The insolvency and bankruptcy

The Insolvency & Bankruptcy Code 2016

Suchi AgarwalAssociate Director – Business Advisory Email – [email protected]

mailto:[email protected]

INDEXSl NO Particulars

1. Insolvency and Bankruptcy- Defined

2. Objective of Insolvency and Bankruptcy Code

3. Applicability

4. Understanding Few Terms

5. Insolvency Resolution Process for Companies/ LLPs

6. Insolvency Resolution Process for Individuals / Partnerships

7. Institutional Infrastructure

8. Other Acts dealing with Insolvency and impact of IBC on those Acts

Difference between Insolvency & Bankruptcy

Insolvency

• Insolvency occurs when an individual or a firm is unable to meet their financial obligations

• Insolvency is a state of affairs in which the financial difficulties of a company are such it is unable to run its business at its current pace

Bankruptcy

• Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor

OBJECTIVE OF INSOLVENCY AND BANKRUPTCY CODE

RESOLUTION TIME

Country In years

India 4.3

United States 1.5

United Kingdom 1

Malaysia 1

Singapore 0.8

Japan 0.6

Process Cost of Insolvency

An Indian entity on an average hasto spend 9 per cent of its estate as compared to 3.5 per cent in countries like Finland, Japan and Korea.

Recovery Rate

In India, the average recovery rate as a result of insolvency or liquidation is 25.7 per cent compared to more than 80 per cent in countries such as Finland, Japan, Germany and USA

Objectives of Code

• To offer a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms)

• Promote entrepreneurship

• Availability of credit

• Time bound resolution of insolvency matters

APPLICABILITY OF INSOLVENCY AND BANKRUPTCY CODE

Applicability

Section 2:

• company incorporated under the Companies Act, 2013 or under any previous company law

• any other company governed by any special Act

• any Limited Liability Partnership

• partnership firms and individuals

Default

DEFAULT

In case of Company and LLP

(CORPORATE DEBTOR)

In case of Partnership &

Individual

Minimum amount of Rs. 1,00,000/-

Minimum amount of Rs. 1000/-

Central Government can increase the amount of One Lakh to a max of One Crore and One Thousand to a max of One Lakh

UNDERSTANDING FEW TERMS

NEW TERMS

Financial Creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Financial Debt incudes:i. Money borrowed against the payment of interestii. Any amount raised pursuant to the issue of bonds, debentures, loan

stock or any similar instrumentiii. The amount of any liability in respect of any lease or hire purchase

contract iv. Any counter indemnity obligation in respect of guarantee, indemnity,

letter of credit or other instrument of bank or financial institution

NEW TERMS

OPERATIONAL CREDITOR means any person to whom a operational debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Operational Debt means a claim in respect of provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority

NEW TERMS

MORATORIUM

This operates as a 'calm period' during which there shall be no:

(a) institution of suits or continuation of pending suits or proceedings by any court of law, tribunal, arbitration panel or other authority;

(b) transfer, encumbrance, or disposal of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

INSOLVENCY RESOLUTION FOR COMPANIES/ LLPs

Companies/LLPs(Insolvency)

Insolvency Resolution & Revival

Liquidation

Voluntary Liquidatio

n

Fast Track Insolvency Resolution

Process

Corporate Debtor

(A) Insolvency Resolution Process (IRP) (Rescue & Revival)

Insolvency resolution process starts from the date of admission of the application which is called ‘insolvency commencement date’ and the process must be completed within 180 days of its commencement

Commencement

• A financial creditor (for a defaulted financial debt) or an operational creditor (for an unpaid operational debt) can initiate an IRP against a corporate debtor at the National Company Law Tribunal (NCLT).

Corporate Debtor

Moratorium

• The NCLT orders a moratorium on the debtor's operations for the period of the IRP.

Public Announcement NCLT shall make a public announcement of the IRP covering :

• Name and address of the corporate debtor under the IRP• Name of the authority with which the corporate debtor is

registered• Last date for the submission of claims• Details of the Insolvency Resolution Professsional who shall be

vested with the management of the corporate debtor• Penalties for false or misleading claims• The date on which the IR process shall close

Corporate Debtor

Appointment of Resolution Professional

• The NCLT appoints an insolvency professional or 'Resolution Professional' to administer the IRP.

• Take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors

• Shift of control from the defaulting debtor's management to its creditors, where the creditors drive the business of the debtor with the Resolution Professional acting as their agent.

Corporate Debtor

Creditors Committee and Revival Plan

• The Resolution Professional identifies the financial creditors and constitutes a creditors committee.

• Operational creditors above a certain threshold are allowed to attend meetings of the committee but do not have voting power.

• Each decision of the creditors committee requires a 75% majority vote. Decisions of the creditors committee are binding on the corporate debtor and all its creditors

• The creditors committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan or liquidation within a period of 180 days (subject to a one-time extension by 90 days).

Corporate Debtor

(B)Liquidation

• If the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor.

• Other scenarios for liquidation:i. A 75% majority of the creditor's committee resolves to

liquidate the corporate debtor at any time during the insolvency resolution process.

ii. The creditor's committee does not approve a resolution plan within 180 days (or within the extended 90 days)iii. The NCLT rejects the resolution plan submitted to it on

technical groundsiv. The debtor contravenes the agreed resolution plan and an

affected person makes an application to the NCLT to liquidate the corporate debtor

Liquidator to admit or

reject claim

Liquidator to distribute

assets

Liquidator to make

application to NCLT

NCLT to order

dissolution

IRP to be appointed

as Liquidator

Liquidator to form

Liquidation Estate

Liquidator to consolidate

claimsLiquidator to verify claims

LIQUIDATION

VOLUNTARY LIQUIDATION

Declaration from the directors verified by an affidavit that the company has no debts or that it shall be able to pay its debts from the proceeds of assets sold in the liquidation and that the company is not being liquidated to defraud any person

Special Resolution to be passed in the general meeting resolving voluntary liquidation and appointment of Insolvency Professional to act as the liquidator

Where the company owes any debt to any person, creditors representing 2/3rd in value of the debt of the company shall also approve the resolution

Liquidator to form Liquidation estate, consolidate claims and distribute assets

Liquidator to make an application to NCLT

Dissolution of corporate debtor by NCLT order

FAST TRACK IRP

Can be made by:

A company/ LLP with assets and income below a level as may be notified by Central Govt

A company/ LLP with such class of creditors or such amount of debt as may be notified by Central Govt

Such other category of corporate persons as may be notified by the Central Govt.

IRP to be completed within 90 days with single extension of upto 45 days, if needed.

Distribution of assets

1. Insolvency Resolution Process Costs to be paid in full2. (a) Workmen dues for the period of 24 months preceeding the

liquidation commencement date (b) debts owed to a secured creditor

3. Wages and any unpaid due to employees other than workmen for the period of 24 months preceeding the liquidation commencement date

4. Financial debts owed to unsecured creditors5. Amount due to Central Govt or State Govt for the period of 24

months preceeding the liquidation commencement date6. Any remaining debts or dues7. Preference shareholders , if any; and8. Equity shareholders or partners as the case may be.

INSOLVENCY RESOLUTION FOR INDIVIDUALS/ PARTNERSHIP FIRMS

Individuals/Partnership(Insolvency)

Fresh StartInsolvency

Resolution & Discharge Order

Bankruptcy Order

Individuals/Partnership

(A)Fresh Start Process

• Eligible debtor can apply to the Debt Recovery Tribunal for discharge from qualifying debts not exceeding a specified threshold, allowing them to start afresh.

• Insolvency Resolution Professional on being satisfied about the correctness of the debts and the financial status of the debtor make a list of qualifying debts and report to the Debt Recovery Tribunal (DRT). DRT shall then pass a Discharge Order.


Eligible Debtor:

Whose gross annual income does not exceed Rs 60,000;

Whose total value of assets does not exceed Rs 20,000;

Whose total value of qualifying debts does not exceed Rs 35,000

Who does not own a dwelling unit, whether encumbered or not;

There is no pending bankruptcy proceeding against him.

Qualifying Debt means any amount due including interest owed under any contract but does not include a secured debt or debt incurred 3 months prior to making application for fresh start process


(B) Insolvency Resolution

A defaulting debtor or a creditor can make an application either himself of through Insolvency Resolution Professional

Preparation of a repayment plan by the debtor, for approval of creditors.

If approved, the DRT passes an order binding the debtor and creditors to the repayment plan

ON completion of the repayment proceedings, discharge order is given by DRT

If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order wherein Bankruptcy trustee shall be appointed and the estate of the debtor shall vest with him till discharge orders are given by DRT

INSTITUTIONAL INFRASTRUCTURE

Institutional Infrastructure

Insolvency and Bankruptcy Board of India

• Overseeing the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities

• Regulating the insolvency process• Consists of :

• A Chairperson• Three members not below the rank of joint Secretary or

equivalent, one of each to represent the Ministry of Finance, the Ministry of Corporate Affairs and Ministry of Law, ex-officio

• One member to be nominated by the Reserve Bank of India, ex-officio

• Five other members to be nominated by the Central Government, of whom at least three shall be the whole-time members


Information Utilities

• Information utilities collect, collate, authenticate and disseminate financial information of debtors in centralised electronic databases

• Such information would be available to creditors, resolution professionals, liquidators and other stakeholders in insolvency and bankruptcy proceedings

Adjudicating Authorities

• For Corporate Insolvency: NCLT, NCLAT and Supreme Court

• For Individual and Other Persons: DRT, DRAT and Supreme Court


Insolvency Resolution Professionals

• Intermediaries who would play a key role in the efficient working of the bankruptcy process

• Consists of Class of regulated but private professionals having minimum standards of professional and ethical conduct

• Verifies the claims of the creditors

• Constitutes a creditors committee

• runs the debtor's business during the moratorium period and helps the creditors in reaching a consensus for a revival plan

• Acts as a liquidator and bankruptcy trustee

New Professionals

Insolvency Professional

Enrolled as a Member of Insolvency

Professional Agency

Registered with Insolvency and

Bankruptcy Board of India

The Board will specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field, as it deems fit, which can be appointed as Insolvency Professionals

OTHER ACTS DEALING WTH INSOLVENCY AND IMPACT OF IBC ON SUCH ACTS

Impact of IBC on existing Legislations

Act Purpose Adjudicating Authority

Existing Provision

Impact of IBC

Sick Industrial Companies (Special Provisions) Repeal Act, 2003

To repeal the Sick Industrial Companies (Special Provisions) Act 1985

Board of Industrial and Financial Reconstruction (BIFR)

- • Any appeal made to Appellate authority or any reference made, inquiry pending before the BIFR• Any proceeding pending before Appellate Authority or BIFR

shall stand abated and can be referred to NCLT under IBC

Limited Liability Partnership Act 2008

Regulates Limited Liability Partnerships in India

National Company Law Tribunal

Section 64, clause (c): A LLP may be wound up by the Tribunal, if the LLP is unable to pay its debts

This shall be omitted

Indian Partnership Act 1932

Regulates Partnership firms in India

Registrar of Firms

A firm has to be compulsorily dissolved in case of adjudication of all or all except one as insolvent.



Act Purpose Adjudicating Authority

Existing Provision

Impact of IBC

Recovery of Debts Due to Banks and Financial Institutions Act, 1993

Legislature in ensuring speedy recovery of bank dues

Debt Recovery Tribunal

Debt Recovery Appellate Tribunal

- • Establishment of Debt Recovery Tribunal (DRT) and its benches as per IBC• Establishment of Debt Recovery Appellate Tribunal (DRAT) and its benches as per IBC• Powers of DRT and DRAT shall be as per Schedule III of IBC•Applications made to the Tribunal shall be dealt with the manner as provided under IBC

Securitisation and Reconstruction of Financial Assets and Enforcement Security Interest Act, 2002

Recovering Non Performing Assets (NPAs) of Banks and FIs

Debt Recovery Tribunal

Debt Recovery Appellate Tribunal

- Resolution process shall be as per IBC


Act Existing Provision Impact of IBC

Companies Act 2013

- • Definition of Winding up inserted u/s 2(94A) as winding up under this Act or liquidation under the IBC, as applicable

Section 8(9) : Any asset remaining after winding up of the Company, it shall be transferred to another Sec 8 Company or its proceeds after sale shall be credited to Rehabilitation and Insolvency Fund

Insolvency and Bankruptcy Fund shall be substituted in place of Rehabilitation and Insolvency Fund

Wherever in the Act mention as ‘liquidator’ or ‘on the liquidator’

Appointed under this Act or under the IBC, shall be inserted

Section 253 to 269 : Revival and Rehabilitation

These shall be omitted

Section 270: Modes of Winding Up

Voluntary Winding up shall be omitted


Act Existing Provision Impact of IBC

Companies Act 2013

Circumstances of winding up by tribunal

The following circumstances shall be omitted:• if the company is unable to its debts• if Tribunal has ordered winding up under Revival and Rehabilitation of Sick companies

Section 272: Petition for winding up

winding up on petition by creditors shall be omitted

Section 275 : Company Liquidator and their appointment

The liquidator shall be appointed by the Tribunal amongst the Insolvency Professionals under IBC

Part II : Voluntary Winding Up (Section 304 to 323)


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