C.V.O. CA’S NEWS & VIEWS VOL. 21 NO. 7 / JANUARY 2018It doesn't matter if you end up working for yourself or someone else, the education element is an investment that provides the

C.V.O. CA’S NEWS & VIEWS VOL. 21 NO. 7 / JANUARY 2018

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From the desk of Chairman

NEWS BULLETINCOMMITEE

ChairmanCA Dinesh Shah

Office BearerCA Sunil Dedhia

AdvisorCA Manoj Shah

ConvenorCA Harsh Dedhia

Jt. ConvenorCA Jigar Chheda

MembersCA Hitesh Pasad

CA Bhavin DedhiaCA Kaushik GadaCA Nikita GogriCA Sagar MaruCA Virav DedhiaCA Zalak Savla

Sp. InviteesCA Rakesh Vora

C O N T E N T S

ASSOCIATION NEWS

Forth ComingEvents ........................... 4

EventsRetrospect ..................... 4

A R T I C L E S

Insolvency andBankruptcy Code,2016 – A GameChanger? ....................... 5

CorporateInsolvencyResolutionProcess: ........................ 9

LiquidationUnder IBC .................... 13

ImportantPronouncementsunder theInsolvency andBankruptcyCode, 2016 :Issue Analysis ............. 21

LEGAL UPDATES

Direct TaxUpdates ....................... 27

Updates onGST ............................. 29

When we talk about investment, the first thing that comes to our mind is investment instock markets, mutual funds, bonds, gold, bank and company deposit or real estate; therisks and yields associated with each of them and the risk-reward trade-off.However, there are yet other forms of investment, which never fluctuate over time, arenot dependant on the economy or the whims and fancies of foreign institutional investors(FIIs), are risk free, yield positive and often disproportionately high return, and mostimportantly, are not taxable. These investments are actually inbuilt in our lives -i) Health - Looking around, and as per statistical data, the world appears full of people

with health related problems. Alarmingly, heart attacks, diabetes and other diseasesare increasingly affecting the young as well as old. We can get some clues bystudying the cost of coping with certain common illnesses. Diabetes patients, forinstance, spend nearly Rs. 2 to 3 Lakhs per year for treatments includingmonitoring, medicines, visit to the doctor, etc. And this cost does not include theprecious time lost for self and family members.It takes very little to be healthy. You can start this very day and of course, you'renever too poor or too old to take advantage of the opportunity. When was the lasttime you had a health check-up done? Do you have a regular regime of exercise oryoga in which you invest a minimum of half hour per day, five days a week? If yourinstinctive response is that you don't have the time, think again! If you really careabout your health, ensure you eat healthy foods including fresh fruits and saladsand get your quota of sleep.Investing in your health is not only sensible but essential. The reward is living long,with good health, well being, vigour and energy.

ii) Education - Education is a lifelong companion; unless one suffers from memory loss.It is not that education ends when one leaves college, or achieves any qualification.Learning is a never ending process. It doesn't matter if you end up working foryourself or someone else, the education element is an investment that provides thetoll necessary for you to move forward, and become successful. Besides having agreat time with new experience, connections are the first reason education is aworthwhile investment. Conveniently grab every opportunity to attend trainingprogrammes even if they are outside your immediate area of interest.It pays to invest your own money and time in continuing education. Remember,what you know is your biggest asset in this knowledge era.

iii) Experience - You are the sum total of your experiences. Spend money on experience,not things. Enjoyment in little events matters. Remember it is the memories of littlethings, which are to be cherished. Enjoy in giving than receiving. Feeling good isbetter than looking good. If you have to choose between two jobs, one which paysbetter money and another that gives richer and varied experience, choose the latter.In the long run, invest in experiences and you will be better off. Invest in eventsand matters of interest, and success will surely follow you.

iv) Books - Make books your companions and you will never be lonely. Investing in theclassics, biographies and self development books are treasures as valuable as a rarepainting. One nugget from these can change the course of your life at any time.

v) Travel - There is an old adage that travel broadens the mind. Europeans believethat no education is complete unless we have travelled for a year. It is not enoughto just travel, we must mix with the local people and understand their culture and

THE SEVEN INVESTMENTS

VOL. 21 NO. 7 / JANUARY 2018 C.V.O. CA’S NEWS & VIEWS

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EVENTS IN RETROSPECT

Compiled by :CA. Harsh DedhiaCA. Jigar Chheda

ASSOCIATIONNEWS

FORTHCOMING EVENTS

YOUNG AND INDUSTRY MEMBERSEMPOWERMENT COMMITTEEEvent Yoga by the BayDate 14th January, 2018, SundayFaculty Dr. CA Kishore GadaVenue Shivaji Park GardenFees Rs.150/- per person

MEMBERSHIP & RECREATIONCOMMITTEEEvent Day-Night Box Cricket League

(Form Members, family andstudent members)

Date 20th January, 2018, SaturdayVenue Dr. Antonio D’Silva Turf GroundFees Own a male team – Rs. 6000/-

Own a female team – Rs. 3000/-Individual Registration – Rs. 200/-

PROGRAM COMMITTEEEvent Union Budget 2018Date 7th February , 2018, WednesdayVenue Yogi Sabha Gruh , Dadar EastFees Free and open for allRemarks Program jointly with other local

body at central and western suburbwill be announced in due course.

YOUNG & INDUSTRY MEMBERSCOMMITTEEEvent Moonlight CyclingDate Saturday, 16th December, 2017,Venue Asiatic Library - WorliParticipants 63Remarks : In all 25 km cycle ride completed by oneand all with good health. It was amazingexperience for youth to ride bicycle from 11.00 pmto 3.30 am.

STUDENTS COMMITTEEEvent Study Circle –

Basic overview of FEMADate Thursday, 21st December, 2017,Venue D. R. Ghalla Memorial HallFaculty CA Viral SatraParticipants 43

GUJURATI MOVIE SCREENING -Chal Man Jeetva JaiyeDate Monday, 1st January, 2018,Venue PVR, R-Odean, Ghatkopar EastParticipants 239Remarks : Movie with a good message in today'senvironment, which shows distinction betweenpractical decision versus ethical decision inbusiness. All appreciated the depth, content andmessage given by the movie.

way of life. The world is a global village and the more you experience, share and know of othercultures, the better the manager and business person you will be.

vi) Family - Talk to any high flier of yesteryears and the one common regret they all have is that theydid not spend enough time with their children. For them it may be too late, but perhaps not for us.Think of yourself as a stock in which the principal stakeholder is your family. They are the real reasonwhy you work so hard, but do you set aside the time to take part in their joys and sorrows? No matterhow busy you are, make it a point to be there for your children's school annual days and PTA meetingand certainly their birthdays. Get to know your children, it is time well spent.

vii) Spirituality - We all have a personal connection with the creator. Meditation, prayers, satsangs andworshiping, nurture and celebrate that connection. I feel relieved and refreshed when I meditate orsay my prayers. Make it a part of your routine and recharge your spiritual bank regularly and not justwhen you need divine help. It will serve as a reminder of where you came from and you are headed.These 'Investment strategies' may seem as simplistic as buy low, sell high but if carried outsystematically, they can enrich your life beyond imagination!

TREAT OTHERS THE WAY YOU WANT TO BE TREATED ! REMEMBER THE SOUL IS ON THE JOURNEYMumbai CA Dinesh Shah


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1 Setting the Context1.1 Insolvency and Bankruptcy Code 2016 (‘IBC’ or

‘Code’) ushers India’s delay prone archaic“recovery judicial system” to new age, time-bound, comprehensive and efficientcodification. Important sections of IBC, whichwas passed by both houses of parliament andreceived President’s assent in May-2016, werenotified on 5th August, 2016. Insolvency andBankruptcy Board of India (‘IBBI’) was set upon 1st October 2016 under IBC. It regulatesInsolvency profession as well as transactionsunder IBC. It has regulatory oversight over theInsolvency Professionals (‘IP’), InsolvencyProfessional Agencies (‘IPA’), InsolvencyProfessional Entities (‘IPE’) and InformationUtilities (‘IU’). IBBI frames and enforces rulesfor transactions, e.g. Corporate InsolvencyResolution Process (‘CIRP’), corporateliquidation, individual insolvency resolutionand individual bankruptcy etc. under the IBC.It is a key pillar of the ecosystem responsible forimplementation of IBC that consolidates andamends the laws relating to reorganization andinsolvency resolution of corporate persons,partnership firms and individuals in a timebound manner for maximization of the value ofassets of such persons, to promote entrepre-neurship, availability of credit and balance theinterests of all the stakeholders.

1.2 The legal framework in India before IBC in theareas of recovery proceedings, insolvency,liquidation and allied aspects were complex, fullof multiplicity and inefficient. The civil suits incourt of law for recovery cases were extremelytime consuming; five to ten years’ time used totake only to get a judgment; execution of decreeand actual recovery took longer time. The oldframework contained several Laws e.g. (i) ThePresidency Towns Insolvency Act, 1909 (ii) TheProvincial Insolvency Act, 1920 (iii) Recovery ofDebts due to Banks and Financial InstitutionsAct, 1993 (‘DRT Act’) (iv) Sick IndustrialCompanies (special provisions) Act, 1985(‘SICA’) (v) Remedies for recovery and Windingup petitions under Company Law (vi) Chequebouncing provisions under the NegotiableInstruments Act, 1881 (vii) SARFAESI Act,2002 etc.

1.3 Plethora of such legislations could neither

INSOLVENCY AND BANKRUPTCY CODE,2016 – A GAME CHANGER?

achieve the desired results nor enablepreserving the asset values and nor recognize orprotect genuine business failures. The quality ofdebt market and credit lending suffered heavily.Stress in the Indian Banking Sector over lastabout decade is ever growing, which rankedIndia poorly on many counts including ‘ease ofdoing business’. Under the directives of ReserveBank of India (‘RBI’), the Indian Banksexplored several other ‘out of court’ options toreduce the stress and level of Non-PerformingAssets (‘NPA’) like: (i) Corporate DebtRestructuring (CDR), (ii) Joint Lending Forum(JLF), (iii) Bilateral (iv) Strategic DebtRestructuring (SDR) and (v) Scheme forSustainable Structuring of Stressed Assets(S4A) etc. But for several reasons all theseefforts fell short of the expectations to reducethe stress over banking, enhance credit qualityand recognize genuine business failures fortimely corrective actions. The reported NPAs ofIndian Banking system approximated awhopping number of Rs. 8 Lakh Crores at thebeginning of current fiscal year. The actual badloans scenario could be even worse if oneaccounts for loans that are being restructuredunder various aforesaid schemes and aretechnically retained as ‘standard’ in the books oflenders. According to an estimate, this numberwould presently cross Rs. 10 Lakh Crores.

1.4 In this scenario, a need for drastic legislativeoverhaul was felt over last several years. Reportof Bankruptcy Law Reforms Committee, 2015(‘BLRC’) aptly summarizes the systemicproblems and lays foundation of this new lawi.e. IBC, aiming to: (i) promote entrepre-neurship (ii) make credit available (iii)consolidate and/or amend the existing lawsrelating to insolvency and bankruptcy (iv)reduce the time of resolution for maximizingvalue of assets and (vi) balance the interest ofall stakeholders.

2 Differentiating features of IBC whichmake it a game changer

2.1 IBC brings a paradigm shift from “Debtors inpossession” to “creditors in control” of stressedassets.

2.2 The test of insolvency moves from ‘erosion innet-worth’ to “occurrence of default”.

Contributed by :CA Hasmukh B. Dedhia(a member of the association)

he can be reached [email protected]


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2.3 Provides Single comprehensive nation-wideframework. IBC Replaces/modifies/amendsseveral existing laws. Therefore, it is referred toas ‘Code’ and not merely an ‘Act’.

2.4 Strict time-bound resolution process at eachstage from occurrence of payment default toresolution/liquidation/bankruptcy.

2.5 Provides for suitable institutional infrastructureas under:An independent regulator IBBIAdjudicating Authorities NCLT forwith adequate powers corporates and

DRT for otherdefaulters

Appropriate Appellate NCLAT formechanism corporates and

DRAT for othersInvolvement of IP, IPA, IPE andprofessionalism with IU all theserelevant expertise and being regulatedclearly spelt out duties by IBBIand roles

2.6 IBC contains a clearly defined, unambiguousdistribution of recovery proceeds from thestressed assets. Apropos to Government forgiving statutory dues lesser priority, therebyencouraging the chances of resolution and/orrestructuring of ailing businesses.

2.7 IP to take over the management and control ofthe Corporate Debtor (‘CD’) and suspension ofBoard of Directors immediately upon order ofadjudicator. Remuneration / compensation of IPgiven top priority and in cases of liquidation thequantum thereof provided in the framework ofIBC.

2.8 Committee of Creditors (‘CoC’) to be formedimmediately from amongst Financial Creditors(‘FC’) to guide, supervise and supplement theactions of the IP. Operational Creditors (‘OC’)can invoke IBC against defaulting CD but havelimited say in course of resolution and/orliquidation process as the decisions are to betaken by IP & CoC.

2.9 Upon order of the adjudicator, Moratoriumprohibiting suits, legal actions, execution ofdecree against CD is granted till earlier of (i)completion of CIRP (ii) approval of resolutionplan or (iii) liquidation order. This facilitatespeace and time for working out resolution.

2.10 Adequate provisions in IBC to deal withconcealment, fraud, and/or manipulation asalso regulating the transactions with relatedparties (the definition of related parties under

IBC is wider than Companies Act or AccountingStandards). Suitable remedies contained in IBCfor ‘Preferential Transactions’, ‘Under ValuedTransactions’ and ‘Extortionate CreditTransactions’. All these provisions would golong way in instilling financial discipline duringstress period.

2.11 The entire framework now matches with best ofinternational perspectives.

2.11 Last but not least, such comprehensive andtime-bound legislation would provide muchneeded confidence to lenders and investors inthe debt market. The quality of credit isexpected to improve gradually.

3 IBC – at a glance3.1 IBC comprises of 255 Sections across the

following Parts and Chapters:Part ChapterNo No Part /Chapter headingI - PreliminaryII Insolvency Resolution and

Liquidation for Corporateperson

I PreliminaryII Corporate Insolvency ProcessIII Liquidation processIV Fast Track Corporate Insolvency

Resolution ProcessV Voluntary Liquidation of Corporate

personsVI Adjudicating Authority for

Corporate PersonsVII Offenses and Penalties

III Insolvency Resolution andBankruptcy for Individuals andPartnership Firms

I PreliminaryII Fresh Start ProcessIII Insolvency Resolution ProcessIV Bankruptcy Order for Individuals

and Partnership FirmsV Administration and Distribution of

the Estate of the BankruptVI Adjudicating Authority for

Individuals and Partnership FirmsVII Offenses and Penalties


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IV Regulation of InsolvencyProfessionals, Agencies andInformation Utilities

I Insolvency and Bankruptcy Boardof India

II Powers and Functions of the BoardIII Insolvency Professional AgenciesIV Insolvency ProfessionalsV Information UtilitiesVI Inspection and InvestigationVII Finance, Accounts and Audit

V Miscellaneous

3.2 The Code contains 11 schedules amendingseveral Acts including Partnership Act,Companies Act, Excise Act, Customs Act, IncomeTax Act, DRT Act, SICA etc. The IBC issupported by several Regulations issued byMinistry of Corporate Affairs like InsolvencyProfessional Regulations, CIRP Regulations,Liquidation regulations etc. The entire resourceof the Code, Regulations, Circulars andnotifications as also decided cases are madeavailable online at www.ibbi.gov.in/

3.3 The Code is not applicable to financial serviceproviders as a separate legislation is beingdrafted to address the issues relating tofinancial service providers. Recently, intent ofgovernment was noticed to either make separatelegislation or separate provisions within the IBCfor simpler and quicker insolvency / bankruptcyof Small and Medium Enterprises.

3.4 The IBC Amendment Bill, passed by theParliament, provides for some restrictions onbidding process by the ‘willful defaulters andother such class’; the said provisions werepromogulated by an ordinance earlier as RBIhad advised the Banks to invoke the provisionsof IBC against large borrowers which havebecome NPAs. Those cases of large defaulterswould now be in process of resolution orliquidation. In the first phase 12 big accountswere identified and in the second phase anotherabout 28 big accounts are being taken up underIBC by the banks. RBI’s intention is to make thePSU commercial banks fully provided for all thestressed loans by March-2018. Recapitalizationof these Banks has already been announced bythe finance ministry to make the Banking sectorhealthier.

4 Report Card post one year of operation ofIBC pertaining to corporates

4.1 The Financial Stability Report, 2017 publishedby RBI recently states that first year of IBC hasbeen indicative of substantial changes andreforms taking place in the Debt and creditsegment of the economy. The said reportprovides following details of CorporateInsolvency Resolution Process (CIRP) as atNovember 30, 2017:No. of applications under CIRPfiled under various benches of NCLT 4300No. of cases rejected, dismissedor withdrawn 500No. of cases admitted by NCLT atvarious stages of insolvency 470No. of resolution plans orliquidation plans approved 25No. of cases whose admissionset aside vide orders by NCLAT/SC 25Thus, more than 3200 cases are being heard atvarious stages across all the benches of NCLT.The precedence of these cases and judgementson some of the contentious issues wouldfacilitate quicker judicial pronouncements infuture. The website of IBBI as on Dec-2017contains about 589 decisions of NCLT, 161decisions of NCLAT and 10 judgments ofSupreme Court. The spread of IBC wouldfurther enhance when provisions pertaining tonon-corporate entities are made effective.

4.2 Examples of major such contentious issuesencountered or judicially decided (either byNCLT or NCLAT or Supreme Court) so farinclude: Constitutional validity of IBC Overlap of IBC with prevailing state level

legislations Whether opportunity of being heard to

defaulting CD is necessary in case of IBCpetitions against CD filed by the OC

The CD can site ‘existence of dispute’ fornegating the demand notice raised by OCand thereby deny admissibility of petitionunder section 9 of IBC. Several cases evolvearound question as to what is existence ofdispute because definition of the term‘dispute’ u/s 8(2) of IBC is inclusive one andit refers to ‘suit or arbitration…..’

IBC petition against a leading builder/developer company in NCR is in news for theconcerns of numerous flat/unit buyers, inunder construction premises, whose advancepayments to that builder company are stuck.


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4.3 Three IPAs have been registered with IBBIrepresent ICAI, ICSI and ICMA. IPA’s role is toregister, educate and govern its own membersas IP. Chartered Accountants, CostAccountants, Company Secretaries andAdvocates, being in practice for 15 years or morecan avail the benefit of provisional registrationunder section 9 of IBBI Regulation pertainingto IPs. For final certificate of registration as IP,a ‘Limited Insolvency Examination’ (‘LIE’) isrequired to be passed within six months by suchprofessionals. The syllabus and curriculum(revised every six months) of LIE is available onthe website of IBBI. LIE is conducted by NISM.Other interested persons would have to clearNational Insolvency Examination (yet to benotified) to become registered IP. The rules andsyllabus for registered valuer’s examinationhave been recently published by IBBI. As perthe website of IBBI, number of registered IPs ismore than 2000. About 59 IPEs have beenformed and registered, one IU (‘National E-Governance Services Limited’) and couple ofRegistered Valuers organizations have so farbeen registered with IBBI. Thus, while the newlegislation is evolving, the entire framework isgearing up to take on challenges of handlingsubstantially enormous number of cases underIBC. The profession of insolvency is consideredone of the highly respected one in the developedwestern countries; the new legislation attemptsto professionalize the entire process of revival,resolution as also liquidation.

4.4 The new legislation, though matching withinternational prevailing laws, would prove itsworth only when all the stakeholders combinetheir efforts in making it a success. The IndianJudicial system is often alleged to be timeconsuming; among other things, that one aspectis duly taken care under IBC, which containsstringent time limit (of 14 days) even for NCLTto decide upon the petitions. Time of 30 daysfrom the date of order of NCLT is prescribed tocomplete the task by Interim resolution process,which is considered to be far more stringent.Within this time of 30 days, the tasks to becompleted by interim resolution professionalinclude but not limited to: (i) announcement inprescribed format and manner (ii) collating theclaims (iii) reviewing the claims (iv) uponsuspension of Board of Directors of thedefaulting CD, managing/controlling businessoperations of the CD (v) formation and meetingsof CoC (vi) obtaining two independent valuers’report on liquidation value of distressed asset ofthe CD (vii) decision about resolution or

liquidation (viii) preparation and adoption ofresolution plan by CoC (ix) approval ofresolution plan by NCLT (x) appointment ofresolution professional or liquidator to takeforward the plan etc. All these are indeeddaunting tasks. The total time of 180 days fromthe date of the order is prescribed to completethe entire process of resolution also poses severechallenges to meet the regulatory timelines.

5 What is in it for Practicing CharteredAccountants?The education, professional competence andcaliber of CA’s suit for performing numerousservices to several stakeholders under entireIBC process in qualitative manner, addingvalue to the entire process of insolvency andbankruptcy. Noted below are only selectivesample functions that suit core competences ofpracticing CA:

5.1 As stated above, CA can function as Resolutionprofessional / Liquidator – a career referred toas ‘bright’ by none other but the Prime Ministerof India.

5.2 CA can act as registered valuer and provideservices to IP, CoC and others.

5.3 CA can be consultant, financial analyst, forensicauditor, claims reviewer, carry due diligence ofthe bidders or other interested parties, providevaluable advice on structuring the deals andplay several other important roles to cater to IPsand other stakeholders.

5.4 CA with other professionals can form andregister IPE to provide consultancy and act ascatalyst to various stakeholders under IBC.

5.5 CA’s as professionals are known to havedigested and work within prescribed Code ofEthics. They would be at ease to live by thestringent ‘Code of Conduct’ prescribed for IPunder the regulations of IBC.

6 The Way forward….In the separate articles elsewhere in this issue,the topics of (i) CIRP, (ii) Liquidation and (iii) ananalysis of judicial decisions/pronouncementsare dealt with by the expert contributors, ingreater details. Covering the entire gamut ofsuch comprehensive legislation even in tens ofsuch special issues may be a challenging task.The humble attempt is aimed at arousinginterest amongst the readers about this newlegislation and to look seriously at professionalopportunities that it offers.


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CORPORATEINSOLVENCY

RESOLUTION PROCESS:The Insolvency & Bankruptcy Code 2016 was passed as an Act in both the houses of parliament on 11 May2016 & received the President’s assent on 28 May 2016. This is an Act to consolidate and amend the lawsrelating to re-organisation and insolvency resolution in a time bound manner for maximisation of value of assetsof such persons, before it becomes obsolete.

The vision of the Law (as stated in press release of Government of India) is to encourage entrepreneurship &innovation. Some business ventures will always fail, but they will be handled rapidly & swiftly. Entrepreneurs& lenders will be able to move on, instead of being bogged down with decision taken in the past.

Overview of Corporate Insolvency Resolution Process (CIRP):

In the following flowchart, we can see an overview of CIRP.

Let us now understand the CIRP in detail:

What causes anCorporate Insolvency Resolution Process:When a Company – Corporate Debtor is unable to pay its debts eg: salaries, bank loan installments, tradepayables etc; there is a default event & the company becomes insolvent, which can trigger the InsolvencyResolution Process.

Who can initiate the Corporate Insolvency Resolution Process:Where any corporate debtor commits a default, a financial creditor, an operation creditor or corporate debtoritself can initiate the CIRP where the minimum amount of default is Rs. 1 lakh.

Contributed by :CA Paras Savla(a member of the association)


Contributed by :CA Priti Savla(a member of the association)

she can be reached [email protected]


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What is the procedure for initiating Corporate Insolvency Resolution Process:The financial creditor or an operation creditor or corporate debtor has to make an application to the AdjudicatingAuthority i. e. National Company Law Tribunal (NCLT) in the prescribed form & with prescribed fees asmentioned in the following table.

Sr. Application to NCLT for CIRP by Form Fee (In Rs) Section Rule1. Financial Creditor (whether solely or jointly) 1 25,000.00 7 42. Operational CreditorIf the amount is not disputed or

settlement amount is not received from corporate debtorin 10 days of delivery of Demand Notice or Copy ofInvoice, Operational Creditor may file an application. 5 2,000.00 9 6Must first deliver Demand Notice or Copy of invoice 3 or 4 NIL 8 5

3. Corporate Debtor 6 25,000.00 10 7

An application by the persons mentioned above made to NCLT along with required documents / information,as may be specified, shall be admitted (unless rejected) by NCLT within 14 days to enable the CIRP to beconcluded in a time-bound manner, i.e. 180 days or the maximum extended time of 270 days from the date ofadmission of the application. Withdrawal of an application is permitted only before admission of the applicationby NCLT and not thereafter, as the Act is silent on the same. This aspect is repeatedly coming to the fore andmay necessitate an amendment, especially in cases where the corporate debtor settles the amount due andpayable to its concerned creditor post-admission and wishes to seek discharge from the purview of the Code.NCLT and its appellate body, the National Company Law Appellate Tribunal (NCLAT), have expressed the lackof any inherent power in this regard. The Hon’ble Supreme Court has, however, utilized its power under Article142 of the Constitution recently to take on record consent terms entered into between the creditor and thecorporate debtor [order dated 24.07.2017 in Civil Appeal No. 9279 of 2017 in re: LokhandwalaKatariaConstruction Pvt Ltd, Appellant(s) versus Nisus Finance and Investment Managers LLP, Respondent] and alsoto dispose of the pending proceeding before NCLT on acceptance of the settlement [order dated 28.07.2017 inCivil Appeal No. 9286 of 2017 in re: Mothers Pride Dairy India Pvt Ltd, Appellant(s) versus Portrait Advertisingand Marketing Pvt Ltd, Respondent(s)].

What happens when the Application to NCLT is admitted?Once the NCLT admits the application, the Corporate Insolvency Resolution Process has to be completed withina period of 180 days from the date of admission of the application to initiate such process. The following chartdepicts the entire process of CIRP.


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Declaration of Moratorium Period, PublicAnnouncement, Appointment of IRP:The NCLT on admission of application - declaresmoratorium, requires public announcement to bemade & appoints an Interim Resolution Professional.The moratorium prevents proceedings under anysuits, prevents sale or mortgage of any assets &prevent enforcement of any security interest by anycreditor, but allows the company to carry on its’ day– to – day operations. The moratorium thus providesthe company some breathing space to restructureitself.The public announcement gives creditors anopportunity to notify their claims within the periodwhich is specified in the notice.The NCLT appoints IRP within 14 days fromInsolvency Commencement Date. If the applicationfor CIRP is made by financial creditor or corporatedebtor, the IRP is appointed as proposed by them if nodisciplinary action is pending against that IRP.

Duties of IRP:From the date of appointment as an IRP, he has tomanage the affairs of the corporate debtor. Thepowers of the Board of Directors shall be exercised byhim. The officers & managers of the corporate debtor,the financial institution having accounts of thecorporate debtors have to act on the instructions ofIRP & provide all details & information of thecorporate debtor to IRP.The IRP has to act & execute in the name & on behalfof the corporate debtor& has to take actions, in themanner & subject to such restrictions, as may bespecified by the Board. He has the authority to accessall the records of corporate debtors lying withgovernment or any other person.The IRP has to Collect all information relating to assets, finances

& operations of corporate debtor, for the periodspecified, for determining the financial position ofthe corporate debtor

Receive & collate all the claims submitted by thecreditors pursuant to public announcement

Constitute committee of creditors (COC) Monitor the assets of the corporate debtor &

manage its’ operations until the ResolutionProfessional is appointed by COC

Take the control & custody of any assets overwhich the corporate debtor has ownership

To perform such other duties as may be specifiedby the Board.

Committee of Creditors (COC)The IRP constitutes COC after collection of claimsfrom creditors & determination of financial position ofcorporate debtor.

COC comprises of all financial creditors. The firstmeeting of the COC is held within 7 days of itsconstitution.

Appointment of Resolution Professional:COC, in its first meeting appoints IRP as RP orreplaces IRP by another RP by majority of vote of notless than 75% of voting share of financial creditors.

Duties of Resolution Professional &Preparation Information Memorandum (IM):It shall be the duty of the RP to preserve & protect theassets of the corporate debtor along with thecontinued business operations. Accordingly, he has toperform all actions, raise interim finance, prepareinformation memorandum, appoint resolutionprofessionals, convene & attend all COC, present allresolution plans at COC meeting etc. There arespecified matters/actions where the approval of COCis required.

Submission of Resolution Plan:The RP has to examine each resolution plan receivedfrom resolution applicant according to the specifiedrequirements of the Act & shall present the same toCOC. The resolution plan has to be approved by theCOC by a vote of not less than 75% majority. The RPhas to submit the approved resolution plan to theNCLT.

A resolution plan may contain various provisions forits implementation while containing certainmandatory requirements such as identification of thesource of funds for the payment of the insolvencyresolution process costs in priority to any othercreditor; liquidation value to the dissenting financialcreditors before any recoveries are made by thefinancial creditors who voted in favor of theresolution plan etc. Further, the RP must ensure thata resolution plan provides for the term of the planand its implementation schedule; the managementand control of the business of the corporate debtor;and adequate means for supervising itsimplementation.

The Insolvency and Bankruptcy Board of India(IBBI) has amended (i) the Insolvency andBankruptcy Board of India (Insolvency ResolutionProcess for Corporate Persons) Regulations, 2016,and (ii) the Insolvency and Bankruptcy Board ofIndia (Fast Track Insolvency Resolution Process for


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Corporate Persons) Regulations, 2017 on 31stDecember, 2017.

According to the Regulations, a Resolution Planneeds to identify specific sources of funds to be usedfor paying the liquidation value due to dissentingcreditors. For this purpose, the ‘Dissenting FinancialCreditor’, according to amended Regulations, meansa financial creditor who voted against the ResolutionPlan or abstained from voting for the ResolutionPlan, approved by the Committee of Creditors.

As per the Amendments, it is not necessary to disclose‘liquidation value’ in the Information Memorandum.After the receipt of Resolution Plan(s) in accordancewith the Insolvency and Bankruptcy Code, 2016(Code) and the Regulations, the ResolutionProfessional shall provide the liquidation value toevery member of the Committee of Creditors afterobtaining an undertaking from the member to theeffect that such member shall maintainconfidentiality of the liquidation value and shall notuse such value to cause an undue gain or undue lossto itself or any other person. Also, the InterimResolution Professional or the ResolutionProfessional, as the case may be, shall maintainconfidentiality of the liquidation value.

According to the Amendments, a ResolutionApplicant shall submit the resolution plan(s) to theresolution professional within the time given in theinvitation for the Resolution Plans in accordance withthe provisions of the Code. This will enable theCommittee of Creditors to close a resolution process asearly as possible subject to provisions in the Code andthe Regulations.

The Amendments have come into force from 31stDecember 2017 on their publication in the Gazette ofIndia. The Amendments are available atwww.mca.gov.in and www.ibbi.gov.in.

NCLT shall approve the resolution plan, if it issatisfied that the resolution plan is as per therequirement of the Act & approved by COC asrequired. The order of NCLT shall be binding on thecorporate debtor, its employees, members, creditors,guarantors, stake holders etc.

NCLT has power to reject the resolution plan. In caseNCLT rejects resolution plan, the corporate debtorgoes into liquidation.

The CIRP has to complete with the period of 180 daysfrom the date of admission of the application. TheResolution Professional can file the application toNCLT to extend the period of CIRP beyond 180 days,

if instructed to do so by a resolution passed at ameeting of COC by a vote of 75% of voting shares.The NCLT can extend the duration of the processbeyond 180 days for such further period, if satisfiedwith the subject matter of the case, as it deem fit, butnot exceeding 90 days.

Fast Track Corporate Insolvency ResolutionProcess:The Act has given an option for speedy resolutionprocess for small & less complex corporate entitieswhich is termed as Fast Track Corporate InsolvencyResolution Process.

What is the time period under fast track CIRP?The time period for resolution shall be 90 daysinstead of 180 days. The period can be extendedfurther maximum by not exceeding 45 days with theprior approval of NCLT.Who can apply for fast track CIRP?An application for fast track CIRP can be made byCorporate Debtor: with assets & income below a level or with such class of creditors or such amount or Such other categoryas may be notified by Central Government

How to initiate the fast track CIRP?An application to NCLT for fast track CIRP can bemade by financial creditor or operational creditor orCorporate Debtor himself along with The proof of existence of default as per record

available with information utility or such othermeans as specified by IBBI

Such other information as specified by the IBBIto establish the eligibility

The process for conducting Corporate InsolvencyResolution Process shall apply for fast track CIRP asthe context may require. The process remains thesame as Corporate Insolvency Resolution Process.

When the company goes into liquidation?If the fast track CIRP is not completed within the timeperiod of 90 days, or extended maximum time periodof 45 days (if granted), it would lead automatically forliquidation.

Is it possible to Convert from Fast Track toNormal – CIRP? Based on the records & claims, ifIRP is of the opinion that the fast track process is notapplicable, he shall time an application to NCLT topass an order for converting fast track process tonormal CIRP. If accepted, the process gets convertedto normal CIRP. IRP can apply only in case if the fasttrack conditions are not satisfied. The permission ofCOC is not required for such application.


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A lot is being talked about the Liquidation process under the new law i.e. Insolvency and Bankruptcy Code,2016. As on the date of this article going into printing, 23 companies under compulsory liquidation and 94companies under voluntary liquidation. This number is set to shoot up as more and more applications are filed.

Alongwith the, Insolvency and Bankruptcy Code, 2016, the liquidation process is also governed by theInsolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and the Insolvency andBankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 deal with the processes veryminutely.

The content of this article is restricted to the basic understanding of the provisions of Insolvency andBankruptcy Code, 2016 and minor references to the Regulations where absolutely necessary.

1. What is Liquidation?

The word ‘Liquidation’ in simple terms implies the process of creating liquidity of funds through the processof selling the assets of an entity with the intention of either repaying the liabilities and creditors orreturning the capital infused by stakeholders (net of payment to creditors).

It is a stage prior to the winding-up or striking-off of the name of the entity from the records by theRegistrar. However, the words ‘Liquidation’ and ‘Winding-up’ are being used synonymously.

In India, the process of Liquidation is governed by Companies Act, 2013 (‘the CA’) alongwith Insolvencyand Bankruptcy Code, 2016 (‘IBC’) for companies and by Limited Liability Partnership Act, 2008 (LLPA)along with Insolvency and Bankruptcy Code, 2016 for limited liability partnerships.

2. What are the different modes of Liquidation / Winding-Up and what is the trigger point underCA and IBC?

Companies Act, 2013 Insolvency and Bankruptcy Code, 2016

Voluntary

1. If the Articles of Association / LLP 1. Su-moto by the Company/LLP.Agreement has specified certain However, the pre-condition is that theconditions that would trigger the entity should not have committedwinding-up process. any default.

2. If the Shareholders / Partners pass a —-resolution for winding-up of operationsof Company / LLP respectively.

Compulsory

1. If the shareholders of the Company / 1. The Adjudicating Authority (AA) doesPartners have passed a special resolution not receive the resolution plan within theresolving that the Company be wound time the prescribed time limit of 180 / 270up by the Tribunal days under Corporate Insolvency Resolution

Proceedings of within 90 days within FastTrack Corporate InsolvencyResolution Proceedings

LIQUIDATIONUNDER IBC

Contributed by :CA Neha Gada(a member of the association)

she can be reached [email protected]

Contributed by :CA Rajen Gada(a member of the association)



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2. The Company / Partnership has acted 2. Adjudicating Authority rejects theagainst the sovereignty and security of India. Resolution PlanThe Registrar would be required to takeCentral Government Approval.

3. The Company / LLP are unable 3. Any person contravenes the approvedto pay their dues resolution plan

4. The Company / LLP have defaulted 4. The Resolution Professional intimates toin filing Financial Statements / the Adjudicating Authority regarding theStatement of Solvency and annual returns decision of Committee of Creditors (CoC)for a period 5 consecutive years to liquidate the Company before the

confirmation of plan by the AA

5. The Tribunal is of the opinion that it isjust for the Company / LLP be wound up —

6 In case of an LLP, there once morecondition which that the number of partnersin an LLP have reduced below two fora period more than six months

3. Who can file an application?

Companies Act, 2013 Insolvency and Bankruptcy Code, 2016

1. The Company / LLP 1. The Company / LLP

2. Any Contributory/(ies); 2. The National Company LawTribunal ('NCLT').

3. All or any of the persons stated 3. The Resolution Professional ('RP') uponin (a) and (b) above; the direction from CoC.

4. The Registrar; 4. Any person, other than the corporate debtor,whose interest is prejudicially affect due tocontravention of the resolution planapproved by the AA.

5. Any person authorised by the CentralGovernment on its behalf; --

6. In case if the Company / LLP has actedagainst the sovereignty and security ofIndia then the Central Government orthe State Government. --

4. What is Insolvency Commencement Date and Liquidation Commencement Date?Insolvency commencement date ('ICD') means the date of admission of an application initiating corporateinsolvency process by the AA.

Liquidation commencement date ('LCD') means the date on which the proceedings of liquidation commenceeither under Compulsory liquidation or under Voluntary liquidation.


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5. How the Liquidation process is initiated and what is are its effects?

The AA while initiating the liquidation process shall pass an order requiring the Corporate Debtor (CD)to be liquidated in the manner prescribed under IBC which is discussed broadly in this article. The AA isalso required to issue a public announcement stating that the CD is under liquidation and cause the orderto be sent to MCA or any other entity with which the CD is registered.

From the date of passing of such liquidation order by the AA, no suits can be initiated either by the CDor against the CD. However, the right of the secured creditors is an exception to this provision. TheLiquidator, on behalf of the CD, may file a suit or undertake legal proceedings with the permission of theAA.

The liquidation order is the notice of discharge to officers, employees and workmen of the CD, except whenthe business of the CD is carried on during the liquidation period.

6. Steps and process involved in Liquidation:

A. Appointment of Liquidator, Powers and Duties:

Upon passing of the Liquidation order, the RP shall act as the liquidator unless the AA replaces theexisting RP and appoints a new RP to act as the liquidator for liquidation process.

The Liquidator shall step into the shoes of the Board of Directors / Partners of CD, as the ace may be.The powers of the Board of Directors / Partners and key managerial personnel shall cease exist.

The personnel of the CD shall however be required to give full assistance and support to the Liquidatorin managing the affairs of the CD.

In case where the replacement of RP is initiated either by the AA or by the Insolvency and BankruptcyBoard of India ('Board'), such replacement has to be done in 10 days. The AA needs to pass a freshorder for appointing new Insolvency Professional ('IP') as the Liquidator.

The Liquidator so appointed shall be paid his/her fees from the liquidation proceeds of the liquidationestate.

The Liquidator has wide Powers and Duties encompassing powers and duties of Board of Directors /Partners of the CD such as invite, verifying and settle claims of the creditors in accordance of IBC,taking custody of assets of CD, taking measures to protect the assets of the CD, carrying on businessof the CD for beneficial liquidation, sell moveable and immoveable properties after taking intoaccount the interests of the secured financial creditors ('FCs'), undertaking operating andfinancial transactions in the ordinary course of business, recover monies due from contributories ortheir estate, etc.

The Liquidator shall also have investigative powers with regard to the financial affairs of the CD anddetermining whether there are any undervalued or preferential transactions.

A liquidation estate of the assets of the CD will be formed by the Liquidator who will hold the estateas a fiduciary for the benefit of all the creditors.

Unlike Companies Act, 1956 which did not provide for certain assets to be excluded from liquidationassets, IBC provide for certain prescribed types of assets that are to be included or to be excluded fromthe liquidation estate.


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Assets to be included in Assets to be excluded fromLiquidation assets Liquidation assets

" Any assets owned by the CD " Those assets owned by third party andincluding shares of the subsidiary. in possession of CD.

" Assets that assets that may or may not be " Assets in security collateral held by financialin possession of CD. These include but are service providers and are subject to nettingnot limited to encumbered assets. and set-off in multi-lateral trading or

clearing transactions.

" All tangible assets, whether movable or " Personal assets of any shareholder or partnerimmovable, intangible assets including but of CD not held on account of avoidancenot limited to intellectual property, transactions.securities and financial instruments,insurance policies, contractual rights; " Assets of India / Foreign subsidiary of CD

and any other assets that the Board" Assets that are subject matter of litigation may specify. These may also include assets

in the court for ownership or authority; which may be subject matter of set-offon account of mutual dealings between CD

" Any assets or their value recovered through and creditor.proceedings for avoidance of transactions inaccordance with this Chapter dealing withLiquidation under IBC;

" Any asset of CD in respect of which asecured creditor has relinquishedsecurity interest;

" Any other property belonging to or vestedin the corporate debtor at the insolvencycommencement date; and

" All proceeds of liquidation as andwhen they are realised.

B. Admission, Consolidation, Verification and Determination of Valuation of Claims

The Liquidator has wide powers with regard to accessing any information system for the purpose foradmission and proof of claims and also for identification of liquidation assets relating to the CD. Itcould be Information Utility ('IU'), credit information systems regulated under any laws, any Centralor State or Local Government agency, etc.

The Liquidator shall receive or collect the claims or the creditors with 30 days of commencement of theliquidation process. The FC has to submit their claim alongwith the record of the claim with IU. Withregard to the claim not recorded with IU, the FC has to submit the claim in the manner provided forOperational Creditor ('OC'). The OC has to submit the claim in the prescribed manner alongwith proofof claim. A Creditor can withdraw or vary the claim within 14 days of its submission.

The liquidator shall verify the claims submitted within 30 days of the last claim submitted and maycause further evidence to be provided by either the creditor or the CD to substantiate the claim. Theliquidator has to communicate the admission / rejection of claim to the creditor within 7 days of suchadmission / rejection. However, in case of rejection, the liquidator has to record reason in writing forrejecting the claim. Further, in case of rejection, the creditor can appeal to AA against the decision ofthe Liquidator with 14 days of receipt of such communication of rejection. The Liquidator shall


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determine the value of claims i.e. the best estimate of claim value based on the information availablewith him.

C. Preferential Transactions, Under Valued Transactions, Transactions defrauding creditorsand Extortionate Credit Transactions

1. Preferential Transactions: The CD may transfer a property or interest therein to the creditor /surety / guarantor. Such transfer maybe for or on account of a prior financial debt or operational debtor other liabilities that are owed by the CD to such creditor / surety / guarantor. Further, such transfermay put the creditor / surety / guarantor in a more beneficial position than if the normal procedurefor distribution as prescribed under the IBC would have been followed. These type of transactions aredeemed to be Preferential Transactions.

Transfers made in the ordinary course of business, transfers creating security interest over a propertyof the CD that creates 'new value' and such interest is registered with the IU within 30 days of CDreceiving such possession and transfer made pursuant to order of a Court.

A CD shall be deemed to have entered into a Preferential Transaction if it is give to a related party(excluding employees) during a period of 2 years preceding ICD. In case the transfer is to a non-relatedparty the period is reduced to 1 year.

On an application made by the Resolution Professional ('RP') or the Liquidator, the AA shall pass anorder with various remedies as specified under IBC such re-vesting of property to the CD, repaymentof sales proceeds, release or discharge security interest created by the CD, etc. However, such ordershall affect the interest in property if such acquisition was in good faith and for a value from a personother than the CD. Also, such person shall not be asked to repay any sum to liquidator.

If the person who was given preference or who has benefited from the preferential transaction hadinformation regarding initiation or commencement of insolvency process of CD or is related party thenit shall be deemed that such person has acquired interest in property or benefit otherwise than in goodfaith. The onus of proving otherwise will be on such person acquiring interests in property or benefit.

2. Undervalued Transactions: There may be cases where the CD makes a gift to a person or entersinto a transaction of transfer at a significantly less value than such transactions shall be consideredas undervalued transactions. Also, such transfer should not have taken place in the ordinary courseof business. The Liquidator or the RP may apply to the AA and on satisfaction the AA shall pass anorder restoring the original position of the asset i.e. as it was prior to the undervalued transfer.

The application for avoiding undervalued transactions to AA can be for those transactions which havebeen undertaken with a related party within a period of 2 years from ICD or with any other party then1 year from ICD. The AA may require appointment of an independent expert to assess the evidencerelating to the value of such undervalued transaction.

In case if the Liquidator or the RP do report such transaction then the creditor, a member / partnerof CD can report such transaction to AA alongwith relevant evidence. The AA, on being satisfied theundervalues transaction has occurred and determining that the Liquidator or RP even after havingsufficient information did not report such transaction, will pass an order restoring the position of theasset as it existed before such transfer. The AA shall also require the Board to initiate disciplinaryaction against the Liquidator / RP.

If the AA is satisfied that the CD had deliberately entered into an undervalued transaction then theAA may pass such order restoring the position as it existed prior to such transfer and for protectingthe interest of the persons who are victims of such transactions. However, the order shall affect theinterest in property or benefit from person other than CD and was acquired in good faith and for valuewithout the knowledge of the existing circumstances. Also the order shall not require such person torepay such sums unless he was a party to such transactions.


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3. Extortionate Credit Transactions: The CD may have acquired financial or operation debtrequiring the CD to make exhorbitant payments. In such case the Liquidator / RP may apply to theAA for passing an order. However, such transaction should have been undertaken by the CD withina period of 2 years from ICD. The AA may pass an order restoring the position as it existed prior tothe said extortionate transaction, set aside whole or part of the debt, modify the terms of thetransaction, require the person party to the transaction to repay the amounts received, etc. However,where the debt extended by the person providing financial services which is in compliance with thelaw for the time being in force then such debt will not be considered to be extortionate credittransaction.

7. What are the options available to a Secured Creditors in Liquidation proceedings?

The Creditor has 2 options with regard to its security interest in the liquidation estate:1. First being that the Secured creditor relinquishes the security interest in the liquidation estate and

receive the proceeds from sale of assets by the liquidator as per the waterfall mechanism; and

2. Second being that the Secured Creditor realises the sale proceeds in the security interest in theprescribed manner.

Where the Secured Creditor chooses the second option then it shall intimate the Liquidator and identifythe asset corresponding to the security interest from the liquidation estate for realisation purposes. Beforereleasing such security interest, the Liquidator shall verify the security interest based on the evidence fromrecords maintains by IU or such other means as may be specified by the Board. In case if the SecuredCreditor faces any resistance from the CD either while taking possession or sale, etc then it can apply tothe AA requesting facilitation of realisation of security interest. The AA will pass order as may be necessaryunder the law for the time being in force.

Any excess amounts realised shall be returned to the Liquidator. The insolvency resolution process cost duefrom such secured creditor who realises the security interest in the manner stated above shall be deductedfrom proceeds of such realisation.

In case the proceeds are insufficient then the unpaid debts of the Secured Creditor will be dealt with asprovided in the Waterfall mechanism.

8. What is Waterfall mechanism?

IBC has specified an order of priority in which the proceeds from sale of Liquidation assets would bedistributed.

Consider a situation where 5 to 6 water pots are placed below each other and water is poured from the top.The top pot will get filled 1st. Only if the topmost pot overflows, the water will flow down to the 2nd potbelow the 1st pot. Again, the third pot will get water only if the 2nd pot now overflows, so on and so forth.

Similarly, based on the priority assigned by IBC, the payments will be done to the topmost priority categoryof creditors and after repaying the first category the Liquidator will pay make payments to the secondcategory and then the third and so on.

The hierarchy or order of priority for payment of proceeds is as follows:

1. The insolvency resolution process costs and the liquidation costs paid in full and will have the firstpriority;

2. At the second stage are the debts which shall rank equally between and among the following :(i) workmen's dues for the period of twenty-four months preceding the liquidation commencement

date; and


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(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security inthe manner set out in section 52;

3. Wages and any unpaid dues owed to employees other than workmen for the period of twelve monthspreceding the liquidation commencement date stand third in priority;

4. Fourth is financial debts owed to unsecured creditors;

5. At fifth stage, the following dues shall rank equally between and among the following:

(a) the Central Government and the State Government dues including the amount to be received onaccount of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respectof the whole or any part of the period of two years preceding the liquidation commencement date;

(b) debts owed to a secured creditor for any amount unpaid following the enforcement of securityinterest;

6. At sixth stage, any remaining debts and dues;

7. Preference shareholders, if any stand seventh in priority; and

8. Finally, equity shareholders or partners, as the case may be are as usual the last to receive any leftoveramount from the proceeds.

The Liquidator has to strictly follow this order of priority and cannot deviate even if there is any contractualobligation.

The liquidation fees shall be deducted proportionately from the proceeds payable to each class of recipients,and the proceeds to the relevant recipient shall be distributed after such deduction. Further, at each stageof the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts willeither be paid in full. However, if the proceeds are insufficient then the payment will be made in proportionwithin the same class of recipients.

9. So when is the CD finally dissolved?

When the assets of the CD are fully liquidated, the liquidator will apply to the AA for dissolution of CD.The AA will pass an order that the CD be dissolved from the date of that order. The CD shall stand dissolvedfrom the date of the dissolution order. A copy of such order will have to be forwarded to the authority withwhich CD was registered.

10. Are there any additional requirements in case of Voluntary Liquidation?

Yes. The Corporate Person ('CP') registered as a Company has the following additional requirement:

1. A majority of the directors have to give a declaration stating that:(a) the company has no debts or that it will be able to repay all the debts in full from the proceeds

of sale of its assets; and(b) the company is not being liquidated to defraud any person.

2. The declaration shall be accompanied with:(a) Audited financial statements and record of business operations for a period of two years or for the

period since its incorporation, whichever is later; and(b) Registered valuers report on valuation of assets of the company, if any.


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3. Within 4 weeks of the declaration the company shall hold a general meeting of the shareholders. Theshareholders shall pass a special resolution requiring the company to be liquidated voluntarily and forappointing a insolvency resolution professional to act as the liquidator.

4. In the alternative, the shareholders may pass a resolution in the general meeting so held requiringthe company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixedby its Articles of association or on the occurrence of any event in respect of which the Articles ofAssociation provide that the company be dissolved, as the case may be, and for appointing a insolvencyresolution professional to act as the liquidator.

5. Further, if the Company owes any debt to any person, then such creditors repenting 2/3rd in valueshall approve, within 7 days, the shareholders resolution passed at the general meeting as statedabove.

6. Within 7 days of creditor approval the Company shall intimate the Registrar of Companies ('ROC') andthe Board regarding the liquidation resolution passed.

7. The Voluntary Liquidation of the company shall be deemed to have commenced from the date ofpassing the liquidation resolution, subject to approval of creditors.

8. The liquidation process stated herein above in this article shall apply to voluntary liquidationproceedings of corporate person with modification as may be necessary.

9. Where the assets of the CP are completely liquidated and the affairs are completely wound up, theLiquidator shall make an application to AA for the dissolution of such CP. The AA shall on receipt ofsuch application from the Liquidator pass an order dissolving the CP from the date of that order andthe CP shall stand dissolved accordingly. A copy of the order, within 14 days, shall be forwarded toAuthority with which the CP is registered.

So, we have discussed broadly the basic provision with regard to Liquidation under IBC. The law is new andstill evolving based on the cases being filed and the need of the hour. The pronouncements delivered by NationalCompany Law Tribunal, National Company law Appellate Tribunal and the Courts will bring more clarity withregard to implementation and interpretation of this new Law.

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DISCLAIMER:

This write up is the personal property of theauthor to this article. If this write-up iscirculated, content of this disclaimer and creditto CS Bhavik Gala shall be retained.

The content of this write up is purely academicand is intended to provide a general guide to thesubject matter and not intended to be aprofessional advice and should not be reliedupon for real life facts and the views are ofpersonal opinion in nature. Specialist adviceshould be sought about your specificcircumstances, if any.

INTRODUCTIONThe doctrine of precedent is one of the principles thatunder pins common law. When a law is evolving, theprecedents of higher court are binding on and settone for the pronouncements by lower courts in termsof interpretational issues in law and also bringsobjectivity in judgments. Such binding precedentsare critical especially for any emerging legislation, asthe law settles on the basis of legal interpretations.

The Insolvency and Bankruptcy Code, 2016 (Code) isabout a year old law and is built on a stronginstitutional adjudication mechanism. Theadjudication mechanism for Corporate InsolvencyResolution Process under the Code is three tier, i.e.,National Company Law Tribunal (NCLT), being theAdjudicating Authority, National Company LawAppellate Tribunal (NCLAT) being the AppellateAuthority and Supreme Court being the Apex Court.

Since January 2017, there have been significantamount of increase in terms of number of filingsunder the Code and consequent increase in numberof pronouncements by NCLT, NCLAT and theSupreme Court on various issues and richjurisprudence is evolving fast as large number ofissue are getting settled. This has created a situationwhere it becomes essential to remain updated of thesecritical pronouncements.

One of the critical factors in building effectiveadjudication process is creating awareness of judicialpronouncements. I am confident that this Article,would prove to be extremely helpful and handy for

the readers who would be benefited from a quickunderstanding of issue wise analysis of judgmentspassed by Hon’ble Supreme Court, Hon’ble HighCourts, NCLAT and various benches of NCLT.

ISSUES SETTLED THROUGH JUDGMENTSPASSED BY HON’BLE SUPREME COURT OFINDIA

1. Meaning of “Dispute”: Whether inclusiveor exclusive as per section 5(6) read withsection 8 of the Code

Hon’ble Supreme Court in MobiloxInnovations Private Limited vs. KirusaSoftware Private Limited, [Civil Appeal No.9405 of 2017] decided on 21st September, 2017,provided much required clarity on theexpression “existence of dispute” and put to restthe confusion regarding the meaning of term‘dispute’ and held that the term ‘dispute’ isinclusive one and cannot be restricted to pendingsuit or arbitral proceedings.

It was further held by Apex Court that at theinitial stage of admission, NCLT is to only seewhether there is a plausible contention whichrequires further investigation and that the‘dispute’ sought to be raised is not a patentlyfeeble legal argument or an assertion of factunsupported by evidence.

Thus, the definition of the term ‘dispute’ isinclusive.

2. Whether an application by an OperationalCreditor to trigger a CIRP must beaccompanied by a copy of the certificatefrom the financial institutions andwhether Demand Notice can be sent byAdvocate on behalf of OperationalCreditor ?

In sequential terms, the Code requiresoperational creditors who initiate a CIRP toundertake two steps. First, such a creditor isrequired under section 8 to deliver a demandnotice to the corporate creditor regarding thenon-payment of dues. Second, and in theabsence of payment or a dispute raised by the

IMPORTANT PRONOUNCEMENTSUNDER THE INSOLVENCY AND

BANKRUPTCY CODE, 2016 : ISSUE ANALYSIS

Contributed by :CS Bhavik Gala(a member of the association)



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corporate debtor, the operational creditor may,under section 9, initiate the CIRP by filingrelevant documents.

In a decision rendered on December 15, 2017 inMacquarie Bank Limited v. Shilpi CableTechnologies Limited, the Supreme Courtreversed the positions adopted by the NCLAT inthese cases, and remanded the relevant mattersfor reconsideration based on the legal outcome.Despite strong arguments raised by counsel onboth sides, the Supreme Court found in favour ofthe creditors.

A. Certificate from Financial InstitutionsThe Supreme Court began with a detailedreview of the Code and the provisions of theInsolvency and Bankruptcy (Application toAdjudicating Authority) Rules, 2016.Based on this, it found that therequirement under section 9(3)(c) isnot a “condition precedent totriggering the insolvency processunder the Code”. The certificate is onlya piece of evidence to confirm theexistence of the debt rather than aprecondition.

B. Demand NoticeThe Court observed that the intention wasnot to require the operational creditor tosend the notice itself (through employees orofficers) but through authorized agents aswell. Similarly, the Adjudicating AuthorityRules provide for demand notice (undersection 8) as well as the application (undersection 9) to carry the signature of theperson “authorized to act”. Further, therelevant forms require the authorized agentto state his position with or “in relation to”the operational creditor. All of theseexpressions signify a wide meaning to thetype of person that can sign and deliver thedemand notice on behalf of the creditor,which includes a lawyer acting on behalf ofa client.

The Court then considered the impact of theAdvocates Act on the issue, wherein theexpression “practice” is “of extremely wideimport, and would include all preparatorysteps leading to the filing of an applicationbefore a Tribunal”. It found that the Codeand the Advocates Act can be readharmoniously to resolve any issue, thereby

yielding the result that an operationalcreditor’s demand notice can be sent byits lawyer.

3. Whether institution of suits orcontinuation of pending suits orproceedings against the Corporate Debtor,including execution of any judgment,decree or order in any court of law,tribunal, arbitration panel or otherauthority is barred upon imposition ofmoratorium?

In Alchemist Asset ReconstructionCompany Ltd. vs. M/s Hotel Gaudavan Pvt.Ltd. [Civil Appeal No. 16929 of 2017], decided on23rd October, 2017, application under the Codewas filed by Alchemist Asset ReconstructionCompany Ltd., Financial Creditor (“AlchemistARC”) against M/s Hotel Gaudavan, theCorporate Debtor (“Hotel Gaudavan”) and thesame was admitted by NCLT resulting inimposition of moratorium.

The Hon’ble Supreme Court observed that themoment petition is admitted, the moratoriumthat comes into effect under section 14 (1) (a) ofthe Code, expressly interdicts institution orcontinuation of pending suits or proceedingsagainst the corporate debtors.

Apart from setting aside the order of the DistrictJudge in relation to arbitration proceedingsinstituted after imposition of the moratoriumunder the Code, Hon’ble Supreme Courtquashed F.I.R. against IRP and observed thatF.I.R. has been taken in a desperate attempt tosee that the IRP does not continue with theproceedings under the Code which are strictlytime bound.

Hon’ble Supreme Court also gave directions thatthe steps that have to be taken under the Codewill continue unimpeded by any order of anyother Court.

Thus, after the imposition of moratorium underthe Code, no suit or Proceedings against theCorporate Debtor shall be instituted orcontinued.

4. Whether the time period of 7 days given toa Financial Creditor/ OperationalCreditor/Corporate Applicant to rectifydefects in an application is mandatory ordirectory?


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In appeal before the Hon’ble Supreme Courtin M/s Surendra Trading Company vs. M/sJuggilal Kamlapat Jute Mills Co. Ltd. &Ors. [Civil Appeal No. 8400 of 2017], decided on19th September, 2017, Hon’ble Supreme Court,while only considering the time period of 7 daysgiven to an applicant to cure the defects, held,that the said time period is not mandatory and ismerely directory and the failure to cure thedefects in 7 days time period would not entaildismissal of application.

The Hon’ble Supreme Court observed that it hasto be seen whether the rejection would be treatedas rejection of application on merits therebydebarring filing of fresh application or the sameis merely an administrative order. In the formercase, it would lead to travesty of justice as eventhough the case may have merits, the applicantwould be shown the door without adjudication.If it is the latter case, then rejection ofapplication in the first instance is not going toserve any purpose as applicant would be entitledto file fresh application which would have to beentertained. Thus, in either case, no purpose isserved by treating the aforesaid provision asmandatory.

However, the Hon’ble Supreme Court also put arider. It held that while refilling the applicationafter removing objections, applicant would berequired to file an application in writing showingsufficient case as to why the applicant could notremove the objections within seven days. Whensuch an application comes, NCLT is to decidewhether sufficient cause is shown or not.

Thus, the period of 7 days notice periodgranted by NCLT to Financial Creditor,Operational Creditor, Corporate Applicantfor curing defects in an application filedunder section 7, 9 or 10 of the Code isdirectory, subject to the rider abovementioned.

5. Whether in case of repugnancy, theprovisions of Central Act i.e. Insolvencyand Bankruptcy Code, 2016 would prevailover the provisions of any state law?

In M/s Innoventive Industries Ltd. vs. ICICIBank & Anr., [Civil Appeal No. 8337-8338 of2017] decided on 31st August, 2017, the issuebefore the Hon’ble Supreme Court was whetherthere was conflict between the State law and the

Code and if yes, which law would prevail.

In order to ascertain repugnancy, the Hon’bleSupreme Court considered the field of operationsof the two legislations.

The Hon’ble Supreme Court held that there wasconflict between the State law (in this case) andthe Code in as much as, by giving effect to theState law, the plan or scheme which is adoptedunder the Code, will directly be hindered and/orobstructed.

Once it was held that both the statutes i.e. theCentral law and the State law covered same fieldand that there was repugnancy, the Hon’bleSupreme Court went on to examine the caselaws to decide as to which statute shall prevail.The Hon’ble Supreme Court culled out thepropositions with regard to repugnancy betweenthe Central law and the State law and it washeld that in view of section 238 of the Coderelating to non obstante clause, the Codeshall prevail over an earlier State lawcovering the same field.

ISSUES SETTLED THROUGH JUDGMENTSPASSED BY HON’BLE HIGH COURTS

1. Whether section 7 of the Code isunconstitutional being violative ofprinciples of natural justice since section 7does not afford any opportunity of hearingto a Corporate Debtor before admission ofapplication for initiation of CIRP?

In Sree Metaliks Limited and Anr. vs. Union ofIndia and Anr. [Writ Petition No. 7144 of 2017]decided on 7th April, 2017, the Hon’ble HighCourt of Calcutta considered the question ofconstitutional validity of section 7 of the Code onthe ground of violation of principles of naturaljustice.

Hon’ble High Court held that since NCLT andNCLAT are constituted under the CompaniesAct, 2013 and procedure before these authoritiesis guided by Section 424 of Companies Act, 2013which mandates following the principles ofnatural justice.

Hon’ble High Court observed that even thoughNCLT is not bound to follow code of civil


24

procedure, it can regulate its procedure subjectto the provisions of section 424 of the CompaniesAct, 2013, which requires adherence to theprinciples of natural justice.

Hon’ble High Court further observed that wherethe statute does not expressly bar the adherenceto the principles of natural justice, the same canand should be read into it.

Thus, provisions of section 7 of the Codeare not unconstitutional and theprinciples of natural justice are implicit insection 7 of the Code.

2. Territorial jurisdiction of NCLT Benches

In Kusum Products Limited (KPL) vs.Union of India and Anr. [W.P. (c) No. 236 of2017], decided on 29th August, 2017, a schemefor rehabilitation under the Sick IndustrialCompanies (Special Provisions) Act, 1985 hadbeen sanctioned by the Board for Industrial andFinancial Reconstruction (BIFR) with regard tothe Kusum Products Limited, Corporate Debtor–(“Kusum Products”) vide order passed in2012.

The Hon’ble High Court observed that thescheme of the Code is such that the CorporateDebtor shall approach the NCLT in whosejurisdiction, its registered office is situated and inthe present case, the registered office of theKusum Products was situated in West Bengal.Thus, Kusum Products has no option but toapproach NCLT, Calcutta Bench for appropriateorders.

Thus, the Corporate Debtor shallapproach the NCLT having territorialjurisdiction over the place where itsregistered office is located.

ISSUES SETTLED THROUGH JUDGMENTSPASSED BY ISSUES SETTLED THROUGHJUDGMENTS PASSED BY NATIONALCOMPANY LAW APPELLATE TRIBUNAL

1. Whether the time period of 14 daysprovided under the Code to NCLT to eitheradmit or reject an application ismandatory or directory?

In J K Jute Mills Company Limited vs. M/sSurendra Trading Company [Company Appeal

(AT) No. 09 of 2017], decided on 1st May, 2017,an application was filed by M/s SurendraTrading Company, Operational Creditor,(“Surendra Trading”) against J K Jute MillsCompany Limited, Corporate Debtor (“J KJute”). However, the application was not decidedby NCLT, Allahabad Bench, within the period of14 days and hence, J K Jute filed an appealcontending that the NCLT had become functusofficio.

In the appeal, NCLAT while considering varioustime lines under the Code, held that the timeperiod of 14 days, within which NCLT ismandated to either admit or reject an applicationfiled by Financial Creditor/Operational Creditor/Corporate Applicant, is only directory and notmandatory.

Thus, the time period of 14 days withinwhich NCLT is mandated to either admit orreject application under section 7, 9 or 10of the Code is directory.

2. Whether two or more operational creditorscan file a joint application under section 9of the Code?

In Uttam Galva Steels Limited vs. DFDeutsche Forfait AG & Anr. [CompanyAppeal (AT) (Insolvency) 39 of 2017], decided on28th July, 2017, an application was filed by twoOperational Creditors namely M/s DF DeutscheForfait AG (“Deutsche”) and Misr Bank EuropeGmbH (“Misr Bank”) against Uttam GalvaSteels Limited, Corporate Debtor (“UttamGalva”) stating that the Corporate Debtor haddefaulted in making payment of an amountpayable towards 20,000 tons of prime steel billetssupplied by German Company named AICHandels GmbH (“AIC Handels”).

In appeal before NCLAT, a contention wasraised by Uttam Galva that the joint applicationfiled two Operational Creditors was notmaintainable.

NCLAT, upon perusal of definition of section 9and section 7 of the Code, came to the conclusionthat since the language used in section 9 of theCode is different from section 7 of the Code, twoor more operational creditors cannot file a jointapplication under section 9 of Code. NCLATnoted that in section 7 of Code, it is specificallywritten that a Financial Creditor can file


25

application either by ‘itself or jointly with otherfinancial creditors’, whereas, such phrase is notused in section 9 of Code.

Thus, two or more operational creditorscannot file a joint application forinitiation of CIRP under section 9 of theCode.

3. Whether the property not owned by theCorporate Debtor come within theprotective umbrella of “moratorium”under section 14 of the Code?

In Alpha & Omega Diagnostics (India) Ltd.vs. Asset Reconstruction Company of IndiaLtd. & Ors. [Company Appeal (AT) (Insol.) No.116 of 2017] decided on 31st July, 2017, anapplication was filed by Alpha & OmegaDiagnostics (India) Ltd. Corporate Debtor(“Alpha & Omega”) under section 10 of theCode.

On appeal by Alpha & Omega, NCLAT observedthat the use of the word “its” in section 14 of theCode is significant. The plain language of thesection is that on the commencement of theinsolvency process the ‘Moratorium’ shall bedeclared for prohibiting any action to recover orenforce any security interest created by theCorporate Debtor in respect of “its” property.

Thus, the property not owned by theCorporate Debtor would not come withinthe protective umbrella of moratoriumunder section 14 of the Code.

16. Whether NCLT has power to appoint anIRP, without obtaining suggestions fromIBBI on its own, and where the name of anIRP has also not been suggested byOperational Creditor in the application forCIRP?

NCLAT in Sandeep Reddy & Anr. vs. JayconInfrastructure Ltd. [Company Appeal (AT)(Insolvency) No. 228 of 2017], decided on 26thOctober, 2017, was hearing the appeal of theSandeep Reddy & Anr, Corporate Debtor(“Sandeep Reddy”) against whom NCLT hadadmitted the application filed by JayconInfrastructure Ltd., Operational Creditor(“Jaycon Infrastructure”) NCLAT observedthat the application for CIRP under Section 9 ofthe Code was not maintainable since it was not

disputed by Jaycon Infrastructure that therewas a dispute in existence prior to issuance ofdemand notice under sub-section (1) of Section 8of the Code and that parties have alreadyreached the settlement

NCLAT observed that, prima facie it was of theopinion that the Code does not empower theNCLT to suggest any name or appoint any IRP/RP of its own choice.

Since the parties had settled the dispute andinitiation of resolution process under section 9 ofthe Code was not maintainable, in view ofexistence of dispute, NCLAT left the questionopen as to whether the NCLT had power toappoint any person of its own choice or not.

ISSUES SETTLED THROUGH JUDGMENTSPASSED BY VARIOUS BENCHES OFNATIONAL COMPANY LAW TRIBUNAL

1. Whether NCLT can appoint a new IRP incase the certificate of practice of IRPappointed by NCLT has expired afteradmission of application for initiation ofCIRP?

In Macro Leafin Private Limited vs. ArrowResources Limited [CA No. 259(PB)/2017 inCP No. (IB)-152(PB) of 2017], decided on 7thSeptember, 2017, an issue arose whether theNCLT can appoint a new IRP in place of IRPwhose certificate of practice expired before theinsolvency commencement date.

NCLT observed that, in the absence of RP, nosteps can be taken to proceed with the insolvencyprocess. NCLT noted that the CoC can proceedwith the replacement of the RP under Section 27of the Code only if meeting of the CoC isconvened which obviously have to be done byIRP.

The Code being silent on the issue and theapplicant having no other alternative efficaciousremedy, NCLT deemed it fit to admit theapplication and appointed a new IRP.

NCLT accepted the application and appointednew IRP in view of the facts of the case and inthe interest of justice; and for smooth conduct ofCIRP. However, NCLT imposed cost of Rs.25,000/- on the applicant.


26

2. Whether the insolvency resolutionproceedings under the Code can beinitiated, in view of pendency ofproceedings before DRT and invocation ofSection 13(4) of the SARFAESI Act?

NCLT, Ahmedabad Bench, in SarthakCreations Pvt. Ltd. vs Bank of Baroda &Others, [C.P. No. (IB) 85/10/NCLT/AHM/2017],decided on 30th August, 2017, held that thependency of proceedings before DRT orinvocation of Section 13(4) of SARFAESI Act, isno ground not to commence CIRP in view of non-obstante clause under section 238 of the Code.

NCLT further noted that the prime objective ofthe Code is to revive and resolve the company asagainst the recovery of the debt, and if notpossible then go for liquidation.

3. Whether set-off or counter-claim byCorporate Debtor can be treated as a‘dispute’ relating to financial debt andwhere a Corporate Debtor is entitled to set-off or counter-claim, can it be said thatthere is no ‘default’?

In V.R. Polyfab Pvt. Ltd. vs. SadhbhavEnterprise Pvt. Ltd. [CP No. (IB) No. 115/7/NCLT/AHM/2017], decided on 19th September,2017, NCLT, Ahmedabad Bench, considered anobjection raised by Corporate Debtor thatinstead of the Financial Creditor, the CorporateDebtor is entitled to claim an amount from the

Financial Creditor and as such, there is nodefault.

NCLT observed that even assuming that theCorporate Debtor is entitled for certain amountfrom the Financial Creditor, the same can onlybe treated as a set off or counter claim andtherefore it cannot be treated as a ‘dispute’relating to financial debt due to the financialcreditor from the Corporate Debtor. Further,NCLT observed that though Corporate Debtorhas pleaded counter-claim or set-off, but itcannot be said that there is no default inrepayment of financial debt by CorporateDebtor.

4. Whether concealment of facts byCorporate Debtor while makingapplication for insolvency resolutionprocess amounts to abuse of process of theCode?NCLT in M/s Unigreen Global PrivateLimited, [Company Petition No.IB- 39 (PB)/2017] decided on 8th May 2017 took note of thefact that the Corporate Debtor – M/s UnigreenGlobal Private Limited (“Unigreen”) had notmade complete disclosure in relation to the assetsmortgaged and deliberately engineered civilsuits in relation to the properties mortgaged.

NCLT dismissed the application and with a viewto discourage the parties from abusing theprocess of the Code, deemed it a fit case to imposecosts of Rs. 10 lakhs.

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27

SECTION 40A(3) OF THE INCOME-TAXACT, 1961, READ WITH RULE 6DD OF THEINCOME-TAX RULES, 1962 - BUSINESSDISALLOWANCE - CASH PAYMENTEXCEEDING PRESCRIBED LIMITS -CLARIFICATION ON CASH SALE OFAGRICULTURAL PRODUCE BYCULTIVATORS/AGRICULTURISTS

CIRCULAR NO. 27/2017 DATED 3-11-2017

The Central Board of Direct Taxes (CBDT) hasreceived representations from the stakeholdersregarding applicability of provisions of Income-tax Act, 1961 (‘the Act’) to cash sale of agriculturalproduce by the cultivators/agriculturists.

CBDT has clarified that cash sale of theagricultural produce by its cultivator to the traderfor an amount less than Rs 2 lakh will not:—

(a) Result in any disallowance of expenditureunder section 40A (3) of the Act in the case oftrader;

(b) Attract prohibition under section 269ST of theAct in the case of the cultivator; and

(c) Require the cultivator to quote his PAN/orfurnish Form No. 60.

SECTION 9 OF THE INCOME-TAX ACT,1961 - INCOME - DEEMED TO ACCRUE ORARISE IN INDIA - CLARIFICATION ONINDIRECT TRANSFER PROVISIONS INCASE OF REDEMPTION OF SHARE ORINTEREST OUTSIDE INDIA

CIRCULAR NO.28/2017 [F.NO.500/10/2017-FT&TR-IV], DATED 7-11-2017

Under the provisions contained in section 9(1)(i)of the Income-tax Act, 1961 (‘Act’), all incomeaccruing or arising, whether directly or indirectly,

through or from any business connection in India,or through or from any property in India, orthrough or from any asset or source of income inIndia or through the transfer of a capital assetsituate in India, shall be deemed to accrue or arisein India. Explanations 5, 6 and 7 of section 9(1)(i)further define the scope of said provision.Concerns have been expressed by investmentfunds, including private equity funds andventure capital funds, that on account of theextant indirect transfer provisions in the Act, non-resident investment funds investing in India,which are set up as multi-tier investmentstructures, suffer multiple taxation of the sameincome at the time of subsequent redemption orbuyback. Such taxability arises firstly at the levelof the fund in India on its short term capital gain/business income and then at every upper level ofinvestment in the fund chain on subsequentredemption or buyback. The Board has receivedrepresentations to exclude investors above thelevel of the direct investor, who is alreadychargeable to tax in India on such income, fromthe ambit of indirect transfer provisions of the Act.Addressing such concerns in his Budget speech on1st February, 2017, the Finance Minister hadstated that Category I and Category II ForeignPortfolio Investors (FPI) will be exempted fromindirect transfer provisions. It was also stated thata clarification will be issued that indirect transferprovisions shall not apply in case of redemption ofshares or interests outside India as a result of orarising out of redemption or sale of investment inIndia which is chargeable to tax in India. VideFinance Act, 2017, Category I and Category IIFPIs have already been exempted from indirecttransfer provisions of the Act through insertion ofproviso to Explanation 5 to section 9(1)(i) of theAct, with effect from 01.04.2015.

There could be situations in multi-tieredinvestment structures, where interest or shareheld indirectly by a non-resident in anInvestment Fund or a Venture Capital Companyor a Venture Capital Fund (hereinafter referredto as ‘specified funds’), is redeemed in anupstream entity outside India in consequence oftransfer of shares or securities held in India bythe specified funds, the income of which have

LEGAL UPDATES /DECISIONS1. DIRECT TAXES

UPDATECompiled by :

CA. Haresh P. Kenia


28

been subject to tax in India. In such cases,application of indirect transfer provisions onredemption of share or interest in the upstreamentity may lead to multiple taxation of the sameincome. In respect of Category I and Category IIFPIs though, such multiple taxation will not takeplace on account of the insertion of proviso toExplanation 5 to section 9(1)(i) of the Act, videFinance Act, 2017.

The matter has been examined by the Board andit has been decided that the provisions of section9(1)(i) of the Act read with Explanation 5 thereofshall not apply in respect of income accruing orarising to a non-resident on account ofredemption or buyback of its share or interest heldindirectly (i.e. through upstream entitiesregistered or incorporated outside India) in thespecified funds if such income accrues or arisesfrom or in consequence of transfer of shares orsecurities held in India by the specified funds andsuch income is chargeable to tax in India.However, the above benefit shall be applicableonly in those cases where the proceeds ofredemption or buyback arising to the non-residentdo not exceed the pro-rata share of the non-resident in the total consideration realized by thespecified funds from the said transfer of shares orsecurities in India. It is further clarified that anon-resident investing directly in the specifiedfunds shall continue to be taxed as per the extantprovisions of the Act.

For the purposes of this Circular,(i) “Investment fund” shall have the meaning

assigned to it in clause (a) of Explanation 1 tosection 115UB of the Act.

(ii) “Venture Capital Company” and “VentureCapital Fund” shall have the meaningsrespectively assigned to them in Explanationto clause (23FB) of section 10 of the Act.

SECTION 143 OF THE INCOME-TAX ACT,1961 - ASSESSMENT - GENERAL -INSTRUCTIONS FOR UNAUTHORIZEDEXPANSION OF SCOPE OF LIMITEDSCRUTINY

LETTER [F.NO.DGIT(VIG.)/HQ/SI/2017-18],DATED 30-11-2017CBDT has issued detailed guidelines/directionsfor completion of cases of limited scrutiny selectedthrough CASS module. These guidelines

postulate that an Assessing Officer, in limitedscrutiny cases, cannot travel beyond the issues forwhich the case was selected. The idea behind suchstipulations was to enforce checks and balancesupon powers of an AO to do fishing and rovinginquiries in cases selected for limited scrutiny.Further, the guidelines for proper maintenance oforder sheets have been given in the Manual ofOffice Procedure issued by the Directorate ofOrganisation and Management Services. TheManual clearly lays down:—A. The minutes of the hearing must be entered

with date, in the order-sheet.B. Make proper order-sheet entries for each

posting, hearing and seeking and granting ofadjournments

C. If nobody attends a hearing or the request foradjournment comes after the hearing date,enter the facts in the order-sheet.

Maintenance of a cursory and cryptic order sheetshows irresponsible, ad hoc and undisciplinedworking of any officer.

Instances have come to notice of CBDT wheresome Assessing Officers are travelling beyondtheir jurisdiction while making assessments inLimited Scrutiny cases by initiating inquiries onnew issues without complying with mandatoryrequirements of the relevant CBDT Instructionsdated 26-9-2014, 29-12-2015 and 14-7-2016.These instances have been viewed very seriouslyby the CBDT and in one case the CentralInspection Team of the CBDT was tasked withexamination of assessment records on receipt ofallegations of several irregularities. Amongstother irregularities, it was found that no reasonshad been recorded for expanding the scope oflimited scrutiny, no approval was taken from thePCIT for conversion of the limited scrutiny case toa complete scrutiny case and the order sheet wasmaintained very perfunctorily. This gave rise to avery strong suspicion of mala fide intentions. TheOfficer concerned has been placed undersuspension.

In view of discussion in the preceding paragraphsit is once again reiterated that the AssessingOfficers should abide by the instructions of CBDTwhile completing limited scrutiny assessmentsand should be scrupulous about maintenance ofnote sheets in assessment folders.

* * * * *


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2. UPDATE ONGST

Compiled by :

NOTIFICATIONS - CENTRAL TAX :

Notification No. 67/2017-CENTRAL TAX-DATED 21st December 2017Time limit for making declaration of stock inForm ITC 01 by registered person who areeligible for ITC during the month of July 2017,August 2017, September 2017, October 2017 andNovember 2017 is extended to 31/01/2018.

Notification No. 68/2017-CENTRAL TAX-DATED 21st December 2017Time limit for furnishing return by a non residenttaxable person in Form GSTR 5 for the month ofJuly 2017, August 2017, September 2017,October 2017, November 2017 and December2017 is extended till 31/01/2018.

Notification No. 69/2017-CENTRAL TAX-DATED 21st December 2017Time limit for furnishing return by a personsupplying online information & database accessor retrieval services from a place of outside Indiato a non taxable online recipient in Form GSTR5A for the month of July 2017, August 2017,September 2017, October 2017, November 2017and December 2017 is extended till 31/01/2018.

Notification No. 70/2017-CENTRAL TAX-DATED 21st December 2017CGST Rules are amended to collect additionalinformation for processing of Refunds easily.Changes have been made to Table 6 of formGSTR-1, Form GST RFD 01, Form GST RFD01A.

Notification No. 71/2017-CENTRAL TAX-DATED 29th December 2017Last date for furnishing 2nd quarter return of FY 2017-18 for the registered persons havingturnover upto Rs.1.5 crores is extended till 10/01/2018. Last date for 3rd & 4th quarter of F Y2017-18 continues to be same as 15/02/2018 and30/04/2018 respectively.

Time limit for furnishing return Form GSTR-2and GSTR-3 for periods July 2017 to March 2018shall be notified subsequently.

CA Bharat K. GosarCA Nitin D. Kenia

Notification No. 72/2017-CENTRAL TAX-DATED 29th December 2017Time limit for furnishing monthly return ofoutward supply by the registered person havingaggregate turnover of more than Rs.1.5 crores inthe preceding financial year or the currentfinancial year for the months July 17 toNovember 17 is extended till 10/01/2018. ForDecember 17, January 18, February 18 andMarch 18 it will remain same as 10/02/2018, 10/03/2018, 10/04/2018, 10/05/2018 respectively.

Time limit for furnishing return is Form GSTR-2& GSTR-3 for the period July 17 to March 18shall be notified subsequently.

Notification No. 73/2017-CENTRAL TAX-DATED 29th December 2017CGST late fee payable for not furnishing returnin Form GSTR-4 in time by composition dealer isnow Rs. 10 per day during which such failurecontinues. This is applicable where total amountpayable in lieu of Central Tax is NIL. Otherwiselate fees applicable will be Rs.25 per day.

Notification No. 74/2017-CENTRAL TAX-DATED 29th December 2017E-way bill will be required to be uploaded onsystem where there is movement of goods formore than Rs. 50,000/-. Movement of goods canbe for sale, export, import, job work, sales return,exhibition, fairs, to other premises of samebusiness, purchase from unregistered person etc.Government has notified 01/02/2018 to be thedate from which this will be applicable.

Notification No. 75/2017-CENTRAL TAX-DATED 29th December 2017

Following Rules are amended in The CentralGoods and Services Tax Rules, 2017.Amendments are effective from 29th December2017

Rule 19(1A) : This Sub Rule is newly added.Any amendments to any particulars of theapplication for registration will be amended fromthe date of submission of application in form GSTREG 14 on portal.

Rule 89(4) : Revised formula is prescribed forclaiming refund of Input tax credit in the case ofzero rated supply of goods or services or bothwithout payment of tax under Bond or Letter ofundertaking.


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Rule 95(1) : This Sub Rule is substituted. FormRFD 10 has been notified for a person havingUnique Identification Number to claim therefund or taxes paid on inward supplies. Thisform is to be submitted along with a statement ofthe inward supplies of goods or services or both inForm GSTR -11.

Rule 96 : Rule is amended so as to include refundof Integrated Tax paid on services exported out ofIndia. Till now it was restricted to goods exportedout of India.

ORDERS : CGST :

Order No. 9/2017-GST-DATED 15thNovember, 2017, Order No. 7/2017-GST-DATED 28th October, 2017 and Order No.3/2017-GST-DATED 21st September, 2017

Time limit for furnishing the declaration in formGST-TRAN-1 U/R 117 of CGST Rules, 2017 isextended till 27/12/2017.

Order No. 10/2017-GST-DATED 15thNovember, 2017, Order No. 8/2017-GST-DATED 28th October, 2017 and Order No. 2/2017-GST-DATED 18th September, 2017

Time limit for furnishing revised TRAN-1 isextended till 27/12/2017

Order No. 11/2017-GST-DATED 21stDecember, 2017, Order No. 5/2017-GST-DATED 28th October, 2017 and Order No. 4/2017-GST-DATED 29th September, 2017

Person registered under earlier law and migratedto GST and has opted for composition schemeunder section 10 under GST Act is required tointimate details of stock on migrated date in FormGST CMP 03. Time limit for furnishing this formis extended to 31/01/2018.

CIRCULARS : CGST :

Circular No. 22/2017dated 21st December,2017

It is clarified that i) the art work for supply onapproval basis can be moved from the place ofbusiness of the registered person (artist) toanother place within the same State or to a placeoutside the State on a delivery challan along withthe E-way bill wherever applicable and theinvoice may be issued at the time of actual supplyof art work. ii) It is also clarified that the supplies

of the art work from one State to another Statewill be Inter-State supplies and attractIntegrated Tax in terms of section 5 of theIntegrated Goods and Services Tax Act, 2017. iii)It is further clarified that in case of supply byartists through galleries, there is noconsideration flowing from the gallery to theartist when the art works are sent to the galleryfor exhibition and therefore, the same is not asupply. It is only when the buyer selects aparticular art work displayed at the gallery, thatthe actual supply takes place and applicable GSTwould be payable at the time of such supply.

Circular No. 23/2017 dated 21st December,2017

The Principal and the Auctioneer of tea, coffee,rubber etc. are required to declare warehouseswhere such goods are stored as their additionalplace of business. Both the principal and theauctioneer are required to maintain the books ofaccounts relating to each and every place ofbusiness in that place itself. It is clarified thatthey may maintain the books of accounts relatingto the additional place(s) of business at theirprincipal place of business instead of suchadditional place(s). Such principal or auctioneershall intimate their jurisdictional proper officer inwriting about the maintenance of books ofaccounts relating to additional place(s) ofbusiness at their principal place of business.

Circular No. 24/2017 dated the 21stDecember, 2017

The Circular in details deal with manual filingand processing of refund claims on account ofinverted duty structure, deemed exports andexcess balance in electronic cash ledger.

Circular No. 25/2017 dated 21st December,2017

The Circular in details deal with manual filing ofapplications for Advance Ruling and appealsbefore Appellate Authority for Advance Ruling.

Circular No. 26/2017 dated the 29thDecember, 2017The circular clarifies on various aspects of returnfiling such as return filing dates, applicabilityand quantum of late fee, amendment of errors insubmitting / filing of FORM GSTR-3B and otherrelated queries.

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C.V.O. CA’S NEWS & VIEWS VOL. 21 NO. 7 / JANUARY 2018It doesn't matter if you end up working for yourself or someone else, the education element is an investment that provides the