recovery. The plan has to be approved by the CDR empowered group, which comprises the executive director-level representatives of IDBI, ICICI and SBI as standing members and the executive director-level representatives of financial institutions and banks that have an exposure in the concerned company whose debt restructuring is under consideration. The empowered group decides the individual corporate debt restructuring cases and the acceptable viability of the concerned borrower based on the return on capital

As mentioned above, the term bankruptcy is not found in Indian law. The synonymous term is winding-up. In this question we have limited our answer to voluntary winding-up. On the company passing a special resolution for voluntary winding-up, such resolution is published in the Official Gazette and in at least one newspaper in the district of the registered office of the company. At the meeting of the board of directors, the majority of the directors of the company are required to give a declaration of solvency verified by an affidavit and appoint a liquidator. If at any time the liquidator is of the opinion that the company is unable to pay its debts, the liquidator is required to call a meeting of the creditors and lay before the meeting a statement of assets and liabilities of the company. In the event of the winding-up continuing for more than one year, the liquidator is required to call a meeting of the creditors at the end of the first year and every succeeding year thereafter and lay before the meeting his acts, dealings and position of the windingup. On the company being fully wound up, the liquidator is required to call for a meeting of the company and its creditors for laying the accounts before the meetings. Notice of such meetings is required to be published in the Official Gazette and some newspapers circulating in the district where the registered office of the company is located. Within one week of the meeting the liquidator is required to file such accounts and a return of the meeting with the official liquidator and registrar of companies. Creditors at any time have the ability to
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require that the winding-up be conducted under court supervision and apply to the court for determination of, inter alia, questions arising in the winding-up. Creditors are not permitted to pursue remedies of the estate directly.
24 Creditor representation
What committees can be formed and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

INDiA
27 Enforcement of estates rights
If the insolvency administrator has no assets to pursue a claim, may the creditors pursue the estates remedies? If so, to whom do the fruits of the remedies belong?

The creditors at a general meeting can appoint a committee of inspection, which has the right to inspect the accounts of the liquidator. The committee of not more than five members is appointed at the meeting of the creditors, after a resolution of voluntary winding-up is passed by the company, or any meeting thereafter. Creditors have been given the right to resolve that a person so appointed ought not to be a member. The court has the power to overturn such resolution of the creditors. Costs properly incurred are payable out of the assets of the company in priority to all other claims. The Companies Act does not specifically permit the appointment of advisers. However, if the appointment is necessary then in our view such costs will have been properly incurred and are therefore reimbursable. Under SICA, the creditors do not have the power to form any committees. The CDR system is a voluntary system based on the DCA and the ICA, where the creditors come together to form a consortium for the purpose of financial restructuring of the company. There is no provision for a group representing the interests of the creditors under CDR, since they themselves undertake the reorganisation.
25 Insolvency of corporate groups
In insolvency proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes? May assets be transferred from an administration in your country to an administration in another country?

Under the Companies Act, on liquidation the assets of the company have to be distributed pari passu among all the creditors. If a creditor wants to dispose of the companys assets that constituted his security, he has to obtain permission of the court and associate the official liquidator with the process of sale. It is possible for the creditors to seek permission from the court to pursue the estates remedies and seek orders that the fruits be first distributed to the creditors. The court has the discretion to make such orders as it deems fit and proper.
28 Claims and appeals
How is a creditors claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Are there provisions on the transfer of claims? Must transfers be disclosed and are there any restrictions on transferred claims? Can claims for contingent or unliquidated amounts be recognised? How are the amounts of such claims determined?

In ordinary circumstances, the winding-up and liquidation proceedings are limited to the particular corporate entity being wound up, ie, the relevant company in question, and there is no pooling of assets of the subsidiaries or parent companies.
26 Modifying creditors rights
May the court change the rank of a creditors claim? If so, what are the grounds for doing so and how frequently does this occur?

The Companies Act specifies the ranks, manner and priorities in which the creditors claims have to be settled; however, the court has certain discretionary powers to give priority to a particular creditors claim on a case-by-case basis. Section 446(2)(d) of the Companies Act further empowers the court to decide any question on priority notwithstanding anything contained in any other law. Certain grounds for priority payment are: where the assets of the company are insufficient, payment can be made in rateable proportions to the creditors and workers; mutual understanding between the debtor and creditor; and pressure by the creditor for filing a suit and attachment of property.

In a creditors winding-up, the creditor will make a petition to the court to commence winding-up proceedings if the company has been given notice of the debt due to him and the debt has remained unpaid for three weeks from the date of the notice. There is no specific procedure for disallowing creditors claims. Nor is there any provision related to the transfer of claims. An unsecured creditor, under Indian law, has to prove his claim and such a claim has to be definite (not contingent or unliquidated). It cannot be a claim that has to be determined by a court process. The general period of limitation under Indian law is three years; in certain specific cases it is longer. A claim is disallowed if not proved. Appeal lies to the appellate bench of the court hearing the winding-up petition and is required to be made in the same manner as any other appeal from an order of such court. Prior to the making of the winding-up order there is no restriction on the transfer of claims. It is, however, pertinent to mention that champerty and maintenance are usually not permitted under Indian law. On a company being wound up under supervision of the court (in the case of voluntary winding-up) or being ordered to be wound up by the court, the relevant court that is winding up the company has the jurisdiction to determine all claims by or against the company and any suit by or against the company. Furthermore, on making an order for winding-up no suit can be commenced or proceeded with, except by leave of the relevant court. In a winding-up proceeding all claims including contingent and unliquidated claims are to be recognised and a just estimate of such claims made.
29 Priority claims
Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganisations? Which have priority over secured creditors?

In liquidations, apart from employee-related claims, revenues, taxes, cesses and rates due to the government have priority over secured creditors. Except for the above, no claims have priority over secured creditors. The claims of workmen, however, are equated to those of secured creditors by operation of law. In reorganisations under SICA and CDR, the lenders providing additional financing shall have a preferential claim over the providers of existing finance with respect to the cashflows of the borrower for their recoveries.

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30 Employment-related liabilities in restructurings
What employee claims arise where employees are terminated during a restructuring or liquidation? What are the procedures for termination?

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proceedings against the company on such terms as it deems necessary. Where an application is made to the BIFR under SICA (until the time the scheme under SICA is in progress) there is a temporary suspension of the proceedings. The consent of the BIFR or AAIFR is mandatory for proceedings against industrial companies. Under CDR, one of the clauses under the ICA and DCA is the stand-still clause, according to which the parties to the agreement cannot commence or proceed with any legal action or proceeding against each other and observe a stand-still position after a reference is made to the CDR cell and during the period the scheme is under preparation and implementation. Thus, although there is no annulment of proceedings in reorganisations, there is temporary setting-aside or postponement of legal proceedings.
34 Proceedings to annul transactions
Does your country use the concept of a suspect period in determining whether to annul a transaction by an insolvent debtor? May voidable transactions be attacked by creditors or only by a liquidator or trustee? May they be attacked in a reorganisation or a suspension of payments or only in a liquidation?

Employees are entitled to their contractual and statutory dues upon termination of employment irrespective of whether the termination is effected during restructuring or liquidation or otherwise. Liquidation and restructuring do not per se affect the procedure of termination of employees, except to the extent of the manner of settlement of dues. Under the Companies Act, during liquidation workmens claims are given priority over all claims and by operation of law they are equated to secured creditors and have a pari passu charge over security held by secured creditors. Their dues include wages, gratuities, compensation awarded under the Employees Compensation Act, etc. During winding-up, all sums due to employees from salaries, wages, provident funds, pension funds, gratuity funds or any other fund for the welfare of the employees are also to be paid. A restructuring under the Companies Act should safeguard the interests of the existing employees of the companies undergoing restructuring. If their interests are not safeguarded, they can object to the schemes implementation. Under SICA there is no specific provision in respect of employee claims and they form a part of the revival scheme. The CDR system does not specifically deal with employee-related liabilities.
31 Liabilities that survive insolvency proceedings
Do any liabilities of a debtor survive an insolvency or a reorganisation?

At the end of a winding-up proceeding, the company is dissolved and none of its liabilities survives it. On the other hand, in a reorganisation, under the Companies Act and SICA the liabilities will be determined in accordance with the reorganisation scheme.
32 Distributions
How and when are distributions made to creditors in liquidations and reorganisations?

The concept of suspect period does not exist under Indian law. However, under the Companies Act, any transfer of property made by a company within a period of one year before the presentation of a petition for winding-up by or subject to the supervision of the court or the passing of a resolution for voluntary winding-up of the company, shall be void against the liquidator if the transfer is not made in the ordinary course of its business or if transfer was without consideration or that the consideration was so inadequate as to raise presumption of want of good faith. It may be noted that the transaction is void only against the liquidator and is valid against all others. Transactions may only be attacked in liquidations and not otherwise.
35 Directors and officers
Are corporate officers and directors liable for their corporations obligations? Are they liable for pre-bankruptcy actions by their companies? Can they be subject to sanctions for other reasons?

During liquidation, the assets of a company are distributed among the secured creditors pari passu and to the unsecured creditors on proof of their claim. Once a reorganisation process (under SICA or the CDR system) is successfully completed, distributions are made from the debtors cashflow. The creditors who contributed to the reorganisation of the company have the first charge on such property, and stand in front of the other creditors of the company, whose debts would be repaid subsequently.
33 Transactions that may be annulled
What transactions can be annulled or set aside in liquidations and reorganisations and what are the grounds? What is the result of a transaction being annulled?

Under the Companies Act, a director or officer (namely, managing directors, full-time directors, managers, secretaries, any person on whose directions and instructions the board of directors acts, any person charged by the board of directors to be responsible in this behalf, or any director specified by the board of directors in this behalf) in default of a company is punishable with imprisonment up to two years as well as a fine, if he or she, inter alia: induces a person to give credit to a company under false pretences or under a fraud; or transfers the property of the company with intent to defraud the creditors; or conceals the property of the company from the creditors. Further, as long as directors or officers have acted in utmost due diligence while carrying on the operations of the company, have acted in good faith and to the best of their knowledge have not initiated any action to cause any harm to the company, they cannot be held personally liable. However, it is pertinent to note that at any point of time if the number of members of the company is reduced below the statutory limit and the company carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time it carries on business after those six months and is cognisant of such fact shall be severally liable for the payment of the entire debts of the company contracted during that time and may be severally sued therefor.
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Under the Companies Act, during winding-up, any transaction up to six months before the date of commencement of the winding-up process, if found to be fraudulently preferential to any one of the creditors, in detriment to all others, is held to be invalid. The burden of proof in this case lies on the party who impugns it. Voluntary transfers made one year prior to presentation of the petition or making of the resolution are void as against the liquidator. Further, any transfer to trustees for the benefit of the creditors is also void. If a transaction is thus held void, or annulled, the money can be recovered by the liquidator, who then holds it in trust for the general body of the creditors. Where an application for reorganisation is made under the Companies Act, the court may, at its discretion, stay any other

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36 Creditors enforcement
Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

INDiA
are concluded by the BIFR approving the scheme of reconstruction drawn up by the operating agencies. Reorganisation cases under CDR are concluded on implementation of the directions of the CDR empowered group.
39 International cases
What recognition or relief is available concerning an insolvency proceeding in another country? How are foreign creditors dealt with in liquidations and reorganisations? Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments? Has the UNCITRAL Model Law on Cross-Border Insolvency been adopted or is it under consideration in your country?

Yes, under the provisions of SARFAESI and SFCA, as discussed above. Proceedings under SARFAESI can only be initiated by banks and financial institutions. The terms banks and financial institutions have been defined in SARFAESI and do not include foreign banks. Proceedings under SFCA can only be initiated by financial corporations, as defined therein. The term financial corporation does not include foreign banks. Under both acts the creditors have the right to transfer the secured asset. Creditors under both the above acts also have the right to approach the relevant court and seeking appropriate orders.
37 Corporate procedures
Are there corporate procedures for the liquidation or dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Yes. As mentioned above, winding-up can be initiated voluntarily. The major ways in which winding-up proceedings by the court (involuntary winding-up) differ from voluntary winding-up by the company are that the former is conducted by the court while the latter may or may not be conducted under the supervision of the court; in the former, on orders for winding-up being made, the official liquidator is appointed, while in the latter the company appoints a liquidator; in the former there are limited grounds for instituting proceedings, while in the latter as long as the company is solvent there is no restriction; and the former is not instituted by the company, the latter may be instituted by the company.
38 Conclusion of case
How are liquidation and reorganisation cases formally concluded?

Liquidation cases are formally concluded by an order of the high court, ie, the high court of that state in which the registered office of the company is situated has jurisdiction for such winding-up proceedings. Reorganisation cases under the Companies Act are concluded by the court approving the scheme of reorganisation prepared by the company, which has received the assent of a three-quarters majority of the companys members and creditors, and under SICA they

Under the CPC, section 44A deals with the enforcement by Indian courts of decrees passed by courts in reciprocating territories. Another option available to a foreign creditor with a foreign judgment is to bring a suit in an Indian court upon the original cause of action based on the said judgment. This option is exercised mostly in cases where the judgment is granted by a court other than that of a reciprocating territory. The Companies Act deals with the liquidation of companies incorporated in India. However, the Indian business of a company incorporated outside India can also be wound up under the Companies Act by treating the Indian business as an unregistered company. In other words, if a foreign company is being liquidated outside India its Indian business can be wound up in India on the basis of the liquidation order or other order passed by the foreign court, based on which the Indian court can form an opinion that it is just and equitable that the Indian business (company) be wound up. Indian law makes no distinction between an Indian creditor and a foreign creditor and either can commence winding-up proceedings in the case of insolvency. Though there is no specific provision in the Companies Act to deal with foreign creditors and their claim or cause of action arising outside India, it has been held by the Supreme Court of India in Rajah of Vizianagaram v Official Receiver, AIR 1962 SC 500, that the foreign creditors and contributories can bring an action and file claim under the Companies Act. The UNCITRAL Model Law on Cross-Border Insolvency was considered in 1999 by the Working Committee on Law relating to Insolvency of Companies under Shri Justice V Balakrishna Eradi, which was appointed by the Ministry of Company Affairs. This committee submitted its recommendation to amend part VII of the Companies Act (winding-up) to correspond to the provisions of the UNCITRAL Model Law and in 2001 Dr NL Mitra submitted the report of the Advisory Group on Bankruptcy Laws, but no other action has been taken since then.

Sakate Khaitan Sangeeta Jhunjhunwala Mahrukh Umrigar 1202B One Indiabulls Centre, Tower 2B, Floor 12B 841 Senapati Bapat Marg, Elphinstone Road Mumbai 400 013 India

sakate.khaitan@clasislaw.com sangeeta.jhunjhunwala@clasislaw.com mahrukh.umrigar@clasislaw.com Tel: +91 22 491 00000 Fax: +91 22 491 00099 www.clasislaw.com

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Update and trends


The government passed the Companies (Second Amendment) Act 2002 (Amendment Act) on 13 January 2003. The act proposed setting up the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), a forum for reorganisation of sick companies. Subsequently, parliament passed the Sick Industrial Companies (Special Provisions) Repeal Act 2003 (SICRA) repealing the existing statute on sick companies. The Amendment Act and the SICRA are pending notification and will come into force only after being notified. Also it is pertinent to note that the Companies Bill 2009 (Companies Bill) was introduced in August 2009. The Companies Bill, along with certain significant changes to the existing Companies Act, inter alia includes specific provisions with respect to NCLT. However, the Companies Bill has not yet been placed before parliament and information available in the public domain seems to indicate that in all probability this may be laid before parliament in the forthcoming winter session. Once the Companies Bill has been approved in parliament and notified it will become law.

40 Cross-border cooperation
Does your countrys system allow cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings?

41 Cross-border insolvency protocols and joint court hearings


In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

Not applicable in India.

India is not party to any cross-border insolvency protocols, and no precedents of joint court hearings have taken place to date.

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