PPT on Insolvency and Bankruptcy Code, 2016 analysis the jargons, processes, access, limitations, opportunities, etc. A bried comparison with US Bankruptcy Code has also been stated and addressing issues like cross border insolvency amongst others issues. Also, the probe of recently notified transfer of pending proceedings has been made in the presentation.
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Insolvency and Bankruptcy Code, 2016
1. Insolvency and Bankruptcy
Code, 2016
Disclaimer: This presentation is based on my internal research. It is notified that the presenter and any
other person related to him shall be not responsible for any damage or loss of any action taken based on
this presentation. It is suggested to seek professional advice before initiating any action.
A presentation by:
Saurabh Dugar
Company Secretary
Date: March 24, 2017
1
3. Insolvency, Bankruptcy and Liquidation
3
Insolvency:
a state in which financial
difficulties of a company
are such it is unable to run
its business at its current
pace.
Liquidation:
The process of
winding up a
company
Bankruptcy:
When a person is
legally declared as
incapable of paying
their dues and
obligations
Insolvency precedes
bankruptcy and liquidation
follows bankruptcy.
Insolvency warnings:
drop in sales
delay in payments
Increasing reliance on credit
Cash flow test:
when cash flow in is less
than cash flow out .
4. Insolvency v/s Bankruptcy
4
Black s law dictionary defines the following:
Insolvency
The condition of a person who is insolvent; inability to pay one s debts; lack of
means to pay one s debts. Such a relative condition of a man s assets and
liabilities that the former, if all made immediately available, would not be
sufficient to discharge the latter. Or the condition of a person who is unable to
pay his debts as they fall due, or in the usual course of trade and business.
Bankruptcy
The state or condition of one who is a bankrupt; amenability to the bankruptcy
laws; the condition of one who has committed an act of bankruptcy, and is
liable to be proceeded against by his creditors therefore, or of one whose
circumstances are such that he is entitled, on his voluntary application, to take
the benefit of the bankruptcy laws.
6. Regime of Insolvency in India
6
For individuals
As old as a century
The PresidencyTowns Insolvency Act, 1909
The Provincial Insolvency Act, 1920
this included insolvency as proprietors too
For corporates
The provisions of the 1956 Act were as old as 6 decades
LLP Act, 2008 for closure of LLPs
MSME Development Act, 2006 also registers a MSME but has no
framework for closure of MSMEs.
7. 7
SARFAESI Act, 2002
Enforcement of security interest without intervention of any authority.
The stake of stakeholders other than the concerned creditor gets diluted.
Recovery of debts due to Banks and Financial Institutions Act, 1993
Grants special rights to unsecured creditors for recovery of defaulted debts.
Sick Industries Companies (Special Provisions) Act, 1985
Revival of sick companies
Applicable to industrial companies only
The moratorium provision under SICA was used by defaulters to keep
the creditors at bay.
Other informal frameworks by RBI
Regime of Insolvency in India
11. Bankruptcy Law Reform Committee
11
Mandate of BLRC
Setup by the Department of Economic Affairs, MoF, through office order dated August
22, 2014
Chairman: Mr.T.K.Vishwanathan
Objective of BLRC
To study the framework of Corporate bankruptcy in India
To submit a report to the government for reforming the system
Reports
Interim Report (February 2015)
Served as an approach paper for the proposed new Code
Reforms suggested for improving the insolvency regime in India
Final Report (November 2015)
Two parts:
Volume I: Rationale and Design model of theCode
Volume II: Draft Insolvency and Bankruptcy Code
12. Key changes under the Code
12
Government dues take a backseat
Fragmented status gets clubbed into one
Scope of professionals like CS / CA / CWAs has been enhanced
Individual bankruptcy gets included
Financial creditors are voting at par as per their credit value
Application under the Code can be made by financial creditor /
operational creditors / debtor himself
But decision making is in the hands of financial creditors
Decentralisation on the part of government
13. Key Highlights
13
Resolution before Liquidation: If possible, the business should be revived before
liquidation
Time bound process: Unlike previous practice, now the entire insolvency resolution
process shall complete in at max 270 days
Information Utilities have been formed under the Code to provide timely
dissemination of information to the concerned
Automatic liquidation if revival process does not complete within 180 or 270 days as
the case may be
Creditors Voluntary winding up done away with
Shareholders have no say during the process of revival as well as resolution
Operational creditors with more than 10 percent aggregate exposure may participate
during the CoC meetings
16. Why collective remedies are better suited?
16
Individual remedy put the debtor under serious stress.
This does not allow the debtor to focus on business and bring it
back on track.
Collective remedy ensures that business remains a going
concern.
The objective of insolvency is to ensure that equitable
distribution takes place.
Might is right might not always be right.
18. What all gets amended?
18
SCH AMENDMENTTO
I The Indian PartnershipAct, 1932
II The Central ExciseAct, 1944
III The Income –TaxAct, 1961
IV TheCustomsAct, 1962
V The Recovery of Debts Due to Banks and Financial InstitutionsAct, 1993
VI The FinanceAct, 1964
VII The Securitisation & Reconstruction of Financial Assets & EnforcementOf Security InterestAct, 2002
VIII The Sick IndustrialCompanies (Special Provisions) RepealAct, 2003
IX The Payment and SettlementSystemsAct, 2007
X The Limited Liability PartnershipAct, 2008
XI The CompaniesAct, 2013
19. Applicability of the Code
19
Applies to whole of India
Except for Part III [J&K excluded]
Piecemeal commencement possible
Persons covered
Companies incorporated under the Companies Act, 2013
Companies governed by any special Act, to the extent the provisions are
consistent with that Act;
LLPs
Any other body corporate, incorporated under any Act for the time being in
force, as the Central Government may specify
Partnership firms
Individuals
Financial entities - Not covered
20. The Ecosystem of the Code
20
SC / NCLAT / NCLT
IBBI
IU IU
IPA - 1 IPA - 2
Certificate of Registration
Certificate of Registration to conduct business & enroll IPs
IP1 IP2 IP3 IP4 IP5
K Ltd. A LLP
XYZ
Ltd.
Q Ltd. M LLP
Enroll individual IP as a member
Registration
Committee of
Creditors
SC: Supreme Court, NCLAT: National Company Law Appellate Tribunal, NCLT: National Company Law Tribunal, IBBI: Insolvency and Bankruptcy
Board of India, IPA: Insolvency Professional Agency, IP: Insolvency Professional, IU: Information Utilities
21. How does one become Insolvency Professional?
21
The IBBI had notified Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 . Salient
features of the regulations are:
Insolvency
Professionals
Examination
The Board shall conduct a National Insolvency Examination and Limited Insolvency Examination .
The syllabus, format and frequency of the Limited Insolvency Examination , including qualifying
marks, shall be published on the website of the Board at least one month before the examination.
Eligibility and
Qualification for
registration of
insolvency
professionals
(Reg 5)
Any person resident of India who:
has passed National insolvency examination; or
has passed the Limited Insolvency Examination, and has 15 years of experience in management,
after graduation; or
has passed the Limited Insolvency Examination and has ten 10 years of experience as a member
of ICAI; ICSI; ICAI (Cost) and Bar council
Application for
registration
An individual enrolled with an insolvency professional agency may make application to IPA with
application fee of Rs 10,000
Registration for a
limited period
(Reg 9)
an individual who has been in practice for 15 years as a CA, CS, CA (Cost), and advocate
Valid for a period of 6 months
This is notwithstanding Regulation 5 (i.e without exams)
Recognition of IP
Entities (Reg 12)
LLP, partnership firm, or a company if:
a majority of the partners of the LLP or partnership firm or a majority of whole time directors of
the company are registered as insolvency professionals.
23. Some definitions (1/2)
23
Section Term Definition
2 (7) Corporate person • Company as defined in CA, 2013
• An LLP [As per LLP Act, 2008]
• Any other person incorporated with limited liability
under any law for the time being in force
• Excludes - Financial service provider
2(10) Creditor • Any person to whom debt is owed
• Financial or operational Creditor / Decree holder
2(11) Default • Non-payment of debt – whole/part/installment
2 (27) Property • Money, goods, actionable claims, every description of
property
• Within & outside India
• Includes interest [present/future/vested/contingent]
incidental to the property
24. Some definitions (2/2)
24
Section Term Definition
4(6) Dispute Includes a suit or arbitration proceedings
relating to—
• the existence of the amount of debt;
• the quality of goods or service; or
• the breach of a representation or warranty;
4(13) Insolvency
commencement date
• Date of admission of application for
Corporate Insolvency Resolution process by
NCLT
4(14) Insolvency resolution
process period
Period of 180 days beginning from the
insolvency commencement date and ending
on 180th day
26. CIRP
26
Applicability –
Minimum amount of default – Rs.1 lac
CG may provide for higher minimum amount not beyond Rs. 1
Crore
Who can initiate CIR process
Financial creditor
Operational creditor
Corporate debtor itself
27. CIRP: Snapshot
27
When can an application be filed?
Occurrence of default
Operational creditor to deliver 10 days demand notice to
corporate debtor
After effects?
NCLT either admits or rejects the application;
If admitted, Corporate Insolvency Resolution commences and
the date of admission of application is called the insolvency
commencement date.
28. Who cannot apply?
28
A corporate debtor who is already undergoing CIR
A corporate debtor who has completed CIR 12 months preceding the
date of making of the application
A corporate debtor or a financial creditor who has violated any of the
terms of a resolution plan - approved 12 months before the date of
making an application
A corporate debtor in respect of whom a liquidation order has been
made
29. CIRP Process: Key points
29
Sec 3(20), 3(21) - Operational Creditor includes employees, Central and State
Governments -Needs to give a 10-day notice to the debtor for repayment before taking
action
Corporate Debtor - Defaulting company, its shareholder or management personnel can
start proceedings by making a application to the NCLT upon occurrence of any default
Creditors in possession approach as against Debtors in possession approach
Potentially creates risk the minority creditors being mooted out
Threat of automatic liquidation can create strange results –May push the recoverable
companies into liquidation, thereby disrupting markets
Suspended BoD or partners eligible to attend meetings of Committee of creditors, but
not eligible to vote
30. CIRP: In brief
30
Filing of
application to
NCLT
Admission of
application
0
3
Public
announcement
14
–ve 14
Appointment
of IRP and
declaration of
moratorium
Appoint 2
registered
valuers
Creditors to submit
their claims
7 21
IRP to verify
claims
23
Submission of
records to NCLT
30
First
Committee
of Creditors
meeting
44
Circulation of
Information
memorandum
150
Submission of
Resolution
Plan to RP
Approval of plan
by Committee of
creditors
Submission of
plan to NCLT
180
Acceptance /
Rejection of plan
by NCLT
31. CIRP: Phase I
31
Financial Creditor Operational Creditor Corporate Applicant
- Filing of application on occurrence
of default;
- Based on the information from IU,
other financial creditor may file an
application as well
- Deliver a default notice to the
corporate debtor on occurrence of
default
- Filing of occurrence of default
Alongwith the application, to furnish
record of default and propose name of
interim resolution professional.
Adequate reply Not adequate reply
Settlement of
dues
Dispute
Filing of application
Along with the application, to furnish
record of default and to propose
name of interim resolution
professional
To ascertain the existence of default, if satisfied, it shall accept, or otherwise reject
Suggest rectification
Re-apply
Proceed with Phase II
Prior to rejection Accept
Reject
Within 14 days
Within 7 days
32. CIRP: Phase II
32
The entire process shall be completed within Resolution Period (180 days; extendable by 90 days)
- Order of admission of
application by NCLT;
- Declaration of moratorium;
- Public announcement as per
the order of NCLT;
- Appointment of Interim
Resolution Process
- Interim resolution
Professional to appoint
committee of creditors
(financial creditors);
- First meeting of creditors;
- CoC may accept the IRP
appointed by NCLT or may
appoint a new RP;
- For any option, the NCLT is
required to be
communicated.
- RP to conduct the corporate
insolvency resolution process;
- As many number of CoC
meetings can be convened as
necessary;
- RP shall prepare Information
memorandum.
- RP to appoint Resolution
Applicant;
- RA to submit Resolution plan
basis the IM;
- RP to examine and approve the
Resolution Plan and submit to
CoC for approval.
- CoC to approve plan (75%) and
submit to NCLT;
- NCLT may accept / reject plan;
- Implementation of plan;
- Moratorium ceases here;
- RP to submit records to IU / IBBI
Liquidation If contravention on implementation of resolution plan
If plan rejected
33. Moratorium
33
Moratorium - till the completion of the Corporate Interim Resolution process
institution of suits or continuation of pending suits or proceedings against the Corporate
Debtor
including execution of any judgment, decree or order in any court of law, tribunal, arbitration
panel or other authority
transferring, encumbering, alienating or disposing of any of its assets or any legal right or
beneficial interest
action to foreclose, recover or enforce any security interest created by the Corporate
Debtor in respect of its property
including any action under the SARFAESIAct, 2002
recovery of any property by an owner or lessor
DURING MORATORIUM
Public announcement is done for the creditors to give the claim
Creditors appoint Resolution Professional
Resolution Professional to prepare Information Memorandum -- based on this the
ResolutionApplicant will make the plan
34. CIRP initiation: Operational Creditor and Corporate
Debtor
34
Documents to be furnished along with application –Operational Creditor
To be furnished along with application
a copy of the invoice demanding payment or demand notice delivered by the
Operational Creditor to the Corporate debtor
an affidavit to the effect that there is no notice given by the corporate debtor relating
to a dispute of the unpaid operational debt
a copy of the certificate from the financial institutions that there is no payment from
debtor
Documents to be furnished along with application – Corporate debtor
its books of account and such other documents relating to such period as may be specified;
and
May propose name of Resolution Professional to act as Interim Resolution Professional
36. Liquidation Process: Phase III
36
Trigger Event:
-CoC does not agree on RP
-CoC decides to liquidate
-NCLT rejects plan
-Debtors contravenes plan
RP should be appointed
as the liquidator by NCLT,
unless rejected by CoC.
Powers of BoD / Partners
vest with liquidators.
Liquidator to identify the
assets of the corporate
debtor and form
Liquidation Estate and
hold such estate as
fiduciary for the Creditors
Liquidator to collect
claims from creditors
within 30 days from
commencement of
liquidation
Liquidator to verify
claims of secured
creditors and discharge
the secured payments
Secured creditors to
identify assets offered to
them as security against
the sums owed to them
Liquidator to either
admit or reject claims and
communicate within 3
days of such admission or
rejection
Liquidator to verify such
claims within such time
as may be specified by
the Board (IBBI)
Excess money realized by
secured creditors from
the liquidation of secured
assets to be accounted
and remitted to
Liquidator)
Any short recovery of
secured debts by a
secured creditor to be
treated as unsecured
debt and repaid in the
specified order of priority
After paying off secured
creditors, the unsecured
debts are to be paid off in
specified order of priority
If all the assets of the
corporate debtor are
completely liquidated, the
liquidator shall apply for
dissolution of corporate
debtor before NCLT
NCLT to pass an order dissolving the
C.Dr. from the date of such order
Copy of order to be filed w RoC within
7 days from the date of such order
DISSOLVED
37. Liquidation Estate (Section 36)
37
Inclusions [Section 36(3)]
Any assets over which the corporate debtor has
ownership rights
Assets that may/ may not be in possession of the
corporate debtor, including encumbered assets
Tangible assets (movable/ immovable)
Intangible assets (such as IPs), securities, financial
instruments, insurance policies, contractual rights
Assets subject to determination of ownership by
Courts
Assets recovered through proceedings for avoidance
of transactions
Asset in respect of which secured creditor has
relinquished security interest
Any other property vested in the corporate debtor on
the insolvency commencement date
All realization proceeds of liquidation
Exclusions [Section 36(4)]
Assets in the possession of corporate debtor but
owned by third parties
Assets in security collateral held by financial service
providers
Personal assets of shareholder or partner of
corporate debtor
Assets of subsidiaries (Indian/ foreign) of the
corporate debtor
Any other assets as may be specified by the IBBI
38. Moratorium Again
38
The company cannot transfer its assets
Suits will be shifted to NCLT
SARFAESI action by any secured creditor cannot be stayed
The secured creditor will need to inform the liquidator and also
prove he is a secured creditor.
A secured creditor also has the right to move separately and his
enforce security under SARFAESI Act or relinquish his security
right and become a part of the proceedings
39. Distribution of Assets
39
Insolvency Resolution and
Liquidation Cost
Secured Creditors +
Workmen s dues
Wages and unpaid dues
to employees
Unsecured Creditors
State Government and
Central Government
Any remaining debts or
dues
Preference
Shareholders
Equity Shareholders /
Partners
In case of liquidation,
the assets of the
corporate debtor will
be sold and the
proceeds will be
distributed amongst
the creditors in the
following order of
priority:
1. Government dues (including tax) rank
lower than the unsecured creditors and
wages as against the 1956 Act provisions,
where after secured creditors and workmen
dues, Government dues take preference on
liquidation payouts.
2. Ring-fenced priority for workers – Priority
being awarded to salaries up to 24 months
over all other creditors (including secured
creditors)
40. Remuneration of Liquidator
40
The Insolvency and bankruptcy (Liquidation) regulations 2016 specifies that remuneration of liquidator shall be
determined by the Committee of creditors. However where the committee does not determine the
remuneration, the Adjudicating Authority shall determine the remuneration of the Liquidator, which shall at
the maximum of the below table:
41. VoluntaryWinding Up
41
Member s & Creditor s winding-up – distinction has been removed
Code has no provision for creditors voluntary winding up
Declaration from majority of the directors, verified by an affidavit stating that—
Company has no debt or it will be able to pay its debts in full; and
Company is not being liquidated to defraud any person
Within four weeks of a declaration either:
Special resolution at the general meeting; OR
Ordinary resolution at the general meeting, as the case may be
Creditors representing 2/3rd in value of the debt of the company shall
approve the winding up of the company
Notify RoC & the Insolvency and Bankruptcy Board of India
Voluntary liquidation process commences from date of passing of resolution
43. Preferential transactions
43
Transactions covered:
transfer of property for benefit of a particular creditor;
granting of a security interest to secure existing unsecured debts;
Defence available:
transaction as consistent with normal commercial practice
ordinary course of business
new credit & new value
counterparty proves that it was unaware of a preference
no knowledge of the debtor s insolvency
Reach-back period
Two years in case of related party transactions;
One year in any other case.
44. Undervalued transactions
44
Incase if the RP or the liquidator is of the view that
transactions referred in section 43 are undervalued:
He shall make an application to NCLT to declare such transactions
as void and reversal of such transactions.
What constitutes undervalued transaction ?
Gift
Significantly less value
and such transaction has not taken place in ordinary course
of business.
45. Application for undervalued transactions
45
If the resolution professional or the liquidator does not report
undervalued transactions to NCLT:
a member / partner or creditor may make an application for same.
If NCLT is satisfied that:
undervalued transaction has occurred, and
RP or liquidator has not reported such transaction which he could have
then NCLT shall:
restore the position by reversing such transaction;
order IBBI to initiate disciplinary proceedings against RP or liquidator.
46. Extortionate credit transactions
46
Where the corporate debtor has been a party to a extortionate
credit transaction:
the RP or liquidator may make an application to NCLT for reversal of
such transaction wherein extremely high price is paid by the corporate
debtor.
NCLT upon examination may:
restore the position by reversing the transaction;
set aside the whole part of the debt;
modify the terms of transactions;
order for repayment of such dues;
Order for relinquishment of security interest.
48. Does Cross Border Insolvency gets addressed?
48
Code has not adopted the UNCITRAL Model of cross border insolvency
Currently 23 countries (including USA, UK, South Africa, Japan, Australia) have
substantially implemented the UNCITRAL Model Law into their domestic legislation
Code for the first time attempts to addresses the issue of cross border insolvency
given the multi-jurisdictional spread of assets of large corporate houses
Code stipulates a pronged solution:
Section 234 – Central Government may enter into agreements with any other
country for enforcing the provisions of the Code and notify applicability of the
same from time to time
Section 235 - Adjudicating Authority has the ability to issue letter of requests to
the courts / authorities of other countries for seeking information/ requesting
action in relation to assets of the debtor situated outside India
49. What overrides what?
49
The Code shall have an over riding effect where other laws,
for the time being in force are inconsistent to this Code.
It is specifically provided that civil courts or authority not
to have jurisdiction once an application is filed under this
code.
All criminal suits to be tried at Special courts under section
435 of the Companies Act, 2013
Provisions of Code of Criminal Procedure to apply.
51. December 7 - MCA notifies theTPP Rules
51
MCA vide Notification no. G.S.R. 1119(E) issued the Companies (Transfer
of Pending Proceedings) Rules, 2016 TPP Rules, 2016 , in exercise of
the powers conferred under section 431 (1) and (2) of the Companies Act,
2013 read with section 239 (1) of the Insolvency and Bankruptcy Code,
2016.
The MCA has appointed two different dates on which the provisions of
theTPP Rules, 2016 shall come into force.
December 15, 2016 – Entire TPP Rules, 2016 except Rule 4 shall come into force;
and
April 1, 2017 – Rule 4 (which provides for pending proceedings relating to
voluntary winding up) shall come into force.
52. Winding up on inability to pay
52
While the proceedings of winding up on the ground of inability to pay debts, if transferred to
NCLT, shall be dealt with in accordance with the provisions of the Code;
On the other hand, winding up on grounds other than inability to pay debts, if transferred to
NCLT, shall be dealt with in accordance with the provisions of the Act, 2013.
Winding up on
grounds of inability
to pay debts
Pending as on
December 15, 2016
before HC?
New application under
the Code, 2016
Petition served
under Rule 26 of
Company Court
Rules/
Remains with High
Court under 1956 Act
Yes
Yes
No
Transfer to NCLT
under the Code
No
53. VoluntaryWinding Up
53
Voluntary Winding up
Remains with High Court
under 1956 Act
Pending as on April 1,
2017 before High Court
New Application under
the section 59 of the
Code
Yes
No
54. Proceedings under SICA, 1985
54
Stages of proceedings
under SICA
Reference to BIFR / Appeal
to AAIFR
Scheme of revival
sanctioned
BIFR suggests winding up
Pending as on 1st
December, 2016
Abatement of proceedings
Fresh Application to NCLT
/ NCLAT under Code, 2016
Yes
NCLT / NCLAT under
Code, 2016
No No change
Initiated on or before 15th
December, 2016
Any appeals
Remains with High Court
under 1956 Act
Yes
No
NCLT under the Code 2016
No
Yes
56. Needs attention
56
Debtors management
Adequacy of information
Extent to which information can be seeked
Involvement of operational creditors
Level playing field
Being disenfranchised
Conflict of interest
Equal treatment
Financial creditor
Will financial creditors really want to move?
Connection between financial creditors and corporate debtor
Turbulent times ahead
57. Needs attention (Continued)
57
Process
favour to creditors
game of financial creditors has not necessitated level playing field
ouster of directors, members
principle of natural justice
Borrowed from United Kingdom
similar process
though have resulted in higher realization, the corresponding increase
in bankruptcy cost has lead to only marginal growth of recoveries
antitrust concerns due to creditor-resolution professional nexus.
58. Needs attention (Continued)
58
Boost to MSMEs?
will it really happen as operational creditors have greater skin as
compared to erstwhile law?
Are 180 / 270 days sufficient?
May lead to disharmony for stakeholders in the longer run?
Resolution applicant:
Financial creditor being resolution applicant;
Number of resolution plans;
Content of resolution plan
Infrastructural environment
Capacity Building
59. The litmus test of the success of the Code
will be on how these technical issues are
being dealt and how it is implemented.
59