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INSOL International and The Institute of Company Secretaries of India Educational Programme New Delhi

INSOL International and The Institute of Company Secretaries of India Educational Programme New Delhi. Welcome. Ms.Preeti Malhotra, President, The ICSI. Proposed Insolvency Law. Mr. Sumant Batra Vice-President INSOL International. Special Address. Mr. Robert O. Sanderson

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INSOL International and The Institute of Company Secretaries of India Educational Programme New Delhi

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  1. INSOL International andThe Institute of Company Secretaries of IndiaEducational Programme New Delhi

  2. Welcome Ms.Preeti Malhotra, President, The ICSI

  3. Proposed Insolvency Law Mr. Sumant Batra Vice-President INSOL International

  4. Special Address Mr. Robert O. Sanderson President INSOL International

  5. INSOL International • Independent • Non-governmental Organization • Recognized authority • Knowledge repository • Membership ascribes highest ethical standards and professional excellence

  6. Membership • Over 9,500 members • Over 40 Member Associations • Members from over 70 countries

  7. INSOL’s Mission • “to take the leadership role in international turnaround, insolvency and related credit issues, facilitate the exchange of information and ideas and encourage greater international co-operation and communication amongst the insolvency profession, the credit community and related constituencies”

  8. INSOL’s goals are: • Implement research into international and comparative turnaround and insolvency issues • Liaise and participate with Governmental, Intergovernmental and NGO advisory groups • Develop cross border insolvency policies, international codes and best practice guidelines • Leadership in international turnaround and insolvency education

  9. INSOL Collaborates • World Bank, UNCITRAL, OECD, ABD etc. • Judicial Colloquium • Hawkamah

  10. Publications • INSOL World – Quarterly • Electronic Newsletter - Monthly • Regular specialist publications • Treatment of Secured Claims in Insolvency and Pre- insolvency Proceedings 2007 • Credit Derivatives in Restructurings 2006 • Directors in the Twilight Zone 2005 • Employee Entitlements 2005

  11. Technical Series • Economics and Geographical Implications of Hedge Funds in Distressed Debt; Sandra A. Larrat-Smith, Swing Bridge Capital & Steven P. Ordaz, BMC Capital • Formalities for the Transfer of Business in Insolvency; David Burdette, University of Pretoria, INSOL Scholar • Securities Law Claims in Insolvency Proceedings; Professor Janis Sarra, University of British Columbia

  12. INSOL Shanghai INSOL Annual Regional Conference 14-17 September, 2008 Shanghai, PRC

  13. INSOL One Day Seminars • Brussels, 4th March 2008 • Buenos Aires, 17th April 2008 • Chicago, 10th July 2008

  14. INSOL Fellowship • Global Insolvency Practice Course • Launched 1st October • First Course starts 2008 • Intensive Programme • Unique international learning experience • Facilitates future networks

  15. Core Committee Bob Wessels, Professor University of Leiden, The NetherlandsIan Fletcher, Professor University College London, UKJanis Sarra, Associate Professor and Associate Dean, Faculty of Law, University of British Columbia, CanadaGareth Hughes, Ernst & Young LLP, INSOL Treasurer

  16. Course Committee • University of Pretoria, South-Africa • University of Cologne, Germany • University College London, UK • China University of Politics & Law, PRC • University of Sussex, UK • Queensland University of Technology, Australia • University of British Columbia, Canada • University of Leiden, The Netherlands. • University of Texas, Austin, USA

  17. Practitioner Advisory CommitteeStephen Adamson INSOL Past President, Chair, UKSumant Batra Kesar Dass B. & Associates, IndiaDavid Cowling Clayton Utz, AustraliaJames Garity Shearman & Sterling LLP, USAAdam Harris Bowman Gilfillan, South AfricaDetlef Hass Lovells LLP, GermanySijmen de Ranitz De Brauw Blackstone Westbroek, The NetherlandsBob Sanderson KPMG, Canada

  18. Structure of CourseModule A: Three day face to face meetingDate: 16th – 18th June 2008Venue: Faculty of Law, University of Leiden, The Netherlands.Module B: Three day face to face meetingDate: 12th –14th September 2008 Venue Pudong Shangri-La, Shanghai, China. Module C: Five days on line sessions Date: 3rd – 7th November 2008 In association with and organised by the National Centre of Business Law University of British Columbia, Vancouver, Canada

  19. Mahesh Uttamchandani Senior Counsel and Head of Global Insolvency Initiative, World Bank:“The fellowship programme will be a very rewarding investment towards a successful career, both through helping the development of professional skills and through fostering a greater understanding of different jurisdictions' cultures and systems.”

  20. Special Address Mr. Robert O. Sanderson President INSOL International

  21. Address by Chief Guest Mr. Shri Prem Chand Gupta Honorable Minister of Corporate Affairs

  22. Vote of thanks Mr. N.K. Jain, Secretary & CEO, ICSI

  23. Networking Coffee Break

  24. Directors in the Twilight Zone Mr. UK Chaudhary, Senior Advocate & Past President ICSIMr. Gordon Stewart, Allen & Overy LLP

  25. DIRECTORS IN THE TWILIGHT ZONE AGENDA • Director duties and the Twilight Zone in context • The key areas of concern • Practical problems and solutions • The position in India U.K.CHAUDHARY, SENIOR ADVOCATE

  26. DIRECTORS IN THE TWILIGHT ZONE IN CONTEXT • The role of insolvency law • NB: there is not enough money to go round • recycles the assets • avoids a free-for-all • The role of directors • the veil of incorporation and risk-taking • piercing the veil: personal liability of directors • Consensual restructuring -v- formal insolvency • restructurings: avoid stigma and insolvency ‘dislocation’ • when would formal insolvency be better? • ‘pre-pack’ insolvency to force through restructuring U.K.CHAUDHARY, SENIOR ADVOCATE

  27. DIRECTORS IN THE TWILIGHT ZONE IN CONTEXT II • Insolvency laws: history and pro-creditor or pro-debtor bias • world maps U.K.CHAUDHARY, SENIOR ADVOCATE

  28. DIRECTORS IN THE TWILIGHT ZONE U.K.CHAUDHARY, SENIOR ADVOCATE

  29. DIRECTORS IN THE TWILIGHT ZONE U.K.CHAUDHARY, SENIOR ADVOCATE

  30. DIRECTORS IN THE TWILIGHT ZONE U.K.CHAUDHARY, SENIOR ADVOCATE

  31. DIRECTORS IN THE TWILIGHT ZONE IN CONTEXT II • Insolvency laws: history and pro-creditor or pro-debtor bias • world maps • The insolvency timeline • the Twilight Zone • keeping everyone ‘honest’ • restoring the pot (of assets) U.K.CHAUDHARY, SENIOR ADVOCATE

  32. DIRECTORS IN THE TWILIGHT ZONE IN CONTEXT - THE INSOLVENCY TIMELINE Start of clawback vulnerability period Duty to commence insolvency (?) Financial Health Dissolution Administration/Liquidation Twilight Zone Formal insolvency commences U.K.CHAUDHARY, SENIOR ADVOCATE

  33. DIRECTORS IN THE TWILIGHT ZONE KEY AREAS – WHO IS A ‘DIRECTOR’? • Directors • de iure • de facto • shadow directors • non-executive directors • Who else is in the firing line? • banks? • parent and sister companies? • shareholders? • counterparties in the Twilight period? U.K.CHAUDHARY, SENIOR ADVOCATE

  34. DIRECTORS IN THE TWILIGHT ZONE KEY AREAS – PENALTIES FOR DIRECTORS • Personal liability for losses • wrongful/fraudulent trading • negligent management? • Disqualification as a director • removing the privilege of limited liability • the badges of unfitness, eg: • responsibility for insolvency • implication in preferences, undervalues etc • failures to provide information U.K.CHAUDHARY, SENIOR ADVOCATE

  35. DIRECTORS IN THE TWILIGHT ZONE KEY AREAS – RESTORING THE POT • Clawbacks • preferences • undervalue transactions • other security vulnerabilities • voidness for non-registration • invalid floating charges U.K.CHAUDHARY, SENIOR ADVOCATE

  36. DIRECTORS IN THE TWILIGHT ZONE PRACTICAL PROBLEMS AND SOLUTIONS • Groups of companies • directors and conflicts of interest • ‘group benefit’/interlocking fates of group companies? • Foreign corporations • subject to local insolvency? • conflicts of laws • Insurance • a panacea, a help or a mirage? • limits on cover • Practical steps • take professional advice • board minutes of decisions and reasons U.K.CHAUDHARY, SENIOR ADVOCATE

  37. INDIAN POSITION Special provisions Under SICA 2002 Provisions Under Companies Act 1956 Start and duration of Twilight Period On what does “Twilight zone” depend Issues on Twilight Zone. Actions giving rise to liability Impact on counterparties Who may be Liable Orders Passed by the court / Tribunal Enforcement Remedies U.K.CHAUDHARY, SENIOR ADVOCATE

  38. Introduction to “Twilight Zone” • Twilight Zone with respect to Indian Companies is a period of financial distress for a company • A Period after which either the sun finally sets for a company, or efforts for its revival gets approval in a case of a Sick Industrial Company, by the Board for Industrial and Financial Restructuring (BIFR) or its Appellate Authority and in case of a company under winding up by the High Court concerned. • The Twilight Zone starts from the day when obligation to file reference under section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) finally arises in case of a Sick Industrial Company after loss of its 50% Net worth and in case of any other company on the presentation of a creditors winding up or any other winding up petition under the provisions of Companies Act (section 433) for its inability to pay debts or for any other reason. That such proceedings are governed by the provisions of Companies Act,1956 or SICA as the case may be. • During Twilight Zone in essence, Directors’ responsibilities change from protecting shareholders or the company’s interest to protecting the interest of creditors. U.K.CHAUDHARY, SENIOR ADVOCATE

  39. In December 2002, the Parliament passed the Companies (Second Amendment Act 2002) paving the way for a new insolvency regime providing for a composite law dealing with both re-organization and liquidation proceedings. • ISSUES ON COMPANIES (SECOND AMENDMENT) ACT 2002 & SICA • A new Part VIA was inserted in the 1956 Act for the purpose However, the second amendment has yet to be implemented apart from limited provisions facilitating the setting up of National Company Law Tribunal. • SICA was first enacted in the year 1985 and is amended from time to time till its repeal, which is not yet notified Consequently, the repeal of SICA remains unnotified until the NCLT is constituted, and until then the old SICA continues in operation Once the Amended or New Companies Act is implemented all reference in this chapter to the words “Court” and “BIFR” will then have to be read as “NCLT” U.K.CHAUDHARY, SENIOR ADVOCATE

  40. “Start and duration of Twilight Period” Under SICA 1985 No definite period has been prescribed during which transactions entered into by a company are vulnerable to attack or liable to give rise to personal liability on the part of directors and / or others involved in the management of the company The Period and liability of the directors and other officers will vary depending up on the following factors: When 50% of company’s Net worth is eroded at the end of any financial year BOD is required to intimate BIFR by filing a mandatory reference under section 23 of the Act within 60 days from the finalisation of Annual Accounts and hold a general meeting of the shareholders to report such erosion with a proper report with causes for such erosion. In case where BIFR forms the opinion that the company cannot be revived and that it to be wound up. The recommendation to wind up is sent to High Court concerned. If the company fails to notify the BIFR as above, all the directors and other officers are liable to imprisonment of not less than six months and up to two years and a fine. Contnd….2 U.K.CHAUDHARY, SENIOR ADVOCATE

  41. When entire net worth is eroded under the definition of Section 3(1)(o), BOD is required to file reference under Section 15 of the Act, within 60 days from the finalisation of the Annual Accounts or earlier, if BOD has reason to believe that net worth has been eroded. BIFR will make suitable enquiry under section 16 and on completion of inquiry make suitable orders under section 17 and sanction a scheme under section 18 and take steps to revive the company. The Directors are bound by all directions, obligations and conditions imposed by BIFR in doing so. If BIFR is of the opinion that Sick Industrial company is not likely to make its net-worth positive with in a reasonable time and its not likely to become viable, it can frame its opinion for winding up of the Sick Industrial Company under section 20 and refer the matter to High Court concerned and winding up will then start under the provisions of Companies Act 1956. The violation of the Act, including not filing of reference under Section 15 is a punishable offence with simple imprisonment which may extend to 3 years and also fine. U.K.CHAUDHARY, SENIOR ADVOCATE

  42. Director’s Responsibilities in Twilight Zone Under SICA • Under Section 24 of the Act, any person, who has taken part in promotion, formation or management of the Sick Industrial Company or its undertaking, including any past or present directors, Manager or officer or employee of Sick Industrial Company, if found guilty of Misfeasance, regarding its property, assets or funds, BIFR by order may direct him to repay or restore the money or property to the Sick Industrial Company. • Similarly if BIFR has evidence, in its possession that any person, who is or was a director or an officer or an employee of a Sick Industrial Company, who has diverted funds or property with out bonafide purpose or managed the company in a manner highly prejudicial to the interest of the company, BIFR by order may direct that such person shall not received any financial assistance from any Financial Institution and bank as may be specified. U.K.CHAUDHARY, SENIOR ADVOCATE

  43. Companies Act, 1956 ALLEN & OVERY U.K.CHAUDHARY, SENIOR ADVOCATE

  44. Directors Liabilities – Various Issues Under the Companies Act 1956 • Maintenance of Proper Accounts Under Section 446A, inserted by Companies (Second Amendment) Act, 2002 and 541directors and other officers of the company are under Legal Obligation to ensure that books of accounts are to be completed/ audited up to date of the winding completed order and submitted to the tribunal failing which such directors and officers shall be liable for punishment for a term not exceeding one year and fine not exceeding one lakh rupees. • Filing of Statement of Affairs Under Section 454 of the Act, a statement of affairs shall be submitted to the official liquidator duly verified by one or more persons, who are at relevant date are the directors, manager, secretary or other chief officer of the company. The responsibility can also be cast up-on ex-directors or persons associated with formation of the company, ex- employees or officers with in one year of the relevant date. The offence is punishable by imprisonment not exceeding two years or fine. • Falsification of Company’s Books • Under Section 539, any officer or contributory of a company, which is being wound up, if with intent to defraud or deceive • any person, • destroys, mutilates, alters, falsifies or secrets, or is privy to the destruction, mutilation, alteration, falsification or • secreting of any books, papers or securities; or • b) makes or is privy to the making of, any false or fraudulent entry in any register, books of account or document belonging • to the company. He shall be punishable with an imprisonment for a term of 7 years and shall be liable to fine. U.K.CHAUDHARY, SENIOR ADVOCATE ALLEN & OVERY

  45. Directors Liabilities – Various Issues Under the Companies Act 1956 • Fraudulent conduct of Company’s Business Under Section 542 officers or persons are guilty of fraudulent conduct of business if, in the course of winding up of a company, it is found that any business of the company has been carried on with intent to defraud creditors of the company or any other person , or for any Fraudulent purpose. Persons engaged in the conduct of the business shall be personally responsible, with out any limitation of liability, for all or any of the debts and other liabilities of the company. • Delinquency, Breach of Trust & Misfeasance: Directors and others • Under Section 543 any Person who has taken part in the formation or formation of the company, or any past or present • director, manager, Liquidator or officer of the company shall be guilty of delinquency, if he: • He misapplied or retained or become liable or accountable for any money or property of the company; or • Has been guilty of any misfeasance or breach of trust in relation to the company: • Liability under this provision is civil • Transactions defrauding Creditors Under Schedule XI of the companies act 1956 directors can be punished for such activities, which amount to malfeasance and misfeasance. ALLEN & OVERY U.K.CHAUDHARY, SENIOR ADVOCATE

  46. Directors Liabilities – Various Issues Under the Companies Act 1956 • Handing over assets and properties of the company.. Under Section 450 and 456, the directors are under obligation to hand over all assets and properties and actionable claims, to a provisional liquidator or the official liquidator as the case may be. In case of final winding up order, and in case of provisional liquidator under section 47 all books of accounts and statutory registers and books and papers will be handed over to the official Liquidator. Violation is punishable with imprisonment not exceeding 5years or with fine or both or for the period of imprisonment not exceeding two years or fine or both. as the case may be under the section 538. • Fraudulent Preferences Under section 531 of the Act, any transfer of Property, movable or immovable, delivery of goods by or against the company With in six months from commencement of winding up would be fraudulent preference and in the event of company being wound up be deemed a fraudulent preferences of its creditors and be invalid. Similarly under section 531A, any Transfer of property or delivery of goods made by a company, not being a transfer or delivery in the ordinary course of its business or in favour of a purchaser in good faith and for valuable consideration made with in one year before the presentation of the petition for winding up or passing of a resolution for voluntary winding up shall be void against the liquidator. Similarly under Section 532 of the Act, any transfer or assignment by a company of all its properties to trustees for the benefit of all its creditors shall be void. ALLEN OVERY U.K.CHAUDHARY, SENIOR ADVOCATE

  47. Counter Parties Dealing with the company during the Twilight Period The Potential heads of Challenge which may lead to transactions being set aside relate to transactions are: • Transactions which are at an undervalue • Fraudulent Preferences • Defrauding creditors • Extortionate credit transactions • Avoidance of floating charges for past value. • Disclaimer of onerous property • Disposition of Company’s property made after the commencement of winding up. • Failure to register a charge • Avoidance of Voluntary transfer ALLEN & OVERY U.K.CHAUDHARY, SENIOR ADVOCATE

  48. Orders which may be the court / Tribunal • To Pay compensation to company • To discharge Liability to creditors • Disqualifying from acting as director • Imprisonment or fine or both • Setting aside "tainted" transaction • Postponing any debt owed by company to director U.K.CHAUDHARY, SENIOR ADVOCATE ALLEN & OVERY

  49. Pros and cons Pros • Stop recklessness before too late • Encourages responsible management • Incentive to hire professionals Cons • Accelerates collapse • Inhibits workouts • Weakens enterprise initiative • Increases risk to lenders & introduces uncertainty U.K.CHAUDHARY, SENIOR ADVOCATE ALLEN & OVERY

  50. Obligation to co-operate in investigation of affairs of the company. Under the 1956 Act and SICA officers and agents, past and present, of the company are requiredto co-operate with investigation into affairs of the company. The General duty to cooperate where: • Proceedings are pending before BIFR / AAIFR under SICA, even though this is an investigation prior to recommendation to wind up the company. • A winding up petition has been presented • A provisional or official liquidator has been appointed. • The company goes into liquidation or • A winding up order has been made by the court • Obligation to provide information • Obligation to provide company’s statement of affairs • Obligation to assist with getting in the company’s property. U.K.CHAUDHARY, SENIOR ADVOCATE ALLEN & OVERY

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