Insolvency & Bankruptcy Code, 2016

Insolvency- The inability of an Individual OR a Corporate Person to

pay their debt(s) when they are due and

payable

Bankruptcy - When an Individual is

declared incapable of paying their dues

by a competent Court of Law.

Liquidation – Process of winding up of a Corporate person.

What are Insolvency, Bankruptcy and Liquidation?

ØChapter XIX & Chapter XX of Companies Act, 2013 - Revival and Rehabilitation of Sick Companies and Winding Up of Companies (Not in force)

ØPart VIA, Part VII & Section 391 of Companies Act, 1956 - Revival and Rehabilitation of the Sick Companies and Winding Up of Companies.

ØRDDBFI Act, 1993 -Recovery of debt(s) due to banks and financial institutions.

ØSARFAESI Act, 2002 - Regulates securitisation and reconstruction of financial assets and enforcement of security interest.

ØSICA Act, 1985 - Detecting Sick and Potentially Sick companies and enforce measures to prevent, ameliorate and provide remedy to them.

ØThe Presidency Towns Insolvency Act, 1909 - Law relating to Individual insolvency in the Presidency towns (Bengal, Madras & Bombay)

ØThe Provincial Insolvency Act, 1920- Law relating to Individuals in India.

ØChapter XIII of the LLP Act, 2008 - Winding up and dissolution of Limited Liability Partnerships.

Erstwhile Legislative Framework for Corporate & Individual Insolvency

Impact of the Code, 2016

Amending Schedule

Existing Legislature

Amended XI Chapter XIX & Chapter XX of Companies Act, 2013

Amended V RDDBFI Act, 1993

Amended VII SARFAESI Act, 2002

Amended X Chapter XIII of the LLP Act, 2008

Amended VIII SICA Act, 1985

Repealed NA The Presidency Towns Insolvency Act, 1909

Repealed NA The Provincial Insolvency Act, 1920

Amended : Amending specific provisions under the Act which deals with Insolvency/Bankruptcy/Liquidation.Repealed : Completely Repealed*Section 238 of the Code, 2016 states that in case of any inconsistency between any Act and the Code, the provision of the Code shall prevail.

ØHighly fragmented legal framework WITH

ØMultiple judicial forums resulting in lack of clarity and certainty in

jurisdiction.

ØConcurrent/Overlapping jurisdictions encouraged appeals/stays

resulting in delayed decisions.

ØAverage time to resolve insolvency matters is 4.5 years. [Singapore 8

months , London 1 year]

ØIndia has the lowest recovery rate - 20% of the debt value [World Bank

Report, 2014]

ØLack of adequate and credible data regarding assets, indebtedness and

security situation of Companies.

Challenges in Existing Legal Framework

Ecosystem under the 2016 Code

Insolvency and Bankruptcy

Board of India

Insolvency Professional

Agency

Information Utilities

Adjudicating Authorities and

Appellate Tribunals

Insolvency Professionals

THE INSOLVENCY AND BANKRUPTCY

CODE, 2016

INSOLVENCY RESOLUTION AND BANKRUPTCY FOR INDIVIDUALS AND

PARTNERSHIP FIRMS

INSOLVENCY RESOLUTION AND LIQUIDATION FOR

CORPORATE PERSONS Corporate Person means a Company,

a Limited Liability Partnership, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider such as a Bank.

Scope of the 2016 Code

Who can file for Corporate Insolvency Resolution?

Financial Creditor

Operational Creditor

Corporate Debtor

Who is a Financial Creditor?Financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or

transferred to. Financial debt means a debt along with interest, if any, which is disbursed against the

consideration for the time value of money.

Who is an Operational Creditor?Operational creditor means a person to whom an

operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

Operational debt means a claim in respect of the provision of goods or services including employment or a debt in

respect of the repayment of dues arising under any law for the time being in force and payable to the Central

Government, any State Government or any local authority.

Who is a Corporate Debtor?

Corporate debtor means a corporate person who owes a debt to any person.

Corporate person means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.

Corporate Insolvency Resolution - Steps

Default (Minimum Threshold Rs 1 Lakh)

Petition with the Adjudication Authority

Appoint the Interim Resolution Professional

Formation of Committee of Creditors

Appointment Confirmed by Committee of Creditors

Resolution Professional to Prepare Information Memorandum

Resolution Plan Proposed by Creditors

Resolution Plan approved by Creditors Committee with 75% majority by value

Resolution Plan Approved by Adjudication Authority Liquidation

Next Day

Approve or Reject Petition within 14

days

Appointment to be confirmed within 20

days of appointment

Within 180 days or such extended

period, not exceeding 90 days

Compulsory Liquidation of Corporate Debtors in the Event the resolution

has not been agreed within 180 days or such extended period

A 75% majority of the creditor's committee does not approve of the resolution plan .

The NCLT rejects the resolution plan submitted to it on technical grounds.

The debtor contravenes the agreed resolution plan and an affected person makes an application to the NCLT to

liquidate the corporate debtor.

The creditor's committee does not approve a resolution plan within 180 days (or within the

extended 90 days

Grounds for Liquidation for Corporate Person

Waterfall Mechanism – Priority for payment of Claims under Liquidation

Order of Priority for Distribution of Assets:

•Insolvency related costs

•Secured creditors and workmen dues up to 24 months.

•Other employees’ salaries/dues up to 12 months.

•Financial Debts (unsecured creditors)

•Government Dues (up to 2 years)

•Any remaining debts and dues

•Equity

Steps of Voluntary Liquidation

Declaration by majority Directors via affidavit stating:a. The company has no debts and is able to pay existing debtsb. Purpose of liquidation is not to defraud

Documents to be attached with the declaration:a. Audited financial statementsb. Record of business operations for the last 2 yearsc. A report of valuation of assets

Passing of Special Resolution within 4 Weeks of the Declaration:a. To liquidate the company b. To appoint the insolvency Professional as liquidator.

*2/3 Majority of Creditors (if any) must approve the Special Resolution within 7 Days

Notifying the ROC and the Board within 7 days of resolution or approval by the creditors.

Initiate Liquidation process as per the Code

Liquidator to make application to the Adjudicating Authority to pass dissolution order on completion of the Liquidation.

Adjudicating Authority to pass an order dissolution . The order shall be placed with the concerned Authority with which the Corporate Debtor is registered within 14 days

Steps of Voluntary Liquidation

Declaration by majority Directors via affidavit stating:a. The company has no debts and is able to pay existing debtsb. Purpose of liquidation is not to defraud

Documents to be attached with the declaration:a. Audited financial statementsb. Record of business operations for the last 2 yearsc. A report of valuation of assets

Passing of Special Resolution within 4 Weeks of the Declaration:a. To liquidate the company b. To appoint the insolvency Professional as liquidator.

*2/3 Majority of Creditors (if any) must approve the Special Resolution within 7 Days

Notifying the ROC and the Board within 7 days of resolution or approval by the creditors.

Initiate Liquidation process as per the Code

Liquidator to make application to the Adjudicating Authority to pass dissolution order on completion of the Liquidation.

Adjudicating Authority to pass an order dissolution . The order shall be placed with the concerned Authority with which the Corporate Debtor is registered within 14 days

Voluntary Liquidation

ØFor individuals and unlimited partnerships

ØThe minimum default amount is INR 1000 (USD 15) and above.

ØThe Code envisages three distinct processes in case of insolvency:

a. automatic fresh startb.insolvency resolution processc.bankruptcy

ØThe Adjudicating Authority for Individual/Partnership insolvency resolution process is the Debt Recovery Tribunal .

Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms

ØFor individuals and unlimited partnerships

ØThe minimum default amount is INR 1000 (USD 15) and above.

ØThe Code envisages three distinct processes in case of insolvency:

a. automatic fresh startb.insolvency resolution processc.bankruptcy

ØThe Adjudicating Authority for Individual/Partnership insolvency resolution process is the Debt Recovery Tribunal .

Fresh Start for Individuals

ØAn eligible debtor who is unable to pay his debt shall be entitled to make an

application either personally of through resolution professionals for a fresh start

resulting in discharge of his qualified debts.

ØThe fresh start process is only available to individual insolvency.

ØThe resolution professional appointed by Debt Recovery Tribunal (DRT)shall examine merits of the fresh start application and shall submit the report to DRT for its decision

What is the Eligibility Criteria of the Debtor(a) the gross annual income does not exceed Rs 60,000/-

(b) the aggregate value of the assets does not exceed Rs. 20,000/-

(c) the aggregate value of the qualifying debts does not exceed Rs.

35,000/-

(d) not an un-discharged bankrupt

(e) does not own a dwelling unit

(f) a fresh start process, insolvency resolution process or bankruptcy

process is not subsisting

(g) no previous fresh start order made in the preceding twelve

months

What are Qualified Debts? - Qualified debt are debts all kinds of dues excluding(a) an excluded debt;(b) a debt to the extent it is secured; and(c) any debt which has been incurred three months prior to the date of the application.

What are Excluded Debts? - Excluded debt means—Øfine imposed by a court or tribunalØdamages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;Ømaintenance to any personØStudent loan.

Individual Insolvency Resolution Process for Individual and Partnership Firms

ØAn application to initiate an insolvency resolution process shall be made by the debtor himself or by the creditors though the insolvency resolution professionals with the Debt Recovery Tribunal.

ØPartners of a partnership firm shall not be allowed to apply for an insolvency resolution process unless a joint application is filed by the majority of the partners of the partnership firm.

ØThe creditor and the debtor shall have to arrive at an agreement as to the repayment plan which shall be approved by the 75% of the financial creditors.

ØOnce the plan is finalized, it is placed with DRT to finalize and pass an order accordingly. Once approved, it becomes binding on the parties.

ØOn rejection, process of Bankruptcy follows.

ØThe bankruptcy of an individual can be initiated only after the failure of the insolvency resolution process.

ØThe bankruptcy trustee (insolvency professional) shall be responsible for the administration of the estate of the bankrupt and shall , pay the claims based on the priority defined by the code.

Bankruptcy for Individuals and Partnership Firm

SL. Key Aspects of the Insolvency and Bankruptcy Code

1 Debtor in possession’ to a ‘Creditor in control’ regime.

2 Resolve insolvencies in a strict time-bound manner – 180 days (extendable up to 270 days) of Moratorium

3 Clearly defined ‘order of priority’ or the waterfall mechanism

4 The waterfall to render government dues junior to most others is significant.

5 Protect workers’ Interests – Prioritizes the payment of workmen dues.

6 Formation of Information Utilities to reduce information asymmetry between the various participants involved in the insolvency procedures

ØEstablishment of new infrastructure such as the Board and CLT/DRT

ØRequirement of trained and competent insolvency professionals.

ØPossibility of delay because of disputes and appeals

ØPossibility of Government intervention.

Operational/Legal Issues

Major facelift to the existing regime relating to restructuring and insolvency and bankruptcy in India.

It promises to provide the one, big missing piece in the existing jigsaw of laws in the form of establishing a framework for time–bound resolution for delinquent debts.

Induces a balanced approach of rehabilitation and recovery.

To safeguard interest of the stakeholders, promote entrepreneurship and to increase the flow of capital into the economy.

The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market.

The passing of this Code and implementation of the same will give a big boost to Ease of Doing Business in India. 

Conclusion