The Hindu Business Line : Govt to facilitate fast track debt rejig

New Delhi, Sept. 28 To ensure a sound regulatory framework for facilitating fast track debt restructuring, the Companies Bill, 2008 is likely to propose that the arrangement scheme should have the consent of 75 per cent secured creditors for it to be considered acceptable. It has to meet the other prescribed requirements as well.

The Bill is also expected to propose adequate safeguards for unsecured and secured creditors, a liquidity test to ensure continuity of company’s functioning, and creditors’ responsibility statement to protect against fraudulent preferences.

A senior Ministry for Corporate Affairs (MCA) official told Business Line that “the Reserve Bank of India has specific tools for fast track debt restructuring known as the CDR mechanism (Corporate Debt Restructuring Mechanism).

To avoid delays

In the new Company Law, the Ministry is looking at bringing provisions which would ensure that such schemes meant to enable the corporates to become viable “are not scuttled or delayed.”

Explaining the rationale, he said that it is often seen that even though 75 per cent of the secured creditors, while making significant sacrifices, consent to the debt restructuring, minority secured creditors or unsecured creditors place hurdles in the way.

This results in the scheme getting delayed or scuttled. To avoid this situation, the Bill is likely to propose that if 75 per cent of secured creditors give their consent, then the scheme is to be accepted.

Built-in safeguards

The Bill, however, is also likely to suggest built-in safeguards for both secured and unsecured creditors.

The Minister for Corporate Affairs, Mr Prem Chand Gupta, has been maintaining that the intent to bring in the new law is to try to plug the loopholes for any manipulations or corporate frauds.

The Bill has broadly followed the suggestions made by the J. J. Irani Committee on Company Law for CDR schemes, sources said. For instance, in case of contractual mergers or schemes of arrangement, the Committee had recommended that if the petitioning creditors or company is able to prove that 75 per cent of the secured creditors have consented to the CDR mechanism and have made sacrifices to restructure the company, then notwithstanding the minority dissent, such a scheme should be sanctioned on filing.

The provision relating to obtaining consent of unsecured creditors is being done away with in the proposed Bill.

To curb mis-statement of facts and protect the unsecured creditors, adequate safeguards have been proposed. “The unsecured creditors are in the queue without the consent of secured creditors and the debt restructuring. They would have no hope of getting their dues. To safeguard their interests and to ensure the continuity of the company’s functioning, the concept of liquidity tests is being suggested,” he said. The concept would be defined in the regulations, the official said.

Besides, CDR schemes must contain safeguards against fraudulent preference. A creditor’s responsibility statement, similar to a directors’ responsibility statement, has been also proposed.

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