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ISSN 2455-4782 1 | Page Journal on Contemporary Issues of Law Volume 3 Issue 4 OVERVIEW OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 & THE ACCOMPANYING REGULATIONS Javish Valecha 1 & Ankita Anupriya Xalxo 2 BACKGROUND In the backdrop of Vijay Mallya episode and season of corporate defaults when public sector banks and financial institutions are helplessly chasing their dues in largely protracted legal battles, the Parliament of India in the first week of May swiftly passed Insolvency and Bankruptcy Code 2016 (New Code). The New Code has received the President's assent and awaits to be formally notified. This Code is essential because no single umbrella legislation has governed insolvency and bankruptcy proceedings in India till now. Instead, there was a slew of legislation governing the legal framework. The Insolvency and Bankruptcy Code, 2016 (Code), a landmark legislation consolidating the regulatory framework governing the restructuring and liquidation of persons (including incorporated and unincorporated entities) was enacted into law by the Parliament on 11 May 2016. As in the case of Companies Act 2013 (2013 Act), different provisions of the Code are being notified and operationalised in a phased manner. Part IV of the Code provides for the setting up of an insolvency regulator, the Insolvency and Bankruptcy Board of India (Board). The Board is empowered to frame regulations on matters pertaining to insolvency and bankruptcy. Provisions pertaining to the constitution and powers of the Board were notified and operationalised by the Central Government on 5 August 2016. Subsequently, the Board was constituted on 1 October 2016 under the Chairmanship of Mr MS Sahoo. EARLY FRAMEWORK Corporate Insolvency In India till now has always been regulated and administered by multiple and sometime overlapping laws as follows: 1 5th Year BBA LLB (Hons.)Student, School of Law, KIIT University, Bhubaneswar, Odisha. 2 5th year BA LLB (Hons.) Student, Hidayatullah National Law University, Raipur

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Page 1: OVERVIEW OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 … · In the backdrop of Vijay Mallya episode and season of corporate defaults when public sector banks and financial institutions

ISSN 2455-4782

1 | P a g e Journal on Contemporary Issues of Law

Volume 3 Issue 4

OVERVIEW OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016

& THE ACCOMPANYING REGULATIONS

Javish Valecha1 & Ankita Anupriya Xalxo2

BACKGROUND

In the backdrop of Vijay Mallya episode and season of corporate defaults when public sector

banks and financial institutions are helplessly chasing their dues in largely protracted legal

battles, the Parliament of India in the first week of May swiftly passed Insolvency and

Bankruptcy Code 2016 (New Code). The New Code has received the President's assent and

awaits to be formally notified. This Code is essential because no single umbrella legislation

has governed insolvency and bankruptcy proceedings in India till now. Instead, there was a

slew of legislation governing the legal framework.

The Insolvency and Bankruptcy Code, 2016 (Code), a landmark legislation consolidating the

regulatory framework governing the restructuring and liquidation of persons (including

incorporated and unincorporated entities) was enacted into law by the Parliament on 11 May

2016. As in the case of Companies Act 2013 (2013 Act), different provisions of the Code are

being notified and operationalised in a phased manner. Part IV of the Code provides for the

setting up of an insolvency regulator, the Insolvency and Bankruptcy Board of India (Board).

The Board is empowered to frame regulations on matters pertaining to insolvency and

bankruptcy. Provisions pertaining to the constitution and powers of the Board were notified

and operationalised by the Central Government on 5 August 2016. Subsequently, the Board

was constituted on 1 October 2016 under the Chairmanship of Mr MS Sahoo.

EARLY FRAMEWORK

Corporate Insolvency

In India till now has always been regulated and administered by multiple and sometime

overlapping laws as follows:

1 5th Year BBA LLB (Hons.)Student, School of Law, KIIT University, Bhubaneswar, Odisha. 2 5th year BA LLB (Hons.) Student, Hidayatullah National Law University, Raipur

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The Companies Act 2013

The Sick Industrial Companies (Special Provisions) Act 1985

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

The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act 2002

Individual Insolvency

This has always been regulated and administered through the Presidency Towns Insolvency

Act (for residents of Mumbai, Kolkata and Chennai) and Provincial Insolvency Act (for other

residents) which are century old legislations and have now outlived their utility.

The Presidency Towns Insolvency Act 1909

The Provincial Insolvency Act 1920

LEGISLATIVE HISTORY

A single piece of legislation to connect the various insolvency laws has been on the cards for

some time, with recommendations from the Law Commission of India dating back to its 26th

report on insolvency laws in 1964. Various committees have explored the idea of

consolidating India's insolvency and bankruptcy laws which are explained hereunder:

In 1964, the 26th Report of the Law Commission recommended reform of personal

insolvency laws and suggested a new Insolvency Bill to consolidate the extant two

separate insolvency laws.

The Tiwari Committee (1985) introduced the Sick Industrial Companies Act.

The Narasimhan Committee I and II (1991 and 1998), introduced the Recovery of

Debts Due to Banks and Financial Institutions Act and the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest Act

The Justice Eradi Committee (1999) introduced changes to the Companies Act and

proposed the repeal of the Sick Industrial Companies Act:

It revealed some startling facts – that the average time taken in winding up matters

was 11 years pan-India, and in the Eastern Region, it took on an average 25 years to

resolve a bankruptcy.

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The idea of the National Company Law Tribunal (“NCLT”) was born, inclusively, out

of the recommendations of the Eradi Committee which paved way for amendment of

the Companies Act was amended in 2002.

The N.L Mitra Committee (2001) proposed a comprehensive bankruptcy code in

2001.

The J J Irani Committee finally implemented the Mitra Committee recommendations

and thus, the Companies Act, 2013 was enacted. The basis of insolvency was changed

from “inability to pay” to “failure to pay”.

In 2014, the Finance Minister announced that the government hoped to overhaul the

present setup of insolvency and bankruptcy laws in the country and the code surfaced

for the first time.

On November 4, 2015, the Bankruptcy Law Reforms Committee (chaired by TK

Viswanathan) submitted its final report recommended the passage of the Insolvency

and Bankruptcy Code 2015.

On December 2, 2015 Finance Minister Arun Jaitley tabled the code before the lower

house of the Indian Parliament (the Lok Sabha)

On May 5, 2016, The Lok Sabha passed the Insolvency and Bankruptcy code 2016

with all the amendments proposed by the joint committee of Parliament being

accepted by the government.

On May 11, 2016, the Rajya Sabha passed the Insolvency and Bankruptcy Code,

2016.

On May 28, 2016, the Insolvency and Bankruptcy Code, 2016 (“Code”) received

President's assent.

Notification of the code has been done. However, those sections of the Companies

Act, 2013 which form counter part of the Code got notified on June 1, 2016.

A FLAWED INSOLVENCY REGIME

The problems stemming from the present legal regime for insolvency/ bankruptcy

proceedings in India with respect to corporate insolvency are: are multi-fold, some of which

are as follows:

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1. Might is Right

The enforcement of security interests by creditors is based on a “might is right” principle – a

creditor is obviously concerned with its own dues rather than the interests of other

stakeholders in the business – other lenders, creditors, workers, and others whose livelihood

depends on the business. In short, the equitability principle in which insolvency laws are

rooted all over the world is rarely seen on the Indian scene as of now.

2. Incoherent System

The incompatibility and absence of hierarchy in jurisdictions laid down by the

aforementioned statutes have resulted in often conflicting judgements by various High Courts

and the Supreme Court of India regarding the interpretation of these statutes and how they

interact with one another.

3. Rusted Procedures

The existing legal regime makes no room for contemporary market realities ultimately

harming the businesses. The RDDB Act and the SARFAESI Act provide a safety measures to

secured creditors such as banks and financial institutions but not to unsecured creditors who

comprise equally big chunk. Even the safety for secured creditors is not assured because of

the haphazard system. Put together, such factors have resulted in India having one of the

worst recovery rates in the world.

For the sake of limited scope of this memorandum, only the various dimensions of corporate

insolvency will be dealt with.

THE NEW CODE & CORPORATE INSOLVENCY

1. Scope of Applicability

The law is to cover insolvencies of “corporate persons” (covering companies, limited liability

partnerships (“LLPs”), and all other entities having limited liability), as also individuals,

firms etc. While the law is admittedly a code for insolvent companies, it covers liquidation of

solvent companies as well, and thereby, serves as a complete code on liquidation of

companies.

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2. Institutional Framework

Insolvency and Bankruptcy Board of India

The primary functions of the Board will include registration of insolvency professionals,

insolvency institutions, information utilities, provide guidelines on the conduct of bankruptcy

resolution, etc.

Adjudicating Authority (“AA”)

The AA is the primary quasi-judicial body presiding over the entire process of bankruptcy. In

case of corporate persons, the AA will be the National Company Law Tribunal ("NCLT")

and National Company Law Appellate Tribunal ("NCLAT") 3 . The NCLT, which was

constituted under Section 408 of the Companies Act 2013, which got recently notified on

June 1, 2016.4 The insolvency proceedings against companies presently being handled by the

company court benches in various high courts across India will now get transferred subject to

a recent notification and an awaited notification of the Insolvency Code.

Insolvency professionals (IPs)

IPs may be practically read as administrators (pre liquidation stage) and liquidators (post

liquidation order) – who have role to play in both insolvency, liquidation and resolution. The

following are the insolvency professionals:

- Interim resolution professional – immediately on admission of an insolvency resolution

process.

- Final resolution professional - on appointment by the Committee of Creditors.

- Liquidator – on commencement of liquidation proceedings. Typically, the final resolution

professional will act as liquidator, unless replaced by the AA.

- Resolution applicant: the entity that prepares a resolution plan.

Information utilities

The information utilities will be storing financial information – this may be seen as electronic

filing of defaults, security interests. There will obviously be an overlap with present filing of

defaults with someone like CIBIL, security interests with the Companies Act, etc., which

may be eventually resolved. It is not clear whether this will dovetail into the existing Central

3 The AA for individuals and partnership firms, it is the extant Debt Recovery Tribunal ("DRT") and Debt

Recovery Appellate Tribunal ("DRAT"). 4 Notification constituting the National Company Law Tribunal and National Company Law Appellate Tribunal

under Sections 408 and 410 respectively of the Companies Act, 2013-01.06.2016-S.O. 1932(E) and 1933(E).

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Registry of Securitisation Asset Reconstruction and Security Interest of India (“CERSAI”)

and/or Central Repository of Information on Large Credits (“CRILC”) or end up adding to

the plethora of registries in India.

Interplay

The Code envisages that the insolvency resolution processes will be conducted by insolvency

professionals ("IPs"). The IPs will be licensed professionals and will be members of

insolvency professional agencies ("IPAs"), which will be created for regulation of such IPs.

The Code also provides for establishment of information utilities ("IUs"), for collection,

collation and dissemination of financial information to facilitate insolvency resolution. The

regulation and operation of these IPs, IPAs, and IUs is to be overseen by an Insolvency and

Bankruptcy Board ("Board") established under the Code.

3. Corporate Insolvency Resolution Process

Who can initiate?

The “corporate insolvency resolution process” may be initiated on application to NCLT:

o by a financial creditor("FC")5, either by itself or jointly with other financial creditor,

meaning a creditor for financial facility (which is a broadly worded expression including

financial lease and hire purchase transactions, which are treated as financial transactions

under applicable accounting standards);

o by an operational creditor (“OC”)6, meaning a creditor other than a financial creditor;

o By the corporate debtor (“CD”)7 himself, that is, company itself.

On what basis?

o In case of FCs, the basis of filing is the fact of a default to any FC. A default, for this

purpose, includes a default in respect of a financial debt owed not only to the applicant

financial creditor but to any other financial creditor of the CD. This drastically changes the

basis of the current provisions of “sickness” under the Companies Act, which is based on

5 The Code distinguishes between a FC and OC, and lays down different procedure for initiating the

proceedings. FC is a creditor to whom a financial debt is owed and includes anyone to whom such debt is

assigned/transferred. 6 OC is one to whom an operational debt is owed i.e., debt in respect of goods or services including employment

or debt arising under any law in force for the time being and payable to Central Government/State

Government/Local Authorities. 7 A Corporate applicant includes the corporate debtor (whose IRP is proposed to be initiated) or its shareholder,

management personnel or employees satisfying certain criteria. A corporate applicant may file an application

for IRP upon occurrence of any default and shall along with application submit its books of account and other

documents to initiate the IRP

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default to a majority in value of the creditors. In addition, the only fact on which the

application for insolvency will be admitted is the fact of a default, established from the

records of the information utility.

The FC has to move an application before the NCLT showing them the proof of default and

proposing an interim IP. The NCLT will then ascertain the existence of default from the

records of an IU (i.e. information utilities) or on the basis of other evidence furnished by the

creditor.

In case of OCs, he has to first serve a demand notice along with the proof of default, giving

the debtor ten days to respond to dispute the claim. If the claim remains undisputed, then the

OC can file an application before the AA. If the claim for the above situations is not paid

within 10 days, the creditor may initiate insolvency process. This largely creates a level-

playing field between secured and unsecured creditors.

Here, the NCLT has been offered mere fourteen days' time to ascertain the existence of a

default based on the records of IUs or other evidence provided by an applicant creditor in the

corporate insolvency resolution process (CIRP). This is too without offering an opportunity

of being heard to the corporate debtor. This may defeat the principle of natural justice vis-à-

vis the corporate debtor and NCLT may end up admitting several frivolous petitions. Some of

these provisions need a close review.

Roadmap after Admission of Application

Broadly, the insolvency resolution process, after an application has been admitted by the AA

will entail the following steps:

o Declaration a moratorium period

-This will prohibit actions such as, institution of suits, continuation of pending suits/

proceedings against the CD including execution of any judgement, decree or order;

disposal/encumbering of CD's assets or rights/interests therein; any action to foreclose,

recover or enforce any security interest created by the CD, etc.

One of the most important features of a bankruptcy law is the grant of moratorium during

which creditor action will remain stayed, while the bankruptcy court takes a view on the

possibility of rehabilitation. In the chapter on Sick Companies under the Companies Act

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2013, there is no provision for automatic moratorium – it merely empowers the NCLT to

grant a moratorium up to 120 days.

The Code8 talks about a mandatory moratorium – thereby, it serves almost like the automatic

moratorium under global bankruptcy laws. The moratorium will continue throughout the

completion of the resolution process – which is 180 days as mentioned above. However, if in

the meantime, the creditors’ committee resolves to approve liquidation of the entity, then the

moratorium will cease to have effect.

Explicitly, the moratorium before liquidation applies to enforcement of security interests

under SARFAESI Act as well9. A moratorium also applies when an order for liquidation has

been passed by the AA.10

o Appointment of an Interim IP

-Issuance of public announcement of the initiation of insolvency resolution process and call

for the submission of claims. Interim IP inter alia takes over the management and powers of

the board of directors of the CD, and collects all information relating to assets, finances and

operations of the CD for determining its financial position; collates all claims submitted by

the creditors and constitutes a Committee of Creditors ("COC").

-The COC thereafter either resolves to appoint the interim IP as the IP or replaces the interim

IP by appointing a new IP, in accordance with the prescribed procedure. This IP shall be

appointed as the liquidator for the process.

The IP will then take over the management and assets of the CD, and can exercise the wide

powers granted to it, in the manner prescribed under the Code. It will prepare an information

memorandum in relation to the CD, on the basis of which the resolution applicant will

prepare a resolution plan. IP will scrutinize the resolution plan11 and present it to the COC.

8 Section 13 9 Section 14 (1) (c) 10 Section 33 (6), The Insolvency and Bankruptcy Code, 2016 11 Under the Code, each financial creditor of the COC, whether secured or not, gets to vote on the resolution

plan of the corporate debtor on the basis of its voting share (proportionate to the money advanced by the

creditor).

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The COC approved plan will be submitted to the AA, for its acceptance, and it is only when

the AA, gives it a final nod that the resolution plan becomes binding upon all the stakeholders

and the insolvency resolution process of the CD is initiated. In case the AA rejects the plan,

the liquidation process of the CD will commence.

o Timeline for the process

Particulars Timelines (in days)

Filing of Insolvency application – Details of what needs

to be mentioned in the application has been specified

(interim finance)12 X

Adjudicating Authority- admission or rejection of

application -

Before rejecting an application, the Adjudicating

Authority shall give a notice to the applicant to rectify

the defect in the application within 7 days.

If admitted, Adjudicating Authority to declare

moratorium upon admission X+14

Insolvency Resolution Professional appointment (X+14) + 14

Constitution of Committee of Creditors

Appointment of final resolution professional

(X+14) + 14 +10

12 Incentive to Insolvency Professionals & Interim Financing: In the distribution of liquidation proceeds, the cost

of IP and the IRP has first priority, thereby acting as an incentive for them to strive for speedy resolution. This

is at par with international practices. The Code prescribes that any interim financing and the cost of raising

such financing will be included as part of the IRP cost, thereby giving it first priority in the waterfall and also

in any creditor driven plan. Security can be created over the assets of the company to secure such financing by

the interim resolution professional without the consent of existing creditor(s) if the value of the property

secured in favor of existing secured creditors is at least twice the outstanding debt. However, any financing

after the appointment of the resolution professional and constitution of the COC must be approved by 75% of

the financial creditors by value.

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Submission of Resolution plan

If approved- Moratorium ceases to have effect

If rejected- Initiation of Liquidation

Insolvency Resolution Process Completion (X+14) + 180

Insolvency Resolution Process Extension (X+14) + 180 +90

Even within body corporates, small companies are fast-tracked and their insolvency

resolution processes must be completed within 90 days of submission. The Insolvency and

Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons)

Regulations, 2016 came in effect from 1st December, 2016 onwards and will likewise govern

the procedures under this head.

4. Corporate Liquidation Process

Initiation of the liquidation process13

In the event that:

o the COC cannot agree on a workable resolution plan within the IRP Period (i.e. 180

days extendable once by another 90 days);

o the COC decides to liquidate the company;

o the NCLT rejects the resolution plan; or

o the corporate debtor contravenes provisions of the resolution plan,

The NCLT shall:

o Pass an order requiring liquidation of corporate debtor;

o Make a public announcement of corporate debtor entering liquidation; and

o Require a liquidation order to be sent to the registering authority of the corporate

debtor (for example Registrar of Companies in case of companies incorporated under

Companies Act).

The IP acting as the resolution professional shall, upon commencement of liquidation shall be

appointed as the liquidator for the process, unless replaced by NCLT.

13 Section 33, The Insolvency and Bankruptcy Code, 2016

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Appointment of Liquidator14

Formation of Liquidation Trust15

This provision is indeed very significant as it defines the reach of the so-called “liquidation

estate” 16 . That is to say, to the extent assets of the corporate debtor form part of the

liquidation trust, the assets will be distributed by the liquidator in the manner of priorities laid

in the law, and individual claimants or those claiming to have any special rights on such

assets will have to form part of the liquidation process.

o Important inclusions in the liquidation trust are:

All assets and interests as evidenced in the balance sheet of the corporate debtor. This will

continue to cause confusion as it relies on accounting principles which are quite often not

aligned with legal title.

For example, under IFRS, several securitization transactions or sale of financial assets do not

go off the balance sheets. This may put to question the “true sale” character of several

securitization transactions.

o Important exclusions are:

Third party assets, including,

Trust assets, that is, assets whereof the corporate debtor is merely a trustee

Bailment assets – thereby, leased assets will be excluded from liquidation trust but it

may be argued that in case of financial leases, as the assets are on the balance sheet,

at least the right to use will be an asset, unless the right to use gets terminated by

virtue of the bankruptcy event.

Transactions where there is no transfer of title but merely a right to use.

Assets placed as collateral with financial debtors, that are subject to netting under

multilateral or clearing contracts – thereby giving protection to such derivatives as

14 Section 34, The Insolvency and Bankruptcy Code, 2016 15 Section 36, The Insolvency and Bankruptcy Code, 2016 16Section 36, The Insolvency and Bankruptcy Code, 2016

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are settled by multi-lateral clearing. The provision seems to have been picked from

international jurisdictions, but multilateral clearing is not currently in vogue in India.

Assets of subsidiaries – while shares held in the subsidiary form part of the

liquidation trust, the assets do not.

o Collection of Creditors’ Claims

This has to be done within 21 days of the commencement of liquidation, and verification of

claims17. The COC shall only include financial creditors as decision makers (operational

creditors with more than 10% aggregate exposure have mere observer status during the COC

meetings) and shall be responsible for deciding the important affairs of the company.

It shall also be responsible for authorising the IP (acting as resolution professional) to take (or

not to take) certain actions such as raising interim finance up to the limit specified by the

committee, creating security on assets of the secured creditor, undertaking related party

transactions, amending constitutional documents, change of capital structure or management

of the Borrower etc.

More importantly, the COC shall approve the resolution plans received by the IP. All

decisions of the COC are required to be approved by a majority of 75% of the voting

shares/value of the financial creditors

It also includes elaborate provisions 18 about voidable transfers and undue preferences,

incorporating several safe harbours for bona fide transactions against “clawback” rights of a

bankruptcy court.

Under existing law, the court simply has powers to preserve bona fide transactions – the Code

gives several such transactions which are protected from any clawback. In addition to this,

there are usual provisions for undervalued transactions, fraudulent transfers, etc. There is

seemingly a new provision pertaining to avoidance of “extortionate credit” contracts, entered

into within 2 years before the commencement of insolvency process19.

17 Section 37-40, The Insolvency and Bankruptcy Code, 2016 18 Section 41, The Insolvency and Bankruptcy Code, 2016 19 Section 49-51, The Insolvency and Bankruptcy Code, 2016

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Realization of debt by secured creditors20

-This very important section incorporates the classic principle understood over the decades in

India – which a secured creditor may either relinquish security interest or force his claim on

the overall liquidation trust assets, or may opt to realise security interest outside the winding

up process.

-The secured creditors are permitted to realise security interest according to such law as may

be applicable – thereby preserving the process of self-help realisation under the SARFAESI

Act. However, there will be reference to the liquidator for the purpose of the liquidator

identifying the asset.21

Upon liquidation, a secured creditor may choose to realise his security and receive proceeds

from the sale of the secured assets in first priority. If the secured creditor enforces his claims

outside the liquidation, he must contribute any excess proceeds to the liquidation trust.

Further, in case of any shortfall in recovery, the secured creditors will be junior to the

unsecured creditors to the extent of the shortfall.

This section, however, brings a very important balance in the process of repossession outside

the liquidation process under SARFAESI Act, by requiring the secured creditor to return the

excess realised by him to the liquidator.

Thereby, the liquidator also becomes an interested party in the process of sale of secured

assets under SARFAESI Act, throwing greater burden on the creditors in being more

transparent in the conduct of the sale.

Distribution of assets by the liquidator22

Most interestingly, the section23 dealing with this starts with a non-obstante clause, giving

this section supremacy over conflicting provisions of a vast number of Central and State

laws. There have been several rulings of the courts, including the apex court, on conflict of

laws pertaining to claims of the state creditors over assets of companies in winding up.

Hopefully, this section, being a dedicated section pertaining to distribution of assets on

liquidation, will operate as a special law, and will resolve the cacophony currently existing in

the matter. In fact, state dues come at number 5 in the rung.

20 Section 52, The Insolvency and Bankruptcy Code, 2016 21 Section 52 (4), The Insolvency and Bankruptcy Code, 2016 22 Section 53, The Insolvency and Bankruptcy Code, 2016 23 Section 53, The Insolvency and Bankruptcy Code, 2016

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-One disturbing point is the provision24 which seeks to disregard contractual arrangements

between claimants of a single class. Usually, in capital market transactions, there are several

classes of preference created among creditors – for example, super senior, senior,

subordinated, etc. Clause 53 (2) may be interpreted to disregard these priorities as

“contractual arrangements”.

The Code is touted as and is expected to be a game-changer in dealing with India's mounting

arrears of recovery cases nationwide. The Code is also an important part of the incumbent

NDA government's Ease of Doing Business in India narrative and introduces a number of

changes to the present setup.

Application for dissolution25

Order for dissolution 26

5. Fast track resolution27

As a notable feature of the Code, the Code proposes a fast track resolution process, intended

to be completed within 90 days, as opposed to the 180 days’ time for a normal process. The

fast track process will be applicable for corporate debtors of a particular class, or having

assets or income up to such level as may be notified by the Central Government. Essentially

the process seems to be targeting small companies.

6. Voluntary liquidation

It would have been a pity if the process of liquidation under the Code was to be reserved only

for defaulting companies, since voluntary winding up of healthy companies in India currently

takes enormously long time and, surprisingly, all attention has been to the speed of

incorporating companies, not winding them up. Thus, a healthy company, based on a

declaration of solvency, may pass a special resolution to liquidate itself. At least 2/3rds of the

creditors in value must also support the members’ resolution. The rest of the liquidation

mechanics under the Code will apply to a voluntary winding up as well.

24 Section 53 (2), The Insolvency and Bankruptcy Code, 2016 25 Section 54 (1) 26 Section 54 (2) 27 Section 55- 58, Chapter IV, Part II

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7. NCLT to mind its timelines28

One of the highlight points of the Code is timely completion of the liquidation process. Since

most delays take place due to protracted time before the Benches, will keep the benches of

NCLT and NCLAT serious about timely disposal of matters. Theses sections enact that where

the NCLT or NCLAT does not dispose of the matter within the time limits, the president of

the forum shall record the reasons for not doing so.

LEGAL CONSIDERATIONS

1. Interplay of Existing Laws

As outlined earlier in this note, the Code not only repeals 2 statutes, but also amends 11 other

statutes such as Companies Act, SICA and SARFAESI for effectuating the provisions

relating to insolvency and liquidation/ bankruptcy of all legal and natural persons under the

Act. However, the interplay of provisions of the Code, the amended statutes and several other

statutes (such as Negotiable Instruments Act, 1881) will be an important factor in

determination of insolvency proceedings. It is imperative that the provisions of all the key

legislations are synchronized in order to ensure that there are no discrepancies or overlaps

with existing laws. Failure to ensure this may lead to more confusion in the short run, as far

as applicability of specific laws is concerned.

2. Cross Border Insolvency

Even though the Code suggests 2 mechanisms to deal with the cross border element of

insolvency/liquidation, a comprehensive framework needs to be imbibed to effectively deal

with this issue. Various Indian companies have assets and creditors located across different

parts of the world and various foreign companies have subsidiaries in India. Issues relating to

Insolvency/liquidation of Indian companies with assets located in several jurisdictions outside

India and vice-versa cannot be achieved without having a mechanism like adoption of the

UNCITRAL Model Law on Cross Border Insolvency. In case of bilateral agreements

suggested by the Code presently, it will not only be difficult but will also take a very long

time to negotiate an agreement with each country. In addition, several countries may refuse to

divulge any information about the assets located in their country upon receipt of a letter

28 Section 64

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envisaged under the Code. As such, while the Code recognises cross border issues, it does not

specifically deal with them other than providing the legal basis for dealing with the issue

down the line.

3. Practical Ramifications

Paradigm shift in approach to debt

The Code will fundamentally change the approach to debt in India across a cross-section of

society, including the approach and psychology of promoters towards lenders, the way

business is done and for individuals, who will all need to adapt to the new framework.

Balancing Interests of Different Creditors

In any restructuring process, different creditors have varying interests which often leads to

conflicts. Depending upon the nature of their debt (operational or financial) or the security of

debt (secured or unsecured), each creditor may have a different strategy of recovery.

Likewise, foreign creditors may have a different approach from domestic creditors. The new

inter-creditor dynamics introduced by the Code will realign the existing practices of various

creditor groups.

Delaying Tactics

One of the key objectives of the Code is to have a system which curbs tactics used by debtors

to delay enforcement/winding up/restructuring by 'gaming' the system. This is often done by

restricting dissemination of correct information to the lenders and filing of frivolous appeals

against the orders passed in favour of the lenders. While the Code addresses the underlying

causes for such delaying tactics and seeks to put robust information systems in place, it is yet

to be seen if this is sufficient in practice to prevent debtors from arm-twisting the lenders who

may not see sufficient recovery from the liquidation process.

Time bound process and restrained role of the Courts

The Code seeks to implement a time bound restructuring of the debtor while encouraging a

limited the involvement of Adjudicating Authorities and other judicial remedies. No doubt

the ability of Adjudicating Authorities and courts to exercise this restraint will be tested by

corporate debtors.

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Third Parties Stepping-in

Based on the processes contemplated by the Code, a concern arises as to how well equipped

would third party professionals and creditors directing them be, to step into the shoes of the

promoters and take control of the board, especially at the beginning of the insolvency

process, and run the underlying business of a defaulting debtor.

Applicability

Unlike bankruptcy laws in the US, the Code does not envisage 'debtor in possession' (DIP)

financing, which would effectively allow the debtor to keep control of the assets during the

IRP. Rather, it follows a UK style approach where the IP controls the process during the IRP.

However, in the Indian context, the Code does not allow the IP to sell assets without creditor

consent, thereby making UK style administration sales or pre-packaged sales ('pre-packs')

difficult to achieve.

RECENT DEVELOPMENTS

Since its constitution, the Board had initially released draft rules on the regulation of

insolvency professionals (IPs) and insolvency professional agencies (IPAs) for comments

from the public. IPs are insolvency professionals charged with the responsibility of

conducting insolvency or liquidation proceedings in accordance with the provisions of the

Code, similar to administrators in the UK. IPAs are insolvency professional agencies

responsible for registering and regulating IPs. After a period of public consultation, the

following regulations were notified into law on 21 and 23 November 2016:

Insolvency and Bankruptcy Board of India (Registration of Insolvency Professional

Agencies) Regulations, 2016 (IPA Regulations);

Insolvency and Bankruptcy Board of India (Model Bye-laws and Governing Board of

Insolvency Professional Agencies) Regulations, 2016 (Model Bye-laws Regulations);

and

Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations,

2016 (IP Regulations).

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The Code and the rules framed there under, have adopted a quasi-self-regulatory model

for regulating IPs. IPs are required to be registered with any IPA. Any not-for-profit

company is eligible to be an IPA. Both IPs and IPAs are in turn regulated by the Board. In

this Newsflash, we highlight certain key aspects of these regulations.

Also, Insolvency Resolution Process for Corporate Persons Regulations, 2016 was

notified on in the end of the month of November, 2016 and it would be in effect from

1st December, 2016 onwards.

Again, the Insolvency and Bankruptcy Board of India (Board), in exercise of its

powers conferred under section 240 of the Insolvency and Bankruptcy Code 2016

(code), has notified on 15th December, 2016 the Insolvency and Bankruptcy Board of

India (Liquidation Process) Regulations, 2016. These regulations inter alia provide for

the details of activities from issue of liquidation order under section 33 of the Code to

dissolution order under Section 54. These regulations came into force with immediate

effect.29

1. Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies)

Regulations, 201630

The IPA Regulations lay down the procedure and eligibility for registration as an IPA and

grounds for rejection, suspension and cancellation of registration. Certain key highlights of

the IPA Regulations include:

The IPA is required to be incorporated as a not-for-profit company under Section 8 of

the 2013 Act.

The IPA is required to have a minimum net worth of INR 100 million and a paid- up

share capital of INR 50 million.

Only 49% of the share capital of an IPA can be held, either directly or indirectly, by a

person resident outside India. Furthermore, prior approval of the Board is required

when a person other than a statutory body seeks to hold more than 10% in the share

capital of an IPA, either directly or indirectly.

29 Available at http://taxguru.in/corporate-law/insolvency-bankruptcy-board-india-liquidation-process-

regulations-2016.html 30 Available at http://www.ibbi.gov.in/Law/IPA%20REGULATIONS_professional_agencies.pdf

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Every IPA applicant, along with its directors, promoters and all persons holding more

than 10% of its share capital, is required to be a 'fit and proper' person as determined

by the Board based on the guidelines in the Code and the IPA Regulations.

In-principle registrations (i.e., temporary registrations) are also available to IPs for a

limited period of 1 year. The in-principle approval regime replaces the provisional

and transitional registration regime proposed in the draft IPA regulations.

2. Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board

of Insolvency Professional Agencies) Regulations, 201631

The Insolvency and Bankruptcy Board of India (IBBI), in exercise of its powers conferred

under Section 240 of the Insolvency and Bankruptcy Code, 2016 (Code), has notified today

the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.

The regulations inter alia provide for registration, regulation and oversight of insolvency

professional under the Code. These Regulations have come into effect from 29th November,

2016. The following categories of individuals are eligible for registration as an insolvency

professional:

The Model Bye-laws Regulations prescribe model bye-laws that every IPA is required to

adopt. These model bye-laws lay down the duties of the IPA, eligibility norms for enrolment

as a member of the IPA, monitoring of members of an IPA, adoption of a grievance redressal

mechanism, the manner of conduct of disciplinary proceedings against the members of an

IPA, and norms pertaining to surrender of membership and expulsion of members of an IPA.

The Model Bye-laws Regulations also prescribe certain governance standards for IPAs,

which include:

Governing body of the IPA is required to have at least one-half independent directors

and one-half Indian resident directors.

No meeting of the governing body of an IPA can be held without at least one

independent director being present.

At least a quarter of the directors are required to be insolvency professionals

themselves.

31 Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency

Professional Agencies) Regulations, 2016, Lawyersclubindia, available at

http://www.ibbi.gov.in/Law/IPA%20REGULATIONS_professional_agencies.pdf

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The following categories of individuals are eligible for registration as an insolvency

professional:

Advocates, Chartered Accountants, Company Secretaries and Cost Accountants with 10

years’ of post-membership experience (practice or employment) or a Graduate with 15

years’ of post-qualification managerial experience, on passing the Limited Insolvency

Examination or

Any other individual on passing the National Insolvency Examination.

However, Advocates, Chartered Accountants, Company Secretaries and Cost

Accountants with more than 15 years’ of experience may seek registration, without any

examination. But applications for e such registration need to be made till 31st December,

2016 and such registration shall be valid for a limited period of six months. There shall be

a ‘National Solvency Examination’ the details of which will be specified through

regulations. There shall also be ‘Limited Insolvency Examination.’ The syllabus, format

and frequency of the ‘Limited Insolvency Examination’. The syllabus, format and

frequency of the ‘Limited Insolvency Examination’, including qualifying marks, shall be

published on the website of the Board at least one month before the examination. A

limited liability partnership, a registered partnership firm and a company may be

recognised as an insolvency professional entity if a majority of the partners of the limited

liability partnership or registered partnership formed a majority of the whole-time

directors of the company are registered as insolvency professional under the Code. AN

insolvency professional may use the organisational resources of a recognised insolvency

professional entity subject to the condition that the entity as well as the insolvency

professional shall be jointly and severally liable for all acts of omission or commission of

its partners or directors as insolvency professionals. 32

3. Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations,

201633

The Insolvency and Bankruptcy Board of India has issued the Notification on Insolvency and

Bankruptcy Board of India. These Regulations shall come into force on 29th November,

2016. The IP Regulations lay down eligibility norms (including the requirement to have

32 Available at http://www.lawyersclubindia.com/news/Insolvency-and-Bankruptcy-Board-of-India-Model-Bye-

Laws-and-Governing-Board-of-Insolvency-Professional-Agencies-Regulations-2016-

16471.asp?wb48617274=02C812AB 33 Available at http://www.ibbi.gov.in/Law/GAZETTEIP_professional.pdf

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passed an examination held by the Board) and other registration requirements for IPs. They

prescribe a code of conduct that IPs must adhere to, highlighting standards of impartiality and

independence, integrity, professional competence, confidentiality, etc. Certain key highlights

of the IP Regulations include:

What is the purpose?

At present, there are multiple overlapping laws and adjudicating forums dealing with

financial failure and insolvency of companies and individuals in India. The current legal and

institutional framework does not aid lenders in effective and timely recovery or restructuring

of defaulted assets and causes undue strain on the Indian credit system. Recognising that

reforms in the bankruptcy and insolvency regime the Government introduced the Insolvency

and Bankruptcy Code, 2016.

This step opens a new opportunities of practice for professionals in the areas of Corporate

and Individual Insolvency, Corporate Liquidation Process.

Who can be eligible?

An Individual who

1. Is a resident of India

2. Have prescribed qualification as provided 5 the regulations

3. Is of sound mind

4. Should be a fit and proper person

5. Is not a minor

6. Is not an undischarged insolvent or has not applied to be adjudicated as an insolvent

7. Have not convicted any offence with imprisonment and others as prescribed under the

regulations

The Institute of Company Secretaries of India (ICSI) has set up an Insolvency

Professionals Agency (IPA). Insolvency professional has to get registered with ICSI’s

IPA to practice. Graduates interested can approach any of ICSI’s centres across India.

Besides getting information about the examination, they will also be provided with

study material. ICSI is already preparing study material for an examination, which will

launched within one month. As of now members of Institute of Chartered Accountants

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of India (ICAI), Institute of Cost and Work Accountants of India (ICWAI), ICSI and

legal professionals with 15 years of experience in matters relating insolvency and

liquidation can directly get registered IPA.

Though they can start practising immediately, they have to pass an examination to be

conducted by ICSI-IPA. The ICSI will soon open up enrolment to all graduates

interested in insolvency practice. Graduates can become insolvency professionals by

passing the exam.

What are the qualifications and experience required for getting registered?

According to these regulations an Individual shall be eligible for registration as an insolvency

professional, if he –

o has passed the National Insolvency Examination;

o has passed the Limited Insolvency Examination, and has fifteen years of experience in

management, after he received a Bachelor’s degree from a university established or

recognized by law; or

o has passed the Limited Insolvency Examination and has ten years of experience as –

A chartered accountant enrolled as a member of the Institute of Chartered

Accountants of India

A company secretary enrolled as a member of the Institute of Company

Secretaries of India,

A cost accountant enrolled as a member of the Institute of Cost Accountants of

India, or

An advocate enrolled with a Bar Council.

How can a person apply?

An individual enrolled with an insolvency professional agency as a professional member may

make an application to the Board in Form A of the Second Schedule to these Regulations,

along with a non-refundable application fee of ten thousand rupees to the Board.

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If the Board is satisfied, after such inspection or inquiry as it deems necessary that the

applicant is eligible under these Regulations, it may grant a certificate of registration to the

applicant to carry on the activities of an insolvency professional in Form B of the Second

Schedule to these Regulations, within sixty days of receipt of the application, excluding the

time given by the Board for presenting additional documents, information or clarification, or

appearing in person, as the case may be.

The New Insolvency and Bankruptcy Code, 2016 stipulates the maximum time to be taken

to liquidate a company to 180 days with a one-time extension of 90 days, while earlier it

used to take at least four years for the same. With the new law, arises the new

opportunities for youth in the form of insolvency professionals. To cater to the huge

insolvency and liquidation market and produce insolvency professionals, the Institute of

Company Secretaries of India (ICSI) has set up a Insolvency Professionals Agency and

also allotted about H14 crore to train graduates to become insolvency professionals. ICSI’s

IPA has already got permission from the Union Government to conduct examination to

register as insolvency professional from December 31, 2016 onwards.

While the ICSI can start conducting exams from this date onwards, the exact dates will be

announced soon. One can get information about insolvency professional examination from

ICSI’s official website: www.icsi.edu.

What is the role of an insolvency professional?

He/she takes up matters relating to insolvency of individuals, partnerships and liquidation

of companies. He advises and monitors his clients in matters related to insolvency,

bankruptcy and liquidation.

Less than 100 insolvency professionals have been enrolled till now. Enrolment of insolvency

professionals has been started from December 1. Though there isn’t any clear number, ICSI

estimates that more than a lakh cases relating to insolvency, bankruptcy and liquidation are

pending and from now only insolvency professionals can 34 Insolvency and Bankruptcy

34Available at http://www.newindianexpress.com/business/2016/dec/09/icsi-expedites-insolvency-professional-

training-1547103.html

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Board of India (Liquidation Process) Regulations, 2016.35The Insolvency and Bankruptcy

Board of India (IBBI) today notified regulations for liquidation process whereby an

insolvency professional is barred from acting as a liquidator unless that individual is

independent of the corporate debtor concerned.

4. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For

Corporate Persons) Regulations, 2016 36

The overview of the same has been given under Part 3 of this paper.

5. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 201637

While announcing that the regulations for liquidation process have been notified, IBBI on

9th of December, 2016 mentioned that these norms specify the manner and contents of

public announcement, receipt and verification of claims of stakeholders, among other

requirements. The new set of regulations provide for, among other things, details of

activities to be undertaken — from issue of liquidation order under Section 33 of the

Code to dissolution order under Section 54. The salient features of the regulations are:

It prohibits partners and directors of an insolvency professional entity of which the

insolvency professional is a partner or director from representing other stakeholders in

the same liquidation process.

A liquidator should ordinarily sell the assets through auctions and private sale would

be allowed only if the asset is perishable. With respect to fee payable to a liquidator,

the amount would form part of the liquidation cost.

A liquidator shall be paid such fees and in such manner as has been decided by the

committee of creditors during the resolution process. In all other cases, the liquidator

shall be entitled to a fee as a percentage of the amount realised net of other liquidation

costs and of the amount distributed.38

35Available at

http://www.ibbi.gov.in/Law/IBBI%20(Liquidation%20Process)%20Regulations,%202016%2015%20DEC.pd

f 36 Available at http://www.ibbi.gov.in/Law/GAZETTEIP_professional.pdf 37Available at

http://www.ibbi.gov.in/Law/IBBI%20(Liquidation%20Process)%20Regulations,%202016%2015%20DEC.pd

f 38 IBBI notifies norms for liquidation process, Press Trust of India, Business Standard, 15 Dec 2016, New Delhi

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These oblige the liquidator, and also registered valuer(s) and professional(s) assisting

him in liquidation to make disclosures — initial and continuing — about pecuniary or

personal relationship with any of the stakeholders entitled to distribution of assets.

All in all, the following bodies have been created under the IBC39:

Name of the Body Relevant Provisions Objective and Function

Insolvency Regulator - The

Insolvency and Bankruptcy

Board of India (IBBI)

Section 3(1) and Section 188

of IBC

Regulatory oversight over

Insolvency Professional

Agencies, Insolvency

Professionals and

Information Utilities

Adjudicating Authority

(AA) - NCLT for

Companies and LLPs, and

- DRTs for individuals and

partnership firms

Section 5(1) of IBC that

recognizes National

Company Law Tribunal

(NCLT) established under

Section 408 of Companies

Act 2013

Section 79(1) of IBC that

recognizes Debt Recovery

Tribunal (DRT) constituted

under Section 3(1) of the

Recovery of Debts Due to

Banks and Financial

Institutions Act, 1993

(RDDB Act)

Overseeing Resolution

process and Authority for

approval of resolution

process initiated against

Corporate Debtor,

Partnership Firm or

Individual and to adjudicate

on provisions of law and

rules being followed and on

any complaints against

Resolution Professional

(RP)

Insolvency Professional

Agencies (IPA)

Sec 3(20) of IBC and

Registered with IBBI under

Section 201 of IBC.

Register Insolvency

Professional (IPs), Develop

professional standards, code

of ethics for IPs who

become members of IPA.

Institute of Company

39 Neeraj Parmar, Insolvency Resolution Process- A Game Changer, Dec 22, 2016, available at <

https://corporatelaws.taxmann.com/topstories/105010000000013948/insolvency-resolution-process-a-game-

changer.aspx>

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Secretaries of India (ICSI)

has formed ICSI Insolvency

Professional Agency

Institute of Chartered

Accountants of India (ICAI)

has formed The Indian

Institute of Insolvency

professionals of ICAI (IIIPI)

Insolvency Professionals

(IP)

Section 3(19) of IBC,

Section 206 of IBC &

Registered with the Board

under Section 207 of IBC

To conduct entire process of

insolvency resolution

Information Utilities (IU) Section 3(21) of IBC,

Section 209 of IBC &

Registered with the Board

under Section 210 of IBC

To collect, collate,

authenticate and sharing of

information which shall be

used by IPs, Insolvency

Applicants and AA

CONCLUSION

The Code is a landmark piece of legislation providing a major facelift to the existing regime

relating to restructuring and insolvency and bankruptcy in India. It promises to provide the

one big missing piece in the existing jigsaw of laws in the form of establishing a framework

for time–bound resolution for delinquent debts. India now has a bankruptcy and insolvency

framework which is comparable with international standards and while this will go a long

way in bringing an element of certainty and predictability to commercial transactions in the

country and facilitating the ease of doing business, the litmus test for its success will be in

how it is implemented. In particular, various practical, logistical and legal hurdles will need

to be overcome and the coming months will be crucial with a lot resting on the nuts and bolts

of the rules which are now expected to be notified under the Code.