The Insolvency and Bankruptcy Code 2016

CA Rajesh Donkeshwar rajeshd@sbsandco.com

Date:10/5/18

By

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IBC code – over view

Bankruptcy

Liquidation.

Insolvency

Insolvency precedes bankruptcy and liquidation follows bankruptcy. Insolvency warnings: • drop in sales • delay in payments • Increasing reliance on credit Cash flow test: • when cash flow IN s less than

cash flow OUT flow.

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Black’s law dictionary defines the following:

Insolvency

The condition of a person who is insolvent; inability to pay one’s debts; lack of means to pay one’s debts. Such a relative condition of a man’s assets and liabilities that the former, if all made immediately available, would not be sufficient to discharge the latter. Or the condition of a person who is unable to pay his debts as they fall due, or in the usual course of trade and business.

Bankruptcy

The state or condition of one who is a bankrupt; amenability to the bankruptcy laws; the condition of one who has committed an act of bankruptcy, and is liable to be proceeded against by his creditors therefore, or of one whose circumstances are such that he is entitled, on his voluntary application, to take the benefit of the bankruptcy laws.

Definition of Insolvency and Bankruptcy

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Corporates

1956 – Companies Act, 1956

1985 – Sick Industrial Companies (Special Provisions) Act – SICA

1993 – Recovery of Debts Due to Bank and Financial Institutions Act – RDDB

2002 – Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act – SARFAESI

2013 – Companies Act – Chapter XIX & XX

2016 –The Insolvency and Bankruptcy Code – IBC

Individuals

1909 – Presidency Towns Insolvency Act

1920 – Provincial Insolvency Act

1932 – Partnership Act

Various laws for Insolvency and Bankruptcy

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So many Acts -what is the requirement of IBC

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TIME (YEARS) • As per the Ease of Doing business index 2016 released

by World Bank, India continues to fare the worst

amongst the BRICS nation.

• With 136th rank, India is far behind the developed

economies such as UK, US, and others.

• Among several requisites of an effective insolvency

regime, recovery is one of the most important

parameters.

• At 25.7 cents per dollar, India is ahead only of Brazil

amongst BRICS nation.

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Improve ‘Ease of Doing Business’ ranking for India.

Address the stressed assets over Rs 10 lakh crores (~15% of gross advances)

Heightened focus on the resolution of the problem by the Reserve Bank of India (RBI) and the

Supreme Court.

There is a dire need of capital today – not just for stressed companies but for growth in general.

Doing away with a fragmented framework.

Long time for resolution and recovery

The average life of cases recommended for restructuring in 2002 was 7 years and the average life

of cases recommended for winding up to the court was 6.5 years.

Improve the confidence of the International investor in the debt market.

IBC code – Requirement

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Consolidation of various laws –IBC Code

IBC 2016

CA 1956

SICA, 1985

CA 2013

Presidency Towns

Insolvency Act, 1909

Provincial Insolvency Act, 1920

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Mandate of BLRC

Setup by the Department of Economic Affairs, MoF, through office order dated August 22, 2014

Chairman: Mr. T.K. Vishwanathan

Objective of BLRC

To study the framework of Corporate bankruptcy in India

To submit a report to the government for reforming the system

Reports

Interim Report (February 2015)

Served as an approach paper for the proposed new Code

Reforms suggested for improving the insolvency regime in India

Final Report (November 2015)

Volume I: Rationale and Design model of the Code

Volume II: Draft Insolvency and Bankruptcy Code

Journey of IBC code 2016

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Journey of IBC code 2016

21.12.2015- IBC Bill of 2015 -introduced in LS

23.12.2015 - IBC Bill of 2015 - Referred to Joint Committee of both Houses of Parliament

28.04.2016- IBC Bill of 2015 -Joint Committee placed its Report to both Houses of Parliament

05.05.2016- IBC Bill of 2015 -passed by LS

11.05.2016- IBC Bill of 2015 -passed by RS

28.05.2016- IBC, 2016 -Assented by President of India & Notified

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An Act to consolidate and amend laws relating to :

reorganization and insolvency resolution of corporate persons, partnership firms and

individuals -in a time bound manner for

(i) maximization of value of assets of such persons,

(ii) to promote entrepreneurship,

(iii) availability of credit, and

(iv) balance the interests of all the stakeholders including alteration in the

order of priority of payment of Government dues, and

to establish an Insolvency and Bankruptcy Board of India, and for matters connected

therewith or incidental thereto.

IBC code – Preamble

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The IBC proposes a Creditor in Control scenario

Once a default occurs, it is the Committee of Creditors who are empowered to make a decision

Committee of creditors is constituted to comprise all the financial creditors of the enterprise

All decisions of the CoC is by 75% majority

Voting share is based on value of debt owing to the creditor

Creditor in Control

Control and custody of assets continue to vest with debtors even in the event of a debt default.

Promoters continue to stay in control with limited rights to creditors except for secured financial creditors who have the right to repossess assets of the defaulter

Debtor in possession presents the following issues :

Emphasis on secured credit only

SME’s are starved of credit because they are unable to provide collaterals

Debtor in possession is also faught with possibilities of mishandling of assets of the enterprise by promoters

Debtor in Control

shift of control from debtor to creditor

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IBC code – Infrastructure

Insolvency and Bankruptcy Board (IBB)

Insolvency Agencies

Insolvency Professionals (IPs)

Information Utilities (IUs)

NCLT

– Th

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(AA)

Committee of Creditors (CoC)

Insolvent entity

Insolvency Agencies: Indian Institute of Insolvency Professionals of ICAI IIIP-ICAI. ICSI Institute of Insolvency Professionals Insolvency Professional Agency of Institute of Cost Accountants of India

In the lines of CBDT CBIE

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IBB – apex body for promoting transparency & governance in the administration of the IBC; will be involved in setting up the infrastructure and accrediting IPs & IUs.

IUs - Centralised repository of financial and credit information of borrowers; would validate the information and claims of creditors vis-à-vis borrowers, as needed.

IPAs- professional bodies registered by the Board to promote and regulate the insolvency profession; these bodies will enrol Ips

IPs- Licensed private professionals regulated by the Board; will conduct resolution process; to act as Liquidator/bankruptcy trustee; appointed by creditors and override the powers of board of directors.

Adjudicating Authority (AA) - would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/ reject resolution plans, decide in respect of claims or matters of law/ facts thereof.

CoC- consists of financial creditors to who will appoint and approve actions of IPs

IBC code – Infrastructure

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Insolvency Bankruptcy code 2016

Rules Regulations Circulars Notifications Orders

IBC code – structure of the code

Section 239: Rules can be made by Central Govt. on matters stated in Section 239 (a) to (zn) (forty matters). Section 240: Regulations can be made by IBBI (Insolvency and Bankruptcy Board of India) on matters stated in Section 240 ((a) to (zzzc) (eighty one matters).

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Part I

•Short title , extent, definition

•Section 1-3

Part II

•7 chapters

•CIRP,

•Liquidation,

•Fast Track CIR,

•Voluntary Liquidation

•Adjudicating Authority

•Offences and Penalties

•Section 4-77

Part III

•7 chapters

•Applicable to individuals and firms

•Fresh start process

•Bankruptcy order for individuals

•Distribution of estate

•Adjudicating authority

•Offences and penalties

•Section 78-186

Part IV

7 Chapters

Regulation of

IBBI

IPA,

IP

IU,

Inspection and Investigation

Finance and accounts

Section 188-223

Part V

Repeal amendment,

Transitional provisions,

Empowerment 11 schedules

Section : 224-255

IBC code - Five Parts

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Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Insolvency and Bankruptcy Board of India (Salary, Allowances and other Terms and Conditions of Service of

Chairperson and members) Rules, 2016.

IBC Code - Rules

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IBBI (Model Bye- Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016

IBBI (Insolvency Professional Agencies) Regulations, 2016

IBBI(Insolvency Professionals) Regulations, 2016

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

IBBI (Liquidation Process) Régulations, 2016

Insolvency and Bankruptcy Board of India (Engagement of Research Associates and Consultants)

Regulations, 2017

Insolvency and Bankruptcy Board of India (Procedure for Governing Board Meetings) Regulations, 2017

Insolvency and Bankruptcy Board of India (Advisory Committee) Regulations, 2017

Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017

IBBI - Regulations

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Insolvency and Bankruptcy Board of India (Voluntary liquidation Process) Regulations, 2017.

Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017.

Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons)

Regulations, 2017.

IBBI - Regulations

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Applies to whole of India

Except for Part III [J&K excluded] . Act doesn’t not apply to individuals , partnership firms who are residing in J&K.

Persons covered

Companies incorporated under the Companies Act, 2013

Companies governed by any special Act, to the extent the provisions are consistent with that Act;

LLPs

Any other body corporate, incorporated under any Act for the time being in force, as the Central Government may specify

Partnership firms

Individuals

Financial entities - Not covered

IBC code – Applicability

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CIRP – who can initiate

CIRP initiation

By Financial Creditor

Section -7

By operational Creditor

Section -8

By Corporate debtor himself

Section -10

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Who Can Initiate corporate insolvency resolution process.

Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process

A financial creditor either by itself or jointly with other financial creditors may file an application against a corporate debtor before the Adjudicating Authority when a default has occurred.

CIRP – who can initiate

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Corporate debtor: "corporate debtor" means a corporate person who owes a debt to any person;

Financial Creditor: Any person to whom Financial debt is owed and includes a person to whom such debt is legally assigned or transferred.

financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money .

Operational Creditor: Any person to whom operational debt is is owed and includes a person to whom such debt is legally assigned or transferred.

Debt : means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

Default: "default" means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be;

corporate applicant" means—

(a) corporate debtor; or (b) a member or partner of the corporate debtor who is authorized to make

an application for the CIRP under the constitutional document of the corporate debtor; or (c) an individual who is in charge of managing the operations and resources of the corporate debtor; or (d) a person who has the control and supervision over the financial affairs of the corporate debtor;

IBC code – Definitions

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CIRP Process

Application and

Admission

• Application by Financial debtor or operational debtor upon default

• AA admits or rejects with in 14 days

IRP

COC

• AA declares moratorium. Appoints IRP

• IRP makes a public announcement about CIRP

• Management of affairs by IRP

• After receiving claims, IRP constitutes COC and decides voting share

• COC shall with 7 days shall meet appoint IRP as RP or replace another RP with IRP

RP

Resolution

• RP shall conduct all meeting of COC

• RP will manager the affairs of corporate debtor

• Prepare Information memorandum and seek LOI from corporate applicants

• >75% of COC approves, such resolution plan shall be submitted to AA

• If AA satisfies , approves Resolution plan.

• Resolution shall be completed within 2 years

• If not , shall go for liquidation

• If COC approves liquidation and AA satisfies and approves liquidation, then RP shall go for liquidation.

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Time limit for completion of CIRP

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An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

The corporate debtor shall, within a period of ten days of the receipt of the demand notice bring to the notice of the operational creditor— existence of a dispute / suit/ arbitration

After the expiry of the period of ten days if the operational creditor does not receive payment from the corporate debtor or notice of the dispute the operational creditor may file an application

Can propose a IP to act as an IRP.

Adjudicating authority with in 14 days shall Accept or reject the application. In case of any defect shall give notice to rectify with in 7 days of receipt of such notice.

Application by Corporate Creditor –Section 9

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Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating CIRP with the Adjudicating Authority.

the RP proposed to be appointed as an IRP.

The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order—

(a) admit the application, if it is complete; or

(b) reject the application, if it is incomplete:

Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice

The CIRP shall commence from the date of admission of the application.

Application by Corporate Applicant –Section 10

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Moratorium and Public announcement

Moratorium

• AA After admission of application under section 7,9,10

• declare moratorium by order

• Cause public announcement

Appointment of IRP

• Appoint an IRP

• IRP call for submission of claims under section 15

Public announcement

• The public announcement shall be made by the IRP mentioning the last date of submission of claims etc.

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Objective:

Maximizing value of the Entity to Continue Operation

No additional stress on Business

AA shall by order declare moratorium from prohibiting all of the following

institution / continuation /proceedings against the corporate debtor

transferring, encumbering, alienating or disposing of its assets /legal right /beneficial interest therein;

any action to foreclose, recover or enforce any security interest created in respect of its property under the SARFAESI Act, 2002

the recovery of any property by an owner or lessor where such property is occupied

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

The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

the moratorium shall cease to have effect if AA approves the resolution plan /passes an order for liquidation of corporate debtor.

Moratorium – Section 14

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The AA shall appoint an IRP within fourteen days from the insolvency commencement date.

Where the application is made by a financial creditor or the corporate debtor, the IP proposed respectively shall be appointed as the IRP,

Where the application made by an operational creditor and— no proposal for an IRP is made, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an IRP;

The Board shall, within ten days of the receipt of a reference, recommend the name of an insolvency professional to the Adjudicating Authority

The term of the IRP shall not exceed thirty days from date of his appointment.

Appointment and tenure of IRP- Section 16

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From the date of appointment of the IRP

the management of the affairs of the corporate debtor shall vest in the IRP;

the powers of the board of directors or the partners shall stand suspended and be exercised by the IRP.

The financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the IRP

The IRP vested with the management of the corporate debtor shall—

(a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;

(c) have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor;

(d) have the authority to access the books of account, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as may be specified.

Management of affairs by IRP- section 17

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The IRP shall perform the following duties, namely:—

collect all information relating to the assets, finances and operations of the corporate debtor

receive and collate all the claims submitted by creditors to him.

monitor the assets of the corporate debtor and manage its operations until a RP is appointed by the COC;

file information collected with the information utility, if necessary; and

take control and custody of any asset over which the corporate debtor has ownership rights

to perform such other duties as may be specified by the Board.

shall make every endeavor to protect and preserve the value of the property and manage the operations as a going concern

shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a COC

Duties of IRP- section 17

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The COC shall comprise all financial creditors

Related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the COC.

Where two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the COC and their voting share shall be determined accordingly.

Where the terms of the financial debt as part of a consortium arrangement provide for a single trustee or agent to act for all financial creditors, each financial creditor may authorize the trustee or agent to act on his behalf in the COC to the extent of his voting share;

All decisions of the COC shall be taken by a vote of not less than seventy-five per cent of voting share of the financial creditors:

The COC shall have the right to require the RP to furnish any financial information and the RP shall make available any financial information within a period of seven days of such requisition.

Formation of COC – section 21.

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The first meeting of the COC shall be held within seven days of the constitution of the COC.

The COC, may, in the first meeting, by a majority vote of not less than seventy-five per cent. of the voting share of the financial creditors, either resolve to appoint the IRP as a RP or to replace the IRP by another RP.

Where the COC resolves to continue IRP as RP , it shall communicate its decision to the IRP, the corporate debtor and the Adjudicating Authority; or

to replace the IRP, it shall file an application before the Adjudicating Authority for the appointment of the proposed RP

The Adjudicating Authority shall forward the name of RP to the Board for its confirmation and shall make such appointment after confirmation by the Board.

Where the Board does not confirm the name of the proposed RP within ten days of the receipt ,IRP to continue to function as the RP until such time as the Board confirms the appointment of the proposed RP.

Appointment of RP

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RP shall conduct the entire CIRP and manage the operations of the corporate debtor during the CIRP period.

The RP shall exercise powers and perform duties as are vested or conferred on the IRP under this Chapter.

The RP shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan.

The RP shall provide to the resolution applicant access to all relevant information

Function of Resolution Professional –Section 23

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All meetings of the COC shall be conducted by the resolution professional.

The resolution professional shall give notice of each meeting of the committee of creditors

operational creditors, may attend the meetings of committee of creditors, but shall not have any right to vote in such meetings:

Any creditor who is a member of the committee of creditors may appoint an insolvency professional other than the resolution professional to represent such creditor

Each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor.

The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Board.

Meeting of COOC –Section 23

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to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.

take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;

represent and act on behalf of the corporate debtor with third parties, in judicial, quasi-judicial or arbitration proceedings;

raise interim finances subject to the approval of COC

appoint accountants, legal or other professionals in the manner as specified by Board;

maintain an updated list of claims;

convene and attend all meetings of the committee of creditors;

prepare the information memorandum in accordance with section 29;

invite prospective lenders, investors, and any other persons( resolution Applicants) to put forward resolution plans;

present all resolution plans at the meetings of the committee of creditors for their consideration.

Duties of Resolution Professional –Section -25

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A resolution applicant may submit a resolution plan

The RP shall examine each resolution plan received by him to confirm that each resolution plan—

(a) provides for the payment of insolvency resolution process costs

(b) provides for the repayment of the debts of operational creditors

(c) provides for the management of the affairs of the Corporate debtor after approval of the resolution plan; (d) the implementation and supervision of the resolution plan;

The RP shall present to the COC for its approval

The COC may approve a resolution plan by a vote of not less than seventy five per cent. of voting share of the financial creditors.

The resolution applicant may attend the meeting of the COC in which the resolution plan of the applicant is considered:

The RP shall submit the resolution plan as approved by the COC to the Adjudicating Authority.

Resolution plan – Section 30

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If Adjudicating Authority is satisfied that the resolution plan as approved by the COC ,meets the requirements it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

Where the Adjudicating Authority is satisfied that the resolution plan does not confirm to the requirements referred to in sub-section (1), it may, by an order, reject the resolution plan.

After the order of approval under sub-section (1),—

a) the moratorium order passed by the AA under section 14 shall cease to have effect; and

(b) the RP shall forward all records relating to the conduct of the CIRP and the resolution plan to the Board to be recorded on its database.

Approval of Resolution plan –Section 31

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Liquidation – Process.

Trigger Event: -CoC does not agree on RP -CoC decides to liquidate -NCLT rejects plan -Debtors contravenes plan

RP should be appointed as the liquidator by NCLT, unless rejected by CoC. Powers of BoD / Partners vest with liquidators.

Liquidator to identify the assets of the corporate debtor and form Liquidation Estate and hold such estate as fiduciary for theCreditors

Liquidator to verify such claims within such time as may be specified by the Board (IBBI)

Liquidator to either admit or reject claims and communicate within 3 days of such admission

Secured creditors to identify assets offered to them as security against the sums owed to them

Liquidator to collect claims from creditors within 30 days from commencement of liquidation

Liquidator to verify claims of secured creditors and discharge the secured payments

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Liquidation

Excess money realized by secured creditors from the liquidation of secured assets to be accounted and remitted to Liquidator.

Any short recovery of secured debts by a secured creditor to be treated as unsecured debt and repaid in the specified order of priority

After paying off secured creditors, the unsecured debts are to be paid off in specified order of priority

NCLT to pass an order dissolving the Corporate Debtor from the date of such order

Copy of order to be filed with RoC within 7 days from the date of such order.

DISOLVED

If all the assets of the corporate debtor are completely liquidated, the liquidator shall apply for dissolution of corporate debtor before NCLT

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Resolution Vs Liquidation

Factors Resolution Liquidation

Intent Revival Dissolution

Responsibility Going Concern Not necessary

Time Short (270 days max) Long (Ideally 2 years but can go beyond)

Claims No adjudication To be adjudicated

Distribution of Assets That’s not the objective That’s the objective

Hair cut Voluntary acceptance No choice

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Resolution Vs Liquidation Factors Resolution Liquidation

Fee Negotiated Fixed by Regulations, if not fixed by CoC

Initiation Can be initiated by FC, OC or CD Cannot be initiated except voluntary liquidation

Moratorium Mandatorily applicable Limited Applicability

Action under SARFAESI Stayed Creditor can opt to stay out of liquidation

Interim Resolution Professional

Interim Resolution Professional is appointed for 30 days

No interim liquidator

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Resolution Vs Liquidation

Factors Resolution Liquidation

Committee of Creditors CoC oversees resolution process. RP acts in accordance with directions of CoC

Tribunal oversees the liquidation process. Creditors advice not binding on liquidator

Inviting Plan/Bids RP invites resolution applicants for submitting resolution plan

Liquidator invites bids for properties

Appeal Appeal against approval of resolution plan lies on specific grounds

For filing appeal against liquidation order, there is no such restriction

Fast Track Fast track resolution is possible No fast track liquidation

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Assets in the possession of corporate debtor but owned by third parties

Assets in security collateral held by financial service

providers

Personal assets of shareholder or partner of

corporate debtor

Assets of subsidiaries (Indian/ foreign) of the

corporate debtor

Any other assets as may be specified by the IBBI

Exclusions -Section 36(4) Any assets over which the corporate debtor has ownership

rights

Assets that may/ may not be in possession of the

corporate debtor, including encumbered assets Tangible assets (movable/ immovable)

Intangible assets (such as IPs), securities, financial instruments, insurance policies, contractual rights

Assets subject to determination of ownership by Courts

Assets recovered through proceedings for avoidance

of transactions

Asset in respect of which secured creditor has relinquished security interest

Any other property vested in the corporate debtor on

the insolvency commencement date

All realization proceeds of liquidation

Inclusions -Section 36(3)

Liquidation Estate -Section 36

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Distribution of liquidation Asset

Insolvency and resolution cost

Secured Creditors Workmen dues

Wages and unpaid dues to employees

Unsecured creditors

State and Central govt

Preference share holder

Equity SH

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