Theme : Insolvency Profession

WESTERN INDIA REGIONAL COUNCILTHE INSTITUTE OF COST ACCOUNTANTS OF INDIA

(Statutory Body under an Act of Parliament)Rohit Chambers, Janmabhoomi Marg, Fort, Mumbai 400 001.

Tel.: 2204 3406 / 2204 3416 / 2284 1138 • E-mail : [email protected] • Website : www.icmai-wirc.in

Vol. 48 No. 12 Dec. 2020 Pages 36 Price: Rs. 5/- RNI No. 22703/72

Inside Bulletin

EDITORIAL BOARDChief Editor:

CMA Ashishkumar Bhavsar

Editorial Team:CMA Arindam GoswamiCMA Chaitanya MohrirCMA Prashant VazeCMA H. C. ShahCMA (Dr.) Sreehari ChavaCMA Aparna BhondeCMA Vandit Trivedi

ISSN 2456-4982

PageCover Stories • AnalysingprovisionsofLimitationAct,1963withrespect.... CMA Krishna Majethia 5 • DecodingInsolvencyofPersonalGuarantorUnderIBC,2016 CMA Bhavin R. Patel 8 • Conceptsof“GoingConcernValue”v/s“LiquidationValue”.... CMA R. K. Patel 12 • PersonalGuarantorstoCorporateDebtorsunderIBC2016 CMA Satyanarayana V.V. Chebrolu 16 • IBCoverSARFAESIActforrecoveryofdues–..... CMA Malay Hapani 20 • IBCsuccessstory:Resolutionplanshelpcreditors,sickfirmsbothCMA N. Rajaraman 23 • Four(4)SuccessStoriesofIBC(2016)Resolutions CMA (Dr.) Subir Kumar Banerjee 24Other Articles • ImpactofGSTonPowerSector CMA Santosh S. Korade 27 • IndependentDirectors:‘Gatekeepers’anxietyand.... CMA (Dr.) S. K. Gupta 29 • Performanceanalysisofboilerinprocessindustries CMA Dhananjay Kumar Vatsyayan 31 • ImportanceofProperAllocation,Apportionmentand.... CMA Rajesh Kapadia 33GST Corner CMA Vandit Trivedi 34

Theme : Insolvency Profession

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WIRC BULLETIN – DEMCEMBER 2020

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“You reap what you sow”: Christian Proverb

Friends,

Itwasmyardentendeavoraftertakingoverchairmanship,initiatedengagementofCMAsinRegionalDirectorOffice,WesternRegion ofMinistry ofCorporateAffairs&Official Liquidator. It yieldedimmediatebenefitsinwhichtheyundertookandimplementedtheYoungProfessionalSchemeandhave selected 9 CMAs from theWesternRegion and inducted them to theOffice of Registrar ofCompanies(ROC)officeatMumbai&Pune,3morewereshortlistedinthereservePanel.TheOfficeofOfficialLiquidatorareintheprocessofcompletingrecruitmentofCMAs.

We are pleased to state that empanelment of CMAs for conducting Special Audit by GSTCommissionerateIIIisexpectedtobepublishedsoon.

ItwasbroughttomynoticethatemailwasbeingreceivedbypracticingCMAsfromGujratusingthenameofM/sNeogenChemicalsLtdrequestingtosendprofile,experience&quotationforCostAudit.Uponenquiryitwasclarifiedbycompanythattheyhaveneversentsuchemailandpersonmentioneddonotexistonpayrollofthecompany.Accordinglycybercomplaintisfiledwithpoliceagainstanonymousperson(s)aboutthepotentialfraud.IrequestbothmembersinPractice&Industrybewareofsuchthings.

Itsmatterofpride forwholenationwhenMr.RanjitDisale,a teacher fromSolapurreceived theGlobalTeacherAwardwhohaddoneinnovativeexperimentsineducation&teaching.Hisworkwasappreciatedandemulatedbythewholeworld.ThecurrentscenarioofCOVID-19hasgivenusnewdimensionlookintoeducationalsystem.

OurInstitutealsohastakenmajorreforminformofconductingOnlineexamination.IntheDecember2020 examination for Foundation, Intermediate and Final Examination of the Institute will beconductedinanonlineformatgivingoptiontostudentstoundertakeexaminationthroughremoteproctoringandexamineescanattenditeitherthroughhomebasedorcenterbased.Thiswillgivestudentsopportunitytoappearforexaminationinasafeenvironmentandwillalsowillhelpthemtosaveprecioustimelostbycommutingtoexaminationcenters.

Asthecountdownfortheyearendof2020iscomingwearehappytohearthattheworldisintheprocessofgettingtheCOVID-19vaccinewhichwouldbepanaceaforlifeandlivelihoodandhelpustoresurrecttheeconomicdownturn.ThepresentrecoveryisfeltinthezoomingStockMarketIndexwhichisatit’salltimehigh.Weareexpectingtheeconomytorecoverin2021whatwemissedin2020.Wehopeourprofessionwillprosperandbestrongerinthecomingdays.

Wearehappytonotethat theMCAbywayofnotification furtherhadextendedtheduedate forefilingofCostAuditReporttillDecember31st,2020.TheCMAfraternity isrequestedtotakethebenefitandcompletethefillingbeforeduedateinordertoavoidnon-compliance&additionalfees.

WishyouandyourfamilyHappy&ProsperousNewYear2021!

Let’scelebratetogether!

Jai Hind

CMA Harshad S. DeshpandeChairman, ICAI-WIRC.

From the Desk of Chairman . . . . . .-

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What WE could achieve during the 3rd month• WebinarMicrosoftTool:IntroductiontotheMicrosoftTool-7thNovember2020 byCMATriptiPatwa

• WebinaronCostReductionbyLeanSixSigmajointlywithSolapurChapterofICAI-12thNovember,2020byCMAAshishDeshmukh

• WebinaronDe-mystifyingtheRoleofPurchaseFinanceControllerinPurchaseManagementjointlywithBhopalChapteroftheICAI-21stNovember2020byCMAHimanshuDhar,HeadBusinessFinanceSupplyChain,TataMotors

• WebinaronUSElections&itsimpactonIndianEconomyjointlywithGoaChapterofCostAccountant-28thNovember2020byMr.RVenkitachalam,Chairman,BizsolindiaServicesPvtLtd.

• SeriesofWebinaronIndASbyCMARammohanBhave,LimcaRecordHolderonIndAS&AsiapacificRecordholderonValuation,FacultyandConsultant,FCA,FCMA,ACS,LL.B.(G),DipIFR(ACCAUK),CertifiedIndAS-ICAI,Sixsigmagreenbelt

• Webinar on E-invoicing, Govt mandate, regulations & solution jointly with Ahmedabad Chapter of CostAccountants-4thDecember2020byCMAMalavDalwadi,FounderDirector-MicrovistaTechnologiesPvt.Ltd

• VisittoBankofMaharashtraforrepresentationtoincludeCMAinconductingStockAudit

Status # Agenda 21 Completed TotalUpto November 2020 7 21

What all we achieved of #Agenda 21 in the month of November 2020

#Agenda3 Focused Workshops/Trainings for members every month on Online Platform for emergingopportunitiesbothinemploymentaswellaspracticelikeINDAS/Analytics&AI/SAP&ERP/InsolvencyProfessional/ForensicAuditing/Valuationetc.

Series of Webinar on Ind AS#Agenda7 PD/CEPProgrammesinallsmallchaptersperiodicallyjointlybyICAI-WIRC

Conductedprogramjointlywithfollowingchapters

Ahmedabad, Bhopal, Bilaspur, Goa, Nashik, Solapur#Agenda12 SocialMediaCampaigns&DigitalMarketingforVisibility&BrandingofProfession

Activated Facebook Page & Instagram Handle, WIRC App

WIRC WElCOMES NEW ASSOCIATE MEMBERSSr. No. Member No. Name City

1 49314 SadiqueNoorhasanShaikh Surat

2 49321 AbhijeetGopinathChaudhari Shirdi

3 49337 ShivramRajendraGadgil Pune

4 49344 SaurabhRajendrabhaiRathod Ahmedabad

5 49347 SukanyaBalasubramanian Dombivli(East)

6 49354 MilindJayeshkumarJoshi Vadodara

7 49361 HirenShankarlalKatarmal Mandvi

8 49388 BhargavAnilbhaiShah Vadodara

9 49390 PranjalShrivastava Dombivli(East)

10 49392 AmodPradeepDeshpande Nanded

11 49396 RajatSakuja NaviMumbai

12 49399 ManishTulsibhaiPatel Ahmadabad

13 49404 FaiyyajShafikInamdar Pune

14 49405 MaheshKumarPulipati Bilaspur

15 49406 DevendraSinghChouhan Bhilai(C.G.)


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From Desk of Chief Editor . . . . . .-

DearCMAProfessionalColleagues,

Weareinthelastmonthoftheyear2020.2020willberememberfortheCOVID-19pandemic.

Themeofthisbulletinis“InsolvencyProfession”.Wehavereceivedgoodresponsefrommembers.Wehavereceived7articlesonthethemes.Articlesonthethemearepublishedascoverstory.Wearealsopublishingarticlesonotherprofessionalmatters. Iam thankful toallauthors forprovidingarticlesandmakingWIRCbulletinaKnowledgePack.

Wehave also start publishing interview ofCMAswhohad reacheda respectable position likeCFO,VP,Directoretc.ObjectiveofthesametosharetheirexperiencewithCMAfraternity.ItwillinspireyoungCMAsformakingtheirfuturebrighter.Inthisbulletin,wehavenotpublishedinterviewofCFOduetosomeunavoidablecircumstances.IrequestourproudCMAswhoreachathighestpositionduringtheircareertosharetheirexperiencewithCMAfraternity.Placereachussothatwecanconductinterview.

Womenempowermentisalsooneoftheneedsofthehour.WehavealsodecidedtopublishatleastonearticlefromladyCMA.WearegettingregulararticlesfromladyCMA’s.

Wehavestarted“GSTCorner”inthebulletin.GSTcornerwillcontainmajorupdaterelatedtoGSTduring pastmonth anddue dates ofGST for nextmonth. I am thankful toCMAVanditTriveditotakeresponsibilityforcompilingtheupdates.

IurgethememberstoshareknowledgebywayofarticletomakeWIRCBulletinsKnowledgePack.

WewelcomesuggestionsandfeedbackforbettermentofWIRCBulletin.

StaySafe

HappyReading!!!

WithWardRegards

CMA Ashish BhavsarChairman, Editorial Board


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Analysing provisions of limitation Act, 1963 with respect to Insolvency and Bankruptcy Code, 2016

CMA Krishna Majethia

Mob.:9409038769•E-mail:[email protected]

“Law Helps the Vigilant and not the Negligent.”

IntroductionTheInsolvency and Bankruptcy Code, 2016 (IBC) is thebankruptcylawofIndiawhichseekstoconsolidatetheexistingframeworkbycreatingasinglelawforinsolvencyand bankruptcy. The bankruptcy code is a one stopsolution for resolving insolvencies which previously wasa long process that did not offer an economically viablearrangement. The code aims to protect the interests ofsmallinvestorsandmaketheprocessofdoingbusinesslesscumbersome.

Thelimitation Act 1963,isanacttoallowactionsinsomecaseswheretheinjuredpartyhadnotdiscoveredtheinjuryuntilafterthestandarddateofexpiration.Theactallowedaninjuredpartytobringaclaimoutsidethenormalstatuteoflimitationsperiodifhecouldshowthathewasnotawareoftheinjurieshimselfuntilafterthelimitationperiodhadexpiredandifhegainedthepermissionofthecourt.

Introduction of limitation Act in Insolvency and Bankruptcy Code Section 238A was inserted by the Insolvency andBankruptcyCode (SecondAmendment)Act, 2018, (w.e.f.06.06.2018)ontherecommendationoftheInsolvencyLawsCommittee’sReportpublishedinMarch2018.Priortothesection238A,theissueofapplicabilityoftheLimitationActtoproceedingsundertheIBCwasInitiallydealtwithbytheNCLAT (National Company Law Appellate Tribunal) inthematterofSpeculum Plast Private Limited V. PTC Techno Private Limited and Neelkanth Township and Construction Pvt. Ltd. V. Urban Infrastructure Trustees Ltd wherein NCLAT held that the LimitationActwillnotbeapplicabletoproceedingsundertheIBC.

Reason for the introduction the Section 238A into the CodeThe Report of the Insolvency Laws Committee wouldindicate that ithasapplied itsmind to judgmentsof theNCLT(NationalCompanyLawTribunal)andtheNCLAT(NationalCompanyLawAppellateTribunal). It hasalsoapplied itsmindtotheaspectthatthe lawisacompleteCodeandthefactthattheintentionofsuchaCodecouldnothavebeentogiveanewleaseoflifetodebtswhicharetime-barred.

“Ignorance of Law is not an excuse.”

APPlICATION OF lIMITATION ACT, 1963The question of applicability of theLimitationAct, 1963(“LimitationAct”) to theCodehasbeendeliberatedupon

in several judgments of theNCLT and theNCLAT.Theexistingjurisprudenceonthissubjectindicatesthatifalawisacompletecode,thenanexpressornecessaryexclusionoftheLimitationActshouldberespected(Ravula Subba Rao and another V. The Commissioner of Income Tax, Madras, (1956) S.C.R. 577).Inlightoftheconfusioninthis regard, theCommittee deliberated on the issue andunanimouslyagreedthattheintentoftheCodecouldnothave been to give a new lease of life to debtswhich aretime-barred. It is settled law thatwhenadebt isbarredby time, the right to a remedy is time-barred (Punjab National Bank and others V. Surendra Prasad Sinha AIR 1992 SC 1815).Further,debtsinwindingupproceedings cannot be time-barred, (Interactive Media and Communication Solution Private Limited v Go Airlines, 199 (2013) DLT267) andthereappearstobenorationaletoexcludetheextensionofthisprincipleoflawtotheCode.

Further, non-application of the law on limitation createsthefollowingproblems:

First, it re-opens the right of financial and operationalcreditorsholding time-barreddebtsunder theLimitationAct to file for CIRP (Corporate Insolvency ResolutionProcess),thetriggerforwhichisthedefaultondebtaboveINRone lakh.Thepurposeof the lawof limitation is“to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches” (Rajinder Singh v. Santa Singh, AIR 1973 SC 2537). Though the Code is not a debt recovery law,thetriggerbeing ‘defaultinpaymentofdebt’renderstheexclusionofthelawoflimitationcounter-intuitive.

Second, it re-opens the right of claimants (pursuant tothe issuance of public notice) to file time-barred claimswith the IRP/RP,whichmaypotentiallybeapart of theresolutionplan.Sucharesolutionplanrestructuringtime-barreddebtsandclaimsmaynotbeincompliancewiththeexistinglawsforthetimebeinginforceaspersection30(4)oftheCode.

The intent was not to package the Code as a freshopportunity for creditors and claimants who did notexercise their remedy under existing laws within theprescribedlimitationperiod,theCommitteethoughtitfitto insertaspecificsectionapplyingtheLimitationActtotheCode.TherelevantentryundertheLimitationActmaybe ona case to casebasis. Itwas furthernoted that theLimitationActmaynotapplytoapplicationsofcorporateapplicants, as theseare initiatedby theapplicant for its


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debtsforthepurposeofCIRPandarenotintheformofacreditor’sremedy.

“Limitation bars remedy but does not end right.”Some important provisions of the limitation Act related to IBC

DefinitionsPeriod of limitationClause(j)ofSection2oftheLimitationAct,1963definedthat“period of limitation”meanstheperiodoflimitationprescribed for any suit, appeal, or application by theSchedule, and “prescribed period” means the period oflimitation computed in accordancewith the provisions ofthisAct.

A. Suit Clause(l)ofSection2oftheLimitationAct,1963defined

that“suit”doesnotincludeanappealoranapplication. 1. Expiry of a prescribed period when the court is

closed As per Section 4 of the Limitation Act, where the

prescribed period for any suit, appeal, or applicationexpires on a day when the court is closed, the suit,appeal or applicationmaybe instituted, preferred, ormade on the day when the court re-opens. Further,elaboratethroughanexplanationthatacourtshallbedeemedtobeclosedonanydaywithinthemeaningofthis section if during any part of its normalworkinghoursitremainsclosedonthatday.

2. Section 5 of the limitation Act, 1963 Section 5 of the Limitation Act, 1963 dealt with the

extensionoftheprescribedperiodinacertaincase.Itstatesthatiftheappellantortheapplicantsatisfiesthecourtthathehadasufficientcausefornotpreferringtheappeal ormaking the applicationwithin such period,then such an application or appeal shall be admittedaftertheprescribedperiod.

3. Extension of prescribed period in certain cases. Anyappealoranyapplication,otherthananapplication

underanyoftheprovisionsofOrderXXIoftheCodeofCivilProcedure,1908,(5of1908),maybeadmittedaftertheprescribedperiodiftheappellantortheapplicantsatisfiesthecourtthathehadsufficientcausefornotpreferringtheappealormakingtheapplicationwithinsuchperiod.

1. Period of limitation prescribed under Article 137of Part II- PART II – ‘Other Applications’ of ThirdDivision-‘Applications’ofLimitationAct,1963

Article Descriptionofapplication

Periodoflimitation

Timefromwhichperiodbeginstorun

137. Anyotherapplicationforwhichnoperiodoflimitationisprovidedelsewhere in thisdivision.

Three years

When the right toapplyaccrues.

Analysis of Section 238A of the Code1. The legal text of the Section (238A-limitation)-

B.K. Educational Services (P) Ltd. V. Parag Gupta & Associates:

The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

Hon’ble Supreme Court in the matter of B.K. Educational Services (P) Ltd. V. Parag Gupta & Associates held that the Limitation Act, 1963 isapplicabletoapplicationsfiledunderSections7and9oftheCodefromtheinceptionoftheCode,Article137oftheLimitationActgetsattracted.“The right to sue”,therefore,accrueswhenadefaultoccurs.Ifthedefaulthas occurredover three years prior to the date of filing of the application, the application would bebarred under Article 137 of the Limitation Act, saveand except in those cases where, in the facts of thecase,Section5oftheLimitationActmaybeappliedtocondonethedelayinfilingsuchapplication.

2. The Section is applicable retrospective i.e. since the inception of the Code- B.K. Educational Services (P) Ltd. V. Parag Gupta & Associates

Hon’ble Supreme Court in the matter of B.K. Educational Services (P) Ltd. V. Parag Gupta & Associates clarified that the Limitation Act isapplicabletoapplicationsfiledunderSections7and9oftheCodefromtheinceptionoftheCode.

3. The limitation period starts from the date of default-GauravHargovindbhaiDavevs.AssetReconstructionCompany(India)Ltd.

The Supreme Court in Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Ltd.held that theproceedingsunder section7 of theIBCare “an application”andnot “suits”; thus theywould fall within the residuary article 137 of theLimitationActandtherighttoapplywillarisefromthedateofdefault.ItwasagainreiteratedbytheSupremeCourtinJignesh Shah vs. Union of Indiathattheright toapplyunder the IBCwillbe fromthedateofdefaultandnotfromthedateofenactmentoftheIBCi.e.01.12.2016.

4. An Acknowledgement in writing within the expiration of the prescribed period will mark a new commencement period for limitation (Section 18- limitation Act,1963) C. Budhraja V. Chairman, Orissa Mining Corpn. ltd., (2008) 2 SCC 444: (2008) 1 SCC (Civ):

(1)Where,beforetheexpirationoftheprescribedperiodfora suit orapplication in respect of anyproperty orright, an acknowledgement of liability in respect ofsuchpropertyorrighthasbeenmadeinwritingsignedby the party against whom such property or right is


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claimed, or by any person through whom he deriveshis title or liability, a fresh period of limitation shallbecomputedfromthetimewhentheacknowledgementwassosigned.

(2)Wherethewritingcontainingtheacknowledgementisundated,oralevidencemaybegivenofthetimewhenitwassigned;butsubjecttotheprovisionsoftheIndianEvidence Act, 1872 (1 of 1872), oral evidence or itscontentsshallnotbereceived

IfaCorporateDebtorwritestotheCreditorrequestinghimtosendhisclaimforverificationandpayment, itamounts toanacknowledgment.But if theCorporateDebtor merely says, without admitting liability, itwouldliketoexaminetheclaimortheaccounts,itmaynotamounttoacknowledgment.

Alimitationcanbeextendedbasedonacknowledgementin writing, provided the said acknowledgement is made before the expiration of the prescribed period of limitation for a suit or application in respect of any property or right. Anacknowledgementofliabilityinrespectofsuchpropertyorrighthasbeenmadeinwriting,signedbytheparty,against whom such property or right is claimed, orby any person through whom he derives his title orliability, if the acknowledgement is made before theexpiryoftheperiodoflimitation,thenafreshperiodoflimitationshallbecomputed,fromthetime,whentheacknowledgementwassosigned.

5. Date of default- Babulal Vardharji Gurjar Vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. :

ItwillbethedateofdeclarationofaccountasNPAandsuchdateofdefaultwouldnotshiftevenifsubsequentpayment made by the Corporate Debtor – JagdishPrasad Sarada Vs. Allahabad Bank – NCLAT NewDelhi

NCLAT considering theBabulal Vardharji Gurjar Vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. and other relevant judgments held that theperiod of three years from the date of theAccount ofCorporateDebtorisclassifiedasNPAthenitbecomesimpermissibletoproceedwithSection7Applicationasobserved in para 11 of the Judgment. The extensionfortheperiodofLimitationcanonlybedonebywayofapplicationofSection5ofTheLimitationAct,1963ifanycaseforthecondonationofdelayismadeout.

Period of limitation- Jignesh Shah & Anr Vs.Union of India & Anr and Babulal Vardhaji Gurjar Vs. JM Financial Asset Reconstruction Co. Ltd.

Thebaroflimitationofthreeyearswouldbeattractedfromthedatewhenthedefaultoccursandnotfromthefilingofwindinguppetition-Jignesh Shah & Anr Vs. Union of India & Anr – Supreme Court.

Propertyhavingmortgaged,theclaimisnotbarredbylimitationas theperiodof limitation is12yearswith

regard to mortgaged property-Babulal Vardhaji Gurjar Vs. JM Financial Asset Reconstruction Co. Ltd.-NCLAT

ConclusionTheauthorhastriedtothroughsomelightonLimitationActwith respect to Insolvency andBankruptcyCode, bybrieflyintroducingboththeactsandfurtherquotingsomecase laws. All the case laws and points sighted were tohighlighthowLimitationActwasinsertedinIBCtomakeanattempttowardsachievingthepurposeformakingIBCwhichmentions consolidating the existing framework bycreatingasinglelawforIBC.

PIMPRI-CHINCHWAD-AKURDIWebinar on “TCS U/S 206C (1H) & Faceless Assessment Scheme”

Chapter conducted webinar on ‘TCS U/S 206C (1H) &FacelessAssessmentScheme’on1stNovember,2020throughGoogleDigitalplatform.CMASantoshKorade,DyManager,Maharashtra State Electricity Distribution Company Ltd.,Punewasthespeaker.

Webinar on ‘Business Valuation’

Chapter conducted webinar on ‘Business Valuation’ on 7thNovember,2020throughGoogleDigitalplatform.CMAVinodShete,CFOServicewasthespeaker.

Webinar on ‘Ethical Finance: What it is and why it is growing?’

Chapterconductedwebinaron‘EthicalFinance:Whatitisandwhy it isgrowing?’on21stNovember,2020throughGoogleDigital platform. CMA Dr. S K Gupta, CEO of InsolvencyProfessional Agency of the Institute of Cost Accountants ofIndiawasthespeaker.

Webinar on “Faceless Assessment Scheme”

Chapterconductedwebinaron‘FacelessAssessmentScheme’on 22nd November, 2020 through Google Digital platform.CMA Santosh Korade, Dy Manager, Maharashtra StateElectricityDistributionCompanyLtd.,Pune.wasthespeaker.

PUNE Webinar on “Taxation of Trusts and Recent Amendments under Income Tax Act 1961 in respect of Trusts”

Chapter arranged Webinar for members on 7th November2020onthetopic“TaxationofTrustsandRecentAmendmentsunder Income Tax Act 1961 in respect of Trusts”. CMARahulPore(PracticingCostAccountant)wasspeakerforthewebinar.

Webinar on “Role of Independent Director in Corporate Governance during COVID-19”

Chapter arrangedWebinar formembers on 28thNovember2020onthetopic“RoleofIndependentDirectorinCorporateGovernanceduringCOVID-19”.SpeakerforthesessionwasCMASanvediRane.

CHAPTER NEWS


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Decoding Insolvency of Personal Guarantor Under IBC, 2016

CMA Bhavin R. Patel


A. IntroductionOn 15th November, 2019, a notification was issued bythe Ministry of Corporate Affairs which has renderedthe insolvency and bankruptcy proceedings againstpersonalguarantorstobegovernedbytheInsolvencyandBankruptcyCode,2016(“IBC”)andtheregulationsinthisregard came into force as on 01st December, 2019. Forthe purpose of understanding the concept of insolvencyand bankruptcy against personal guarantors, it becomesessentialtounderstandtheconceptofguarantee.Section126 of the Indian Contracts Act, 1872 deals with theconceptofcontractofguarantee.Acontractofguaranteeisanagreementwhereintherearethreepartieswhichinteraliaincludethedebtor,creditorandtheguarantor.Intheeventoffailureonthepartofthedebtortorepaythedebtamountowedtothecreditor,theguarantorshallrepaythedebtamounttothecreditoronbehalfofthedebtorandintheeventoffailuretorepaysuchdebtamount,thecreditorreservestherighttoinitiateinsolvencyproceedingsagainstthepersonalguarantor.

B. Who is A Personal Guarantor under IBC?Section5(22)oftheIBCdefinesapersonalguarantorasanindividualwhoisthesuretyinacontractofguaranteetothecorporatedebtor.

PursuanttoRule3 (e)of theInsolvencyandBankruptcy(Application to Adjudicating Authority for InsolvencyResolutionProcess forPersonalGuarantors toCorporateDebtors)Rules,2019(“Rules”),aguarantormeansadebtorwhoisapersonalguarantortoacorporatedebtorinrespectofwhomguaranteehasbeeninvokedbythecreditorandremainsunpaidinfullorinpart.

ThisarticlecoverstheinsolvencyproceduretobeinitiatedagainstapersonalguarantorunderIBC.

C. Initiation of insolvency proceedings against personal guarantors:PursuanttoSection60oftheIBC,theNationalCompanyLawTribunal (“NCLT”)has the territorial jurisdiction inrelationtotheinsolvencyresolutionforcorporatepersonsincludingthecorporatedebtorsandpersonalguarantors.

Theinsolvencyandbankruptcyprocedurecanbeinitiatedagainstapersonalguarantor,eitherbyacreditororthrougharesolutionprofessionalpursuanttoSection95oftheIBCbyfilinganapplicationbeforetheNCLT.Followingarethestepswhichputforththeprocessofinitiationofinsolvencyagainstapersonalguarantor:

1. Serving a Demand Notice: Pursuant to Rule 7 (1)of theRules, a demandnotice shall be served by thecreditor on the personal guarantor demanding thepaymentofamountindefaultandsuchdemandnoticeshall be served on the personal guarantor in FormB.Within14(fourteen)daysfromthedateofreceiptofthedemandnotice,thepersonalguarantorshallpaythedebtamounttothecreditor,failingwhichthecreditorreserves the right to file an insolvency applicationbeforetheNCLT.

2. Filing of Application:Uponfailuretomakepaymentof thedebtamount, thecreditorreserves theright tofile an application before the NCLT. The applicationshallbefiledinFormCandafeeof2000/-(RupeesTwoThousandonly)shallbepaidbythecreditorinlieuoffilingoftheapplicationbeforetheNCLT.Thefollowingdocumentsshallbeattachedto theapplication intheformofannexures:

• List of documents attached to this application inordertoprovetheexistenceofdebtandtheamountindefault.

• CopyofdemandnoticeservedontheguarantorinFormB.

• Copy of the Income Tax Returns with detailedcomputation of the income of the guarantor, orthefirmasthecasemaybe,forthepreviousthreeyears,ifavailable.

• Copyofpersonalguaranteecontract.

• Copyofauthorization,whereverrequiredundertheform.

• Proofthattheapplicationfeehasbeenpaid.

• Documentsevidencingthedebtandthedefaultinrelationtothedebt,asmayhavebeenprovidedbytheguarantoratanypointintime,ifavailable.

• Documents evidencing the assets, liabilities,incomeandanyotherrelevantinformationasmayhavebeenprovidedbytheguarantoratanypointintime,ifavailable.

• Documentaryevidenceofallinformationsoughtineachentryforeachpartoftheform.

A copy of the application shall be served upon to thepersonalguarantorandthecorporatedebtor.

2. Interim Moratorium: Oncetheapplicationhasbeenfiled with the NCLT, an interim moratorium shall


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commence from the date of filing of the applicationwith respect to all thedebtswhichwould ceaseupontheadmissionoftheapplication.Duringsuchinterimmoratoriumperiod,any legalactionwhich ispendinginrelationtothedebtshallbestayedandthecreditorsshallnotinitiateanylegalactioninrelationtothedebt.

4. Application filed through a Resolution Professional : In the event the application underSection 95 has been filed through a resolutionprofessional,theNCLTshalldirecttheInsolvencyandBankruptcyBoard of India (“Board”),within 7(seven)days from the date of the application to ensure thatno such disciplinary action is pending against theresolution professional. Within the aforesaid periodof7(seven)days,theBoardshallcommunicatetotheNCLTinwritingeitherconfirmingtheappointmentoftheresolutionprofessionalorrejectingtheappointmentof the resolution professional. When a resolutionprofessionalisrejected,nominatinganotherresolutionprofessionalfortheinsolvencyresolutionprocess.

In the event the application is filed by the creditorhimselfandnotthroughtheresolutionprofessional,theNCLTshalldirect theBoardwithin7 (seven)days tonominatearesolutionprofessionalfromthedateoffilingofsuchapplication.UponthereceiptofsuchdirectionfromtheNCLT,theBoardshallnominatearesolutionprofessionalwithin10 (ten)days.TheNCLTshallbypassing an order appoint a resolution professional asrecommendedornominatedbytheBoard.Acopyoftheapplication shall be provided by the applicant to theresolutionprofessionalwithin3 (three)days fromthedateofappointmentoftheresolutionprofessional.

5. Replacement of a Resolution Professional:Intheevent,thecreditorisoftheopinionthattheresolutionprofessionalshallbereplaced,thecreditorshallapplyto the NCLT for the replacement of the resolutionprofessional.Upon receipt of the application for suchreplacement,theNCLTshallmakethereferencetotheBoardandwithin10(ten)daysfromthedateofreceiptof such application from the NCLT, the Board shallrecommendanametotheNCLTanditshallbeensuredby the Board that no disciplinary proceedings shallbe pending against such resolution professional. ThecreditormayapplytotheNCLTforthereplacementoftheresolutionprofessional,where ithasbeendecidedinthemeetingofthecreditorstoreplacetheresolutionprofessionalwithanewresolutionprofessionalforthesole purpose of the implementation of a repaymentplan. When such application for replacement isadmittedbytheNCLT,theNCLTdirectstheBoardtoconfirmofnodisciplinaryactionagainsttheresolutionprofessionalandtheBoardshallberequiredtosendacommunicationwithin10(ten)daysofthedirectionoftheNCLTeitherconfirmingorrejectingandnominatinga new resolution professional. The new and replacedresolutionprofessionalissaidtobeappointeduponthe

passingofanorderinthisregardbytheNCLT.TheoldresolutionprofessionalshallbedirectedbytheNCLTtosharealltheinformationwiththereplacedresolutionprofessional and shall be directed to fully cooperatewiththereplacedresolutionprofessional.

6. Report to be submitted by the Resolution Professional: The application shall be examined bythe resolution professional within 10 (ten) days fromthe date of his/her appointment and the resolutionprofessionalshallsubmitareporttotheNCLTwhereintheresolutionprofessionalshallrecommendapprovalorrejectionoftheapplication.Thedebtorshallberequiredbytheresolutionprofessionaltoprovetherepaymentofthedebt claimedasunpaidby the creditorbywayoffurnishingevidenceshowcasingtheelectronictransferofunpaidamountfromthebankaccountofthedebtor;evidenceshowcasingtheencashmentofthechequeandasignedacknowledgementfromthecreditoracceptingtheduesfromthedebtor.Further,informationmaybesought by the resolution professional and the personfrom whom such further information may be soughtshallbefurnishedbyhim/herwithin7(seven)daysfromthedateofreceiptoftherequestmadebytheresolutionprofessional.Thereasonsfortheacceptanceorrejectionof the application shall be recorded by the resolutionprofessionalinthereport.Acopyofthereportshallbegivenbytheresolutionprofessionaltothecreditor.

7. Application - accepted / rejected: Within 14(fourteen) days from the date of submission of thereportbytheresolutionprofessionaltheNCLTpassesanordereitheracceptingor rejecting theapplication.Uponacceptance,theNCLTshallupontherequestoftheresolutionprofessionalissueinstructionspertainingto the negotiations and for arriving at a repaymentplan.TheNCLTshallprovideacopyoftheorderalongwith the report of the resolutionprofessionaland theapplication to thecreditorwithin7 (seven)days fromthedateofpassingoftheorder.IntheeventofrejectionoftheapplicationbytheNCLTpursuanttothereportoftheresolutionprofessional,thecreditorshallbeentitledtofileforabankruptcyorder.

8. Moratorium upon admission:Upontheapplicationbeing admitted, a moratorium for a period of 180(one-hundred and eighty) days shall commence withrespecttothedebtandshallceasetohaveeffectuponthe completionof theperiodof180 (one-hundredandeighty) days beginning from the date of admission oronthedateonwhichtheNCLTpassesanorderwithrespecttotherepaymentplan.

9. Claims from creditors: The NCLT shall issue apublic notice within 7 (seven) days inviting claimsfromthecreditors.Alltheclaimsofthecreditorsshallbereceivedwithin21(twenty-one)daysfromthedateof such issue of the public notice. The notice shallmentionindetailtheorderadmittingtheapplication,particulars of the resolution professional with whom


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theclaimsaretoberegisteredandthelastdatewithrespect to the submissionof suchclaims.SuchnoticeshallbepublishedinEnglishlanguageandvernacularnewspaper,intheareainwhichtheguarantorresides.ThenoticeshallalsobeaffixedinthepremisesoftheNCLTandshallbeplacedontheNCLTwebsite.Thecreditors shall send their claims to the resolutionprofessionalalongwiththeirpersonalinformation.

10.list of creditors:Alistofcreditorsshallbepreparedbytheresolutionprofessionalwithin30(thirty)days.

11.Repayment Plan: A repayment plan shall beformulated by the debtor in consultation with theresolutionprofessionalwhichshallcontainaproposaltothecreditorsforrestructuringofthedebtsoraffairs.The repayment plan may authorize the resolutionprofessionaltocarryonthebusinessofthedebtorandthe repaymentplan shall contain the justification forthe preparation of such plan and the reasons as towhythesameshallbeconsideredbythecreditors.Therepaymentplanshallcontainthetermoftherepaymentplan,itsimplementationschedule,sourcesoffundsthatwillbeusedtopaytheresolutioncosts,budgetfortheduration, finance required for implementation of theplan,detailsoftheexcludedassetsandexcludeddebtsoftheguarantorandthetermsforthedischargeoftheguarantor.

Contents of repayment plan. (1) The repayment planshallprovidethefollowing-(a) the term of therepayment plan and its implementation schedule,including the amounts to be repaid and dates ofrepaymenttocreditors;

(b) the source of funds that will be used to payresolutionprocesscostsandthatsuchpaymentshallbemadeinpriorityoveranycreditor;

(c) aminimumbudgetforthedurationoftherepaymentplan,tocoverthereasonableexpensesoftheguarantorand members of his immediate family to the extenttheyaredependentonhim,providedthatatleasttenpercentoftherealisableincomeoftheguarantorshallbeutilisedforrepaymentofdebts;

(d) financing required for implementation of therepaymentplan;

(e) if theguarantorhasanybusiness,themanner inwhichitisproposedtobeconductedduringthecourseof the repaymentplan, and the role of the resolutionprofessional;

(f) themannerinwhichfundsheldforthepurposesoftherepaymentplan,investedorotherwisedealtwith,pendingrepaymenttocreditors;

(g) the functionswhich are to be undertaken by theresolution professional, including supervision andimplementationoftherepaymentplan;

(h) variation of onerous terms of a contract ortransactioninvolvingtheguarantor;

(i) thedetailsofexcludedassetsandexcludeddebtsoftheguarantor;and

(j) terms and conditions for the discharge of theguarantor.(2)Therepaymentplanmayprovideforthefollowing-(a)transferorsaleofallorpartoftheassetsof the guarantor alongwith themodeandmanner ofsuch sale; (b) administrationordisposal of any fundsoftheguarantor;(c)satisfactionormodificationofanysecurityinterest;(d)reductionintheamountpayabletocreditors;(e)curingorwaivingofanybreachofadebtduefromtheguarantor;

(f) modificationinthetermsofrepaymentofanydebtduefromtheguarantor;

(g) partoftheincomeoftheguarantortobeusedfortherepaymentof thedebt,andthemannerofcalculatingtheincomeoftheguarantor;

(h) themannerinwhichfundsheldforthepurposeofrepaymenttocreditors,andnotsorepaidattheendoftherepaymentplan,aretobedealtwith;and

(i) such other matters as may be required by thecreditors.

12.Report on the repayment plan:Within21(twenty-one)daysfromthedateofsubmissionofclaimsofthecreditors, the resolutionprofessional shall submit therepaymentplantotheNCLTalongwithareport.Thereport submitted by the resolution professional shallcontainthattherepaymentplanisincompliancewiththe law, has a reasonable prospect of being approvedandimplementedandmayrecommendthesummoningofameetingofthecreditors.Thedateandtimeofthemeetingofthecreditorsshallbeclearlyspecifiedinthereport.Themeetingshallbeconductedonadatewhichshallbenotlessthan14(fourteen)daysandnotmorethan28(twenty-eight)daysfromthedateofsubmissionof the reportwith theNCLT. The convenience of thecreditors shall be considered for thepurpose offixingthedate,timeandvenueofthemeeting.

13.Meeting of creditors:Anoticeshallbeissuedbytheresolution professional calling for the meeting of thecreditors which shall be at least 14 (fourteen) daysbefore the date of themeetingfixed.Thenotice shallbe sent to the list of creditors, which the resolutionprofessionalprepared.ThenoticeshallclearlymentiontheaddressoftheNCLTandshallbeaccompaniedbythecopyoftherepaymentplan,copyofthestatementofaffairs of the creditors, the report of the resolutionprofessionalandproxyformsforthepurposeofvoting.Inthemeeting,thecreditorsmaydecideastowhetherthe repayment plan shall be approved, modified orrejected. In the event, modifications are suggested,thesameshallbemadebytheresolutionprofessionalin therepaymentplan.Creditorsshallhavetherightto vote at every creditorsmeetingwith regard to therepayment plan as per the voting share assigned toeachcreditorandthevotingshareshallbedetermined


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by the resolution professional for each creditor.However, a creditor shall not have the right to vote,intheeventthecreditorisnotacreditorinthelistofcreditors prepared by the resolution professional andisassociatedwith thedebtor.Pursuant toRegulation11 of the Insolvency and Bankruptcy Board of India(InsolvencyResolutionProcessforPersonalGuarantorsofCorporateDebtors)Regulations,2019(“Regulations”),a meeting of the creditors shall be convened by theresolutionprofessionalbycreditorshaving33%ofthevoting share. The voting share shall be in proportionto the debt owed to the creditor. Any decision of thecreditorsshallrequiretheapprovalofmorethan50%voting share of the creditors who voted. Pursuant toRegulation 13 of the Regulations, a meeting of thecreditors shall be quorate if creditors representing33%of thevoting sharearepresent either inperson,throughproxyorthroughvideoconferencing,providedthatthequorumhasbeenmodifiedbythecreditorsinthemeetingofthecreditors.Thesecuredcreditorsshallbeentitledtoparticipateinthemeetingofthecreditorsand the voting in the creditors meeting with respectto the repayment plan forfeits his right to enforcethesecurityduringtheperiodof therepaymentplan.However,intheevent,thesecuredcreditorisnotwillingto forfeit his security, an affidavit shall be submittedto the resolution professional by the secured creditoratacreditorsmeetingstatingthattherighttovoteisbeing exercised by the secured creditor in lieu of theunsecuredportionofthedebtandtheestimatedvalueoftheunsecuredpartofthedebt.Uponsubmissionofsuchaffidavit,thesecuredandunsecuredportionofthedebtsshallbetreatedasseparatedebts.

14.Approval of Repayment Plan: The repaymentplanorsuchmodificationtotherepaymentplanshallbe approved by themajority of 3/4th in value of thecreditorsinpersonorthroughproxyandthevotingonthemeetingofthecreditors.

15.Meeting of creditors report:Areportofthemeetingof creditors shall be prepared by the resolutionprofessional.Thereportshallincludeastowhethertherepayment planhas been approved or rejected and ifapproved, the list ofmodifications if anymade to therepaymentplan,theresolutionsproposedatthemeetingand the decision in regard to the resolutions, list ofcreditorswhowerepresentandtheirvotingrecordsandsuchinformationwhichtheresolutionprofessionalmaydeemappropriateshallbeinformedtotheNCLT.

16.Filing of repayment plan and order of the NClT: The resolution professional shall file the repaymentplanwiththeNCLTandtheNCLTmaypassanordereither approving or rejecting the repayment plan onthebasisof thereportof themeetingof thecreditorspreparedandsubmittedbytheresolutionprofessional.In the event ameeting of creditors is not summonedbytheresolutionprofessional,theNCLTmaypassan

orderbasedonthereportoftheresolutionprofessional.UpontheapprovaloftherepaymentplanbytheNCLT,it shall be binding on the creditors and the debtor.Uponrejection,thecreditorsshallbeentitledtofileabankruptcyapplication.AcopyoftheorderpassedbytheNCLTshallbeprovidedtotheBoardforthepurposeofrecordingoftheentry.

17.Completion of the repayment plan:Uponcompletionoftherepaymentplan,theresolutionprofessionalshallwithin14(fourteen)daysforwardtothepersonsboundby the repayment plan a notice that the repaymentplan has been completely implemented and the copyof a report showcasing all the receipts and paymentsmadepursuanttotherepaymentplanandtheextentof implementation of such plan as compared to therepayment plan approved at the creditor’s meeting.A time extension may be forsaken by the resolutionprofessional of not more then 7 (seven) days in thisregardfromtheNCLT.

18.Premature end of repayment plan:Ifarepaymentplanisnotimplementedfullywithregardtothepersonsboundbyitwithinthetimeperiodmentionedinit,itisconsidered tohavebeencome toanendprematurely.In such an event, the resolution professional shallsubmit a report to theNCLT stating the reasons forthe premature end of the repayment plan, receiptsand payments made in pursuance of the repaymentplanandthecreditordetailswhoseclaimsarenotfullysatisfied.Thecreditorswhoseclaimsarenotsatisfiedreservetherighttofileforbankruptcy.

19.Discharge order:Basedontherepaymentplan, theresolutionprofessional shall apply to theNCLT for adischarge orderwith respect to the debts as detailedout intherepaymentplanandtheNCLTmaypassadischargeorder.Therepaymentplanmayeitherprovideforanearlydischargeordischargeon the completionof implementation of the repaymentplan.SuchorderpassedbytheNCLTshallbeforwardedbytheBoardforthepurposeofrecordingofentries.Thedischargeorderdoesnotdischargeanyperson fromany liabilitywithrespecttohisdebt.

D. ConclusionOn the occasions when a corporate debtor takes a loan,whereinaguaranteeofrepaymentisprovidedbyapersonalguarantor, the creditor through the aforementionedprocedure laid down in this article reserves the right toseek a remedy against the personal guarantor, in theeventofdefault of loanby thedebtor.The regulationsofthe personal guarantor insolvency and bankruptcy hasprovidedthecreditorswithasecondpocketfromwhichthepaymentsinlieuofthedebtcanberecoveredwhichhavenotbeenpaidbythedebtorhimself.


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Concepts of “Going Concern Value” v/s “liquidation Value” (with reference to IBC 2016)

CMA R. K. Patel


PreambleValuationofassetsisoneofthecorefeaturesofthecorporateinsolvency resolution process under the Insolvency andBankruptcyCode,2016(Code).However,therearevariousclarifications needed in relation to provisions pertainingtovaluationofassetsasprovidedundertheCodeandtheRegulations.Oneoftheprominentcontroversiesinrelationto valuation of assets is the lack of clarity surroundinginterpretation of the terms ‘Going Concern Value’ and‘liquidationvalue’undertheCode.Thetwomainroutesthatan insolventbusinesscantakeare (a) to restructure its debts tomanageable levels andcontinuetradingasagoingconcern,or(b)toliquidatethebusiness,sellingoffbusinessorphysicalassetspiecemeal,andreturningtheproceedstocreditors.Valuinganinsolventbusinessthereforeinvolvesidentifyingalternativescenariosforthebusiness,andidentifyingthevalue of the business overall in each scenario. For thepurpose of restructuring an insolvent entity, each partywillthentypicallyidentifythevalueitwillachieveineachscenario,andenternegotiationsoverthefuturestrategyofthebusiness.

Introduction The term “liquidationvalue” is definedunderRegulation35(1) of the Insolvency and Bankruptcy Board of India(InsolvencyResolutionforCorporatePersons)Regulations,2016(CIRPRegulations)as‘theestimatedrealizablevalueof assets of the corporate debtor if the corporate debtorwere to be liquidated on the insolvency commencementdate’.Regulation35(2)oftheCIRPRegulationsprescribesthemethodfordeterminingliquidationvalue.Fromabarereadingof thesaiddefinition, itemerges that liquidationvalue is the notional realizable value that assets of thecorporatedebtorwouldfetch,shouldthecorporatedebtorbeliquidatedontheinsolvencycommencementdate(andnotthevaluethatmaybeactuallyrealizedunderaresolutionplan). However, the ambiguity arises with respect todetermining“estimatedrealizablevalue”inthecontextoftheinsolvencyresolutionprocessasopposedtovaluationinanout-and-outliquidationofassets.Typically,avaluationreportoftencomprisesmorethanonesalevalueforanassetbasedonvaluationunderdifferentscenarios.Forinstance,a valuation report may provide for a fair market value,realizablevalueanddistressedsalevalueofanasset.Themultitudeofjargonandterminologyinvaluationonlyaddstothealreadydifficulttaskthatregisteredvaluers(appointedundertheCode)andtheinsolvencyprofessionaldischarginghis/herfunctionasaninterimresolutionprofessional(IRP)/resolutionprofessional(RP)faceindeterminingcharacter

of asset value that should be considered as liquidationvalueforpurposesofRegulation35readwithRegulations36and38oftheCIRPRegulations.Thedeterminationof‘liquidationvalue’ofassetsisanextremelycrucialexercise,keepinginviewitspracticalimplicationontheresolutionplan,claimsofcreditorsandprospectiveinvestors.

ObjectiveOneofthemostimportantpiecesofinformationthatformspartoftheInformationMemorandum1isliquidationvalue.ThepurposeofhavingtoprovideforaliquidationvalueaspartoftheInformationMemorandumduringthecorporateinsolvencyresolutionprocessisinturntoenablecompliancewithprovisionsofRegulation38oftheCIRPRegulationswhichrequiresidentification(andsubsequentlypayment)ofspecificsourcesoffundsforpaymentofduesofoperationalcreditorsanddissentingfinancial creditorsat liquidationvalue in priority to recovery of dues of other financialcreditors who approve the resolution plan. In the eventa resolution plan is reached and approved, operationalcreditors and dissenting financial creditors will have tobepaidat this “notional” liquidationvalue inRegulation35(1)sincethecorporatedebtorwouldnotactuallygointoliquidation.

liquidation value of the corporate debtor and duty of RP/IRP and Registered ValuersOneofthekeytasksofanIRP/RPistoappointtworegisteredvaluers(asperRegulation27oftheCIRPRegulations),whointurnwilldetermineliquidationvalue(asperRegulation35 of theCIRPRegulations) of the corporate debtor andsubmit the same to the IRP/RP. The registered valuersare required to provide an estimate of liquidation value“computed in accordance with internationally acceptedvaluation standards, after physical verification of theinventory,andfixedassetsofthecorporatedebtor.

It is incumbent upon the IRP/RP to observe if there isa significant difference between the two estimates ofliquidationvaluesubmittedtohim/her,inwhichcase,theIRP/RP may appoint a third registered valuer who willsubmitanestimateoftheliquidationvaluecomputedinthesamefashionasthetwovaluersfirstappointed.Thereafter,theIRP/RPwillhavetoconsideraverageofthetwoclosestestimatesasliquidationvalue.

Pursuanttothis, theIRP/RPisrequiredtonotethesaidliquidation value of the corporate debtor as well as theliquidationvalueduetoanoperationalcreditor(arrivedasperthewaterfallmechanismundersection53oftheCode)in the Information Memorandum prepared in terms ofRegulation36oftheCIRPRegulations.


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Thus, it is to be noted that the duty of determination ofliquidationvalueisbasedontheregisteredvaluerandtheduty of the IRP/RP in this regard is summarized hereinbelow:a) Appointment of two registered valuers (as per

Regulation27);b) Observinganydiscrepancyinthetwovaluessubmitted

by the registered valuers and subject thereto,appointingathirdvaluertoprovideanotherestimateoftheliquidationvalue,sothattheestimateofthetwoclosestvaluesmaybetakenastheliquidationvalue(asperRegulation35(2));

c) Incorporatingthesaidliquidationvalue(asprovidedbytheregisteredvaluers)intheInformationMemorandum(asperRegulation36).

d) Ensuringthateveryresolutionplan identifiessourcesoffunds,andprovidesformakingpaymentofclaimsofoperationalcreditorsatliquidationvalueinprioritytofinancial creditors andwithin30days of its approval(Regulation38(1)(b)oftheCIRPRegulations);and

e) Ensuringthateveryresolutionplan identifiessourcesof funds tomakepaymentof claimsof thedissentingfinancial creditors at liquidation value in priority torecovery by other financial creditors who approvethe resolution plan (Regulation 38(1)(c) of the CIRPRegulations).

liquidation value as per IVSTheInternationalValuationStandardsdefine liquidationvalueasvaluearisingin“…asituationwhereagroupofassetsemployedtogetherinabusinessareofferedforsaleseparately,usuallyfollowingaclosureofthebusiness.”

Assuch, liquidationvaluesforparticularassetsaremostcloselyassociatedtotheconceptofmarketvalue–thevaluethatanassetcouldachieveifsold.However,marketvaluesmay themselves be assessed by reference to the benefitsthatthesoldassetsmaybringtothenewowner(thestreamofprofitsarisingfromahotel,forexample),thatisbytheincomeapproach,and/orbythecosttocreateasimilarasset(thecosttobuildasimilarhotel,forexample),thatisbythecostapproach.Expensesassociatedwithliquidation(salesfee,commissions,taxes,otherclosingcosts,administrativecostsduringclose-outandlossofvalueininventory)mustalso be estimated and deducted from the various assetvalues.

liquidation value v/s Realizable valueThe term ‘Liquidation value’ as generally understood isthevalueofanassetwhichisarrivedatwhenaseller isunder extreme compulsion to sell. As mentioned earlier,Regulation35oftheCIRPRegulations,whichdefinestheterm‘liquidationvalue’specifiesthatthesaidvalueistobeanotionalvalue,whichshouldbearrivedatconsideringahypotheticalscenarioofliquidationoftheCorporateDebtoronthedateofinsolvencycommencement.Inotherwords,it will be an estimated value calculated by registeredvaluers if theCorporateDebtorwere to be liquidated ontheinsolvencycommencementdate.Thisissimilartothe

concept of “vertical comparison”underChapter11 of theUnitedStatedBankruptcyCode,andanaccepteddefinitionforarrivingatliquidationvalueunderEnglishinsolvencylaws.

It is observed that the definition of the term ‘liquidationvalue’usestheterm“realizablevalue”,therebyindicatingthat liquidation value is the notional realizable valuearrivedatthetimeofliquidationoftheCorporateDebtor,intermsofprovisionsoftheCode.Inviewoftheaforesaid,it may be pertinent to consider the procedure to realizeassets during liquidation of the Corporate Debtor, asmoreparticularlyprovidedunderChapterIIIoftheCode,readwith the InsolvencyandBankruptcyBoardof India(Liquidation Process) Regulations, 2016 (LiquidationProcessRegulations).Inthisregard,Regulations32,33andSchedule1oftheLiquidationProcessRegulations,providethata liquidatorappointedaspertheCode,mayselltheassetseitheronastand-alonebasisorselltheassetsinaslumpsale/asetofassetscollectively/theassetsinparcels.However,itisstatedthatthemodeofsaleshallordinarilybethroughauction,unless,

1) theassetisperishable;or

2) likely to deteriorate in value significantly if not soldimmediately;or

3) is fetchingabetterprice than the reservedpriceofafailedauction;or

4) has the permission of the Adjudicating Authority, inwhichcasetheliquidatorshallselltheassetsbymeansofaprivatesale.

The Schedule I to the Liquidation Process Regulations,underpart (1) item (4), specifies that for thepurposesofauction,thereservepricewouldbethevalueoftheassetdeterminedbytheregisteredvaluersintermsofRegulation35.

Thus, it becomes evident that identification of an assetplays a crucial role in determining liquidation value. Inordinary circumstances, the liquidationvalue of anassetislikelytobethenotionalreservepriceatwhichsuchanassetwouldbesoldinanauction.However,ifthenatureof the asset is perishable or such that its value maydepreciate significantly if not sold immediately, then thevalueofsuchanassetmaybedeterminedonthebasisofaprivatesale.Itmaybestatedhereinthatthemethodologytobeadoptedfordeterminingtheaforesaidvaluesistobeasperinternationallyacceptedvaluationstandards,afterphysicalverificationofassetsoftheCorporateDebtor.

Tangible and intangible assetsLiquidated assets typically include: cash and workingcapitalthatcanreadilyberealisedforcash,suchasaccountsreceivablesandinventory;lessliquidtangibleassets,suchas plant and equipment; identifiable intangible assetssuchaspatentsorbrands;aswellasbusinessintangiblessuchasgoodwillintheeventthatanpartofthebusinessbeingliquidatedissoldasagoingconcern.Theliquidationvalueofalltypesofassetmaybemore,orless,thantheiraccountingvalue.


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Working capital items, such as inventory and accountsreceivable,aregenerallytheeasiesttoliquidate.However,discountstothetypicalvaluesofsuchitemsarelikely,astheremaybeadditionalcostsofrecoveryofreceivablesinabusinessthatcustomersnolongerseeasakeysupplier.Moreover,outside theproductioncontextof the insolventfirmitmaybehardertoconvertwork-in-progressitemsintofinishedproduct.Similarly,itmaybehardtosellinventoryoffinishedgoodstofinalcustomersinthepossibleabsenceoftheinsolventfirm’snormalsalesandmarketingteam.

In accounting terms, tangible assets such as plant andequipmentaregenerallydepreciatedovertheirusefullives,withthenotableexceptionofland,whichisnotsubjecttoanyadjustmentinvalue.Identifiableintangibleassetsareclassifiedseparatelyandforaccountingpurposesamortizedover the period for which they have perceived enduringvalue.

“Goodwillinprinciplemeasuresthedifferencebetweenthevalue of a business’s net assets and its overall value. Inaccountingterms,goodwillisrecognisedonlyinthecontextofanacquisition.Generally,

in an insolvency situation, any goodwill in the insolventcompany may have been severely impaired. Under theInternational Financial Reporting Standards (IFRS),thevalueofgoodwill isassessedeachyeartoensureanyimpairmentisrecordedinthefinancialstatementsoftheentity.Any impairment is usually derived froma reviewofthecashflowsattributabletothebusinesstowhichthegoodwillisattached.However,inafast-movinginsolvencysituation, the value of goodwill may have changed sincethelastvaluationandthevalueascribedtogoodwillonabalancesheetvaluemaybemisleading.

Otherassetsareoftennotfrequentlyrevaluedoncompany’sbalancesheets,andcanbesubjecttoparticularaccountingtreatment.Forexample,realestatemayberecordedonthebalancesheetatitshistoriccostoronthebasisofanoldrevaluationratherthanitsactualmarketvalue,whichmaybehigherorlowerthanitshistoriccost.Ontheotherhand,business goodwill must be stated at reduced, impaired,valuesincertaincircumstances,butthevalueofgoodwillonabalancesheetcannotbeincreasedintheabsenceofatransactionintheassociatedbusiness.

Traditionally, in liquidation the value ofmost intangibleassets tends toward zero and the value of all tangibleassetsreflectsthecircumstanceofliquidation.Theconceptof“Valueinuse”hererelatestothevalueoftherelevantasset deployed within the insolvent business. Intangibleassets such as patents and brands may have generatedsignificantvaluefortheinsolventbusinessbutbeoflimiteduse to third parties. Goodwill, the ultimate intangibleasset, is essentially ameasure of residual value and thefactofinsolvencytypicallyindicatesthatthevalueofanypreviously-existinggoodwillishighlyimpaired.

Forced vs. orderly liquidation If a business is able to perform an orderly liquidation,without undue time pressure forcing it to enter into firesalearrangements,itwilltypicallyachieveabetterresult

foritsstakeholdersthaninaforcedliquidation.Anorderlyliquidationwillbeaparticularlyappropriateresponseforacompanythatisabletopayitscurrentdebtsbutperceiveslong-termliabilitiesinexcessofitsassetsanddoesnotseegoingconcernscenariosthataremorefavourablethananorderlyliquidation.

Ifanorderlyliquidationischosen,andisexpectedtounfoldover a significant period of time, the resulting valuationof the business may require discounting the resultingliquidationcashflowsataWeightedAverageCostofCapital(WACC),asinaDiscountedCashFlow(DCF)analysis.

Forced liquidations, by contrast, can lead to significantvaluedestruction.Theabsenceoftimetomarketassetstopotentialbuyerscanleadtolowrealisationonassetvalues,andtheinabilitytoredeployorwinddownaworkforcecaninsomecountriestriggerveryhighstatutoryredundancypayments.

Going concern in liquidation Under a liquidation premise, elements of going concerncan still be found. While the total company may not beviableasagoingconcern,theremayexistdivisionsofthebusiness or operations thatwould bemore valuable as agoingconcernthantheliquidationofitsindividualassets.Forexample,aconsultingbusinessrecentlyfounditselfina liquidation scenario, unable to meet its debtpaymentsand,duetothelossofkeystaff,withlimitedprospectsoftrading sufficientlyprofitably in the long run to justifyarestructuring.Certainpartsofthisbusinessweretradingprofitably,however,andinordertomaximisetherecoveryofitscreditorstheconsultingcompanysoldthoseteamsasgoingconcernstocompetitors.

Other Issues in liquidationTwofurtherissuesariseinthecontextofliquidations.First,liquidationsmayinvolvesignificantprofessionalfeesthatneedtobefactoredintothevaluesidentified.Second,ifitisdeterminedthatthecompanyismorevaluableinliquidationabsent special factors,sometimes considerations whichhavewidersocial,economicandpoliticalconsequencescanbringaboutgovernmentinterventiontoensuretheentityremainsagoingconcern.

Going concern vs liquidation valueIn general, the stakeholders in a business, solvent orinsolvent,canatanypointdecidetoliquidatethebusinessand invest the proceeds in other ventures. Stakeholderswillcontinuetooperateabusinessasagoingconcernonlyif the returns so generated exceed the returns that thestakeholders would expect from investing the proceedsof liquidation. Insolvent businesses differ from solventbusinessesinthattheneedforadecisiononthefutureofthebusinessasagoing concernor in liquidation ismoreorlessurgent,whilemanysolventbusinessescontinueforyearswithoutcloselyexaminingthisquestion.

Forexample,considerabusinessowningandoperatingahotelthatismakingprofitsofRs.1croreayearandhasnodebts.Thisbusinessissolvent.Ifthehotelcouldbesoldfor


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Rs.5crores,andreturnsonequitycapitalare15%,thentheownersofthehotelwillprefertooperatethehotelasagoingconcerngeneratingRs.1CroreayearthantosellthehotelandinvesttheproceedselsewherewiththeexpectedreturnofRs.75lakhsayear(15%ofRs.5crores).However,ifthehotelcouldbesoldforRs.20crores,theownerswouldprefertosell(liquidate)andgenerateaRs.3croresannualreturn(15%ofRs.20crores),thantorealisetheRs.1croreayearprofitsinthehotel.Inthiswayitmaybeprofitabletoliquidateasolventbusiness.

Now consider the samehotel business,with debts ofRs.15croresataborrowingrateof10%,givingrisetointerestpaymentsofRs.1.5croreayear.Thisbusinessisinsolvent,in that it cannot meet its liabilities including interestpaymentsastheybecomeduefromitsRs.1croreayearpre-interestprofits.IfthehotelcanbesoldforRs.5crores,andthecreditorsforcealiquidation,theywillrecoverRs.5 crores of their loanandwrite off the remainingRs. 10croresoftheRs.15croresdebts.If,however,thecreditorsacceptawrite-downoftheirdebtstoRs.9crores,thehotelwillbeabletomaketheassociatedinterestpaymentsofRs.90lakhsayearandcontinueasagoingconcernwithafter-interestprofitsofRs.10lakhsayear,andthecreditorswillsufferaRs.6croreswrite-down,smaller thantheRs.10croreswrite-downintheliquidationscenario.Inthisway,itmaybebeneficialforaninsolventbusinesstocontinueasagoingconcern.IfthehotelcouldbesoldforRs.20crores,then(asabove)boththeownersandthecreditorswouldbebetteroffliquidatingthebusiness.Theaboveexampleillustratestheimportancetoeachgroupof stakeholdersof identifyingboth thegoing concernandliquidationvaluesofaninsolventbusinessindecidingtheappropriatecourseofactionforthatbusiness.

In both the solvency and the insolvency scenarios abovethe business wasmore valuable to its stakeholders as agoing concernwhen the value of the hotel assetwasRs.5crores,andmorevaluable liquidatedwhenthevalueofthehotelassetwasRs.20crores.Thisillustratesthatitistheprofitabilityofanenterpriserelativetotheliquidationvalue of its assets, and not the current capital structureoftheenterprise,thatdetermineswhethertheenterpriseismorevaluableasagoing concernor in liquidation.Assuch, theproblemofvaluing insolventbusinesses relatesinthefirstinstancetoidentifyingitsgoingconcernvalueincomparisontoitsliquidationvalue,bothassessedbeforerepaymentofdebts.Thismeasureofvalueistheso-called“EnterpriseValue”ofabusiness,thevalueofthedebtplustheequityinthebusiness.

SummaryAs with other valuations, valuation in an insolvencyscenariorequiresbeingclearonthenatureandpurposeoftherequiredvaluation.Forwhatpurposeisthevaluationbeingperformed?Forwhoseuse,andwhatinparticulararetheyinterestedin?Whatinformationisbeingusedasthebasisofthevaluation,andisthatinformationstatedfreeofbias?Whatcross-checkscanthevaluerperformtogaincomfort in the results of his or her valuation? Are thereimportant asymmetries in outcome for relevant parties

if things turn out slightly better, or slightlyworse, thanexpected?

Turningtotheimpactonvaluemaximisationininsolvencyscenarios,theselectionofavaluationbasis(goingconcernorliquidation)doesnotdirectlyaffectvalueininsolvencyscenarios. However, the selection of a strategy of goingconcern or liquidation may have a significant effect onthe recovery of stakeholders in the insolvent business.Although each insolvent business is insolvent in its ownuniqueway,ingeneralaliquidationstrategyismorelikelytobesaferbutleadtolowerrecovery,whileagoingconcernstrategywilloftenberiskierbutgeneratehigherreturns–thebusinesscouldtradeitswayoutofdifficulty,orcouldincurfurtherlossesfollowedbyalaterliquidation.

Valuation is a quintessential part of the corporateinsolvencyresolutionprocess,andaproperunderstandingof liquidation value is crucial to protect the interest ofstakeholders and to formulate a compliant resolutionplan. Any errors in determining liquidation value inthe corporate insolvency resolution process can have farreachingconsequences,includingtheeffectofunderminingofreversinganyresolutionplanthatmaybeapprovedonthebasisofanincorrectliquidationvalue.Infact,acaseofallegedlyincorrectdeterminationofliquidationvalueundertheCIRPofHotelGaudavanPrivateLimitedhasalreadyresultedinacriminalcomplaintagainstofficersofaprivatesecuritization company and the resolution professional.It is therefore crucial for insolvency professionals, andmoreimportantly,forregisteredvaluers,tohaveacorrectunderstandingofthedefinitionofliquidationvalueundertheCodereadwithCIRPRegulations.Whileoneexpectstheunderstandingofvaluersandacustomizationofvaluationmethodstomoreaccuratelydetermineliquidationvalueinthecorporateinsolvencyresolutionprocess,anyclarificationonliquidationvalueundertheCIRPRegulationsandtheCodebytheBoardortheAdjudicatingAuthoritywouldbeawelcomemovethatwouldhelpbringaboutconsensusonthismuchdebatedissue.

References1. InsolvencyandBankruptcyCode,2016

2. CorporateInsolvencyResolutionProcessRegulations

3. InternationalValuationStandards,2017

DisclaimerThis article is intended for general information purposes only and is not intended to provide, and should not be used in lieu of, professional advice. The author assumes no liability for readers’ use of the information herein and readers are encouraged to seek professional assistance and other references with regard to specific matters. Any conclusions or opinions are based on the individual facts and circumstances of a particular matter and therefore may not apply in other matters. All opinions expressed in these articles are those of the authors and do not necessarily reflect the views/ recommendations of the author.


16

Personal Guarantors to Corporate Debtors under IBC 2016

CMA Satyanarayana Veera Venkata Chebrolu Insolvency Professional


The provisions relating to insolvency and bankruptcyrelatingtoPersonalGuarantors(PGs)toCorporateDebtor(CD)cameintoforcefromDecember,2019.TilltheendofJune,2020atotalof7applicationsfiledinvariousNCLTs.As per IBBI quarterly newsletter for the quarter endedJune, 2020, out of these 7 applications, one applicationwasfiledbyPGundersection94ofthecodeinAmaravatibench of NCLT and remaining 6 applications filed bycreditorsundersection95,twoinAhmedabadNCLTtwoinNCLTNewDelhi,oneeachinNCLTBengalureandNCLTMumbai.

Application for initiation: ApplicationforinitiationofinsolvencyproceedingagainstthePersonalGuarantorcanbefiledeither

1. by personal guarantor himself or through resolutionprofessionalonhisbehalfundersection94 in formAalongwithanapplicationfeeofRs.2000/-aspertherule6(1)oftheInsolvencyandBankruptcy(ApplicationtoAdjudicatingAuthority(AA)forInsolvencyResolutionfor PersonalGuarantors to CorporateDebtors) rules,2019or

2. by creditor himself or jointly with other creditors orthroughresolutionprofessionalundersection95ofthecodetoAdjudicatingAuthorityinFormCalongwithanapplicationfeeofRs.2000/-withdetailsanddocumentsasstatedundersection95sub-section4.

Onfilingtheapplicationaninterimmoratoriumcommencesinrelationtoallthedebtsandshallceasetohaveeffectonthedateofadmissionoftheapplication..Withdrawalofapplication:TheAAmaypermitwithdrawaloftheapplicationsubmittedeitherundersection94or95asthecasemaybe(a)beforeitisadmittedattherequestbytheapplicant(b)afteritisadmittedattherequestoftheapplicant, ifninetypercentof thecreditorsagreetosuchwithdrawal.Anapplicationforwithdrawaltobemade inFormDaspertherules.

Appointment of Resolution Professional:Incaseiftheapplicationeitherundersection94or95filedthrougha InsolvencyProfessionalonbehalf ofguarantoror creditor, the same IPwill be appointed as ResolutionProfessional ifhis/hername is in thepanelof insolvencyprofessionalsprovidedtotheNCLTbytheIBBI.

Otherwise the Adjudicating Authority i.e. NCLT willappoint a Resolution Professional from the panel of IPsprovidedbyIBBIandinsuchacase,theIPshallprovideawrittenconsentinFormAunderregulation4(2)totheAAandwithin3daysIPhastofileformIP-1withtheIBBI.

TheresolutionprofessionalappointedbytheAdjudicatingAuthorityshallbeprovidedacopyoftheapplicationfiledundersection94or95bytheapplicantorcreditorasthecasemaybe,within3daysofappointmentasperrule9.

To be eligible to act as resolution professional, the IPshouldnothaveactedorisnotactingasinterimresolutionprofessional,resolutionprofessionalorliquidatorinrespectofthecorporatedebtor.

Replacement of resolution professional: Intheeventifthedebtororcreditorisoftheopinionthatthe resolution professional appointed under section 97 isrequired to be replaced they may apply to AdjudicatingAuthorityforthereplacement.

SimilarlycreditorsmayapplytotheAAforthereplacementof the resolution professional, where it has been decidedin the meeting of the creditors to replace the resolutionprofessional with a new resolution professional forimplementationofrepaymentplan.

In such cases the AA shall pass an order appointing anew resolution professional from the panel of insolvencyprofessionals provided by the Board. The AA may givedirectiontotheresolutionprofessionalreplacedtoshareallthe informationwith thenewresolutionprofessionalandtocooperatewith thenewresolutionprofessional insuchmattersasmayberequired

Role of Resolution Professional and reports to be submitted to AA:The Resolution Professional has a key role to play inthe Personal Guarantor to Corporate Debtor InsolvencyResolution Process. Resolution Professional to follow theprovisions contained in section 78, 79, 94 to 120 of IBC2016 besides Personal Guarantors to corporate Debtorsregulations,2019

1. Submission of report by resolution professional (section 99):The resolution professional within 10 days of hisappointmentshallexaminetheapplicationsubmittedundersection94orsection95asthecasemaybeandtosubmita report to theAdjudicatingAuthority recommending forapprovalorrejectionoftheapplication.

TheobjectiveofthereportistoreducethetimetakenbytheAdjudicatingAuthority inexaminationoftheapplication.Noformatisprescribedunderthecodeinviewofthereasonthataset formatwillprove tobe restrictive fordifferentscenariosthatmaycomeupinindividualinsolvencycases.Resolution professional in his reportmay furnish details


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withregardtothefollowingontheeligibilityofthedebtorincaseiftheapplicationissubmittedbythedebtorundersection94.

i) The Applicant/debtor whether has committed defaultin repayment of his debts or not which is the firstrequirement to be satisfied under section 94(1) foradmission.

ii) Allthedebtsmentionedintheapplicationwhetherarenotexcludeddebtsasrequiredundersection94(3)

iii)Whethertheapplicant /debtor isnotanundischargedbankrupt, not undergoing a fresh start process,not undergoing an insolvency resolution process orbankruptcy process, which is another requirementundersection94(4)

iv) Whether any application under Chapter III of IBC,2016hasbeenadmittedinrespectofApplicant/Debtorduringtheperiodoftwelvemonthsprecedingthedateofsubmissionofapplicationasrequiredundersection94(5)

v) Whether the application has been filed in prescribed‘Form A’ along with requisite fee of Rs.2000/- thussatisfyingtherequirementundersection94(6)

Incaseiftheapplicationissubmittedbyacreditorundersection95resolutionprofessionalinhisreportmayfurnishhisobservationsonthefollowing:

i) Thedetailsofdebtsowedbythedebtorwhetherhavebeenfurnishedintheapplication

ii) Thedetailswithregardtothefailureofthedebtortopaythedebtwithinaperiodof14daysoftheserviceofthenoticeofdemandinFormBwhetherfurnishedintheapplicationornot.

iii)Evidence of such default or non-payment of debtwhetherfurnishedintheapplicationornot.

Furthertheresolutionprofessionalmayrequirethedebtortoprovetherepaymentofthedebtclaimedasunpaidbythecreditorbyfurnishing

i) evidence of electronic transfer of the unpaid amountfromthebankaccountofthedebtor,

ii) evidenceofencashmentofchequeissuedbythedebtoror

iii) signedreceiptbythecreditoracceptingreceiptofdues.

Forthepurposeofexaminingtheapplication,theRPmayseeksuchfurtherinformationorexplanationinconnectionwith the application as may be required from debtor orcreditor or any other person. The person from whominformationissoughtshallfurnishwithin7daysofreceiptofrequest.

If resolution professional feels that the debtor is eligibleundersection80forafreshstartprocessheshallsubmitareportrecommendingthattheapplicationbythedebtorunder section94maybe treatedasanapplicationundersection80bytheAdjudicatingAuthority.

After examination of the application, the resolutionprofessionalmayrecommendacceptanceorrejectionofthe

application in his report. The reasons for the acceptanceor rejection of the application shall be recorded by theresolutionprofessionalinhisreport.

TheresolutionprofessionalmayinhisreportrequesttheAAforissuanceofinstructionsforthepurposeofconductingnegotiationsbetweenthedebtorandcreditorsforarrivingattherepaymentplan.

Theresolutionprofessionalshallgiveacopyofthereportaspersection99(7)tothedebtororcreditorasthecasemaybe.

Moratorium:TheAAshallwithin14daysfromthedateofsubmittingthereportbytheresolutionprofessionalundersection99passanorderundersection100eitheradmittingorrejectingtheapplicationreferredtoundersection94or95asthecasemaybe.

Incase if theapplication isadmittedamoratoriumshallcommence in relation to all the debts and shall cease tohaveeffectattheendoftheperiodof180daysfromthedateof admission of application or on thedate theAApassesanorderontherepaymentplanwhicheverisearlier.Thedebtorshallnottransfer,alienateorencumberanyoftheassetsorlegalrightduringthismoratorium

2. Paper announcement inviting claims under section 102 :WhenoncetheapplicationisadmittedbyAAundersection100 of the IBC, 2016, the Insolvency Resolution Processagainstthedebtorwillcommence.Aspersection102,theAAshallissueapublicnoticewithin7daysofpassingorderinvitingclaimsfromcreditorswithin21daysfromthedateofissueoftheorder.InsteadofAdjudicatingAuthorityissuingpublicnoticebyitselftheitmaydirecttheRPtocauseapublicnoticeonitsbehalf.Thenoticeshall include(i)Detailsoftheorderadmittingtheapplication(ii)particularsoftheresolutionprofessionalwithwhomtheclaimsaretoberegistered(iii)thelastdateforsubmissionofclaims.Thenoticeshallbepublishedinat leastoneEnglishandone vernacular newspaper which is in circulation in thestatewherethedebtorresides.TwocopiesofthenoticetobefurnishedtotheAdjudicatingAuthorityforaffixingone,intheirpremisesandtheotherfor placing by the registry in their website. Creditors tosubmitclaimwithproof inFormBasperregulation7(1)beforethelastdatementionedinthepublicnotice.

3. Preparation of list of creditors under section 104:The Resolution Professional in exercise of the powersconferredundersection104shallpreparealistofcreditorswithin30daysfromthedateofpublicnoticeonthebasisof:a) Theinformationdisclosedintheapplicationfiledbythe

debtor or creditor under section 94 or 95 as the casemaybe

b) Claims received in response to public notice issued u/s102


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AcopyofthelistofcreditorstobeservedtotheguarantorandacertifiedcopyofthelistofcreditorstobefiledwiththeAdjudicatingAuthorityalongwithrepaymentplan.

4. Assisting debtor in preparation of repayment plan:Repayment plan is the most important aspect of thePersonal Guarantors to Corporate Debtors insolvencyresolutionprocess.Thedebtorshallpreparearepaymentplan in consultationwith theResolutionProfessional, asprescribed under section 105, containing a proposal forrestructuringofhisdebts oraffairs.However, theplan srequiredtobeapprovedbymorethanthree-fourthinvalueofcreditorsandvotingontheresolutioninameetingofthecreditorsprescribedinsection111oftheCode.

Further as per regulation 17(i) prior to approval, thecreditorscansuggestmodificationstotherepaymentplan,and such modifications have to be consented to by thedebtor.

Theaim is that the repaymentplanwill be the result ofnegotiations between the creditors and debtor, overseenbytheresolutionprofessional,bywhichtheywillreachamutually acceptable payment plan to repay the debts orrestructurethebusiness,asthecasemaybe.

The repayment planmay authorise or require theRP to(a)carryonthedebtor’sbusinessortradeonhisbehalforinhisname,or (b)realisetheassetsof thedebtorsor (c)administerordisposeofanyfundsofthedebtor.

Therepaymentplanshallinclude–

i) Justificationforpreparationofrepaymentplanandthereasonsonthebasisofwhichthecreditorsmayagreeupontheplan;

ii) Provision for payment of fee to the ResolutionProfessional;

iii) Suchothermattersasmaybespecified.

Other contents of repayment plan: The repayment planshouldalsocontaintheinformationonthevariousaspectsascontainedintheregulation17(1)andoptionalinformationasperregulation17(2)

Some of the important aspects the repayment plan shallprovide includes (i) the term of the repayment plan (ii)sourceoffundsthatwillbeusedtopayresolutionprocesscosts(iii)provisionofminimumbudgetforthesustenanceof debtor and his/her family for the period of repaymentplan(iv)provisionforvaryingtermsofonerouscontractsorothertransactions(v)termsandconditionsfordischargeoftheguarantorand(vi)thedetailsoftheexcludedassetsandexcludeddebtsoftheguarantor.

5. Report on repayment plan (section 106)The repaymentplanalongwithResolutionProfessional’sreportontheplantobesubmittedtoAdjudicatingAuthority

within21daysfromthedateofsubmissionofclaims.

Theresolutionprofessionalshallstateinhisreportwhetherthe repayment plan is in compliancewith the provisionsofany law for the timebeing in force.Furtherheshouldcommentinhisreportastowhetherrepaymentplanhasareasonableprospectofbeingapprovedandimplemented.TheRPmaystateinhisreportthenecessityofsummoninga meeting of the creditors, if required, to consider therepaymentplan.

6. Preparation of statement of affairs: Regulation 10Before calling for the meeting of creditors under section107, the RP shall prepare a statement of affairs of theguarantor. The statement of affairs shall include thefollowinginformationoftheguarantor.

i) assetsand liabilities for thepreceding threefinancialyearsandthecurrentfinancialyear;

ii) detailsoftheexcludedassetsandexcludeddebts;

iii) income statement for the preceding three financialyearsandthecurrentfinancialyear;

iv) income-taxreturnsfiledbytheguarantor,ifany,fortheprecedingthreefinancialyears;

v) creditorwiseamountdue,brokenupintosecuredandunsecureddebtsfortheprecedingthreefinancialyears;

vi) detailsofdebtowedbyguarantortohisassociatesfortheprecedingthreefinancialyears;

vii)guarantees given in relation to any of his debts, andwhether any of the guarantors is an associate of theguarantor;and

viii) details of the financial statements for the businessownedbytheguarantor,orof thefirminwhichhe isapartner,asthecasemaybe,fortheprecedingthreefinancialyears,ifapplicable.

7. Notice calling the meeting of creditors- section 107IftheRPisoftheopinionthatthemeetingofthecreditorsshouldbesummoned,thedateonwhichthemeetingistobeheldshallbenotlessthan14daysandnotmorethan28daysfromthedateofsubmissionofthereportbyRPforwhichatleast14daysnoticetothecreditorsasperthelistprepared shall be issued by allmodes. Such noticemustcontainthedetailsasprovidedundersection107.

Thenoticetobeaccompaniedby

i) Acopyoftherepaymentplan

ii) Acopyofthestatementofaffairsofthedebtor

iii)AcopyofthereportoftheRPontherepaymentplanand

iv) Formforproxyvoting

8. Report on meeting of creditors on repayment plan-Section 112TheRPtoprepareareportofthemeetingofthecreditorson


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WIRC Mobile AppAndroid version:

https://play.google.com/store/apps/de-tails?id=wirc.microvistatech.com.wirc

IOS version:https://apps.apple.com/us/app/id1523413767

Suggestions for improvement in Mobile app is welcome.

repaymentplanwithalldetailsasprovidedundersection112andsubmitthesametotheAA.

Thereportshall includeasto (a)whethertherepaymentplan has been approved or rejected and if approved, thelistofmodificationsifanymadetotherepaymentplan,(b)the resolutionswhichwere proposed at themeeting andthe decision on such resolutions (c) list of creditors whowerepresentorrepresentedatthemeetingandthevotingrecordsofeachcreditorforallmeetingsofthecreditorsand(d)suchotherinformationwhichtheresolutionprofessionalthinksappropriatetomakeknowntoAA

9. Filing with Adjudicating Authority – regulation 19Theresolutionprofessionalshallfileapprovedrepaymentplanwithreportpreparedu/s106and112asthecasemaybe with AA within 120 days from the date of resolutionprocesscommencement.CopiesofthedocumentsfiledwithAAtobeprovided toguarantorand tocreditorswithin3daysfromthedateofsuchfilingasperregulation19.

TheAAshallbyanorderapproveorrejecttherepaymentplanonthebasisofthereportofthemeetingofcreditorssubmittedbytheresolutionprofessionalundersection112.The order may also provide directions for implementingrepayment plan. The AA is of the opinion that therepayment plan requires any modification it may directresolution professional to re-convene a meeting of thecreditors for reconsidering the repayment plan. Theresolutionprofessionalshallsupervisetheimplementationofrepaymentplan.

10. Repayment plan coming to end prematurely – Sec 118Arepaymentplanshallbedeemedtohavecometoanendprematurelyifithasnotbeenfullyimplementedinrespectofallpersonsboundbyitwithintheperiodasmentionedintherepaymentplan.

Where a repayment plan comes to an end prematurelyunderthissection,theresolutionprofessionalshallsubmitareporttotheAdjudicatingAuthoritywhichshallstate–

(a) the receipts and paymentsmade in pursuance of therepaymentplan;

(b)thereasonsforprematureendoftherepaymentplan;and

(c)thedetailsofthecreditorswhoseclaimshavenotbeenfullysatisfied.

TheAdjudicatingAuthorityshallpassanorderonthebasisofthereportsubmittedtheresolutionprofessionalthattherepaymentplanhasnotbeencompletelyimplemented.

Thedebtororthecreditor,whoseclaimsunderrepaymentplanhavenotbeenfullysatisfied,shallbeentitledtoapplyforabankruptcyorder.

11. Application for discharge order. Section 119 & regulation 21In case if repaymentplan is completed theRPwithin14daysofcompletionoftheplantoforwardtothepersonswhoareboundbytheplanandtotheAAthefollowing:

a) Anoticestatingthattherepaymentplanhasbeenfullyimplemented

b) Copy of report by RP summarising all receipts andpaymentsmadeinpursuanceoftheplanandextentofimplementationcomparedtotheplanapprovedbyAA

TheRPshallapplyto theNCLTforadischargeorder inrelationtothedebtsmentionedinRepaymentPlan.AcopyofthedischargeordertobeforwardedtotheBoardforthepurposeof recordingentries in theregisterreferredto insection.196.

12. Non- cooperation- regulation 22:In the event of non-cooperation of the guarantor at anytime during the resolution process period or during thecourse implementation repayment plan, the resolutionprofessional shall prepare a statement to that effect andfilewiththeAAforappropriatedirection.

The insolvency process against the Personal Guarantorhelps personal guarantors to settle with the Creditorsthrough legal process to obtain discharge and continuelivingfreefromtheburdenofdebts.

Source: (1) Reports on working group on Individual Insolvency

(2) IBC Code 2016, regulations and Adjudicating authority rules

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances.


20

IBC over SARFAESI Act for recovery of dues – From lender’s Perspective

CMA Malay Hapani


IntroductionIntroductionofINSOlVENCY AND BANKRUPTCY CODE, 2016hasdoneawaywithoverlappingprovisionscontainedinTheSecuritizationandReconstructionofFinancialAssetsandEnforcementofSecurityInterestAct,(SARFAESIACT)2002.Let’sdistinguishbetweenbothActs.

SARFAESI ActThe Securitisation and Reconstruction of Financial AssetsandEnforcementofSecuritiesInterestAct,2002(alsoknownastheSARFAESIAct)isanIndianlaw.Itallowsbanksandotherfinancialinstitutiontoauctionresidentialorcommercialproperties to recover loans. It regulate securitization andreconstructionoffinancialassetsandenforcementofsecurityinterest and to provide for a central database of securityinterestscreatedonpropertyrightsandformattersconnectedtherewithorincidentalthereto.TheSARFAESIActdealswithSecuritization,Assetreconstruction,Enforcementofsecuritywithout interventionof thecourt.Thewholeprocedure is toberegulatedbytheRBI.TheSARFAESIActallowssecuredcreditorstotakepossessionovercollateralagainstwhichaloanhadbeenprovideduponadefaultinrepayment.Thisprocessis undertaken with assistance of the District Magistrate,anddoesnot require the interventionof courtsor tribunals.ThisActhelpstheBanksandFinancialInstitutionswhoarethesecuredcreditorstoenforcesecuritiesheldascollateralsto loans disbursed by them, if such loans turn to be NonPerformingAssets.Ifborroweroffinancialassistancemakesanydefault inrepaymentof loanoranyinstallmentandhisaccountisclassifiedasNonperformingAsset.

Under SARFAESI Act, secured creditors which include Banks and Financial institution can refer the Non-Performing Asset (NPA) to any Asset Reconstruction Company, established with the Reserve Bank of India under section 3 for the purposes of the Asset Reconstruction or Securitization or both.

Theprovisionsof thisActareapplicableonly forNPAloanswith outstanding above Rs. 1,00,000/- (Rupees One Lakh).NPAloanaccountswheretheamountislessthan20%oftheprincipalandinterestarenoteligibletobedealtwithunderthisAct.

NPAshouldbebackedbySecuritieschargedto thebankbywayofhypothecationorchargeorassignment.

TheSARFAESIActprovidesforthemannerforenforcementofsecurityinterestsbyasecuredcreditorwithouttheinterventionof a court or tribunal. If anyborrower fails todischargehisliabilityinrepaymentofanysecureddebtwithin60daysfromthedateofnoticebythesecuredcreditor,thesecuredcreditorisconferredwithpowersundertheSARFAESIActto:

a. take possession of the secured assets of the borrower,includingtransferbywayoflease,assignmentorsale,for

realizingthesecuredassets

b. takeover of the management of the business of theborrowerincludingtherighttotransferbywayof lease,assignmentorsaleforrealizingthesecuredassets,

c. appoint any person to manage the secured assetspossessionofwhichistakenbythesecuredcreditor,and

d. requireanyperson,whohasacquiredanyofthesecuredassetsfromtheborrowerandfromwhommoneyisduetotheborrower,topaythesecuredcreditorsomuchofthemoneyasifsufficienttopaythesecureddebt.

Amendment in SARFAESI ActTheSecuritizationandReconstructionofFinancialAssetsandEnforcement of Security Interests Act, 2002 or SARFAESIAct Amendments have been made in 2016 because of“EnforcementofSecurityInterestandRecoveryofDebtsLawsandMiscellaneousProvisions(Amendment)Act,2016”.

“Amendment Act, 2016”, provides for amendment in theSecuritisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESIAct”), theRecoveryofDebtsdue toBanksandFinancialInstitutionsAct,1993(“RDDBFIAct”), theIndianStampAct,1899andtheDepositoriesAct,1996

TherulespertainingtoSecurityEnforcement,DebtRecoveryTribunal(Procedure)Rules,1993,TheDebtRecoveryAppellateTribunal(Procedure)Rules,1994havebeenamendedtothateffect To DRT (Procedure) Rules, 2016 and DRT AppellateTribunal(Procedure)Rules,2016,respectively.

The act added new definitions to SARFAESI, widened thescopeofdebtsandsecuredcreditorsandbestoweduponRBInewpowersinrelationtomakingofpolicies.

The Amending Act provides that the requirement ofclassification of secured debt as nonperforming asset shallnot apply to a borrower who raised funds through issue ofdebtsecuritiesbuttheprovisionsforenforcementofsecurityinterestshallapplytosuchborrower.

Further, intheeventofdefault, thedebenturetrusteeshallbe entitled to enforce security interest in the samemanneras provided in section 13 with necessarymodifications andin accordance with the terms and conditions of securitydocumentsexecutedinfavourofthedebenturetrustee

Theearlierprerequisite forARCtohold fundnotexceeding15% of total financial asset acquired or to be acquired bycompanyisremoved.

TheearlierconditionforsponsornottobeaholdingcompanyofARCisreplacedwithasponsor,fitandproperinaccordancewithguidelinesofRBI.

MandatorytotakeRBI’sapprovalforappointmentofdirector/managingdirector/chiefexecutivemanagerofARC.


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Exemption from stamp duty on documents given by bankstoARCforthepurposeofsecuritisation.Also,allrightsandinterestregardingtheunpaidportionwhichwasheldbybankearlier,willvestwithARC.

Measures to be taken for asset reconstructions are same.However,ARCwillhavetoactaccordingtothedirectionsandpolicies formulated by RBI. RBI to also release policies forfee charged/incurredbyARCor transfer of security receiptsissuedtoqualifiedbuyers.

Enforcement of Security1. Proviso added to section 13(2) – buyer need not classify

NPAincasehehasraisedfundsthroughdebtsecurities.Upondefault,hecanenforceunderthissection.

2. Section 13(8) – earlier dues could be paid till sale ortransfer. Now it can be paid till the date of auction/publicationofnotice.Thetimeperiodfortheborrowertomakethepaymenthasbeenreducedconsiderably.

3. DM/CMMhas topass order for takingpossession of thesecured assets within 30 days. He is allowed to extendtheperiodbyanother30daysbuthewillhavetorecordreasonsforthesame.

TheRBImaycarryoutorcausedtobecarriedoutauditandinspectionofanARCfromtimetotime.

The Central Government may, by notification, delegateits powers and functions under this Chapter, in relationto establishment, operations and regulation of the CentralRegistry to the Reserve Bank, subject to such terms andconditionsasmaybeprescribed

Insolvency And Bankruptcy Code, 2016TheInsolvencyandBankruptcyCode,2016(“Code”)offersauniformcomprehensiveinsolvencylegislationtoCorporations,FirmsandIndividuals(otherthanfinancialfirms).

OneofthefundamentalfeaturesoftheCodeisthatitallowscreditors to assess the viability of a debtor as a businessdecision, and agree upon a plan for its revival or a speedyliquidation.

The IBC creates a new institutional framework, consistingofa regulator, insolvencyprofessionals, informationutilitiesandadjudicatorymechanisms,thatwillfacilitateaformalandtimeboundinsolvencyresolutionprocessandliquidation.

To provide easy exitwith a painlessmechanism in cases ofinsolvency of individuals as well as companies, the codehas significant value for all stakeholders including variousGovernmentRegulators. Introduction of thisCode has doneawaywithoverlappingprovisionscontainedinvariouslaws–

SickIndustrialCompanies(SpecialProvisions)Act1985.TheRecovery of Debts Due to Banks and Financial InstitutionsAct,1993,TheSecuritizationandReconstructionofFinancialAssets and Enforcement of Security Interest Act, 2002 andTheCompaniesAct,2013.

Applicability of the Code:-The provisions of the Code shall apply for insolvency,liquidation, voluntary liquidation or bankruptcy of thefollowingentities:-

Any company incorporated under the Companies Act, 2013orunderanyprevious law.Anyother companygovernedbyanyspecialactforthetimebeinginforce,exceptinsofaras

thesaidprovisionisinconsistentwiththeprovisionsofsuchSpecialAct.AnyLimitedLiabilityPartnershipundertheLLPAct2008.Anyotherbodybeingincorporatedunderanyotherlaw for the time being in force, as specified by the CentralGovernmentinthisregardPartnershipfirmsandindividuals.

Code has differentiated liquidation and Insolvency processbetween Corporate Debtors (which shall be dealt by theNCLT)andIndividualsandfirmsliquidationprocess(whichshall be of the jurisdiction of DRT), the Corporate Debtorsdefault should be at least INR 100,000 (USD 1495) (whichlimitmaybeincreaseduptoINR10,000,000(USD149,500)bytheGovernment).

(i) For the Corporate Debtors’ the Code proposes twoindependentstages:

• InsolvencyResolutionProcess:wherein thefinancialcreditors assess the debtor’s business and evaluatewhether the business can be subjected to revivalprocedure and evaluate options for its rescue andrevival.

• Liquidation:iftheinsolvencyresolutionprocessfailsorfinancialcreditorsdecidetowinddownanddistributetheassetsofthedebtor.

(ii) Insolvency Resolution Process for Individuals/Unlimited Partnerships:• For individuals and unlimited partnerships, the Code

appliesinallcaseswheretheminimumdefaultamountisINR1000(USD15)andabove (theGovernmentmaylaterrevisetheminimumamountofdefaulttoahigherthreshold). The Code envisages two distinct processesincaseof insolvencies: (i)automatic freshstartand (ii)insolvencyresolution.

• Undertheautomaticfreshstartprocess,eligibledebtors(basis gross income) can apply to the Debt RecoveryTribunal (DRT) for discharge from certain debts notexceeding a specified threshold, allowing them to startafresh.

• Theinsolvencyresolutionprocessconsistsofpreparationof a repayment plan by the debtor, for approval ofcreditors.Ifapproved,theDRTpassesanorderbindingthe debtor and creditors to the repayment plan. If theplanisrejectedorfails,thedebtororcreditorsmayapplyforabankruptcyorder.

Exceptions: There is an exception to the applicability oftheCodethatitshallnotapplytocorporatepersonswhoareregulated financial service providers like- Banks; FinancialInstitutions;andInsurancecompanies.

Objectives of the CodeA sound legal framework of bankruptcy law is required forachievingthefollowingobjectives:-Improved handling of conflicts between creditors and thedebtorIt can provide procedural certainty about the process ofnegotiation,insuchawayastoreduceproblemsofcommonpropertyandreduceinformationasymmetryforalleconomicparticipants.SetalimitbetweenmalfeasanceandbusinessfailureItcanalsoprovideflexibilityforpartiestoarriveatthemostefficient solution to maximize value during negotiations.


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The bankruptcy law will create a platform for negotiationbetweencreditorsandexternalfinancierswhichcancreatethepossibilityofsuchrearrangements.MacroeconomicdownturnslossestobeallocatedAn infirm insolvency regime leads to the stereotype of “richpromotersofdefaultingentities”generatingtheoriessuchas:Misconductisthereasonforallthedefaultsmadeultimatelyit is thepromoterswhoshouldpersonallyandfinanciallybeheldresponsiblefordefaultsofthefirmswhichareundertheircontrol.MacroeconomicdownturnslossestobeallocatedClear allocation of these losses is a result of a well-definedbankruptcyframework.Taxes,inflation,currencydepreciation,expropriation, or wage or consumption suppression are thecommonpracticesoflossallocation.Thesecouldaffectforeigncreditors, smallbusinessowners, savers,workers, ownersoffinancialandnon-financialassets,importers,exporters.Toconsolidateandamendthelawsrelatingtore-organizationand insolvency resolution of corporate persons, partnershipfirms,andindividuals.Tofixtimeperiodsforexecutionofthelawinatime-boundsettlementofinsolvency(i.e.180days).Tomaximizethevalueofassetsofinterestedpersons.Topromoteentrepreneurship. To increase the availability of credit. Tobalance all stakeholder’s interest (including alteration).Balance to be done in the order of priority of payment ofGovernmentdues.ToestablishanInsolvencyandBankruptcyBoard of India as a regulatory body for insolvency andbankruptcy law.Toestablishhigher levels ofdebtfinancingacrossawidevarietyofdebtinstruments.Todealwithcross-border insolvency .To resolve India’s bad debt problem bycreatingadatabaseofdefaulterlist.

SARFAESI Act V/s Insolvency and Bankruptcy Code, 2016.• SARFAESI Act, 2002 provides a safety net to secured

financial creditors (banks and financial institutions)by empowering them to enforce their security interestswithouttheinterventionofanycourt.Ontheotherhand,underIBC,therightsandinterestsofalltypesofcreditorshave been taken into consideration including that ofsecuredcreditors

• Section 14(1)(c) of the Insolvency andBankruptcyCode,2016clearlyprovidesthatduringtheinsolvencyresolutionprocessasdefinedintheCode,theCodetakesprecedenceovertheDRTActandSARFAESIAct.

• The Code is a welcome step in resolving issues facedin these archaic laws. Moreover, it consolidates lawsrelating to insolvencyandrepeals thePresidencyTownsInsolvency Act, 1909 and Provincial Insolvency Act,1920. Other than that, the Code also amends 11 laws,includingtheCompaniesAct,2013,RecoveryofDebtsandBankruptcyAct,1993(DRTAct),andSecuritizationandReconstruction of theFinancialAssets andEnforcementoftheSecuritizationAct,2002(SARFAESIAct).Fromtheamendments,itisclearthatallthese11ActsareaffectedbytheenactmentoftheCode.

• CodehasdifferentiatedliquidationandInsolvencyprocessbetweenCorporateDebtors (which shall be dealt by theNCLT) and Individuals and firms liquidation process

(whichshallbeofthejurisdictionofDRT),theCorporateDebtors default should be at least INR 100,000 (USD1495)(whichlimitmaybeincreaseduptoINR10,000,000(USD149,500)bytheGovernment).TheCodedevisestwoseparate processes for corporate insolvencymatters andindividual/ un-incorporated bankruptcy matter. Part IIof the Code deals with corporate insolvencymechanismpertainingtocompaniesincorporatedundertheCompaniesAct, 1956 and 2013 and limited liability partnershipincorporated under the Limited Liability PartnershipAct, 2008; matters in this regard will be dealt by theNationalCompanyLawTribunal.PartIIIdealswiththebankruptcyprocessforindividualsandpartnershipfirms(unincorporated entities) and ismaintainable before theDebtRecoveryTribunal.

In the case, theNCLATwhile referring toSupremeCourt’sverdictinInnoventivecasehasruledthatwhentwoproceedingsareinitiated,oneundertheInsolvencyandBankruptcyCode,2016 (I&B Code) and the other under the SARFAESI Act,2002,thentheproceedingundertheI&Bcodeshallprevail.

Conclusion : IBC V/S. SARFAESI Section 14(1)(c) of IBC states that on commencement ofinsolvency resolution process (“IRP”), the adjudicatingauthority shall, by order, declare moratorium period. Uponsuch order, all recovery proceedings get stayed includingthe enforcement of security under the SARFAESI Act. Itis pertinent to note that, once the insolvency resolutionperiodends,theentitywillbeeitherputonrevival,orunderliquidation.Incaseofrevivalorders,theeligibilityofthelendertoexerciseSARFAESIpowerswilldependonwhatagreementhasbeenmadebetweenthelendersinrelationtorevivalofanentity.Uponaliquidationorderbeingpassed,themoratoriumwill be deemed to be lifted and the secured creditors mayenforcetheirsecurityinterestsunderSARFAESI.Thestagesoffiling insolvencyresolutionprocessvis-à-visSARFAESI isenumeratedbelow:

1. Applicationforinsolvencyresolutionprocessfiledbutnotadmitted:TherewillbenostayonSARFAESIproceedings.

2. Admissionofresolutionapplication:TherewillbestayonSARFAESIproceedingsasmaybeorderedbytheNCLT.

3. Resolution plan ordered by Adjudicating Authority:PursuanttoSection31(1)oftheInsolvencyandBankruptcyCode,2016,thepartiesareboundtoactinaccordancewiththeresolutionplanandtermsspecifiedtherein.

4. Commencementofliquidationproceedings:TherewillbenostayandsecurityinterestsmaybeenforcedinaccordancewithSection52of the InsolvencyandBankruptcyCode,2016.

Inviewoftheabove,theprovisionsofSARFAESIstanddilutedtotheextentmentionedabove.ItseemsthatthepriorityhasbeengiventorevivaloftheCompanysothattheinterestofallthestakeholderscouldbeprotected.TheBanksandFinancialInstitutions will not be allowed to take any action underSARFAESI,forenforcementofsecurity,uponadmissionoftheapplicationforinitiatingtheresolutionprocessanduntiltheperiodasmaybedecidedbytheNCLT.


23

IBC success story: Resolution plans help creditors, sick firms both

CMA N. Rajaraman


Synopsis:`• The two biggest loan recoveries in the case of Bhushan Steel and

Essar Steel India make up around 49.5% of the overall recovery• If a resolution plan cannot be agreed upon within 330 days, the

company that has defaulted on the loan goes for liquidationTheresolutionplansundertheinsolvencyandbankruptcycodeorIBChaveyielded200%oftheliquidationvalueforcreditors,highlightingtheefficiencyofIBCmechanism.Theplansalsohelpedtorescuetheviablefirmsfrombankruptcy,IBCChairmanMSSahoosaid.AftertheInsolvencyandBankruptcyCode(IBC)becamelawinMay2016,theecosystemofcorporateinsolvencyresolutionprocess(CIRP)wasputinplacebytheyear-end.AsofDecember2019,thesystemhadbeeninexistenceforthreeyears,looksatitsperformance.

How good have been the loan recoveries?Asof31December,the190companiesthathaddefaultedonloansyieldedresolutionplanswithdifferentdegreesofrealization.Claimsworth ₹3.52 trillion in total had been filed by financial creditors,primarilybanks.Ofthis,around₹1.52trillion—43.1%oftheclaimsunderconsideration—hasbeenrecovered.Thisismuchbetterthanthe rate of recoverybefore IBCwasput inplace.Take the case of2015-16:Ofthetotalbadloansupforrecoveryworth₹2.21trillion,only₹22,768crore,or10.3%oftheloans,wasrecovered.ThisevidencesuggestsIBChasbeenahugesuccesscomparedtotheearlierloanrecoveryprocess.The two biggest loan recoveries in the case of Bhushan Steel andEssarSteelIndiamakeuparound49.5%oftheoverallrecovery.Iftheserecoveriesareleftout,thetotalrateofrecoveryfallsto30.5%.Ifanotherbigrecovery,BhushanPowerandSteel,isexcluded,thentherateofrecoveryfallsfurtherto28%,whichissubstantiallylowerthantheoverallrateofrecoveryof43.1%.Havingsaidthat,itismuchbetter thanwhatused to be the case before IBCwas in existence.Also,upuntil2015,itusedtotake4.3yearsonanaveragetoresolveaninsolvencycaseinIndia.ThathasfallendramaticallyafterIBCcameintoeffect.

What about the cases that do not go for resolution?If a resolution plan cannot be agreed upon within 330 days, thecompany that has defaulted on the loan goes for liquidation. Tillnow, liquidation has been initiated against 780 firms, ofwhich 40havebeenclosedintheprocess.TherecoveryrateforfirmsthatwereliquidatedinOctober-Decemberwas10.7%.Ifthebiggestrecoveryisleftout,therateisclosetonil.

How many firms are in bankruptcy courts?The number of companies being admitted to corporate insolvencyresolution proceedings at the National Company Law Tribunal(NCLT) has shot up since January-March in 2017. The number ofsuchcompanieswas1,961asofDecember2019,upfrom1,497asofSeptember.WhatthedataindicatesisthatthenumberofcompaniesfacinginsolvencyresolutionispilingupatNCLTfasterthanitcandisposeofthem.ThisistheproblemDebtRecoveryTribunalsusedtofaceearlier.

What does this mean for the IBC system?AtthecurrentrateofdisposalofcasesbyNCLT,itcouldtakenearlyfive-six years for themost important cases to be settled. There isalsoariskthatthenewsystemisgettingoverloadedwithtoomanycorporatedefaultsbeingbroughtunderCIRP.Onewaytogetaround

thishurdleisbyencouragingbankstosellsmallerloandefaultsofuptoRs.100croreandnottakethemtoNCLT,soasnottoclogtheIBCsystem.Thecreditorscanrealize45%oftheirclaimsunderIBC,whichtakeson average 300 days compared with a recovery of 25% under theprevious regimewhich took up to 5 years for resolution.With theenactment of IBC, tolerance for default has disappeared and nowit has become an obligation to repay the loan unlike earlierwhenrepaymentwasjustanoption.A stakeholder may initiate CIRP (corporate insolvency resolutionprocess) to recover itsdues from thefirmwhich failed to repay itsdebtforthefirsttime.Iftheresolutionprocessisinitiated,thecodeshiftscontrolfromthedebtortocreditorsforresolutionofinsolvencycases,throughtheprocessofresolution,theownershipoftenshiftstothirdparties.The enactment of the Insolvency and Bankruptcy Code (IBC) wasawatershedmomentfortheIndianeconomy,propellingtheIndianeconomyintoaneweco-systemforcorporateinsolvencycomprisingof the Insolvency Professionals, Insolvency Professional Agencies,Insolvency andBankruptcyBoard of India andNationalCompanyLaw Tribunal with the aim of promoting entrepreneurship andinnovation.The objective of the IBCwas to consolidatea robust framework ofinsolvencylawsthatwouldadditionallyserveasaremedialmeasuretotheprevailingmalpracticesintheIndianBankingandCorporateSector. Thus over 3 years since its enactments, it is necessary toconsiderthehitsandmissesof thismomentous legislationtotrulyexploitthepotentialoftheinsolvencyregime.Recovery of Stressed Assets The IBChas successivelyaddressed the logjams in the recoveryofstressedassetsandresolutiontimelinesasperitsintendedobjectives.RecoverythroughtheIBCwasdoubletoamountrecoveredthroughother resolution mechanisms as per the Reserve Bank of India’sreport on Trend and Progress of Banking in India 2017-18, thetotalbad loanrecoveriesundertheIBCinFY2018-19waspeggedat RS.70,000 crore compared to the recovery of Rs. 35,500 croresrecovered through other resolution mechanisms such as the DebtRecovery Tribunal, Securitization and Reconstruction of FinancialAssetsandEnforcementofSecuritiesInterestAct,andLokAdalatEmpowered CreditorsThestringentprovisionsoftheIBChaveinstilledcreditdisciplineandshiftedthebalanceofpowerfromtheborrowertothecreditor.ThisisreflectedinaMarch2019reportoftheInsolvencyandBankruptcyBoardofIndiawhichshowedthatalmostRs2.02lakhcroreofdebtpertainingto4,452casesweredisposedofevenbeforeadmissionintotheProcess,astheborrowersmadegoodtheamountsindefaulttothecreditors.WhileacknowledgingthesupportofJudiciary,Government,andtheRegulatorsinfacilitatingtheimplementationoftheCode.ThestockmarketregulatorSEBIhasexemptedacquisitionsunderresolutionplans from making public offers under the takeover code andReserveBank of Indiahas allowed external commercial borrowingforresolutionapplicantstorepaydomestictermloans.CompetitioncommissionofIndiahasdevisedaspecialrouteforspeedyapprovalsforcombinationsenvisagedunderresolutionplans.


24

Four (4) Success Stories of IBC (2016) Resolutions

CMA (Dr.) Subir Kumar Banerjee


1. Arcel Mittal - Essar Steel (Now AMNS India)EssarSteelwastakenoverbyArcelorMittalandNipponSteel(JV)on16thNovember2019withasettlementpriceofRs.42000croresthroughIBCprocess.Thecompanyisa

fully integratedflat carbonsteelproducerout of ironoretofinishedproductshavingannualcapacityof10milliontonnes.

Figure 1.EssarSteel-AdmittedClaims,ResolutionAmount(Rs.inCrores)

SerialNo.

NameofCorporateDebtor

TotalAmountofAdmittedClaim

TotalClaimsofFinancialCreditors

Liquidation Value

ResolutionAmountforFinancialCreditors

PercentageofHaircutfor

FinancialCreditor1. EssarSteel 54370 48175 15800 40000*** 17%

Note: *** Actually Financial Creditors were allotted 41,131 Cr. but ultimately got Rs.40,000 Cr. because balance Rs.1131 Cr. were distributed to Operational Creditors as per final resolution plan along with ArcelMittal & Nippon Steel.

Source:CompiledbyAuthor

2018-19 (April-March) VS. Part Calender Year, 2019 (April- December)7.23MTcrudesteelrecordingaboostof5percentduringthe fragmentedfinancialyear2019 (9month) in relationto6.92MTinFY2018-19.Thecompany’spelletproductionachieved 11.63MTduring the 9month of 2019which is9.4percentmorethan10.63MTin2018-19.AMNSIndiaattainedrecordproductionvolumesinFY2019inspiteofunfavourabledomesticsituationsinthelastquarterofthecalendaryear2019.

1st Quarter 2020 (January-March) - AM/NS Indiaachieved EBITDA of $140million in Q1FY20 and crudesteelproductionof1.7milliontonne(mt)anddespatchinspiteofCovid-19epidemic.ItisindeedagoodperformanceinJanuaryandFebruary.However,becauseoflockdown,AMNSIndia’sactivitieswereretardedinMarch.

2nd Quarter 2020 - AMNS India’s performances weremostlyretardedbythelockdown(COVID-19)fortheperiodof 2Q 2020 (April-June). However, whenever lockdownwasnotthere,theplantsranwithmoreandmorecapacitycomparedtowhenlockdownwasinfullforce.

EBITDA reduced quarter to quarter 23.5% at $107.7million.AMNSIndia’s2ndQtrcrudesteeloutputreducedby30%at1.2milliontonnescomparedto1.7milliontonnesinthefirstquarter,2020andasaresultthecompany;stotalnetlossofRs4,143crore($559million)duringthe2ndqtr.2020mainlybecauseofeffectofcovid-19pandemic.Positivesideis,insuchgloomyscenario,thecompanystrategicallypushedmore iron ore pellet export from its palletizationplant inOdisha in the eastwhere there is a seaport. Inaddition,ittookoverOridhaSlurryPipelineInfrastructureatacostof$245Million(Rs.1869Crores).

3rd Quarter, 2020 (July - September) -AMNS India)hasachieveda64.4%boostinEBITDAofRs.1,304crore($176million)andaprofitofRs800crore ($107million)because of improved market demand along with highercapacity utilisation. Moreover, AMNS’s maintenancecapitalexpenses,interestandcashtaxoutgofor2020arelikelytototalbelowerthan$250millionannually.ItalsoputseparatelyanamountoverRs20,000croreforproposedinfrastructureinGujrat.

Arcelor Mittal S.A. is biggest MNC specialises in steelproduction having per annum crude steel productionof 97.31millionmetric tonnes as of 2019. Being part ofArcelorMittal Group, success stories of erstwhile EssarSteelhasjuststarted.

2. Tata Steel-Bhushan SteelOnMay18,2018,TataSteel’smergerplanwithBhushanSteelofRs.35,200croreviaIBCproceedingshaveelatedlenders and other creditors. A 100% subsidiary of TataSteel(BamnipalSteel)operatedinthisdealtoentitleTataSteeltoown72.65percentinBhushanSteel.

Priortothis,BhushanSteelwasonlyutilizing64%oftotalcapacity of 5.5 mtpa ( mainly a flat steel manufacturerandalso includefinaloutputbeinghot rolled, cold rolledandcoatedsteel,coldrolledfullhard,galvanizedcoilsandsheets,hightensilesteelstrips,colourcoatedtiles,precisiontubes,largediameterpipes).Withthismerger,TataSteel’srankingasoneofthetopflatsteelproducerwillbestable.Atthetimeofmerger,thecompanywasintheredinviewofahugeinterestliabilityanditwasPlusbeforeinterest(Rs.4,000pertonneofproductioninFY18).


25

Figure 2. BhushanSteelAdmittedClaims,ResolutionAmount(Rs.inCrores)

SerialNo.

NameofCorporateDebtorofAdmittedClaim

Total Amount


LiquidationValue


PercentageofHaircutforFinancial

Creditor

1. BhushanSteel 57505 56022 14541 35,200 37.17%

Source : Compiled by Author

withtheaidoffacilitiesofBhushanSteelalongwithboostof positive vives in the indigenous steelmarket recordeda profit before interest per tonne ofRs.9,650,whichwasmostlyabovethecompetitorsinthesteelindustry.

TheoperatingprofitofBhushanSteelcontinuedtoincreaseunder Tata Steel’s leadership in the past few quarters.During December 2018, Bhushan Steel’s revenue andoperating profits recorded Rs.4,889 crore and Rs.1,008crore respectively,which comprise 12% and 15% of TataSteel’s revenue and operating level surplus of Rs.41,220croreandRs.6,734crorerespectively.Inaddition,insameperiod,operatingprofitpertonneofBhushanSteelturnedtoRs.10,992.

Immediatelyaftertakeover,TataSteeltooksomeinnovativemeasures to make the factory stable, more utilizationof production facilities, generate more cash flows andstartprudentcapital investments forcontinuousreturns.Strategiesalsoincludeemphasingmoreinproductmixinmain automotive sector includingOEMswith a focus onincreasingcustomers.

It also for the first time produced steel for outer panelapplications of automobiles in one of its factory. It alsoinnovatedvalue-addedandhigh-strengthsteelsgivingrisetomoreoptionsofproductstoclients.

Aftermerger,duringquarterendingJune2018(Q1FY19)

Table 1.TataSteelBSL-ComparativeQuarterlyResult(SEP‘19TOSEP‘20)

QUARTERLY RESULTSOF TATA STEEL BSLLIMITED(inRs.Cr.)

SEP‘20 JUN‘20 MAR‘20 DEC‘19 SEP‘19

Net Sales/Income fromoperations

5,187.30 2,514.59 4,064.89 5,038.11 4,311.67

OtherOperatingIncome 332.10 182.41 208.77 ------- 242.96Total Income FromOperations

5,519.40 2,697.00 4,273.66 5,038.11 4,554.63

NetProfit/(Loss) 328.08 -658.23 -2.36 -504.18 -255.89

Source - https://www.moneycontrol.com

It is a good coincidence that at the timemerger inMay,2018thesteelmarketcyclegraduallyboosted.Asaresult,fromtheaboveTable,inspiteofmassiveeffectofCOVID-19sinceMarch 2020, it is evident that in September 2020,themergedcompanygeneratedNetProfit(NotOperatingProfit).ItisapositivebeginningofMergedentityunderthepatronageofTataSheel.

3. Ultratech Cement makes Binani its subsidiary

OnNovember 14, 2018NCLT (under IBC) approved theRs 79.5 billion offer of UltraTech to takeover erstwhileBinaniCementnownownamedasUltraTechNathdwaraCementLimited.BasedinRajasthan,BinaniCementhasa capacity of 6.25mtpa, which consists of an integratedcementunit(capacitybeing4.85mtpa)andasplitgrindingunit(capacitybeing1.4mtpa).Moreover,thecompanyhastwooverseasunits,oneinUAE(2mtpacapacity),anotherinChina(3mtpacapacity).

Figure 3.BinaniCementAdmittedClaims,ResolutionAmount(Rs.inCrores)

SerialNo.

NameofCorporateDebtorofAdmittedClaim

Total Amount


LiquidationValue



FinancialCreditor1. BinaniCement 7202 6469 2300 6469 ZERO

Source: Compiled by AuthorBinani Cement was taken over by Ultratech Cement onNovember14,2018andimplementationwasdoneduringDecember,2018 qnd January 2019. Accordingly, thecompany’sresultsfortheDecemberendingquarters,2019to March quarters .2020 (and part of the financial yearended March 2019) are not comparable to the previous

year (to the corresponding quarter) due to merger withBinaniCementinthepreviousyear.Addedtothat,quarterendingJune2020 toquarterendingSeptember2020arenotcomparablewithpreviousfinancialyearowingtothemassivedisruptionduetoongoingCOVID-19.


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Table 2 -UltraTechNathdwaraCementLtd.-QuarterlyResult(JUN‘19TOSEP‘20)

QUARTERLY RESULTS OF ULTRATECHCEMENT(inRs.Cr.)

SEPT.20 JUN‘20 MAR‘20 DEC‘19 SEP‘19 Jun’19

NetSales/Incomefromoperations 10,018.58 7,373.63 10,360.31 9,981.75 9,253.82 10,177.63OtherOperatingIncome -- -- -- -- -- 131.16TotalIncomeFromOperations 10,018.58 7,373.63 10,360.31 9,981.75 9,253.82 10,308.79NetProfit/(Loss)ForthePeriod 1,208.67 805.57 2,906.32 643.15 639.19 1208.03

Source: https://www.moneycontrol.com theamountwillbeutilizedtoreducetheexistingdebtsinthebooks.Accordingly,thismergerisasuccessstoryitself.

4. Electrosteel Steels ltd. and Vedanta ltd.InJune2018,Vedantatookovera90%stakeinElectrosteelSteelsLtd.,amainproducerofsteel(likeTataSteelLtd.JSWSteelLtd).ThetargetcompanywentthroughtheIBCprocess as per guidelines NCLT, Kolkata. The purchasewasmadewithapaymentinadvanceoftotalofRs.5,320crore,paidfora90%shareofthecompany.Afterthetakeover,theCompanywastakenoutoflistingfromtheStockExchange and is made a subsidiary of Vedanta LimitedwithanewnameasVedantaStarLimited.

Thenewcompany’sproduction factory issituatedaroundBokaro,Jharkhandandhasaexistingcapacityof1.5mtpaandlikelyplanreachto2.5mtpa.

ThismergerwithBinaniCementaddedmuscles toUltraTechCement’sadvantagesofeconomyofscalesinadditiontoupsurgeitstightgripinthecementmarketwhichboostedcaptainship mainly in north India. Moreover, BinaniCement’s limestonereservesresulted inminimumcostofcapacity creation for UltraTech. Since erstwhile BinaniCement has more than 450 million tonnes reserves oflimestoneintwodifferentlocationsinSirohi,Rajasthan,ithasalreadyicingonthecakeformergedUlltratechBinaniCement(nownamedasUltraTechNathdwaraCementLtd).Inaddition,inafiercelycompetitivemarketlikecement,thismergerbetweenUltraTechCementandBinaniCementhas already put ahead Ultratech in bargain power. Themergedcompanyhasstartedlookingforbuyerstodisposeofnon-coreproperties(oferstwhileBinaniCement)inUAEandChina,andwhenthosepropertieswillbedisposedof,

Figure 4.ElectrosteelSteels-AdmittedClaims,ResolutionAmount(Rs.inCr.)

SerialNo.

NameofCorporateDebtor

TotalAmountofAdmitted

Claim


LiquidationValue



FinancialCreditor1. Electrosteel

SteelsLtd.13,958.36 13,175.14 2,899.98 5,320.00 60%

Source : Compiled by Author

In a period of tenmonths from the date of take over byVedantainJune2018,therehasbeenqualitativechangesof the commercial activities which boosted financialposition.Moreover,therehavebeenmarkedimprovementsin theway thenewcompany is operating.For instances,there isabigdiminution in the consumptioncokeby3%and7%atblastfurnaces2&3inthatordercomparativelyfrom lastyear. Inaddition,mosteffectiveuseof the coalproportionsandmixofironorehaveproducedbetterreturnofthefinishingmillfrom95.9%in201-18to96.7percent.

Stepsonoperations’brilliancebyexhibitingbettermarketshares and also, adoption of acclaimed internationalpractices applying the vast technical experience andknowledge bank of the Group, have produced amazingresults.Thishasbeenaddedbyeffectiveuseofaninternalcostreductiondriveandalsowithaneyeonoptimummixof products that yield better margin. Implementation ofinnovative business strategy supplemented by competentleadershiphasaddedspeedoftheturnaroundofthenewcompany.

Withthisturnaround,2018-19haswitnessedhistoricpeak

ofproductionlevels.Thenewcompanyreachedarun-rateofc.1.5mtpain4thQuarterof2018-19.Withunprecedentedjump of production and other strategies have producedanEBITDAmargin forthecompany,whichboosted fromUS$53 per tonne in 2017-18 to US$122 per tonne in4th Quarter 2018-19. With All these accomplishments,erstwhile Electrosteel Steel has already become a keyplayerinIndianSteelIndustry.

References1. https://www.vedantalimited.com/AR2019/electrosteel.

html

2. https://timesofindia. indiatimes.com/business/india-business/company-business-sees-improvement-since-acquisit ion-of -electrosteel -steels-vedanta/articleshow/70195661.cms

3. h t t p s : / / w w w . l i v e m i n t . c o m / M o n e y /vhzMh9zfwxj9zNyuNA1IuK/Binani-Cement-goes-to-UltraTech-What-now-for-Dalmia-Bharat.html

4. https://www.nipponsteel.com/common/secure/en/ir/library/pdf/20191216_500.pdf


27

Impact of GST on Power SectorCMA Santosh S. Korade


AbstractGST act is come into force i.e. 1 July 2017, Its hugerestructuring of indirect taxation in India. Number ofindirect taxesare subsumed inGST likeasExciseDuty,ServiceTax,VAT,CentralSalesTaxetc.and“OneNation,OneTax,OneMarket”conceptisapplied.GSTisnewactforus,lotsofchangeshasdone,it’samendedtimetotime,numbers of clarification has issued, still there are someareaswhichneedstobeanalysedonwhichimpactofGSTis less favourable, andPower sector is one of them.GSTisconsumptionsbasedtaxsoultimateburdenoftaxistobe borne by final consumer, so if cost of projects/productwillincrease,itwillresulttoincreaseinoperationalcost,so finally cost of electricitywill increase.Be careful thatfinalProduct-electricityisnotexcludedfromscopeofGSTbut it’s exempt from GST. ITC Credit is blocked as perSec17ofCGSTact,sotaxespaidon inputsbecomecost,againStatesareleviedElectricityDutyandTaxonsaleofelectricity.LookingofGSTimpactonpowerGenerations,Transmission&Distributionscompany’sprojectsaswellasoutputcostthroughthisarticle

Impact of GST on Power SectorThepowersectorinIndiaismainlygovernedbytheMinistryofPower.Therearethreemajorpillarsofpowersectortheseares - Generation, Transmission and Distribution. Asfarasgenerationisconcerneditismainlydividedintothree sectors these areCentral Sector, State Sector, andPrivateSector.CentralSectororPublicSectorUndertakings(PSUs)constitute29.78%(62826.63MW)oftotalinstalledcapacityi.e,210951.72MW(ason31/12/2012)inIndia.MajorPSUsinvolvedinthegenerationofelectricityincludeNHPCLtd.,NTPCLtd.,,andNuclearPowerCorporationofIndia(NPCIL).BesidesPSUs,severalstate-levelcorporationsaretherewhichaccountsforabout41.10%ofoverallgeneration,such as Jharkhand State Electricity Board (JSEB),MaharashtraStateElectricityBoard(MSEB),KeralaStateElectricity Board (KSEB), in Gujarat (MGVCL, PGVCL,DGVCL, UGVCL four distribution Companies and onecontrolling body GUVNL, and one generation companyGSEC),arealsoinvolvedinthegenerationandintra-statedistribution of electricity. Other than PSUs and statelevel corporations, private sector enterprises also play a

major role in generation, transmission and distribution,about 29.11%(61409.24MW) of total installed capacity isgeneratedbyprivatesector.

Impact of GST on Power ProjectsApplicabilityofGSTtopowerprojects-Mostofprojects inpowersectorsawardedtocontractorsonturnkeybasis.Allmaterialsshouldbeprocuredbycontractorsandhandingover to utility after complete erection of its in usefulmanner.ThesearecategoriesasworkcontractunderGST-TheWorksContractshasbeendefinedinSection2(119)oftheCGSTAct,2017as“workscontract”meansacontractforbuilding,construction,fabrication,completion,erection,installation,fittingout,improvement,modification,repair,maintenance, renovation, alteration or commissioning ofany immovable property wherein transfer of property ingoods(whetherasgoodsorinsomeotherform)isinvolvedintheexecutionofsuchcontract.”

Work contract is treated as supply of services under GSTAs perPara 6 (a) of Schedule II to theCGSTAct, 2017,works contractsasdefined insection2(119)of theCGSTAct, 2017 shall be treated as a supply of services. Thus,thereisacleardemarcationofaworkscontractasasupplyofserviceunderGST.

ITC restricted in Work ContractAspersection17(5) (c)of theCGSTAct,2017, input taxcreditshallnotbeavailableinrespectoftheworkscontractserviceswhen supplied for construction of an immovableproperty (other than plant andmachinery) exceptwhereit isaninputserviceforfurthersupplyofworkscontractservice.

Analysis of Impact of GST on running projectsFrom1July2017,GSThascomeintoforce,lotoftimehaspassed tofind out postGST cost for runningprojects, soit’s impactedonexecutionofprojects.Workhasstuckforsome times its leads todelay inprojects,andcontractorsget punished by penalty for delay executions. Financecostalso increasedduetoworkingcapitalrequirement isincreasedduetoTaxoutflowtopowercompaniesaswellasContractors.

Pre-GST & Post GST Cost of ongoing projectBefore GST Amount Post GST Amount

Material-Ford cost inclusive of taxes excludingVAT

100.00 Material-Post GST, reduction of Excise duty andtaxesfromFORD

88.74

Centiges/Erectioncost@27%ofMaterials 27.00 Centiges/Erectioncost@27%ofMaterialsfordcost 27.00

TotalcostbeforeVAT 127.00 Totalcostbeforetaxes 115.74


28

TaxesonMaterialsasperNote-1 4.10 CGST+SGST@18%onMaterials 15.97

ServicesTax@15%ofServices 4.05 CGST+SGST@18%onCentiges/Eract. 4.86

TotalTax 8.15 TotalTax 20.83

TotalCost 135.15 TotalCost 136.57

VATRefundfromStateGovt-2% 1.40 VatRefundfromState–Nil 0.00

NetCostofProjects 133.75 NetCostofProjects 136.57

IncreasedinCostduetoGST 2.11%

Note-1 Assumed that 70% Materials procured in IntraStateand30%materialsinterState

Amount Note-2

i) 2%VAT refundwasavailable inMaharashtra state for stateutility

ii)Aboveanalysisisdoneonbasisofpre-GSTcostdataofMSEDCLandprocedureadoptedforPostGSTbilling

iii)OthercostlikeCivilerection,PriceVariation,RoadRestorationarenotconsideredinabovecost

70%MaterialsWithinState(IntraState)@5% 3.50

30%MaterialsagainstCForm(InterState)@2% 0.60

TotalTax 4.10

VATRefundfromState-2%VAT 1.40

NetTaxes 2.70Source- Author’s analysis on basis of MSEDCL‘s IPDS/DDUGJY ProjectsExemption to Electricity transmission & DistributionNo. 12/2017- CT (R), Sl. No. 25- “Service by way oftransmissionordistributionofelectricitybyanelectricitytransmissionordistributionutilityisexemptfromGST”.Taxabilityoftheotherservicessuchas,-i. Applicationfeeforreleasingconnectionofelectricity;ii. RentalChargesagainstmeteringequipment;iii. Testingfeeformeters/transformers,capacitorsetc.;iv. Labourchargesfromcustomersforshiftingofmetersor

shiftingofservicelines;v. chargesforduplicatebill;ProvidedbyDISCOMStoconsumeraretaxable.

Increased costs for power CompaniesThe government has exempted electrical energy as wellas services of transmission and distribution of electricityby an electricity transmission and distribution utilityrespectively under the GST law. As a result, powerproducing companies (both renewable and conventional)would be required to pay GST for their inputs such asfuelandmachinery,butwillnotbeabletogetthesetaxesrefunded,giventhattheiroutputi.e.electricityisexempt.Poweristhemostimportantcomponentofinfrastructure.Servicesoftransmissionordistributionofelectricitybeingexemptunder theGST law, power generation companieswouldcontinuetohaveindirecttaxesasasignificantcostfactor.Suchcompaniesmayultimatelypassonsuchburdento consumers under the “change of law” clause in powerpurchaseagreements(PPA).Developerssellingelectricityinthespotmarketoronanon-PPAbasiswouldhavetofactorin the higher cost. Under the pre-GST regime, a projectownerengagedinsettingupofapowerplantorengagedin power transmission/ distribution could procure goods(under an inter-state sale transaction) at a concessionalCSTrateof2%(againstFormC)andstructuresomeoftheprocurementsasin-transitsalestoreducetaxincidenceontheproject.However,thereisnosuchconcessionGSTlaw.Intheabsenceofsuchexemptions/concessions,thereisasignificant increase in project cost aswell as operationalcostofpowercompanies.

Impact on power generationOne of the distinctive features of the new tax regimeimpacting thepowersector is loweringof the taxrateoncoal.Coalhasbeenplacedinthe5percentslab,asagainstan effective tax rate of 11 per cent to 11.5 per cent fordomesticcoalpreGSTregime.AnotherchangeunderGSTisthetaxincreaseonBTG(Boiler,Turbine,andGenerator)and balance of plant (BoP) systems, which would resultin an increase in the capital cost of new plants. Thisequipmenthasbeenplaced inthe18percentslabunderGST,asagainstthepreGST16percenttaxrate.Further,importedequipmentwillbechargedaround23percentasagainstthePreGST21.6percent.Overall,GSTisexpectedtoprovidereliefinthecostofpowergenerationowingtoareductionincoaltax,despitehighertaxratesonBTG.

Impact on renewable energyGSTplacessolarandwindpowerequipmentinthe5percent slab, as against zero taxation for solar and 3-4 percent forwind in the pre-GST regime. In the solar powersegment, GST is expected to increase the capital cost ofprojectsby4-6percent.Forthewindpowersegment,GSTisexpectedtoresult inamarginallynegative impactdueto an increase in capital cost.Ahigher tax rate onwindturbine generators, as against various concessional ratesandtaxexemptionsenjoyedsofarincaseofimporteditems,isexpectedtoincreasethecostofwindprojectsbyaround4percent.Conclusion: Major issue is kept electricity outside thescopeofGSTbyprovidingexemptionwillresultinbreakingthe credit chain, leading to a cascading of taxes and anincreaseinthetaxincidenceontheend-consumer.Anotherimportant aspect for the discoms/gencos under GST isthatloweringthetaxrateforcoalisbringsdownthecostof power.However, as the discoms/gencos are already inlosses, it isuncertainwhetherthecostreductionswillbepassed on to the end-consumer. So Electricity needs tobring under GST scope by withdrawing exemption, andallowpowercompaniestotakebenefitofITConitsinputswithout breaking chain of ITCwill leads to reduction inelectricitycostsomehowthenitwillfulfiloneobjectofGSTtoremovecascadingeffects.


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Independent Directors : ‘Gatekeepers’ anxiety and Board’s response

CMA (Dr.) S. K. Gupta


The perspectiveCorporateGovernanceisagloballyrelevanttheme.Jurisdictionsall across the world are grappling with the ever-increasingchallengesbeingposedinthisdomain.Asaconcept,ithasbeenevolving formore thantwodecadesnowandhasbeendebated,learnt,re-learntandrevisited.Inanenvironmentinwhichfluidityanduncertainty seem to dominate the board agenda, corporateleadershipwillcontinuetobecalledupontodevotesignificanttimeand attention to addressing the emerging legitimate individualaccountability concerns of IndependentDirectors termedas thecorporategatekeepers.Anemerginggovernancechallengeistheneed to address the tension between the pursuit of legitimatecorporatestrategicgoals,andtheconcernsof“gatekeepers”whoperceivethemselvesatincreasingpersonallegalriskforcorporatewrongdoing.

Independent Directors as watch dog of companiesSection 2(47) of the Companies Act, 2013 defines Independentdirector in conjunction with section 149(6) which provides anexhaustive list of qualifications to decide that who can be anindependent director and who cannot be. Schedule IV notifiedbytheMinistryofCorporateAffairsprovidesforcodeofconductof Independent directions and exhaustive guidelines regardingduties,mannerofappointment,meetings,etc.andrequireseveryIndependentdirectortoabidebyit.

AnIndependentDirector(“ID”)isadirectorotherthanamanagingdirectororawhole-timedirectororanomineedirector,who,intheopinionoftheboard,isapersonofintegrityandpossessesrelevantexpertiseandexperience,notbeingapromoterofsuchcompanyof itsaffiliates,notbeingarelativeofpromotersordirectorsofthe company or its affiliates, is an independent director. Suchindividual cannot have any pecuniary relationship with thatcompany,itspromoters,seniormanagementoraffiliatecompanies,during the past two years or the current year. Moreover, theindependentdirectorcannotberelatedtopromotersortheseniormanagement and should not have been an executive with thecompany,partnerorexecutivedirectorof theauditors, lawyers,consultantsofthecompanyinprecedingthreeyears.IthasbeenwitnessedthatIDsarerarelychosenbasedonqualificationand/orexperienceofthecandidate,butmostlythroughcloseassociatesornominationbasis.

Such a Non-executive director plays the role of a watchdog incompanies as they are responsible for handling affairs of theCompanytoboostupethicsofcorporategovernanceandtoensuretransparencyintheCompany.Itcanbesaidthatthegeneraldutyofsuchdirectorsistostriveforbenefitofthecompanybyutilizingitsexperienceincorporategovernanceandtoensuretransparencyin the functioning of the company to avoid the commission offraudsandwrongdoingsbytheofficersofthecompany.

Theimportanceofhavingoutsidedirectorsisbeingincreasinglyviewed as essential to protecting public investors, especially in

controlled companies, all over the world. Accordingly, severalcountrieshaveadoptedoneormoreofthefollowingarrangements:(i)publiccompanyboardsareexpectedtoincludesomefractionofindependent directors; (ii) independent directorsmust serve oncommittees thatplayanactive role inmonitoringmanagementand controlling shareholders; The importance of the institutionof independent directors has been aptly captured by the SEBIreport on corporate governance chaired by Mr. Uday Kotak(2017) as: “The institution of independent directors forms thebackboneofthecorporategovernanceframeworkworldwideandinIndia.Independentdirectorsareexpectedtobringobjectivityinto the functioning of the board and improve its effectiveness.Independentdirectorsarerequiredtosafeguardtheinterestsofallstakeholders,particularlyminorityshareholders,balancetheconflicting interest of the stakeholders and bring an objectiveview to the evaluation of the performance of the board andmanagement.”

Gatekeepers are the Key to Good GovernanceThe term “gatekeeper” refers to those who have direct, formalgovernance authority, and others who perform key roles inpromotingcorporateresponsibility.Regulatorsoftenusetheterm“gatekeepers”torefertothosewithintheorganizationalhierarchywhohavefiduciaryorprofessionalobligationstospotandpreventpotentialmisconduct,andrespondtoanyproblemsthatdooccur.One of themost important roles gatekeepersmust play is as acheckonmanagement’stendencytofocusonshort-termprofitsattheexpenseoflong-termshareholdervalue.

Independent Directors : liabilities and risk factorsOnce considered a dream position, the post of IndependentDirectorhaslostitssheen,asitisnotthecaseoftheprivatesectorbuteventhepublicsectorundertakingsarenotfindingsuitablecandidatestofillthepositionslyingvacantforsometime.TherearemultiplereasonswhythepositionofanIndependentDirectorhasbecomealesssoughtoptionintoday’sera.Strictcompliancerequirementsand failure indistinguishing their liabilitieshavemadeittediousforIndependentDirectorstodelivertheirroles.Independent Directors are required to improve the functioningandeffectivenessof theboardand to safeguard the interestsofallstakeholders.Everylistedpubliccompanyiscompliedtohaveat least one-third of the total number of directors to maintainchecks andbalances and to question the decisions of the boardasanindependentauthorityinanimpartialmanner.Theroleoftheindependentdirectorshasnotchangedbutexpectationshaveincreasedinrecenttimes.

Independent Directors have limited authority in making ameaningfulcontributiontothefirm,whilefacingtheriskofbeingsummoned,investigated,arrestedandharassedbyinvestigatorsandadjudicatingauthoritieshavepromptedindependentdirectorstoresigntheirpostsinrecentyears.Thesituationhasdiscouragedmanypotentiallywell-qualifiedcandidatesfromjoiningboardsofcompanies. The number of independent directors who resigned


30

fromboardpositionsdoubledin2019,comparedwithtotalexitsin theprevious twoyears,asgreater liability, risingnumberofcorporate governance cases, increasing fear of fraud risk andchancesofpersonalreputationbeingonstakeledtotheexodus.

The Board’s challengeThe challenge for the governing board ismultifold.On the onehand, it is expected to exercise informed risk taking with itsstrategicinitiatives,whilecontinuingtopromoteanorganizationalculture that encourages ethical conduct and a commitmentto compliancewith the law.How, then, can boardmembers dotheir jobs and implement appropriate corporate strategy in thefaceofroadblocksraisedbyself-protectiveconduct?Indeed,someindividualboardmembersmayfeelthesameconcernregardingissuesoftheirownpersonalliability,andthusmaybecomemoreinclinedtosay“no.”Howdoleadersmakedifficultandimportantdecisionsforthecompanywhentheyfeelpressuredtoprioritizeconcernswith theirpersonal liabilityprofileover concernswiththe legitimate interests of the company ? The primary boardconcern is that for certain potentially controversial initiatives,somegatekeepersmaybecome“gun-shy;”i.e.,mayengageinself-protectiveconductthatfrustratesvalidboardstrategicinitiativesand other appropriate efforts. This, despite the fiduciary oremployment risks a gatekeepermay assume by acting inwhatmay be perceived as his/her own interests, as opposed to thelegitimatebusinessinterestsofthecompany.

The Board’s ResponseRecently, there have been considerable exits of independentdirectors (‘IDs’) from listed companies due to apprehensionsabouttheirpotential liabilityonaccountof thewrongdoingsofthecompanies.ItisinthiscontextthattheMinistryofCorporateAffairs(‘MCA’)issuedamuchrequiredclarificationonMarch2,2020 that prosecution proceedingswill not be initiated againstindependent and non-executive directors (‘NEDs’) unless therearesufficientevidencestoprovethatsuchdefaultorviolationhadbeencommittedwithhisknowledgeorconsentorhewasguiltyofgrossandwilfulnegligenceorfraud.

MCAhas therefore clarified thatananotherprovisionof theAct [Sec.149(12)]expresslyprovidesthatanIDandNEDcanonlybeheldliableinrespectofsuchdefaultswhichoccurwithhisknowledgeandconsentattributablethroughboardprocesses,andthattheyshouldnotbeheldliableforanycriminalorcivilproceedingsundertheActunlessthesaidcriteriaismet.AspertheCircular,monitoringthedaytodaycompliancesoftheCompanyisnottheresponsibilityoftheIDsandNEDsandhenceanIDorNEDcannotbeheldliableforactswhicharebeyondtheircontrollikefailureonthepartoftheCompanytomaintainandupdatestatutoryregisters,minutesofmeetings,filingofreturnsetc.

Boardswillbecontinuallycalledupontodeftlybalancetheneedtopreserveandenhancetheloyaltyandconfidenceofcorporategatekeepers;theobligationtopromoteanorganizationalculturethatencouragesethicalconductandacommitmenttocompliancewiththelaw.

While the most effective action plan depends upon the uniquecircumstances of an individual company, a successful boardresponsemightincludeelementsofthefollowing:• An internal board-to-gatekeepers acknowledgement that

thisnewtensionexists;whyitexists;whyitismorethefunctionofhumannaturethanitisofbadfaith;andoftherisksthatcanarisefromthisconduct.

• Assure gatekeepers that corporate strategic plans areconsistent with the board-approved risk profile for the

corporation,andthatallmajorcorporatestrategydecisionshavebeencarefullyvettedbyexperiencedlegalcounsel.

• Providegatekeeperswithclearlegaladviceontheproperimplementationofapprovedcorporatestrategies.

• Enhance gatekeeper confidence in the effectiveness andrigorofexistingcorporatecomplianceandriskmanagementprograms,andofconduitsthroughwhichgatekeepersandothers can express—without fear of retribution—to thehighest organizational authorities their concerns aboutindividualstrategicinitiatives.

Conclusion

People are getting more and more selective about joiningboards of companies, while basing their decision on severalqualitative factors. The concern is that these developmentsmay cause somegatekeepersandother corporate officials tobemuch more self-protective in performing their corporate andfiduciary responsibilities, to the possible detriment of strategicimplementation. The attentive and forward looking boardsshould acknowledge the potential for this conflict and take aseriesofpro-activestepstoreducetheunderstandableconcernsof gatekeepers. Such steps should be consistent with a top-down organizational “culture of compliance” that the board isresponsibleformaintaining.

References• Balasubramanian,BalaN., andJaideepSinghPanwar, ‘TheSpirit of

IndependenceRemainsUnaddressed’,LiveMint,October10,2017;• KobiKastielandAaronNili,‘”CapturedBoards”:TheRiseof“Superior

Directors”andtheCaseforaBoardSuite”’,HarvardLawSchoolForumonCorporateGovernanceandFinancialRegulation,June28,2017.

• Lucian A. Bebchuk & Assaf Hamdani, ‘Independent Directors andControlling Shareholders’ (2017), University of Pennsylvania LawReview,Vol.165,No.6,1280.

• N. Sundaresha Subramanian, ‘How Independent are IndependentDirectors?’,BusinessStandard,March17,2017.

• ReportoftheCommitteetoReviewOffencesundertheCompaniesAct,2013,MinistryofCorporateAffairs,GovernmentofIndia(August,2018),

• SEBIReportoftheCommitteeonCorporateGovernance(2017)• SimonWitney, ‘Corporate Opportunities Law and the Non-Executive

Director’(2016),JournalofCorporateLawStudies,Vol.16,No.1,145-146

OBITUARY

CMA M.N. Bapat (M/2491) Sr. Member of Institutepassedawayon22ndNovember2020.Maythedepartedsoulrestinpeace.


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Performance analysis of boiler in process industriesCMA Dhananjay Kumar Vatsyayan


A. Performance AnalysisPerformanceanalysisistechniqueofanalyzingorcomparingtheperformance of any specific equipment, team or situation withregards to standard / target across industries. It also helps inidentifyingthefollowingusefulinformation.1. Factualandobjectivebasedinformation2. Overviewofequipmentperformance&team’sskillinorderto

identifythestrengthandtheWeaknesses.3. Recordsofperformance4. FactualdatatocreatesynergyTheperformanceofanyboilerreducesasitgetsolder,becauseofpoormaintenance,operationalissuelikefoulinginheattransferroute(Sootonoutsidetube,depositinsidetube)poorcombustionoffuel,heatlossetc.So,theperformanceanalysishelpsustofindout,thedriftingawayofboilerfrombestoperatingsituation.Ithelpstopinpointtheproblematicareasneedscorrection.

B. Boiler

Figure 2 – Typical steam flow cycle in process industries

C. Analyzing Boiler PerformanceThe performance analysis of any boiler can be done by visualobservation and through data analysis available in boiler logbook.Referannexure1fortypicalboilerlogbook

1. Visual Observation MethodJustlookatthecolorofsmokebeingemittedthroughthestackofaboiler.Thecolorofsmokewillbe(i)Colorlesssmoke(ii)Whitesmoke(iii)Blacksmoke.Thesmokecolorrevealstheperformanceofboilerfurnacewithrespecttofuelairmixtureinfurnaceorfuelburningstage.

Whenairinfurnaceishigherthanairfuelratio,someamountofairwillremainunusedanditwillcarryinfluegas.Unusedaircarriesawayenergyalongwithitandefficiencyofboilerwillbelow.ThecoloroffluegaswillbeWhiteinthisconditionanditiscalledgoodfuelburning.

Whenair in furnace is lower thanair fuel ratio, some fuelwillhave partial combustion and some quantity remain unburned.Thepartialcombustionoffuelemitscarbonmonoxide(Poisonousgas)andlowenergy.Unburnedfuelandcarbonmonoxidecarryawayinfluegas.TheboilerefficiencywillbeverylowandcolorofsmokewillbeBlack.

When theair in furnace is justappropriate (Oxygen2%higherthantheoreticalrequirement),thefuelwillburncompletelyandemitmaximumenergy.Theboilerperformancewillbeexcellentandcolorlessfluegasemitsfromboilerstake.i) Colorless smoke => Excellent burning of fuel in

furnace=> Fuel + Air = Carbon dioxide+Nitrogen+Waterii) WhiteSmoke=>GoodBurningofFuelinfurnace Fuel + Air = Carbon dioxide + Oxygen+Nitrogen+Wateriii) BlackSmoke=>PoorBurningofFuelinfurnace Fuel + Air = Carbon dioxide + Carbonmonoxide+Carbon

+Nitrogen+Water

Figure 1 – Bagasse fired water tube Boiler; Make - Walchandnagar Industries.

Boiler is a closed vessel used for transferring combustion heatinto water till it become hot water or steam. The combustionheat is transferred throughmeans of conduction (Heat transferthroughphysicalcontact),Convection(Heattransferbyconveyingmedium)andradiation(Heattransferwithoutconveyingmedium– example sunlight reaching to earth). The process of heatingliquid and converting into gaseous state is called evaporationprocess.

At saturation temperaturewater consume huge energy, knownas latent heat (Latent heat of steam is 540KCal / Kg), whileconverting to steam. When water convert to steam it expandvolumetricallyto1700times.Thisexpansionofvolumecontainshuge energy and it can be used as source of energy for kineticmovement or thermal heating. The kinetic movement is usedfor running the power generator through turbine / engine. Thethermal energy is used as heating medium in process. Steamcanbeusedforbothpurposesi.e.superheatedheatedsteamforrunningturbineandsaturatedsteamforprocess.


32

2. Data Analysis MethodBoiler performance can be analyzed with the help of availabledata(BoilerLogBook).ThedataobtainedfromlogbookshouldberearrangedasperrequirementandsystematicallyanalyzedbycalculatingBoiler evaporation ratio,Boiler efficiencyandboilerutilization.

a. BoilerEvaporationRatioorSteamtoFuelRatio

Itissuitabletocomparetheperformanceofboilerondaytodaybasis,monthlyorannualbasisandintercompanycomparisons.Thisratioisindependentofspecificationandotherparameters.Itisaquickanalysisanddoesnotrequirehighskill.

Steamgeneratedinaboilerisdirectlyproportionaltofuelused.However,itdependsonimpurityinusedfuel.

QSisProportionaltoQF

Qs=KQF

K=QS/QF

QS–Quantityofsteam

QF–QuantityofFuel

K–SteamtoFuelratioorEvaporationratio,whichisconstantatspecificboilerparameterandfuelbeingused.

EvaporationRatioofdifferenttypeoffuelisvaryinnarrowrangeand it changes based on impurity in fuel. Necessary data forcalculatingtheSteamtofuelrationcanbeextractedfromBoilerlogbookandcalculatedratioshouldbecomparedwithstandardratioofparticularfuel.Boilerperformancecanbeeasilymeasuredbycomparingactualratiowithstandardratio.

Sr. TypeofFuel Std.SteamtoFuelRatio1 GasFiredBoiler 11.0to13.02 OilFiredBoiler 13.5to14.53 CoalFiredBoiler 4.0to5.54 BiomassFiredBoiler 2.0to3.05 BagasseFiredBoiler 2.0to2.4

Table 1 – Standard Steam to Fuel Ratio

b. Boiler UtilizationEfficiencyofanyboilerdependsonboilerload,whichisindicatedasboilerutilizationinCostAuditReports.TheBoilerefficiencyincreasewithincreasingtheboilerloadanditreachesthepeakat64%to74%level.Theefficiencycurvewilldropbeyondthisloadrange.So,itisimportanttooperateaboilerwithinloadfactorof64%to74%range.Formulausedforcalculatingutilizationfactorinpercentisasunder. =Totalsteamgenerated×100/(BoilerCapacity×BoilerRunningHrs.) If8MTboilerrunsfor24hoursandgenerate144MTofsteam. Theboilerutilization=144×100/(8×24)=75%

A typical calculation of Co-generation plant in sugar factory isappendedbelowforyourreference.LossofRs98Lacsiscalculatedbecauseofoverandunderutilizationoftwoboilersinuse.

Table 2 – Typical calculation of Boiler (Sugar Plant)

c. BoilerEfficiencyorThermalEfficiencyofBoiler

Higher the boiler efficiency, steam cost per MT will be lower.ThermalEfficiencyofboilerismeasuredthroughtwomethods(i)Directmethodand(ii)indirectmethod.

In directmethod energy gain ofworkingmedia (Water, steam)is compared with energy released by fuel burnt. This methodisveryeasyandprovideresultwithinrangeof+-1%.ItcanbeusedbyManagementaccountantwithouthavingtechnicalskill.Necessarydatacanbeminedfromboiler logbook.Theformulausedare EnergyGainedbyMedium= =SteamQuantityxSteamEnthalpy–FeedwaterQuantityx

FeedwaterEnthalpy EnergyavailableinFuel= =FuelQuantityxGrossCalorificValueofthefuel. Boiler Efficiency = Energy Gained by medium / Energy

availableinFuel.Enthalpy indicates theenergy content (KCal /Kg) of steamorwater.Theenthalpyofsteamdependsonpressureandtemperatureofsteam/water.Higherthepressureandtemperature,enthalpywillbehigher.YoumayobtainEnthalpyandgrosscalorificvalueof fuel fromonline (internet)ormayreferdatahandbooks likesteamtablesetc.Indirect Method is most accurate method and it reveals theexactproblemareas.However, it requiresvariousequipment&technicalskill tomeasuredesiredparametersand interpretthesame.So, it isnotrecommendedhere forCMAtousethesamebecauseofitscomplicacyincalculation.

C. Conclusion Thecalculationofvariousparametersrelatedtoboilerperformancewill reveals theproblemandprobablesolutionofsteamrelatedissuelike.1. Reasonofhighsteamcostandpinpointexactproblem.2. Timetoreplacetheboilerandpurchasenewefficientboiler.3. Optimizationofsteamcost.4. Optimumoperatinglevelofboiler.

“Jay Hind”

Annexure 1: Typical Boiler log BookNameofBoiler-8MTBagasseFiredBoilerNo1Date-31Oct.2020

Time SteamPressure(Kg/M2)

SteamTemp.(oC)

SteamQuantity(MT/Hr)

Fuel Quantity(MT/Hr)

FeedWaterQty(MT/Hr)

FeedWater Temp.(0C)

FDFan RMP

FlueGasTemp.

01.00 20.0 330 7.1 3.5 7.5 100 1500 15002.00 20.5 335 7.5 3.6 7.4 100 1500 15003.00 21.0 335 7.3 3.7 7.3 100 1500 15004.00 21.0 340 7.6 3.8 7.5 100 1500 15005.00 20.5 340 7.5 3.7 7.4 100 1500 15006.00 20.5 340 7.4 3.7 7.5 100 1500 15007.00 21.0 335 7.5 3.6 7.6 100 1500 150

Name & Signature of Supervisor Name & Signature of Boiler attendant


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Importance of Proper Allocation, Apportionment and Absorption of Depreciation Cost

CMA Rajesh Kapadia


Afixedassetsuchasaplant&amachineryhasalifespanduringwhichitrendersserviceofthenatureit is intendedtogiveandontheexpiryofwhich,theassethasneithernovalueorhasonlyasmallvalueasscrap.Duringtheperiodofthelifetheasset,itsvalueisthusgraduallyreducedtillitreachesnilloraverysmallfigure.Thisreductioninvalueiscalleddepreciation.Depreciationisdefinedasthediminutioninthevalueofafixedassetduetouseand/orlapseoftime.ToarriveatreliableProductCost,itisessentialtoensureproperallocation,apportionmentandabsorptionofAllCostElements.And Depreciation Cost being an important Cost Element, itis imperative to ensure it proper allocation, apportionment toRespective Cost Centres and thereafter its absorption in FinalProductCostwhichisexhibitedinAnnexureI.ThismakesitnecessarytodefineProperCostCentres.ThisalsomakesitnecessarytohaveMaintenanceofFixedAssetRegistertoenableidentificationofassetswithcostcentres.InFixedAssetRegister,eachAsset/Plant&MachineryshouldbecorrelatedwithproperCostCentre.ListofCostCentresshouldbe provided to Person / Persons responsible to keep /maintainFixed Asset Register to ensure mentioning of Correct CostCentreagainsteachAsset/Plant&Machinery.Sometimes,NewCostCentres are added due to addition to Plant&Machinery,InstallationofNewPlant&Machinery.ThisUpdationshouldbeprovidedtoALLConcerned.WhenaCostingSystemisestablishedforthe1sttime:

1) Eitherintheexistingcompanyor2) InNewCompanythen

ItwouldbeabetterpracticetoeducatetheallconcernedincludingthePersonResponsible tomaintainFixedAssetRegisterabouttheStructureofCostCentresandtheirimportance.Thiswillhelp

andenablecorrelateeachAssetandrelevantcorrectcostCentre.ItisalwaysadvisabletohaveProperCostingSystemwithProperlydefined Cost Centres to have proper allocation, apportionment& absorption of Depreciation Cost. It is also advisable that,DepreciationshouldgenerallyappearasaseparatelineitemintheCostStatementsinsteadofbeinggroupedunderoverheads.Thisisbecauseofitssizeinthetechnologydrivenbusinesstodayanditsuniquecharacteristicofbeingnon-cashcost.Mentionedbelowaresomeillustrativepracticalsituationswhichanyindustrymayfaceandtheirprobablesolutions:1) It may be possible that in Manufacturing Plant, several

ProductsaremanufacturedbutdepreciationisavailablenotProductwisebutforManufacturingPlantasawhole.Inthissituationdepreciationmaybeallocated /apportionedamongproductsonthebasisof:- VolumeofProductionofeachProduct- Process Cycle Time or Equipment OccupancyHours of

eachProduct2) ItmaybepossiblethatSomeManufacturingPlanthasrunat

substantiallylowcapacityduringanygivenperiodwhichmaybeduetoanynoofreasonsincludingpoormarketconditions.

HeretotalDepreciationwillbeallocatedtoPlant&Machinery. ButforProductCostingforManagementDecisionMaking,it

isadvisabletoconsiderdepreciationcostequivalenttoactualcapacityutilised.

3) ItmaybepossiblethatSomeManufacturingPlanthasbeenstoppedmaybebecauseProduct isunabletocover itsRawMaterialCostletaloneeitherContributionorMargin.

Under this situation depreciation will be charged in FinancialBooksofAccountsbutinCostRecords,ItwillbeanExpenseItemforReconciliationofProfitbetweenFinancialAccountsandCostAccounts

ANNEXURE I: Cost CentrewiseDepreciation Cost for Company / for Plant 1YEAR 2019-20 (Rs lacs) % Allocation Apportionment/ Absorption

COSTCENTRESManufacturing Cost Centres

ManufacturingPlant-1 InProductCostSheetitwillap-pearasDepreciationCostManufacturingPlant-2

ManufacturingPlant-3Utilities Cost Centres

PowerPlant AllocatedtoRespectiveUtilities InProductCostSheet,itwillap-pearasCostofRespectiveUtilities

BoilerDMWaterPlantFilterationPlantCoolingWaterPlantChilledWaterPlantAirCompressorNitrogen

Other Cost Centres Allocated InProductCostSheet,itwillap-pearasFactoryOverheads

TOTAlNOTE:VIEWSEXPRESSEDAREPERSONALVIEWSOFTHEAUTHOR


34

GST CornerCompiled by CMA Vandit Trivedi


• Amendments in CGST Rules, 2017: Series ofnotifications issued on 10.11.2020 for implementationofnewlyautomatedGSTComplianceSystem(w.e.f.1stJanuary2020.)

• Rule 59 of CGST Rules:i) Electronic filing of monthly/quarterly GSTR -1

returnsthroughinvoicefurnishingfacility(‘IFF’)

ii) Theregisteredpersonwhohasoptedforquarterlyfilingfacility,mayupdatetheirmonthlydetailsupto thirteen days from the end of the subsequentmonths.CumulativeturnoverofthesetwomonthsshallnotexceedRs.50lacs.

iii) Ifsalesdetailsfurnishedinfirst&secondmonthsofthequarter,notrequiredtofurnishthesameagainwhilefilingquarterlyGSTR-1.

iv) Outward supplies of goods & services shallencompass the details of Interstate & Intrastatesupplies along with Debit note & Credit notesthereof.

• Rule 60 of CGST Rules:Thedetailssubmittedbythesupplier inGSTR -1will be auto-populated inGSTR-2Boftherecipient.DetailsofInputTaxCredit(ITC)willtravelfromGSTR-2BtoGSTR-3B.

• Rule 61 of CGST Rules:PrescribedduedateforfilingofGSTR -3B. other than InputServiceDistributor, aregistered person paying tax under Section 10, 51 &51ofCentralGoods&ServicesTax(CGST)Actalongwith a registered person covered under Section 14 ofIntegratedGoods&Services(IGST)Act.

Period Due dateMonthly Onorbefore20thdayofsubsequentmonthQuarterly Onorbefore22thdayofsubsequentmonth

fromtheendofquarter*

Onorbefore22thdayofsubsequentmonthfromtheendofquarter**

*(Please refer “Compliance Calendar.”)

• Rule 61A of CGST Rules:i) InsertedanoptionforquarterlyfilingofGSTR-3B

under the scheme of Quarterly Return MonthlyPayment(QRPM).

ii) Aregisteredpersonshallrequiretoopttheoptionfromthe1stdayofthesecondmonthoftheprecedingquarter till the last day of the firstmonth of thequarter i.e.the time limit to opt the scheme fromApril–June2021isfrom1.02.2021till30.04.2021.

iii)Once the option is exercised, it will be continueduntilchanged.

iv) Non-complianceof the lastmonthwill restrict theexerciseofoptingthisoption.

v) A registered person, whose aggregate turnoverexceedsRs5croreduringthecurrentfinancialyear,shalloptforfurnishingofreturnonamonthlybasis,from the first month of the quarter, succeedingthe quarter during which his aggregate turnoverexceedsRs5crore.

• Rule 46 of CGST Rules: Furnishing HSN code ismandatoryinGSTR-1

• Rule 60(7) of CGST Rules: Inserted Form GSTR-2B – “Auto Drafted ITC statement” (Notification82/2020-CentralTaxdated10.11.2020)

• Due date for filing of GSTR-1 (w.e.f. 1st January 2020):

Period Due dateMonthly Onorbefore11thdayofsubsequentmonthQuarterly Onorbefore13thdayof subsequentmonth

fromtheendofquarter

(Notification 83/2020-Central Tax dated 10.11.2020)

• ExercisingtheschemeofQRPM:• Registered personhaving turnoverup toRs. 5 crores

canopttheschemeofQRPMfromJanuary2021subjecttothereturnsfortheprecedingperiodsshouldbefiled

• Selectedoptionshalllastuntilrevisedbythetaxpayer• OptionofQRPMisunavailableforthetaxpayershaving

turnoverexceedingRs.5crores.• TheschemeshallberequiredtooptGSTINwise.• Default migration has been prescribed for registered

persons who have furnished the return for the taxperiodOctober2020onorbefore30thNovember,2020.Suchdefaultoptioncanbechangedfrom05thDecember2020to31stJanuary2021.

Sr. Class of Registered Person Default Option1 •Aggregateturnover<Rs1.5crores

•FurnishedFORMGSTR-1onquarterly basisinthecurrentfinancialyear

QuarterlyReturn

2 •Aggregateturnover<Rs1.5crores•FurnishedFORMGSTR-1onmonthly basisinthecurrentfinancialyear

Monthly Return

3 •Rs.1.5crores<Aggregateturnover> Rs5crores

QuarterlyReturn



35

• Monthly payment options under the scheme of QRPM

TwomethodsareavailableforpaymentoftaxinFormPMT-06.Thetaxpayercanoptanyonefordischargingoutputtaxliability.

i) Fixed Sum method: For quarterly return, taxtobepaidequal to35%of taxpaid incash intheprecedingquarter.Andformonthlyreturn,taxtobepaidequaltotaxpaidinprecedingmonth.

Nointeresttobeleviedincasetheauto-calculatedtaxpaidthroughPMT-06iswithintimelimit.Lesspayment of liabilitywill attract the interest fromduedateofquarterlyfilingofGSTR-3Btillthedateofpaymentmade.

ii) Self-Assessmentmethod:Taxtobepaidconsideringoutput liability & ITC available. Interest to beleviedonlatepaymentofliability.

• Mayrestricttodepositanyamount,incaseifsufficientbalance available in electronic credit /cash ledgers aswellashaving“Nil”liability.


• Withdraw Notification 76/2020: Notification 76/2020 dated 15.11.2020 notifying due

datesforFORMGSTR-3BforthemonthsfromOctober,2020tillMarch,2021hasbeenrescinded.


• Revise due date for Job-work Compliance: 30thNovember2020istherevisedduedatefortheJob-

workcompliance(filingofformITC-04)pertainingtoJulytoSeptember2020.


• E-invoicing: E-invoicingimplementation,a“NewYear–2021”giftto

thetaxpayerhavingturnovermorethanRs.100crores.(w.e.f.1stJanuary2021)


• Quick Response (QR) Code: Relaxationinthepenalprovisionsfornon-compliancein

caseofaninvoiceissuedwithoutQuickResponse(QR)

Codetoun-registeredpersonbyaregisteredtaxpayerhaving turnover ofRs. 500 crores from1stDecember2020to31stMarch2021.However,therelaxationwillberemovedfrom1stApril2021.


• Compliance Calendar:

Nature of Compliance Due Date/Extended Due Date

GSTR-7 (TDS Deductor) for themonthofNovember2020.

10Dec.2020

GSTR-8 (TCS Collector) for themonthofOctober2020.

10Dec.2020

GSTR-1(forturnoverofmorethan1.5cr.)forNovember2020.

11Dec.2020

GSTR-6(InputServiceDistributor)forNovember2020.

13Dec.2020

GSTR-3B (for turnovermore than5Cr.)forNovember2020.

20Dec.2020

GSTR-5 (Non-Resident TaxablePerson)forNovember2020.

20Dec.2020

GSTR-5A (OIDAR ServiceProvider)forNovember2020.

20Dec.2020

GSTR-3B (for turnover up to 5Crore)forNovember2020forStatecategoryI.

22Dec.2020

GSTR-3B (for turnover up to 5Crore)forNovember2020forStatecategoryII.

24Dec.2020

*State Category I: Chhattisgarh, Madhya Pradesh,Gujarat, Maharashtra, Karnataka, Goa, Kerala, TamilNadu, Telangana or Andhra Pradesh or the UnionterritoriesofDamanandDiuandDadraandNagarHaveli,Puducherry, Andaman, and the Nicobar Islands andLakshadweep

**State Category II: Himachal Pradesh, Punjab,Uttarakhand,Haryana,Rajasthan,UttarPradesh,Bihar,Sikkim,ArunachalPradesh,Nagaland,Manipur,Mizoram,Tripura,Meghalaya, Assam,West Bengal, Jharkhand orOdisha or theUnion territories of Jammu andKashmir,Ladakh,Chandigarh,andDelhi.

Forthcoming Webinars for the month of December 2020Date Theme Faculty

15-12-2020 IndAs-19,Employeebenefitsdefinedbenefits-Part-6

CMARammohanBhave

19-12-2020 Ind As - 102 Sharebased payment employeestidk

CMARammohanBhave

24-12-2020 Unlock to Take-off - A Paradigm shift forCMA’s

CMAGopalBhutada,Head,BusinessFinance -R&D,TataMotors,Pune

26-12-2020 FacelessAssessmentScheme CMASantoshKorade,Dy.Manager(F&A),MaharashtraStateElectricityDistributionCompanyLtd.

RNI No. 22703/72 Posted at Mumbai Patrika Channel on 10th of every month. Date of Publication is on 10th of every month.Postal Regn. No. MCS/089/2018-20 WPP License No. MR/TECH/WPP-41/South/2018-20

To

If undelivered please return to:

THE INSTITUTE OF COST ACCOUNTANTS OF INDIAWESTERN INDIA REGIONAl COUNCIl,RohitChambers,JanmabhoomiMarg,Fort,Mumbai400001.

36

Printed & Published by Ashishkumar Sureshchandra Bhavsar on behalf of the Western India Regional Council of the Institute of Cost Accountants of India, Printed at M/s. Surekha Press, A 20 Shalimar Industrial Estate, Matunga, Mumbai 400 019. Published at Western India Regional Council of the Institute of Cost Accountants of India, Rohit Chambers, 4th Floor, Janmabhoomi Marg, Mumbai 400 001. Editor: Ashishkumar Sureshchandra Bhavsar.

Disclaimer1. WIRC does not take responsibility for returning unsolicited publication material. Unsolicited articles and transparencies are sent in at the owner’s risk and

the publisher accepts no liability for loss or damage.2. The views expressed by the authors are personal and do not necessarily represent the views of the WIRC and therefore should not be attributed to it.3. WIRC is not in any way responsible for the result of any action taken on the basis of the articles and/or advertisements published in the bulletin. The

material in this publication may not be reproduced, whether in part or in whole, without the consent of the Editor, WIRC.

Theme for Coming MonthsMonth Theme Sub Theme

January Role of Cost Accountant – Atma Nirbhar Bharat & Budget – 2021ExpectationsunderCOVID19

•CostCompetitiveProduction•MSMESector•ServiceSector•TaxReformsunderBudget2021•COVIDImpactonBudget2021

February Management Information System – Costing Prospective & StrategicCost&ManagementSystem

March Yearend (2020-21) Activities Under COVID 19 – Do’s & Don’ts(Accounting,IncomeTax,CompaniesActProspective)

ThemeofJanuary2020isRoleofCostAccountant–Atma Nirbhar Bharat & Budget-2021 Expectations under COVID 19. Articles on the themeaswellas otherprofessionalmattersare invitedalongwith scanned copies of their recentpassport sizephotograph,emailid,mobilenoandscannedcopyofdeclarationstatingthatthearticlesaretheirownoriginalandhavenotbeenconsideredforanywhereelse.Pleasesendyourarticlesbye-mailtowirc.admin@icmai.inbefore25thDecember2020.

Pls. Note the final decision to consider Article/Paper is left with Chairman – Editorial Board.

CMA Harshad Deshpande, Chairman WIRC met Mr. Prashant Khatavkar, General Manager, Bank of Maharashtra to handover ‘representation to include CMA in conducting Stock Audit’

CMA Amit Devdhe has won 3rd Prize in “GST n-You Contest, 2020”, on Benefits of GST held by GSTN for his creative thinking and entry submitted on “Various Benefits of GST”.