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Impact Assessment – The Insolvency and Bankruptcy
Code, 2016
Study Circle Meet, Bangalore Branch of SIRC – June 22, 2016
Presented By: Sandeep Jhunjhunwala, FCA
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Presentation OverviewSummary
Why is it needed?
Belling the Bankruptcy Cat!
Why India's bankruptcy laws are such a mess?
Can the new bankruptcy law prevent more Vijay
Mallyas?
The Build up to the Code
Key Features
Insolvency resolution process for corporate debtors
Liquidation process
Cross Border Insolvency
Insolvency resolution process for non-corporate debtors
International Experience
New Opportunities/ Scope
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Old disease, New Prescription
Content
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Why is it needed? Indian banks, neck-deep in bad debts
Content
Banks have become increasingly vulnerable to poor recovery on loans made to corporates
Gross NPAs of the banking system have risen from 2.4 percent (on a base of INR 23.3 trillion of
advances) in 2008 to 4.8 percent (on a base of INR 59.8 trillion of advances) in 2015
Restructured advances (ie loans whose terms have been revised and which have a higher
probability of becoming NPA in future) have increased from 1.2 percent in 2008 to 6.8 percent in
2015
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Belling the Bankruptcy Cat!
Content India is a capital starved country - essential that capital isn’t frittered away on weak and unviable
businesses. Quick resolution of bankruptcy can ensure this.
Raghuram Rajan's statement on 'Bankrupt defaulters' hits the nail on the coffin
‘19th Century’ approach to doing business will only create ‘third-class’ companies - Niti Aayog CEO
Current laws governing insolvency are fragmented, multi-layered and adjudication of insolvency
matters take place in multiple fora, resulting in development of an unpredictable regime
Entire process of winding up is very long-winded, with Courts, Debt Recovery Tribunals and the
Board for Industrial and Financial Reconstruction (BIFR) all having a say in the process
Current system does not address the interests of unsecured creditors (such as Bond holders etc),
foreign creditors or institutions other than Banks (NBFCs etc)
Creditors would not be stymied by red-tape and promoters will directly become accountable for any
financial lapses
The Code, by forcing failed firms to shut shop, can lead to a survival of the fittest in the job market
too
US has a Bankruptcy Code that provides for fairly quick liquidation or reorganisation of business. It's
time for India to follow suit if it needs to prevent the economy from tumbling southwards
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Why India's bankruptcy laws are such a mess?
Content World Bank reckons that it takes more than 4 years to wind up an ailing company here, almost twice
as long as it does in China, 1.5 years in high-income member countries of OECD – Dismal Statistic!
Recovery of debts - stuck at 25.7 cents on the dollar, among the worst in emerging economies (80.4
cents in the US, 88.6 cents in the UK)
Nearly 60,000 bankruptcy cases languish in India's overburdened courts
Painfully slow pace as courts try to interpret a variety of conflicting laws that cover insolvency:
– Ailing companies have to wait until their net worth is reduced by half before they qualify as “sick”
– Regulations on land and labour which prevents selling of property/ laying off
– Some laws forbid creditors from taking any legal action against the defaulter until a restructuring
plan is in place which can take several years
Kingfisher, once India's second-biggest airline, provides an illuminating example. The Company was
grounded in 2012 with debts of over USD 1.5 billion. But it was not until February of this year that its
long-suffering creditor banks got their hands on its former headquarters in Mumbai.
With respect to insolvency resolution, India's rank is as low as 136 (out of 189) compared to Singapore's
27, Australia's 14, UK's 13, and USA's 5
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Can the new Bankruptcy law prevent more Vijay Mallyas?
Content
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Can the new bankruptcy law prevent more Vijay Mallyas?
Content Defaulting promoters, wilful or otherwise, are known to hide behind the shield that the law provides,
treating a company as a separate legal entity, distinct from its promoters, shareholders and
directors
Ruse of many defaulters - Following the doctrine of limited liability, the law recognises that the
liability of the shareholders of a company is limited to the extent of their contribution
When lenders turn on the heat, defaulters take a ride on the creaky over-burdened Bankruptcy
and insolvency system
Piercing the corporate veil for default may have a chilling effect on entrepreneurial activity, the
Courts appear to be conscious of this
New Code proposes to bring recalcitrant defaulters to book by empowering creditors to initiate the
process at an early stage to replace the management
Provides for takeover of management by insolvency professionals nominated by the creditors.
Professionals to have the flexibility to bring in turnaround specialists and consultants to achieve the
desired business results
Provides for liquidation of a company at the earliest opportunity to minimise losses for debtors and
shareholders. To deal with instances of asset stripping, the proposed Code provides for avoidance
actions to set aside fraudulent transactions intended to siphon of assets.Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Dead Horses
Content Troubled companies in India, or their creditors, largely turn to the Official Liquidator, a government-
appointed officer attached to the Country's High Courts, who administers assets and oversees
liquidation
Official Liquidator system is a complete disaster
Banks can also turn to separate Debts Recovery Tribunals (DRT), partly staffed by officials on
assignment from the banks themselves and overseen by the Ministry of Finance
DRT - officials have little power to draw a line under languishing cases
Both are overstretched - always outnumbered by teetering pillars of files
Presence of multiple adjudication fora creates opportunities for debtor firms to exploit arbitrage to
frustrate the recovery efforts of creditors and to adversely impact timeliness of resolution process
Reform process has so far taken the approach of "interim fixes designed to solve the problem at
hand"
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Background
Content
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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The Build up to the Code
Content A Code, as per Black's law dictionary, defined as 'a collection or compendium of laws'
In legal parlance, refers to a systematic and comprehensive compilation of laws, rules or
regulations that are consolidated and classified according to a particular subject matter
Bankruptcy Code - A comprehensive compilation of laws, rules and regulations pertaining to the
subject of bankruptcy law in India
No single umbrella legislation governs insolvency and bankruptcy proceedings in India
Instead, there is a slew of legislation governing the legal framework, including:
– Companies Act 2013
– Sick Industrial Companies (Special Provisions) Act 1985
– Recovery of Debts Due to Banks and Financial Institutions Act 1993
– Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
2002 (Amendment Bill 2016 introduced before the Lok Sabha)
– Presidency Towns Insolvency Act, 1909
– Provincial Insolvency Act, 1920
– Forums such as the Debts Recovery Tribunals, Company courts and the National Company
Law Tribunal (proposed by the Companies Act and not yet in force)
Single piece of legislation to connect the various insolvency laws has been on the cards for some
time (nothing moves quickly here!)
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
Century Old, Archaic
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The Build up to the Code
Content
1 The Tiwari Committee (1985), which introduced the Sick Industrial Companies Act, Narasimhan Committee I and II (1991 and
1998), which introduced the Recovery of Debts Due to Banks and Financial Institutions Act and the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, Justice Eradi Committee (1999), which introduced
changes to the Companies Act and proposed the repeal of the Sick Industrial Companies Act, LN Mitra Committee (2001) which
proposed a comprehensive bankruptcy code
Various committees1 have explored the idea of consolidating India's insolvency and bankruptcy
laws
It was not until November 4, 2015 that the Bankruptcy Law Reforms Committee (chaired by former
Secretary General, Lok Sabha and former Union Law Secretary – Sri TK Viswanathan) submitted its
final report which recommended the passage of the Insolvency and Bankruptcy Code, 2015
On December 21, 2015, the FM tabled the Code before the lower house of the Indian Parliament
(Lok Sabha); was referred to a standing committee, which gave its report on April 28, 2016
Code 2016 passed by the Lok Sabha on May 5, 2016 and by the Rajya Sabha (Upper House of the
Indian Parliament) on May 11, 2016
Received the assent of the President of India on May 28, 2016
A giant leap forward in terms of streamlining India's somewhat scattered insolvency laws into a
single piece of legislation which governs bankruptcy and insolvency for all debtors, including
companies, limited liability entities (including LLPs and other entities with limited liability),
unlimited liability partnerships and individuals
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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The Build up to the Code
Content Code also seeks to repeal the two Insolvency Acts of 1909 and 1920 and amend many of the
existing statutes that govern insolvency proceedings
Code is aligned with the Government's initiative to make doing business in India easier
Easy of doing business is not only convenient entry into the market but also an easy exit
Aimed at creating an overarching framework to make it easier for sick companies to either wind up
their business or engineer a turnaround, and for investors to exit
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Preamble and Structure
A Code to:Code has 255 sections divided into
5 Parts as below:
Part IPreliminary
1 Chapter
Section 1 - 3
Long Title Structure
Part IICorporate
Insolvency
Resolution Process
7 Chapters
Section 4 – 77
Part IIIInsolvency
Resolution and
Bankruptcy for
individuals and
Partnership Firms
7 Chapters
Section 78 – 187
Of corporate persons, partnership firms
and individuals in a time bound manner
For maximization of value of assets of such
persons, to promote entrepreneurship,
availability of credit and
Balance the interests of all stakeholders
including alteration in the order of priority of
payment of Government dues and
Consolidate and amend the laws relating to
reorganisation and insolvency resolution
Content
To establish an Insolvency and Bankruptcy
Board of India, and for matters connected
therewith or incidental thereto
Part IVRegulation of
Insolvency
Professionals,
Agencies and
Information Utilities
7 Chapters
Section 188 – 223
Part VMiscellaneous
Section 224 – 255
(Section 245 - 255
enables
amendments in
other statutes such
as Companies Act
2013 etc)
SchedulesFirst Schedule –
Eleventh Schedule
(Schedules provide
for amendments to
be carried out in
other statutes such
as Companies Act
2013, IT Act 1961)
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala Divided into various chapters, the Code aims to address the different aspects of insolvency and bankruptcy
proceedings and the varying processes used by different types of debtors
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Key Features
Content
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Key Features
Content Applicable to both corporate and non-corporate persons
Facilitates early detection by permitting all creditors (whether secured, unsecured, domestic,
international, financial or operational) to trigger resolution processes
Establishes the Insolvency and Bankruptcy Board of India (IBBI) as the regulator, the National
Company Law Tribunal (NCLT) as an adjudicating authority for corporate entities, and Debt
Recovery Tribunal (DRT) as adjudicating authorities for non-corporate persons
Establishes a 180+90 day moratorium (quiet/ silent/ standstill period) on acceleration and
enforcement of debts against the company
Provides for the replacement of existing management with resolution professionals during insolvency
proceedings to prevent asset-stripping
Provides for predictable and time-bound viability assessment mechanisms, liquidation processes
and distribution waterfalls
Provides for penalties on promoters for asset diversion leading up to liquidation
Insolvency – A situation when an individual/ firm is unable to meet the financial obligations due to its creditors
Bankruptcy – A legally declared status that an individual/ firm cannot repay debtsBangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Time Bound Insolvency Resolution Process
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Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
Filing of
insolvency
resolution
application before
the NCLT on
occurrence of
“default”
14 Days 14 Days 30 Days
180 Days (extendable by 90 days), Extendable once, only under exceptional circumstances
Adjudicating
Authority
shall admit
or reject the
application
If AdmittedAdjudicating
Authority to
appoint Interim
Resolution
Professional
First
Meeting of
Committee
of Creditors
(“CoC”) and
Appointment
of Final
Resolution
Professional
Restructuring
plan conforming
to the Code
approved by 75
percent of
financial
creditors
If rejected On Admission
7 days
window to
rectify the
application
– Imposition of
Moratorium Period
– Vesting of
Management Powers
– Corporate insolvency
process shall
commence from the
date of admission of
application
Approved Rejection
Resolution Plan
becomes binding
on all
stakeholders
and needs to be
implemented
Adjudicating Authority
issues liquidation
order and public
announcement stating
that corporate debtor
is in liquidation
Who can file application?
Financial Creditors (Banks/ Bond holders), Operational Creditors (Trade Creditors), Corporate Debtor itself
– Application filing procedure for these 3 group of applicants under the Code varies
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Key Points on Insolvency Resolution Process
Content Default [Sec 3(12), Sec 4(1)] - State where debt exceeding INR 1 lakh is not paid by corporate debtor
Default cap ie INR 1 lakh could be increased to INR 1 crore by the Central Government
Such cash flow based assessment could aid in early detection of insolvency trends, seems
better than net worth/ balance sheet based assessments prescribed under the current laws
Sec 3(20), 3(21) - Operational Creditor includes employees, Central and State Governments - Needs
to give a 10-day notice to the debtor for repayment before taking action
Financial Creditor - Can file proceedings with the NCLT along with proof of default. Shall also
suggest an interim resolution professional to manage the defaulter
Corporate Creditor - Defaulting company, its shareholder or management personnel can start
proceedings by making a reference to the Adjudicating Authority upon occurrence of any default
“Creditors in possession approach” as against “Debtors in possession” approach in Bankruptcy
laws of the US
Financial creditors to take all key decisions in relation to company’s resolution plan (approbation of
75 percent in value)
Potentially creates risk the minority creditors being disenfranchised Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Key Points on Insolvency Resolution Process
Content Operational creditors with more than 10 percent aggregate exposure have mere "observer
status" during the CoC meetings
Threat of automatic liquidation can create strange results – May push the recoverable
companies into liquidation, thereby disrupting markets
Suspended BoD or partners eligible to attend meetings of Committee of creditors, but not
eligible to vote
The above point also holds true for the resolution applicant too
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Liquidation Process
Content
Trigger event:
– CoC doesn’t agree on
workable resolution plan
with 180 (+90) days
– CoC decides to liquidate
– NCLT rejects plan
– Debtor contravens plan
RP to be appointed as
liquidator by AA, unless
replaced by CoC. Powers
of BoD/ Partners to vest
with the Liquidator
Liquidator to identify the
assets of the corporate
debtor and form
“Liquidation Estate” and
hold such estate as
fiduciary for the Creditors
Liquidator to collect claims
from creditors within 30
days from commencement
of liquidation
Liquidator to verify such
claims within such time as
may be specified by the
Board (IBBI)
Liquidator to either admit
or reject claims and
communicate within 3
days of such admission or
rejection
Secured creditors to
identify assets offered to
them as security against
the sums owed to them
Liquidator to verify claims
of secured creditors and
discharge the secured
payments
Excess money realized by
secured creditors from the
liquidation of secured
assets to be accounted
and remitted to Liquidator
Any short recovery of
secured debts by a
secured creditor to be
treated as unsecured debt
and repaid in the specified
order of priority
After paying off secured
creditors, the unsecured
debts are to be paid off in
specified order of priority
If all the assets of the
corporate debtor are
completely liquidated, the
liquidator shall apply for
dissolution of corporate
debtor before NCLT
NCLT to pass an order
dissolving the corporate
debtor from the date of
such order
Copy of such order to be
forwarded to the RoC
within 7 days from the date
of such order
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Liquidation Estate – Inclusions and Exclusions
ContentInclusions [Sec 36(3)] Exclusions [Sec 36(4)]
Any assets over which the corporate debtor has ownership rights
Assets that may/ may not be in possession of the corporate debtor, including encumbered assets
Tangible assets (movable/ immovable)
Intangible assets (such as IPs), securities, financial instruments, insurance policies, contractual rights
Assets subject to determination of ownership by Courts
Assets recovered through proceedings for avoidance of transactions
Asset in respect of which secured creditor has relinquished security interest
Any other property vested in the corporate debtor on the insolvency commencement date
All realization proceeds of liquidation
Assets in the possession of corporate debtor but owned by third parties
Assets in security collateral held by financial service providers
Personal assets of shareholder or partner of corporate debtor
Assets of subsidiaries (Indian/ foreign) of the corporate debtor
Any other assets as may be specified by the IBBI
Compared with
existing law, the ambit
of excluded assets
under the Code has
been expandedBangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Fast Track Corporate Insolvency Resolution
Content Application for fast track insolvency resolution may be made in respect of corporate debtor:
– With income/ assets below specified threshold;
– Having notified class of creditors or amount of debt;
– Falling under the category;
– As may be notified by the Central Government
Fast Track Insolvency process to be completed within 90 days from commencement date
Provision for 1 extension only, for a period of 45 days
Process may be initiated by a creditor or corporate debtor by furnishing proof of default or any other
specified details
Process largely the same as that for regular insolvency resolution
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Voluntary Liquidation
Content May be initiated by the corporate debtor even without existence of default
Declarations from majority of directors needed, to be verified by an affidavit of solvency
Special resolution of members needs to be passed within 4 weeks of declaration by directors
Resolution to be approved by creditors representing 2/3rd value of debt within 7 days of the
members resolution
RoC and the Board to be notified of the decision to voluntarily liquidate within 7 days of passing such
resolution and subsequent approval by the creditors
Liquidation process shall commence from date of passing resolution
Liquidator to make application to NCLT for dissolution
NCLT to pass an order dissolving the corporate debtor from the date of such order
Copy of such order to be forwarded to the RoC within 14 days from the date of order
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Distribution of Assets/ Waterfall Mechanism (Sec 53)
ContentInsolvency
Resolution and Liquidation Cost
Secured Creditor + Workmen’s
dues
Wages and unpaid dues to
employees
Unsecured Creditors
Central and State Government
Dues
Any remaining debts or dues
Preference Shareholders
Equity Shareholders/
Partners
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
In case of
liquidation, the
assets of the
corporate debtor
will be sold and the
proceeds will be
distributed amongst
the creditors in the
following order of
priority:
1. Government dues
(including tax) rank lower
than the unsecured
creditors and wages as
against the exiting regime,
where after secured
creditors and workmen
dues, Government dues
take preference on
liquidation payouts.
2. Ring-fenced priority for
workers – Priority being
awarded to salaries up to
24 months over all other
creditors (including
secured creditors)
KEY CHANGES
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Adjudication, Offences and Penalties
Content NCLT – Adjudicating authority in relation to insolvency resolution/ liquidation for corporate persons/
corporate debtors including personal guarantors thereof
Appeal against the order approving resolution plan could be filed on the grounds of contravention of
laws, material irregularity, non-compliance with the statute etc
Appeal lies before the NCLAT followed by the Supreme Court for orders issued by NCLT
Penalties (Sec 68 - 77) prescribed for:
– Concealment of property
– Undertaking transactions defrauding creditors
– Misconduct in course of corporate resolution insolvency process
– Falsification of Books of corporate debtor
– False representation to creditors
– Contravention of moratorium or resolution plan
– Non-disclosure of dispute or repayment of debt by operational creditor
Imprisonment for a term of 1-5 years + Monetary penalty in the range of INR 100,000 - 10,000,000
Insolvency Professional contravening the provisions of this Code liable for imprisonment upto 6
months and monetary penalty in the range of INR 100,000 – 500,000Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Challenges
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Challenges
ContentAre 180/ 270 days enough?
– Notoriously slow legal system in India
– Unlike the US Chapter 11 process, where the resolution plan is initially proposed by the company itself, in the India Code, any creditor can propose a resolution plan. It is, therefore, likely to be flooded with a mass of resolution plans.
– Insolvency professional would need some time to understand the company, its cash flows, essential operational creditors, etc, before it can prepare an Information Memorandum (IM), Resolution Plan
– Depends on whether a lively and robust insolvency professionals’ market develops in India
– Failure to adhere to 180/ 270 timeline results in commencement of liquidation process
– Currently winding up of companies vests on the wisdom of the High Court/NCLT
Financial Creditors vis-à-vis Operational Creditors Bargain:
– Operational creditors denied a seat at the Creditors committee table
– NCLT, when reviewing the resolution plan, needs to ensure that operational creditors are treated fairly
– Overtly benefiting operational creditors may unduly tip the delicate inter-creditor balancesBangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Challenges
ContentSecured creditors vis-à-vis Unsecured creditors Bargain:
– No demarcation for secured and unsecured creditors
– Creditors Committee comprises of all financial creditors and resolution plan is to be approved by 75 percent (in value) of all financial creditors (regardless of whether secured or unsecured)
– If secured creditors constitute less than 25 percent of the financial debt, unsecured creditors could be able to “cram down” a resolution plan on such creditors
– Statute should respect the seniority of secured creditors as a class; Re-look at the treatment of secured creditors is merited
– While the Code does protect the rights of secured creditors in a liquidation, at that stage the value of the secured creditor’s collateral would have further eroded and the costs of the insolvency process would also rank ahead of the secured creditors
Provision for reinstatement of Management powers after the conclusion of Resolution Plan not provided
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Challenges
ContentOperational Challenges:
– Reaping the slew of benefits entailed by the Code warrants the setup of several new entities (in tandem with its 4 pillars – NCLT/ DRT, IBBI, Information Utilities and Insolvency Professional Agency) and addressing existing inefficiencies such as pendency and disposal rate of DRTs
– Huge force of trained and skilled insolvency professionals
– Robust utilities with state of the art technologies
– Looking at the infrastructural requirements, it may be even possible that similar to the Companies Act, different provisions of the Code are notified on different dates, as and when the corresponding infrastructure is implemented
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Cross Border Insolvency
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Cross Border Insolvency
Content Code has not adopted the UNCITRAL Model of cross border insolvency
Currently 23 countries (including USA, UK, South Africa, Japan, Australia) have substantially
implemented the UNCITRAL Model Law into their domestic legislation
Code for the first time attempts to addresses the issue of cross border insolvency given the
multi-jurisdictional spread of assets of large corporate houses
Sec 3(27) – ‘Property’ includes "money, goods, actionable claims, land and every description of
property situated in or outside India…."
Code stipulates a two pronged solution:
– Section 234 – Central Government may enter into agreements with any other country for
enforcing the provisions of the Code and notify applicability of the same from time to time
– Section 235 - Adjudicating Authority to have the ability to issue ‘letter of requests’ to the courts/
authorities of other countries for seeking information/ requesting action in relation to assets of
the debtor situated outside India
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Dealing with Personal
Insolvency
Content
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Fresh Start – Eligibility and Process
ContentTarget group – For indigent, Bottom-of-the-pyramid individuals with little or no money and assets
– Gross income < INR 60,000– Assets < 20,000– Qualifying Debt <35,000– No dwelling unit/ home ownership– Once in a lifetime
Akin to one time waiver of debt, based on adjudication
Not automatic – DRT exercises discretion -admission, discharge order at the end of moratorium period
Creditors can challenge
Discharge from only ‘qualifying debts’ - unsecured, upto INR 35,000
Moratorium + Completion time – 6 months
Decision of the Resolution professional - Appealable before the DRTBangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Fresh Start – Pluses and Inadequacies
Content Good to abolish politically motivated loan-waivers which destroys the credit culture
Smooth process of dealing with insolvent poor people could potentially de-politicise the problem
Paltry limits of income, assets and debt fixed by the Code
Government should notify/ modify the limits at an agreed time interval, Code should not fix such limits
Thresholds designed using the Deprivation Index and Key indicators of debt and investment in
India for 2013 and would need revision/ rethinking over a period of time
Seems impractical that an individual seeking relief in respect of debt upto INR 35,000 could afford
the fee and expenses of resolution process/ insolvency professional
Section 85 – Debtor to make overseas travel during moratorium period after getting permission. Can
such segment afford overseas travel !
Idea behind this scheme may be financial inclusion, but whether the population segment covered
will at all be able to reach out to institutional framework is doubtful
Bangalore Branch of SIRC
June 22, 2016
Sandeep Jhunjhunwala
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Insolvency Resolution and Bankruptcy
Content Insolvency Resolution Process (Sec 94 – 120)
– Negotiated repayment plan for restructuring debts/ affairs
– Resolution Professional to supervise the implementation of repayment plan
– Trigger of Bankruptcy - Not automatic
– Only failure to comply can lead to Bankruptcy
– Maximum time period - 6 months
Bankruptcy Process (Sec 121 – 178)
– Last resort
– Liquidation of estate of the Bankrupt
– Public notice inviting claims from creditors
– Discharge in a year
– Priority of payment of debts
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Insolvency Resolution and Bankruptcy
Content Linear Process
– Moratorium on fresh legal proceedings
– Trigger event - default in payment of debt
– Waterfall similar to corporate insolvency
– Provision for debt waiver
– Penalties prescribed for the Bankrupt and Bankruptcy trustee
Differences from the corporate process
– Distinction between financial and operational creditors absent
– Liquidation is not automatically triggered
– Secured creditors can stay out of Insolvency Resolution Process by enforcing security interest
– Interim moratorium starting from date of application to prevent coercive debt recovery action
– Fresh start
– NCLT – DRT
– Fast track Scheme
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New Opportunities/ Scope
Annexures
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New Opportunities/ Scope
Content Insolvency Professionals
– Induction of new “insolvency professionals” and “insolvency professional agencies” to run the
resolution process
– Under Regulator’s oversight, these agencies will develop professional standards, codes of
ethics and exercise a disciplinary role over errant members leading to the development of a
competitive industry for insolvency professionals
– IBBI to specify categories of professionals possessing qualifications/ experience in the fields of
finance, law, management, insolvency etc
Insolvency Information Utilities
– Code proposes for information utilities which would collect, collate, authenticate and disseminate
financial information from listed companies and financial and operational creditors of companies
– An individual insolvency database is also proposed to be set up with the goal of providing
information on insolvency status of individuals
– It is not clear whether this will slot into the existing Central Registry of Securitisation Asset
Reconstruction and Security Interest of India/ Central Repository of Information on Large
Credits or end up adding to the plethora of registries in IndiaBangalore Branch of SIRC
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Content
International Experience
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Chapter 11 – United States Bankruptcy Code
ContentAspects
Insolvency A business is allowed time to restructure its
debt, while still in operation, in a pre-
insolvency stage
Quick identification of financial distress and a
180-270 day plan to revive a company
Fresh Start Gives the debtor a fresh start, subject to
which the debtor’s fulfilment of its obligations
under its plan of reorganisation
Fresh start provisions apply only to individuals
below the specified income/ asset/ debt
threshold
Management
Control
Company management continues to control
the company under court oversight (“Debtor-
in-possession model”) to steer the company
out of troubled waters
Management control passes over to resolution
professional with substantial power once an
insolvency resolution is underway
Reasons for
filing
Impending insolvency, massive liabilities,
adverse outcome in litigation, anticipated
liquidity issue
Business failure, inability to pay debts,
economic downturn
Secured vs
Unsecured
Creditors
Categorises creditors into classes treating
“like creditors like”
No differentiation - Appears to club secured
creditors with unsecured creditors
Another liquidation code under Chapter 7 provides for the appointment of trustee by the Court to oversee the liquidation of a
company. Under Chapter 7, the business is closed down before sale and the assets auctioned.
Chapter 11 provides to permit the firm to remain in operation while a plan of reorganisation is worked out with the creditors.
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What does the Code mean
for International creditors?
Content
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What does the Code mean for International Creditors?
Beneficial for
international funds/
financial institutions
looking to invest in new
money financings or
distressed debt
situations in India
All financial creditors, in
general, entitled to
participate in
restructuring process
irrespective of debt size
Level Field
Doesn’t override
exchange control
regulations
Adequate
safeguards
Content
For loans advanced by
offshore lenders to
Indian borrowers under
the ECB route,
prepayment would still
require RBI approval
Ability to raise interim
financing from
international sources
could be limited due to
restrictions on end-use
and investor classes for
foreign currency
borrowings etc
Protection from
“Gaming” - Debtors who
have violated the terms
of a Restructuring Plan
in the past or undergone
a Restructuring Process
in the last 12 months,
precluded from initiating
a Restructuring Process
again
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Overall Analysis
Content
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Overall Analysis
Content Many new age and realty cos should be in a position to access corporate bond market (which is
virtually non-existent for firms below AA ratings and thin for AA categories) and see light of fresh
credit lines, as the Code should repose investors’ faith in the Indian markets
Currently in debt funding route, yield hungry bond investors demand rates in high teens
Practice of large borrowers thumbing noses at the creditors should whittle away
Code recognises the balance required between excessive court intervention and excessive power in
the hands of creditors
Should bring in major facelift to the existing regime relating to restructuring and insolvency and
bankruptcy in India
Litmus test for its success will be in how it is implemented
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Annexures
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Case Study - Kingfisher Airlines
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Debt Watch
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OPEN HOUSE & DISCUSSIONS
THANK YOU
Views expressed in the presentation are personal
Sandeep Jhunjhunwala, FCA
M: +91 97401 55469