impact assessment - insolvency and bankruptcy code 2016 - sandeep jhunjhunwala

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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

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June 22, 2016


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Why is it needed? Indian banks, neck-deep in bad debts

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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


June 22, 2016


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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


June 22, 2016


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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


June 22, 2016


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Can the new Bankruptcy law prevent more Vijay Mallyas?

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June 22, 2016


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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


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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"


June 22, 2016


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Background

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June 22, 2016


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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!)


June 22, 2016


Century Old, Archaic

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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


June 22, 2016


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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


June 22, 2016


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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)


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

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June 22, 2016


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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


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Time Bound Insolvency Resolution Process

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June 22, 2016


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


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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


June 22, 2016


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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


June 22, 2016


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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


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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


June 22, 2016


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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


June 22, 2016


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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


June 22, 2016


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


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Challenges


June 22, 2016


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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


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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


June 22, 2016


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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


June 22, 2016


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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


June 22, 2016


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Dealing with Personal

Insolvency

Content


June 22, 2016


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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


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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


June 22, 2016


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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


June 22, 2016


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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


June 22, 2016


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June 22, 2016


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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

June 22, 2016


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International Experience


June 22, 2016


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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.


June 22, 2016


Contents

Summary

Content

Annexures

What does the Code mean

for International creditors?

Content


June 22, 2016


Contents

Summary

Content

Annexures

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


June 22, 2016


Contents

Summary

Content

Annexures

Overall Analysis

Content


June 22, 2016


Contents

Summary

Content

Annexures

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


June 22, 2016


Contents

Summary

Content

Annexures

Annexures

Annexures


June 22, 2016


Contents

Summary

Content

Annexures

Case Study - Kingfisher Airlines


June 22, 2016


Annexures

Contents

Summary

Content

Annexures

Debt Watch


June 22, 2016


Annexures

Contents

Summary

Content

Annexures

OPEN HOUSE & DISCUSSIONS

THANK YOU

Views expressed in the presentation are personal

Sandeep Jhunjhunwala, FCA

E: [email protected]

M: +91 97401 55469

impact assessment - insolvency and bankruptcy code 2016 - sandeep jhunjhunwala

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