Insolvency and Bankruptcy

Code, 2016
A presentation by:
Saurabh Dugar
Company Secretary

Date: March 24, 2017

Disclaimer: This presentation is based on my internal research. It is notified that the presenter and any
1 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.
 Basic Terminologies
2
 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.
 Insolvency precedes
bankruptcy and liquidation
follows bankruptcy.
 Insolvency warnings:
 drop in sales

 delay in payments
Bankruptcy:  Increasing reliance on credit
When a person is Liquidation:
legally declared as
incapable of paying
The process of
winding up a
 Cash flow test:
 when cash flow in is less
their dues and company
obligations
than cash flow out .
 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.
5

What lead to enactment of the Code?

Regime of Insolvency in India
6

 For individuals
 As old as a century
 The Presidency Towns 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.
 Regime of Insolvency in India
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
Some statistics
8

Ease of doing business Rank 2017 Cost of liquidation (in %)

140 130 25 22.7
123
120
20 18
100
78 74 13
80 15 12 12
10 9
60 10 8
40 7
40 4
22
15 5
20 7 8 2
0 0

Recovery Rate (in %) Time taken for liquidation (in years)

5
4.5
4.3
100 4
88.6 88.7 87.4 4
90 78.6 82.8
80 3.5
70 3
60 2.5 2 2.1
50 38.6 36.9 2 1.7
35.1 1.5 1.5
40 1.5
26 1
30 0.8 0.8
15.8 1
20
10 0.5
0 0
Why Code was needed?
9
Journey of the Code
10
 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 the Code
 Volume II: Draft Insolvency and Bankruptcy Code
 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

 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
 When a entity does into red zone !!!
14
 Creditors willingness
15

Options to
creditors

secured unsecured
creditors creditors

Individual Collective
remedies remedies

Enforcement of
Resolution
security right

Monetary Liquidation
claim
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.
 Structure of the Code
17
 What all gets amended?
18

SCH AMENDMENT TO
I The Indian Partnership Act, 1932
II The Central Excise Act, 1944
III The Income – Tax Act, 1961
IV The Customs Act, 1962
V The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
VI The Finance Act, 1964
VII The Securitisation & Reconstruction of Financial Assets & Enforcement Of Security Interest Act, 2002
VIII The Sick Industrial Companies (Special Provisions) Repeal Act, 2003
IX The Payment and Settlement Systems Act, 2007
X The Limited Liability Partnership Act, 2008
XI The Companies Act, 2013
 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
 The Ecosystem of the Code
20

SC / NCLAT / NCLT

Certificate of Registration
IBBI

IU Certificate of Registration to conduct business & enroll IPs IU

Registration
IPA - 1 IPA - 2
Enroll individual IP as a member

IP1 IP2 IP3 IP4 IP5

Committee of
Creditors
K Ltd. XYZ
A LLP Q Ltd. M LLP
Ltd.

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
 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  The Board shall conduct a National Insolvency Examination and Limited Insolvency Examination .
Professionals The syllabus, format and frequency of the Limited Insolvency Examination , including qualifying
Examination marks, shall be published on the website of the Board at least one month before the examination.
Eligibility and  Any person resident of India who:
Qualification for  has passed National insolvency examination; or
registration of  has passed the Limited Insolvency Examination, and has 15 years of experience in management,
insolvency after graduation; or
professionals  has passed the Limited Insolvency Examination and has ten 10 years of experience as a member
(Reg 5) of ICAI; ICSI; ICAI (Cost) and Bar council
Application for  An individual enrolled with an insolvency professional agency may make application to IPA with
registration application fee of Rs 10,000
Registration for a  an individual who has been in practice for 15 years as a CA, CS, CA (Cost), and advocate
limited period  Valid for a period of 6 months
(Reg 9)  This is notwithstanding Regulation 5 (i.e without exams)
Recognition of IP  LLP, partnership firm, or a company if:
Entities (Reg 12)  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.
22

Important terms under the Code

 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
 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 • Date of admission of application for
commencement date Corporate Insolvency Resolution process by
NCLT
4(14) Insolvency resolution Period of 180 days beginning from the
process period insolvency commencement date and ending
on 180th day
25

Corporate Insolvency Resolution Process

 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

 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.
 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
 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
 CIRP: In brief
30

First
Appoint 2 Committee Submission of
Admission of registered Resolution Submission of
IRP to verify of Creditors
application valuers Plan to RP plan to NCLT
claims meeting

–ve 14 0 7 21 30 150
3 14 23 44 180
Public
announcement
Filing of Circulation of Approval of plan Acceptance /
Appointment Creditors to submit Submission of
application to of IRP and records to NCLT Information by Committee of Rejection of plan
their claims
NCLT declaration of memorandum creditors by NCLT
moratorium
 CIRP: Phase I
31

Financial Creditor Operational Creditor Corporate Applicant

- Filing of application on occurrence - Deliver a default notice to the - Filing of occurrence of default
of default; corporate debtor on occurrence of
- Based on the information from IU, default
other financial creditor may file an Along with the application, to furnish
application as well record of default and to propose
name of interim resolution
Adequate reply Not adequate reply professional
Alongwith the application, to furnish
Settlement of
record of default and propose name of
dues
interim resolution professional. Filing of application
Dispute

Within 14 days
To ascertain the existence of default, if satisfied, it shall accept, or otherwise reject

Prior to rejection Accept

Suggest rectification Proceed with Phase II

Re-apply Reject Within 7 days

 CIRP: Phase II
32

The entire process shall be completed within Resolution Period (180 days; extendable by 90 days)

- Order of admission of - First meeting of creditors;

application by NCLT; - Interim resolution - CoC may accept the IRP
- Declaration of moratorium; Professional to appoint appointed by NCLT or may
- Public announcement as per committee of creditors appoint a new RP;
the order of NCLT; (financial creditors); - For any option, the NCLT is
- Appointment of Interim required to be
Resolution Process communicated.

- RP to appoint Resolution - RP to conduct the corporate

- CoC to approve plan (75%) and Applicant; insolvency resolution process;
submit to NCLT;
- RA to submit Resolution plan - As many number of CoC
- NCLT may accept / reject plan;
basis the IM; meetings can be convened as
- Implementation of plan;
- RP to examine and approve the necessary;
- Moratorium ceases here; - RP shall prepare Information
- RP to submit records to IU / IBBI Resolution Plan and submit to
CoC for approval. memorandum.
If plan rejected

Liquidation If contravention on implementation of resolution plan

 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 SARFAESI Act, 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
Resolution Applicant will make the plan
 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
35

Liquidation of Corporate Person

 Liquidation Process: Phase III
36
Trigger Event:
-CoC does not agree on RP
-CoC decides to liquidate
-NCLT rejects plan
-Debtors contravenes plan
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)
Copy of order to be filed w RoC within
DISSOLVED
7 days from the date of such order
RP should be appointed
as the liquidator by NCLT,
unless rejected by CoC.
Powers of BoD / Partners
vest with liquidators.
Liquidator to either
admit or reject claims and
communicate within 3
days of such admission or
rejection
Any short recovery of
secured debts by a
secured creditor to be
treated as unsecured
debt and repaid in the
specified order of priority
Liquidator to identify the
Liquidator to collect
assets of the corporate
claims from creditors
debtor and form
within 30 days from
Liquidation Estate and
commencement of
hold such estate as
liquidation
fiduciary for the Creditors
Secured creditors to Liquidator to verify
identify assets offered to claims of secured
them as security against creditors and discharge
the sums owed to them the secured payments
If all the assets of the
After paying off secured corporate debtor are
creditors, the unsecured completely liquidated, the
debts are to be paid off in liquidator shall apply for
specified order of priority dissolution of corporate
debtor before NCLT
NCLT to pass an order dissolving the
C.Dr. from the date of such order
 Liquidation Estate (Section 36)
37

Inclusions [Section 36(3)] Exclusions [Section 36(4)]

 Any assets over which the corporate debtor has  Assets in the possession of corporate debtor but
ownership rights owned by third parties
 Assets that may/ may not be in possession of the  Assets in security collateral held by financial service
corporate debtor, including encumbered assets providers
 Tangible assets (movable/ immovable)  Personal assets of shareholder or partner of
 Intangible assets (such as IPs), securities, financial corporate debtor
instruments, insurance policies, contractual rights  Assets of subsidiaries (Indian/ foreign) of the
 Assets subject to determination of ownership by corporate debtor
Courts  Any other assets as may be specified by the IBBI
 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
 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
 Distribution of Assets
39

In case of liquidation, 1. Government dues (including tax) rank

Insolvency Resolution and lower than the unsecured creditors and
the assets of the
Liquidation Cost wages as against the 1956 Act provisions,
corporate debtor will
where after secured creditors and workmen
be sold and the Secured Creditors + dues, Government dues take preference on
proceeds will be Workmen s dues liquidation payouts.
distributed amongst 2. Ring-fenced priority for workers – Priority
the creditors in the Wages and unpaid dues being awarded to salaries up to 24 months
following order of to employees over all other creditors (including secured
priority: creditors)
Unsecured Creditors

State Government and

Central Government
Any remaining debts or
dues
Preference
Shareholders
Equity Shareholders /
Partners
 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:
Voluntary Winding 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
42

Certain transactions and its probe

 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.
 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.
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.

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.
47

Miscellaneous
 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
 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.
50

Transfer of proceedings to NCLT

 December 7 - MCA notifies the TPP 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
the TPP 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.
 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.

Yes Petition served No

Winding up on Pending as on
under Rule 26 of Transfer to NCLT
grounds of inability December 15, 2016
Company Court under the Code
to pay debts before HC?
Rules/

No Yes

New application under Remains with High

the Code, 2016 Court under 1956 Act
 Voluntary Winding Up
53

Yes
Pending as on April 1, Remains with High Court
Voluntary Winding up
2017 before High Court under 1956 Act

No

New Application under

the section 59 of the
Code
 Proceedings under SICA, 1985
54

Stages of proceedings
under SICA

Reference to BIFR / Appeal Scheme of revival

BIFR suggests winding up
to AAIFR sanctioned

No Pending as on 1st Initiated on or before 15th

No change No
December, 2016 December, 2016
Yes Yes
Abatement of proceedings Any appeals
Yes
No
Fresh Application to NCLT NCLT under the Code 2016 Remains with High Court
/ NCLAT under Code, 2016 under 1956 Act

NCLT / NCLAT under

Code, 2016
55

Litmus test of the Code

 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
 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.
 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.
60

Insolvency and
Bankruptcy Code,
2016
A presentation by:
Saurabh Dugar
Email: cs.saurabhdugar@gmail.com
Mobile: +91-9867110199