Presentation on. Regulating the Insolvency Profession: Accountability, Ethics and Costs

Transcription

1 International Conference and Meeting of the Forum for Asian Insolvency Reform Presentation on Regulating the Insolvency Profession: Accountability, Ethics and Costs 9 th April,

2 INDUSTRIAL DEVELOPMENT IS NOT A ZERO SUM GAME. IT CAN BE A WIN-WIN PROCESS FOR ALL SECTIONS OF SOCIETY. Dr. MANMOHAN SINGH, PRIME MINISTER, INDIA 2

3 Ministry of Corporate Affairs (MCA) Vision of MCA To be a leader and partner in initiatives for corporate reforms, good governance and enlightened regulation, with a view to promote and facilitate effective corporate functioning, investor protection and inclusive growth, empower the Indian citizen and have a global footprint. Towards achieving that Vision, the role of MCA has been transformed from being a Lawmaker and Regulator to a Friend, Facilitator, Integrator and Educator, with emphasis on enlightened regulation. 3

4 Good Corporate Governance Inevitable for ensuring Accountability and Ethics Good Corporate Governance expects and ensures that business is conducted in a fair and transparent manner and that companies and its directors/management are accountable for their actions. Accountability and Ethics therefore are integral parts of Corporate Governance. Good Corporate Governance Reduces risks of stakeholders Acts as tool for competitive advantage Increases confidence to investors/ other stakeholders Earns respect for organisation Helps in having long term perspective 4

5 Corporate Governance MCA 21 Programme The MCA-21 e-governance Programme initiated by MCA in 2006 seeks to provide an enabling, user-friendly and 24x7 environment to the corporates and other stakeholders. Makes transparent and timely information available with the Registry and also in the public domain bringing more accountability on the part of every body brings on-line access to the Registry from anywhere in the World on round the clock basis thus reducing various malpractices associated with any public office allows Viewing/obtaining copies/extracts available from on-line Registry on nominee fee (Rs. 50 per document) ensures accountability of directors since every director required to obtain Director Identification Number (DIN). Process of issue of DIN ensures that adequate particulars/antecedents of directors are available with authorities; creates effective database to help regulators and policymakers on accountability and ethics. The Government is also considering e-governance Programme for offices of Official Liquidators. 5

6 Corporate Governance MCA Initiatives Setting up of National Foundation for Corporate Governance (NFCG) to:- Provide wide platform to deliberate on good corporate governance issues Sensitize corporate leaders and others on the importance of good corporate governance practices; Introduction in the Parliament, a modern, comprehensively revised and more relevant legislation for corporates i.e. Companies Bill, 2009; Bill being considered by Parliamentary Committee; Enactment and implementation of LLP Act, 2008 for facilitating creation of a new business model for entrepreneurs, professionals and small and medium enterprises ; MCA released Voluntary Guidelines on Corporate Governance and on CSR during India Corporate Week celebrated in December,

7 Accountability and Ethics under Indian Regulatory Structure India has always kept pace with changes in national and international economic environment and taken suitable action to improve its Regulatory Systems; Other sectoral regulatory laws like Banking and Securities Market Laws have also ensured, at all times, that no compromise is made on the prudential and ethical norms for the relevant sector. Because of the sound regulatory structure ensuring fair play to all stakeholders, India has been able to withstand the global recession which has affected many countries. The World has witnessed collapse of very big corporations (like Enron, Lehmann Brothers etc) resulting in huge financial and job losses despite the best regulations existing there. India has not only been able to ensure that there are no such collapses, jobs are not lost, at the same time, companies have performed exceedingly well even during these difficult times. This clearly points out to the resilient nature of Indian regulatory structure and Indian Corporate/Business sector. 7

8 Ensuring Accountability Companies Bill, 2009 Enhanced disclosure norms coupled with accountability e-governance for corporate processes as well Enhancing accountability of Management Strengthening Audit Effective Enforcement and stricter Penalty structure Effective measures for Investor Protection 8

9 Need for a Modern Insolvency Law for Corporates Businesses need efficient and speedy procedures for exit as much as for start-up. Globally, insolvency procedures help entrepreneurs close down unviable businesses and start up new ones ensuing re-channelization of human and economic resources thereby increasing the overall productivity of the economy. Reform in insolvency processes is also recognized as an important means of improving competitiveness of any economy. An effective insolvency system is, therefore, an important element of financial system stability. The ideal framework for rehabilitating and winding up should, therefore, 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. enable a timely and efficient resolution of insolvency and establish a framework for cross border insolvency. 9

10 Insolvency and winding up under Companies Act, 1956 Presently the rehabilitation of sick industrial companies is governed under Sick Industrial Companies (Special Provisions) Act, 1985 [SICA]; Board for Industrial and Financial Reconstruction (BIFR), the statutory body set up under SICA adjudicates on rehabilitation and revival proposals under SICA; The winding up and dissolution of companies is governed by the provisions of Companies Act, 1956; Such proceedings are adjudicated by the High Courts. The Official Liquidators appointed by Central Government (MCA) perform the functions of liquidator as per the provisions of the Act. There are 16 Official Liquidators attached to various High Courts. There are about 5,000 companies under liquidation in various courts. 10

11 Time consuming and costly winding up The winding up process under the provisions of the Companies Act, 1956 is a long drawn process running for years resulting in blocking of assets; The cost involved in winding up process and resultant lower assets recovery rate have also been issues of concern; The reforms in these matters were, therefore, necessary. The Government has undertaken an intensive exercise of review of existing Legislative framework. As a part of this review, Govt is keeping in view international frameworks like UNCITRAL Model Law on Insolvency and is also holding consultations with all stakeholders. 11

12 India Making Improvement Following is the summary of Parameters for India on Closing a Business mentioned in the World Bank (Doing Business in India) Reports of 2005 and 2010: Time (Years) 10 7 Recovery Rate 13% 15.1% Cost (% of Estate) 9 9 The above figures show that India is making progress on the matter, though at a slightly slow pace. 12

13 Amendment of Companies Act to review Insolvency Procedures A High Level Committee (headed by Shri Justice V. Balakrishna Eradi, Retired Judge of Supreme Court) set up in 1999 had made recommendations for changes in existing law relating to winding up of companies. In view of such recommendations, the Government examined all related issues in consultation with all concerned stakeholders and amended the provisions of the Companies Act, 1956 through Companies (Second Amendment) Act,

14 Winding up under Companies Bill, 2009 Setting up of a modern, dedicated, multidisciplinary forum in the form of National Company Law Tribunal (NCLT) for speedier and effective rehabilitation, revival and winding up of companies; Acknowledges, for the first time, Private qualified Insolvency professionals to be appointed from a Panel; Provides a combined set of provisions for company rehabilitation and winding up; Winding up to be ordered only if rehabilitation and revival is not possible; Rehabilitation possible even if winding up process has been initiated. Expedited and Non intrusive process based primarily on creditors consultation; 14

15 Winding up under Companies Bill, 2009 Provides for time bound processes but ensure that these are fair to all stakeholders; Ensures efficiency in preserving value of company assets; Stay on legal proceedings (moratorium) against sick company provided for only limited period to prevent misuse of such provisions; Ensure accountability of company, company s management, Company Liquidator and all other parties involved. 15

16 Winding up under Companies Bill, 2009 Strict accountability of Directors and officers etc provided in the Bill in case it is provided that funds were misapplied by them. This would include directions for restoration of money or property; Company Liquidator also made accountable for completion of all activities in a time bound manner as per directions of Tribunal; Various returns to be filed by Company Liquidator with Tribunal/Registrar in a time bound manner; Rehabilitation and Insolvency Fund proposed which provides for voluntary contributions from companies. Companies which contributed to the Fund, may, if they get financially sick in future, claim withdrawals from the Fund for making payment to workmen or protecting the assets of the company. 16

17 Summary Winding up for smaller companies under Companies Bill, 2009 Summary Procedure for winding up has been provided the Bill in respect of a company if the value of company s assets does not exceed rupees one crore; Official Liquidator (OL) shall be the liquidator for such summary winding up and shall complete the process in a time bound manner, subject to Tribunal s directions; On completion of activities, OL shall submit a final report to Tribunal, which may order for dissolution of such company. 17

18 Role of Insolvency Experts The Companies (Second Amendment) Act, 2002 proposed appointment of Official Liquidators from a Panel of Advocates, Chartered Accountants, Cost and Works Accountants, or Company Secretaries or combination of them; Such Panel may also include firms or bodies corporates of such professionals or combination of them; While retaining the above approach broadly, the Companies Bill, 2009 has further provided that any such professional (to be included in the Panel) shall be required to have at least 10 year s experience in company matters and shall also be subject to such other qualification as may be prescribed by Central Govt under rules. 18

19 Role of Insolvency Experts The Bill has also proposed appointment of Company Administrators (Interim as well as regular) out of a similar Panel of professionals to manage the affairs of a sick company during its revival and rehabilitation of sick companies; The detailed terms and conditions of Company Administrators or Company Liquidators are proposed to be provided in the rules. Tribunal empowered to fix the amount of fees to be paid to Company Administrator/Company Liquidators. The profession of Insolvency Experts, therefore, is likely to be recognized and developed once the NCLT is established or/and the new Companies Bill is enacted. The Insolvency Practitioner is an emerging Profession. Regulatory framework for Insolvency Practitioners is yet to be developed in India. 19

20 LLP New business entity allowed in India The newly enacted LLP Act, 2008 allows formation of a new flexible business entity (in the body corporate form) which may regulate its internal matters through agreement amongst partners. Since the liability of the partners is limited in case of LLP, this structure is found more suitable by professionals and small enterprises. The LLP Act also allows conversion of private companies and unlisted public companies to be converted into LLPs. LLP Act, 2008 has been implemented with effect from 31 st March, 2009 and the LLP Rules, 2009 were made effective from 1 st April, Rules relating to conversion of private/unlisted public companies into LLPs have been notified w.e.f A notification extending provisions of the Companies Act relating to winding up and dissolution to LLPs has been issued on The LLP (Winding up and Dissolution) Rules, 2010 in respect of winding up and dissolution of LLPs have been notified on

21 Rehabilitation and winding up of LLPs Total number of LLPs registered as on are The Government is taking a number of initiatives to create more awareness in respect of LLP Act and it is expected that in view of such initiatives and the tax treatment provided in the Budget , the number of registered LLPs is likely to increase. The LLP (Winding up and Dissolution) Rules, 2010 provide for winding up of LLPs in a time bound manner; Whole process proposed to be completed within about one year; The revival/rehabilitation and winding up of LLPs shall be allowed as per Tribunal s order. However, until the Tribunal is established, such powers shall be exercised by High Court concerned. 21

22 Important Issues of Concern Regulatory framework for regulation of Insolvency Practitioners is yet to be developed in India; The Govt of India would appreciate if FAIR, being the Expert Forum on Insolvency matters, gives suggestions on the manner of regulation Insolvency Practitioners; FAIR may also collaborate with Government of India on Capacity Building for Insolvency Experts in India. 22

23 Thank You 23