Insolvency & Bankruptcy Code
Background
At present, there are multiple
overlapping laws and adjudicating forums dealing with financial failure and
insolvency of companies and individuals in India. The current legal and
institutional framework does not aid lenders in effective and timely recovery
or restructuring of defaulted assets and causes undue strain on the Indian
credit system. Recognizing that reforms in the bankruptcy and insolvency regime
are critical for improving the business environment and alleviating distressed
credit markets, the Government introduced the Insolvency and Bankruptcy Code
Bill in November 2015, drafted by a specially constituted 'Bankruptcy Law
Reforms Committee' (BLRC) under the Ministry of Finance.
After a public consultation process and
recommendations from a joint committee of Parliament, both houses of Parliament
have now passed the Insolvency and Bankruptcy Code, 2016 (Code). While the
legislation of the Code is a historical development for economic reforms in
India, its effect will be seen in due course when the institutional
infrastructure and implementing rules as envisaged under the Code are formed.
Ø Promulgated on 28.05.2016
Ø BIFR scrapped by
notification dated 25.11.2016 w.e.f. 01.12.16
Ø IBC functional w.e.f. 01.12.16
I.
Corporate Insolvency Resolution Process (CIRP) Regulation
framed and effective w.e.f. 01.12.16.
II.
Liquidation Regulation
under IBC framed and effective w.e.f. 15.12.16.
Ø As per Ministry of
Corporate Affairs notification dated 07.12.2016 the winding up matters are to
be transferred in the following way:-
I.
Winding up for inability to pay debt.
II.
Where petition filed and served before 15.12.16 the petition
will remain with High Court and disposed off under Companies Act, 1956.
III.
All new petitions to be filed in NCLT under IBC Part-II,
Chapter-II (CIRP).
IV.
Voluntary Winding Up cases to continue with High Court till 01.4.17.
V.
Cases where BIFR has recorded opinion under Section 20 of
SICA for Winding up of the companies.
VI.
Where appeals pending in AAIFR the reference/appeal abates
and fresh petition to be filed in NCLT under Part-II, Chapter-II of IBC (CIRP).
VII.
Where no appeal pending in AAIFR the winding up to be
conducted by the High Court under Companies Act, 1956.
RESTRUCTURING UNDER IBC
CIRP Procedure under Part-II, Chapter-II of
IBC
The maximum permissible time for completion of
Corporate Insolvency Resolution Process (CIRP) shall be 180 days which can be
further extended by another 90 days with the approval of NCLT upon an
application made in this behalf by RP if instructed to do so by the Committee
of Creditors (CC) by a vote of 75%
Filing of application
under CIRP
Ø Application for
commencement of resolution process can be filed by Financial Creditor (FC),
Operational Creditor (OC) or Corporate Debtor (CD)
Ø FC means any creditor to
whom financial debt is owed by CD and covers
Ø Unsecured and Secured FC
Ø Money Borrowed against
interest
Ø Lease or Hire Purchase
Sale or Discounting of receivable, towards sale or purchase agreement, derivate
transaction, guarantee, counter indemnity against any transaction having
commercial effect of borrowing
Ø FC/CD can file CIRP
application on commitment of default
Ø OC has to give a ten days
demand notice before filing an application
Ø The CIRP applicant
whether FC/CD/OC will propose an Insolvency Professional to act as the Interim
Resolution Professional (IRP) while filing an application.
Admission of CIRP
Ø Within 14 days of filing
an application, Adjudicating Authority (NCLT) will decide on the admission of
the application
Ø On admission of
application, the NCLT will pass an order-
Ø Appointing the proposed
IP as IRP
Ø Declare a moratorium
(Section 14)- all suits, decrees, arbitration matters covered- stay on
transferring, alienating, encumbering assets
Ø cause public announcement
for initiation of CIRP and submission of claims
Ø Stay on SARFAESI Action-
Stay on recovery of property held by CD on lease and in possession of CD
Ø Where application by OC
and no proposed IRP is suggested NCLT to make reference to IBBI for
recommending an IP to act as an IRP
Ø IRP term not to exceed 30 days from the date
of appointment
Role of Interim
Resolution Professional
Ø IRP will take over
management of CD
Ø Powers of Board of
Directors of CD shall be suspended
Ø Officers/management of CD
will report to IRP
Ø Banks/FIs maintaining
accounts of CD will act as per instructions of IRP
Ø Collect all information
relating to assets, finance, operations of CD
Ø Receive and collate all
claims and constitute Committee of Creditors (CC)
Ø Manage operations of CD
as a Going Concern
Ø Take control and custody
of any assets over which CD has ownership rights in India or abroad including
assets not in possession of the CD
Meeting of CC
Ø To be convened by IRP
within 7 days of constitution of CC
Ø IRP to determine voting
share he can estimate the value of debt and share of the concerned FC)
Ø Decision to be taken by
CC by vote of not less than 75% of voting share of FCs
Ø CC in first meeting by
majority vote of not less than 75% may decide to appoint IRP as RP or to
replace him with their proposed RP
Ø In case CC decides to
replace IRP with their proposed RP the NCLT will forward the name of the
proposed RP to IBBI (Board) for confirmation and on confirmation, appoint the
proposed RP as the RP. However, if Board does not confirm the name within 10
days, NCLT will direct IRP to continue as RP till further orders.
Ø Can replace the RP with
another RP
Role of RP
Ø To conduct the CIRP
Ø All powers of IRP to be
exercised by RP
Ø Can raise interim finance
Ø Appoint accountants,
legal and other professionals
Ø Convene meetings of CC
Ø Prepare Information
Memorandum
Ø Invite Lenders/Investors
and other persons to put forward their resolution plan
Ø Put resolution plans for
consideration/approval of CC
Ø File application for
avoidance of extortionate credit transactions, transactions for defrauding
creditors, undervalued transactions and preferential or avoidable transactions
Preparation of
Information Memorandum (IM)
Ø RP to prepare IM with such relevant
information as may be specified by the board for formulating a resolution plan
Submission of Resolution Plan
RP to recommend the resolution plan provided it provides for
the following:
Ø Payment of Insolvency
Resolution Process cost in priority to other debts
Ø Repayment of debt of OC
in such manner as not to be less than the amount payable to them in the event
of liquidation of CD
Ø Management of CD after
approval of Resolution Plan
Ø Implementation and
supervision of Resolution Plan
Ø Does not contravene any
provisions of law
Approval of Resolution
Plan
Ø Where the resolution plan is approved by more
than 75% votes in CC and is in compliance with the provisions of law, the NCLT
would approve the plan which will be binding on all the stakeholders including
CD, Guarantors, employees, creditors, shareholders, etc.
Liquidation
Initiation of Liquidation
Ø The NCLT will pass a
liquidation order in the following circumstances:
a. In case no resolution
plan is received within the stipulated time of 180/270 days
b. NCLT rejects the
Resolution Plan
c. If RP intimates NCLT
that CC with a vote of more than 75% has decided to liquidate the CD
d. Where Resolution Plan
approved by the NCLT has been contravened by CD or any person other than the CD
(scheme has failed)
Implication of
liquidation order
Ø RP under CIRP to act as
liquidator
Ø No suit or other legal
proceedings will be instituted by or against the CD, provided that liquidator
can, with prior permission of NCLT, institute a suit or legal proceeding
Ø Liquidation order is
deemed to be a notice of discharge to officers, employees and workers of the CD
except when business of CD is continued during the liquidation process.
Ø Board of directors
suspended and all the powers to vest in the liquidator
Ø NCLT can replace the
resolution professional in case resolution plan submitted by RP was not as
prescribed by the law/rules or if the Board recommends replacement of RP
Powers and Duties of
Liquidator
Ø To receive and verify
claims of creditors and admit or reject claims
Ø To take into his custody
and control all assets, properties and actionable claims of CD
Ø To evaluate assets,
property of CD
Ø Protect and preserve
assets, properties of CD
Ø Carry on business of CD
for its beneficial liquidation
Ø File application for
avoidance of preferential transactions, undervalued transactions, transactions
for defrauding of creditors, extortionate credit transactions (normally one
year and two years if it is to related party)
Liquidation Estate
Ø Liquidator shall form a liquidation estate of
assets and properties of the CD
Ø Liquidator shall hold liquidation estate as
fiduciary for benefit of all creditors
Secured creditor in liquidation proceedings
The secured creditor in
liquidation proceedings may:
Ø [Section 52(1)(a)] relinquish its security
interest to the liquidation estate and receive proceeds from the sale of assets
as per section 53
Ø Realize its security
interest in the following manner:
a.
Inform
the liquidator of its security interest and identify assets subject to such
security interest.
b.
Liquidator
to verify security interest and permit the secured creditor to realize such
security interest, the existence of which is proved by the records of
information utility or such other means as specified by the board.
c.
Secured
creditor can enforce, settle, compromise or deal with secured assets in
accordance with law (including SARFAESI or execution proceedings in DRT etc.).
In case secured creditor faces resistance from CD or any person connected
therewith in taking possession, selling or disposing off assets, the creditor
can approach NCLT for directions to facilitate the enforcement/sale etc.
d.
Amount
of Insolvency Resolution cost due from the secured creditor to be deduced from
sale proceeds generated from sale of secured assets.
e.
Where
money recovered in excess of dues, the secured creditor shall account to
liquidator and tender to him the excess funds.
f.
Where
money received is less than the debt due towards the secured creditor, the
secured creditor to approach liquidator for recovery of balance dues in terms
of waterfall mechanism as set out in Section 53.
Distribution of Assets (Waterfall Mechanism) – Section 53
The sale of the assets of the liquidation estate will be
distributed in the manner and in the priority as set out below:
Ø Insolvency Resolution
Process costs and Liquidation costs in full
Ø Workers dues for a period
of 24 months preceding liquidation commencement date and dues to secured
creditor who has relinquished his security interest shall be distributed on
pari passu basis
Ø Wages and unpaid dues to
employees (other than workman) for 12 months preceding the liquidation
commencement date
Ø Financial debt owed to
unsecured creditors
Following debts on pari passu basis:
a) Amount due to Central
Government & State Government.
b) Debts due to secured creditor remaining unpaid following the
enforcement of Security interest.
Ø Any remaining debts or
dues
Ø Preference shareholders
Ø Equity shareholders
Effect on Personal Guarantees
The proceedings for Insolvency and Bankruptcy of individuals
who are guarantors of the CD shall be conducted under the jurisdiction of NCLT
where the Insolvency/Liquidation of the CD is being conducted
TIMELINE-CIRP DESCRIPTION
|
DAYS
|
Filing of Application
|
(-) 14
|
Admission of Application/ CIRP
commencement date/ Declaration of Moratorium
|
0 Date
|
NCLT to appoint interim Resolution
Professional (IRP)
|
14th Day
|
Public Announcement
|
16th Day
|
Appointment of Registered Valuer to
calculate Liquidation value
|
21st Day
|
Creditors to submit claims
|
37th Day
|
IRP to constitute COC & submit
Report
|
44th Day
|
1st COC Meeting
|
51th day
|
Preparation of IM
|
65th Day
|
Submission of Resolution Plan
|
150th Day
|
COC approval of RP
|
-
|
Application for approval by NCLT
|
-
|
Initiation of Liquidation Process
|
180th Day
By CS Diwakar Agrawal
|
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