IBC code 2016

Trigger for insolvency resolution

Under the Code, an Insolvency Resolution Process (IRP) can be initiated by a holder of financial debt or an operational creditor (employees, workmen, trade creditors) or a shareholder or the management of corporate debtor, on occurrence of default of repayment of dues exceeding INR1 lakh. A financial creditor whose loan is not in default but the debtor has defaulted on any other financial debt can also make an application for IRP. This is a shift from net worth based assessment under the Sick Industrial Companies Act (SICA) to cash flow based assessment and is expected to lead to early detection of insolvency trends. Also, while SICA remained a rescue mechanism only for ‘industrial companies’, the Code covers all other category of companies in its ambit that have remained remediless. It is important to note that the Code allows both financial as well as operational creditors to initiate the process. This will enable operational creditors like vendors or trade creditors to flag off early signs of stress. Therefore, corporates will need to be diligent in adhering to payment schedules for all their debts and liabilities bearing in mind that any type of creditor, including a vendor can potentially trigger IRP on default.

Moratorium of 180 days

One of the significant feature of the Code is grant of moratorium of 180 days on acceptance of the application by the Adjudicating Authority as a result of which all pending actions against the debtor will be stayed and no new actions can be initiated. In the past, a resolution process typically ended in a gridlock between various stakeholders leaving less opportunities for arriving at a consensual resolution plan. However, moratorium under the Code is expected to allow all the creditors to decide on future course of action without having to deal with multiple enforcements by creditors as well as safeguarding the debtor from the chaos.

Creditors in possession approach

The Code follows a creditor focussed insolvency resolution approach where the debtor ceases to have control on the business and the decision making power shifts to the Committee of Creditors

(CoC), which has the power to approve a resolution strategy. The CoC shall consist of only financial creditors (secured and unsecured) who shall have voting rights proportionate to the value of their debt.

To ensure that CoC remains independent, related party members in CoC will not have voting rights in the decision making.

As the decision making power with respect to resolution process resides with the financial creditors only, the Code protects rights and interests of operational creditors and dissenting financial creditors by envisaging payment of at least a minimum liquidation value to them.

This will ensure balanced and equitable decisions by CoC thereby safeguarding interests of perational and minority creditors.

Role of an Insolvency Professional (IP)

The Code provides appointment of an independent insolvency professional to manage the business of the debtor on behalf of CoC during the resolution process. Though an applicant while making an application for IRP appoint an IP as a Resolution Professional (RP), such person can continue acting as a RP till CoC (on its formation) ratifies of such appointment. A RP will have the responsibility to preserve the value of assets and business of the debtor and coordinate with CoC for effectively implementing resolution process.

An RP shall call for and verify claims of creditors, prepare information memorandum with details of financial information about the debtor, appoint registered valuers for calculation of minimum liquidation value, conduct CoC meetings and do all such other things for conduct of the resolution process. The RP will be also responsible to conduct the business of the corporate debtor on a going concern basis and can appoint accountants, legal or other professionals to carry out necessary business functions.

Under the Code, RP has power to enter into fresh contracts, amend existing ones and disclaim unprofitable contracts and unsaleable properties so as to maximise value to stakeholders. Implication of this shift in management of the business of the corporate debtor on preparation of financial statements and statutory reporting is not clear and will have to be considered as and when cases progress under the Code.

Resolution plan and timelines

Under the provisions of the Code, any person can submit a resolution plan to RP who shall put it before CoC for consideration. The resolution plan may include individually or in combination, sale/transfer of assets, acquisition/merger/consolidation of the corporate debtor, curing or waiving of terms of debt.

Additionally, the resolution plan shall also identify specific sources to pay for insolvency resolution costs and minimum liquidation value, define term of the plan and implementation schedule as well as manner of management of the business during the resolution term. The Code stipulates strict timeline of maximum of 180 days for arriving at a consensus on a resolution plan.

Trigger for liquidation

A resolution plan should be approved by CoC by 75 per cent of majority by value before submission to the Adjudicating Authority. Where CoC fails to arrive at a consensus within 180 days (with one time extension of 90 days) of acceptance of commencement of IRP, the company automatically enters liquidation. This will push the creditors to decide on a resolution strategy within prescribed timelines. Liquidation can also be triggered where the Adjudicating Authority rejects the submitted resolution plan or CoC votes for company to enter into liquidation.

Priority of claims

The Code clearly defines the waterfall mechanism for payment of debt in case of liquidation of the company. A significant change in the priority of claims is that the government dues have moved lower down the chain, below the claims of unsecured financial creditors. In the earlier regime, government dues ranked prior to secured claims.

Timelines for liquidation

The Code envisages a time period of two years for completion of liquidation process from commencement of liquidation. Any delay from stipulated timelines will have to be reported to the Adjudicating Authority explaining causes of delays and taking permission for continuing the process for extended time. The Code also has provisions for fast-tracking of liquidation in case of insufficient assets of corporate debtor. Lack of timelines has resulted in liquidation cases to be dragged on for years in the past. A timeline of two years is expected to ensure wrap up liquidation proceeding within a reasonable timeframe and also improve recovery rate.

Specialised Adjudicating Authority

Unlike current judicial system with concurrent and overlapping jurisdiction, the Code envisages a clearly defined and distinct judicial system. The National Company Law Tribunal and Appellate

Tribunal will act as the exclusive Adjudicating Authority to decide upon corporate insolvency resolution and liquidation case. Corresponding authority for non-corporate entities will be Debt Recovery Tribunal and Appellate Tribunal.Certainty and clarity in judicial system will reduce overlap and conflict with other bankruptcy procedures.

Information utilities

A notable feature of the Code is institution of an independent authority called an information utility to collect and disseminate financial information and act as repository for financial information.

Information obtained from such utility on existence of debt will constitute a proof of debt and will remove information asymmetry and dependency on the debtor for crucial information. A draft report has been issued by the working committee on 17 January 2017 recommending rules,regulations and other matters around formation of information utilities

Bankruptcy code

Bankruptcy Code presented in Rajya Sabha in Dec 2015 and supposed to be passed in 2016 Budget Session.

Here's a cheat-sheet on Bankruptcy Code:

1) The Bankruptcy Code is considered to be the biggest reform measure after Goods and Services Tax.

2) According to the World Bank, it takes 4.3 years on average - twice as long as China - to resolve insolvency in India. The new Bankruptcy Code seeks to cut down the time to resolve insolvency to less than a year.

3) The average recovery in India is just quarter to the dollar, one of the worst among similar size economies.

4) Under current bankruptcy rules, even deciding whether to save or liquidate an ailing company can take years, enabling managers to divest assets from the company.

5) Under the new Bankruptcy Code, a decision to liquidate a company would have to be reached in 180 days - even 90 days for fast-track applications. The management is displaced by insolvency professionals under the proposed law.

6) Current legislation - especially the Sick Industrial Companies Act of 1985 - is geared towards reviving companies, so appeals frequently follow a wind-up order, resulting in virtual paralysis.

7) Under the new Bankruptcy Code provisions, revival of the companies is not considered to be the only solution.

8) The new Bankruptcy Code will impose deadlines for the first time and establish a network of insolvency professionals to lighten courts' workload and tackle delays.

9) Proposed changes will scrap the Official Liquidator and introduce a system of registered insolvency practitioners, with a regulatory body, working under a company law tribunal.

OBJECTIVES

Some of the primary objectives with which the Code has been conceptualized are:

to consolidate the laws relating to insolvency, reorganization and liquidation/ bankruptcy of all persons, including companies, individuals, partnership firms and Limited Liability Partnerships (LLPs) under one statutory umbrella and amending relevant laws;
time bound resolution of defaults and seamless implementation of liquidation/ bankruptcy and maximizing asset value;
to encourage resolution as means of first resort for recovery;
creating infrastructure which can eradicate inefficiencies involved in bankruptcy process by introducing National Company Law Tribunal (NCLT), Insolvency Resolution Professional Agencies (IPAs), Insolvency Professionals (IPs) and Information Utilities (IUs).

SALIENT FEATURES

1. Unified Legislation

The Code is a comprehensive piece of legislation addressing insolvency/ bankruptcy issues pertaining not just to companies, LLPs (and other limited liability entities); but also to individuals and partnerships. The Code also attempts to streamline the multifarious legislations which are currently in operation in India in this area and bring all relevant provisions under one common umbrella. In order to cover bankruptcy of individuals, the Code will repeal the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. Additionally, the Code will amend 11 statutes including, inter alia, the Companies Act, 2013 (Companies Act) Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA), Limited Liability Partnership Act, 2008 (LLP Act), Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI).

2. Code Mandated Infrastructure

Insolvency Regulator

The Code seeks to establish an Insolvency and Bankruptcy Board of India (Board) which will function as the regulator for all matters pertaining to insolvency and bankruptcy. The Board will exercise a range of legislative, administrative and quasi-judicial functions. Some of the primary functions of the Board will include regulating entry, registration and exit of IPAs, IPs and IUs in the field of insolvency resolution, setting out eligibility requirements for such entities, making model bye laws for IPAs, setting out regulatory standards for IPs, specifying the manner in which IUs can collect and store data, and generally acting as the regulator overseeing the resolution process in the manner specified under the Code.
Insolvency Adjudicating Authority

The Code specifies 2 different adjudicating authorities (the Adjudicating Authority) which will exercise judicial control over the insolvency process as well as the liquidation process.

In case of companies, LLPs and other limited liability entities (which may be specified by the Central Government from time to time), the NCLT shall be acting as the Adjudicating Authority. All appeals from NCLT shall lie with the appellate authority, i.e. the National Company Law Appellate Tribunal (NCLAT).

In case of individuals and partnerships, the Adjudicating Authority would be the Debt Recovery Tribunal (DRT) with the Debt Recovery Appellate Tribunal (DRAT) continuing to be the appellate tribunal even for insolvency/ bankruptcy matters. The Supreme Court of India shall have appellate jurisdiction over NCLAT and DRAT.
Insolvency Professionals

Under the Code, IPs will be the licensed quasi-administrators who will carry out on ground supervision of resolution process, manage affairs and assets of the debtor during the process, receive and finalise resolution plans with the committee of creditors (COCs) and carry out the liquidation/bankruptcy of the debtor if the trigger for liquidation/bankruptcy (as set out below) gets activated.
Insolvency Professional Agencies

The IPAs will admit IPs, prepare model of code of conduct, establish performance standards for IPs, redress customer grievances against the IPs and act as a disciplinary body for all IPs registered with them.
Information Utilities

One of the dilatory factors plaguing the existing winding up proceedings has been the time taken by the courts in deciding whether a debt exists or not. In order to address this issue in an objective way, the Code seeks to put in place a robust infrastructure of IUs with an aim to have such information readily available for an Adjudicating Authority to rely upon. IUs are expected to collect, classify, store and distribute all possible relevant data pertaining to the debtors to/from companies and financial and operational creditors of a debtor, including but not limited to the data on financial defaults. However, the specific nature of data required to be managed by IUs will be clarified only when the rules under the Code will be notified.

3. Corporate Insolvency

Meaning and Scope

Part I of the Code deals with corporate insolvency mechanism pertaining to limited liability entities including companies, LLPs and other limited liability entities (Corporate Insolvency) as may be notified from time to time; but does not include any financial service provider. Corporate Insolvency includes two processes within its ambit, (i) Insolvency Resolution and (ii) Liquidation.
Strict Timelines

The Code prescribes a timeline of 180 days for the insolvency resolution process, which begins from the date the application is admitted by the NCLT. The period is subject to a single extension of 90 days in the event the Adjudicating Authority (being petitioned by a resolution passed by a vote of 75% of the COC) is satisfied that the corporate insolvency resolution process cannot be completed within the period of 180 days. This time period is also applicable to individual insolvency resolution process.

During this period, the creditors and the debtor will be expected to negotiate and finalise a resolution plan (accepted by 75% of the financial creditors) and in the event they fail, the debtor is placed in liquidation and the moratorium lifted.
Triggers for Insolvency Resolution Process (IRP)

In order to achieve quick resolution of distress, the Code prescribes certain 'early detection' triggers which can be activated on first signs of stress. The moment a default occurs, a financial creditor, an operational creditor or a corporate applicant may approach the Adjudicating Authority (i.e. NCLT) with an application for initiation of IRP. The procedure for these 3 group of applicants under the Code varies and are primarily as follows:
1. Financial Creditors: Financial creditors are those who extend financial debt to a corporate debtor or to whom a financial debt is assigned by a financial creditor. In case of a financial creditor, the moment a financial default occurs, the financial creditor can make an application to the NCLT for initiating IRP. The financial creditor for this purpose has to submit records of default with IU or evidence of such default in case the information is not available with IU.
2. Operational Creditors: These are creditors to whom corporate debtor owes operational debt (including claims for goods and services, employment or dues to any government under any law) or to whom such debt is assigned by an operational creditor. The operational creditor may upon occurrence of a default on operational credit, serve a demand notice or invoice demanding payment on the corporate debtor. If the corporate debtor fails to make such payment within 10 (ten) days or fails to notify operational creditor of a dispute in relation to the requested payment, the operational creditor can make an application to NCLT along with demand notice/invoice and other documents as prescribed therein.
3. Corporate Applicant: A Corporate applicant includes the corporate debtor (whose IRP is proposed to be initiated) or its shareholder, management personnel or employees satisfying certain criteria. A corporate applicant may file an application for IRP upon occurrence of any default and shall along with application submit its books of account and other documents to initiate the IRP.
Transfer of Powers and Moratorium

The Code stipulates a statutory moratorium during the limited IRP period whereby no suits, proceedings, recovery or enforcement action may take place against the corporate debtor. However, the IP will be appointed as the resolution professional in terms of the procedure outlined in the Code, who will take over the management and powers of board of directors of the corporate debtor. All officers and managers of the corporate debtor are required to act on instructions of the IP and all accounts of the corporate debtor will be managed by it.
Committee of Creditors to chart the course during IRP

The COC shall only include financial creditors as decision makers (operational creditors with more than 10% aggregate exposure have mere observer status during the COC meetings) and shall be responsible for deciding the important affairs of the company. It shall also be responsible for authorising the IP (acting as resolution professional) to take (or not to take) certain actions such as raising interim finance upto the limit specified by the committee, creating security on assets of the secured creditor, undertaking related party transactions, amending constitutional documents, change of capital structure or management of the Borrower etc. More importantly, the COC shall approve the resolution plans received by the IP. All decisions of the COC are required to be approved by a majority of 75% of the voting shares/value of the financial creditors.
Liquidation

In the event that:
1. the COC cannot agree on a workable resolution plan within the IRP Period (i.e. 180 days extendable once by another 90 days);
2. the COC decides to liquidate the company;
3. the NCLT rejects the resolution plan; or
4. the corporate debtor contravenes provisions of the resolution plan,
the NCLT shall:
1. pass an order requiring liquidation of corporate debtor;
2. make a public announcement of corporate debtor entering liquidation; and
3. require a liquidation order to be sent to the registering authority of the corporate debtor (for example Registrar of Companies in case of companies incorporated under Companies Act).
The IP acting as the resolution professional shall, upon commencement of liquidation shall be appointed as the liquidator for the process, unless replaced by NCLT.
Waterfall

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. cost of the insolvency resolution process and liquidation;
2. secured creditors (who choose to relinquish their security enforcement rights and workmen's dues relating to a period of 24 months preceding the liquidation commencement date);
3. wages and unpaid dues of employees (other than workmen) for a period of 12 months preceding the liquidation commencement date;
4. financial debts owed to unsecured creditors;
5. statutory dues to be received on account of Consolidated Fund of India or Consolidated Fund of a State (relating to a period of whole or part of 2 years preceding the liquidation commencement date) and debts of secured creditors (remaining unpaid after enforcement of security);
6. remaining debts and dues;
7. dues of preference shareholders; and
8. dues of equity shareholders or partners (as may be applicable).

TIME BOUND INSOLVENCY RESOLUTION PROCESS

4. Individual Bankruptcy

Scope and Threshold

Part III of the Code sets out the legal regime dealing with the insolvency mechanism for individuals and partnership firms and includes within its ambit, 3 processes, namely, the 'fresh start process', 'the insolvency resolution process' and 'bankruptcy'.

The threshold for applicability of Part III of the Code to individuals and partnership firms have been set at a minimum of INR 1,000. However, the Central Government may by notification increase the threshold to a minimum of INR 1,00,000.
Fresh Start Process

An application for a fresh start process, can be made for any debt (other than secured debt, debt which has been incurred 3 months prior to the date of application for fresh start process and any 'excluded debt').

The Code has introduced the concept of 'excluded debt' and 'excluded assets' for individuals and partnership firms under which certain debt and assets of the debtor would be exempted from the purview of fresh start process and the insolvency process under the Code. For example, any liability imposed by a court/tribunal, any maintenance required to be paid under any law and any student loan form a part of 'excluded debt'. Similarly, any unencumbered tools, books or vehicles of the debtor which are required for personal use, employment or vocation, unencumbered life insurance policies, pension plans, personal ornaments having religious sentiments and single dwelling unit of the debtor fall within the ambit of 'excluded assets'.
1. Eligibility criteria
  
  The Code provides for stringent criteria for any debtor to be eligible to apply for a fresh start process under the Code. For example, any person who does not own a dwelling unit and has a gross annual income of less than INR 60,000, with assets of a value not exceeding INR 20,000, and the aggregate value of the qualifying debt of such individual or partnership firm not exceeding INR 35,000 shall be eligible to apply for a fresh start process. In addition, it is imperative that such applicant is not an undischarged bankrupt and there are no previous fresh start process or insolvency resolution process subsisting against him.
2. Moratorium
  
  The Code stipulates an interim-moratorium period which would commence after filing of the application for a fresh start process and shall cease to exist after elapse of a period of 180 days from the date of application. During such period, all legal proceedings against such debtor should be stayed and no fresh suits, proceedings, recovery or enforcement action may be initiated against such debtor.
  
  However, the Code has also imposed certain restrictions on the debtor during the moratorium period such as the debtor shall be not be permitted to act as a director of any company (directly/indirectly) or be involved in the promotion or management of a company during the moratorium period. Further, he shall not dispose of his assets or travel abroad during this period, except with the permission of the Adjudicating Authority.
Insolvency Resolution Process

An application to initiate an IRP under the Code can be either made by the debtor (personally or through an insolvency resolution professional) or by a creditor (either personally or jointly with other creditors through an insolvency resolution professional).

However, a partner of a partnership firm is not eligible to apply for an IRP unless a joint application is filed by majority of the partners of the partnership firm.
1. Repayment Plan
  
  In the IRP, the creditors and the debtor need to arrive at an agreeable repayment plan for restructuring the debts and affairs of the debtor, supervised by an IP. The repayment plan will require approval of a three-fourth majority of financial creditors in value.
  
  The repayment plan may authorize or require the resolution professional to: (a) carry on the debtor's business or trade on his behalf or in his name; or (b) realize the assets of the debtor; or (c) administer or dispose of any funds of the debtor.
2. Moratorium
  
  The Code prescribes a timeline of 180 days within which the Adjudicating Authority shall pass an order on the repayment plan and beyond such period, if no repayment plan has been passed by the Adjudicating Authority, the moratorium in respect of the debts under consideration under the IRP shall cease to have an effect.
Bankruptcy

The bankruptcy of an individual can be initiated by the debtor, the creditors (either jointly or individually) or by any partner of a partnership firm (where the debtor is a firm), only after the failure of the IRP or non-implementation of repayment plan. The bankruptcy trustee is responsible for administration of the estate of the bankrupt and for distribution of the proceeds on the basis of the priority set out in the Code.

5. Key Changes in the Insolvency/Liquidation Regime

Decision Making in the Hands of Creditors

Presently, winding up of companies as envisaged in the Companies Act vests the decision on whether a company should be wound up or not on the wisdom of the High Court/NCLT. On the other hand, under the new regime, if the restructuring fails to be implemented as prescribed under the Code it would lead to automatic liquidation of the debtor (except in case of individuals).
Unsecured Creditors Vote at Par

Under the Code, each financial creditor of the COC, whether secured or not, gets to vote on the resolution plan of the corporate debtor on the basis of its voting share (proportionate to the money advanced by the creditor).
Government Dues Take Backseat

Under the Code, government dues including taxes rank lower than the unsecured creditors and wages as against the exiting regime, where after secured creditors and workmen dues, government dues including all taxes take preference on liquidation payouts.
Individual bankruptcy gets a shot in the arm

Currently, individual bankruptcy proceedings are adjudicated upon by district courts under 2 different statues. The Code proposes to unify the regime governing individual bankruptcy and in case where the individual bankruptcy is initiated alongside the corporate insolvency, NCLT will have jurisdiction to hear the matter relating to individual bankruptcy along with corporate insolvency. This is expected to speed up resolution on such matters.
Protection to workers

The Code protects the workers in case of insolvency, paying their salaries for up to 24 months in priority over all other creditors including secured creditors. This is a welcome change as in most cases of corporate insolvency, the workers and employees end up bearing the brunt of long drawn insolvency/bankruptcy process.
Incentive to Insolvency Professionals

In the distribution of liquidation proceeds, the cost of IP and the IRP has first priority, thereby acting as an incentive for them to strive for speedy resolution. This is at par with international practices.
Interim Financing

The Code prescribes that any interim financing and the cost of raising such financing will be included as part of the IRP cost, thereby giving it first priority in the waterfall and also in any creditor driven plan. Security can be created over the assets of the company to secure such financing by the interim resolution professional without the consent of existing creditor(s) if the value of the property secured in favour of existing secured creditors is at least twice the outstanding debt. However, any financing after the appointment of the resolution professional and constitution of the COC must be approved by 75% of the financial creditors by value.
Cross Border Insolvency

The Code for the first time attempts to addresses the issue of cross border insolvency given the multi-jurisdictional spread of assets of large corporates. In order to deal with this aspect, the Code stipulates a two pronged solution, one being the Central Government entering into agreements with other countries for enforcing the provisions of the Code and the other giving the Adjudicating Authority the authority to write a letter to the courts and/or authorities of other countries (as may be relevant) for seeking information or requesting action in relation to the assets of the debtor situated outside India.

6. Road Ahead

Operational Issues
1. Infrastructure Requirements: The Code proposes the establishment of the Board and NCLT, which if the government is able to set up even within a year will be laudable, considering the manpower/ facilities these institutions will require to perform their respective functions and the expertise and training they will need to do justice to the aims of the Code.
2. Quality Professionals: Successful implementation of the Code will require a huge force of trained and skilled insolvency professionals. A strong focus and a well-defined plan will be needed to develop a large pool of insolvency professionals and an institutional structure which will produce, certify and regulate them. Such insolvency professionals will not only need to understand the nuances of restructuring/ liquidation but must also be capable of carrying out the affairs of the company during the process. This process will definitely take a substantial amount of time, resources and expertise. Moreover, effort will be needed to ensure that such professionals are available across the entire country and not just for high profile cases in financial hubs.
3. Information Systems: The underlying assumption for the success of the Code is to have access to quality information. For this to materialize, robust utilities with state of the art technologies will swiftly need to be put in operation.
4. Adjudication Infrastructure: By December 2015, almost 59,000 cases were pending before DRTs, which currently deal with recovery cases of only banks and certain financial institutions. This is despite a strict statutory prescription of 180 days for resolution of disputes in relation to recovery of debt. The major reason for clogging of pending cases is the multiplicity of proceedings and misuse of the remedy of appeal to DRAT and other forums. The Code does not take away this option and the order of the DRT and NCLT may be further challenged with DRAT and NCLAT, respectively. The appellate order may also be further challenged at the Supreme Court. Therefore, while the intent objective behind the Code is laudable, the sheer enormity of disputes/appeals in the country and the lack of infrastructure to support this legislative intent, will be a key challenge which will need to be overcome in order to achieve the intended speed.
  
  In addition, the already over-burdened DRTs are now being assigned with the additional responsibility of adjudicating insolvency/ bankruptcy cases of individuals (which can be initiated by all creditors or the individuals themselves). A major overhaul of DRT infrastructure both in terms of physical facilities and manpower will be needed to achieve what the Code seeks.
5. Role of the Board: Instead of making the IPs and/or IPAs self-regulated, the Board has been assigned with the responsibility of regulating their performance and laying down the standards of performance. In most insolvency/ liquidation proceedings, government will be an interested party for recovery of the unpaid statutory dues of its several departments. This will make the impartial operation of insolvency professionals (whose entry and exit in the insolvency profession is regulated by the government through the Board) difficult. As such, for achieving the objectives of the Code and ensuring good governance of the IPs and/or IPAs, the minimum standards set by the Board should be further strengthened in practice with self-regulation.

Rehabilitation of Sick companies under new companies Act 2013 vs SICA 1985

Old Regime before Companies Act 2013

Treatment meted out under SICA, 1985 coverage limited only to Industrial companies. SICA determines sickness based on negative net worth criteria

Companies Act 2013

Treatment meted out under chapter XIX of the Bill: Covers revival and rehabilitation of all companies irrespective of the industry they are in .Sickness of company to be determined on the basis of whether co is able to pay its debt or not.

To be specific, the determining factor of a sick company has now been shifted to the secured creditors or banks and financial institutions with regard to the assessment of a company as a sick company.

The 2013 Act does not recognise the role of all stakeholders in the revival and rehabilitation of a sick company, and provisions predominantly revolve around secured creditors. The fact that the 2013 Act recognises the presence of unsecured creditors, is felt only at the time of the approval of the scheme of revival and rehabilitation. In accordance with the requirement of section 253 of the 2013

Act, a company is assessed to be sick on a demand by the secured creditors of a company representing 50% or more of its outstanding amount of debt under the following circumstances:

• The company has failed to pay the debt within a period of 30 days of the service of the notice of demand

• The company has failed to secure or compound the debt to the reasonable satisfaction of the creditors

To speed up the revival and rehabilitation process, the 2013 Act provides a one year time period for the finalisation of the rehabilitation plan.

Overview of the process

• In response to the application made by either the secured creditor or by the company itself, if the Tribunal is satisfied that a company has become a sick company, it shall give time to the company to settle its outstanding debts if Tribunal believes that it is practical for the company to make the repayment of its debts within a reasonable period of time.

• Once a company is assessed to be a sick company , an application could be made to the Tribunal under section 254 of the 2013

Act for the determination of the measures that may be adopted with respect to the revival and rehabilitation of the identified sick company either by a secured creditor of that company or by the company itself. The application thus made must be accompanied by audited financial statements of the company relating to the immediately preceding financial year, a draft scheme of revival and rehabilitation of the company, and with such other document as may be prescribed.

Subsequent to the receipt of the application, for the purpose of revival and rehabilitation, the Tribunal, not later than seven would be required to fix a date for hearing and would be appointing an interim administrator under Section 256 of 2013 Act to convene

a meeting of creditors of the company in accordance with the provisions of section 257 of the 2013 Act. In certain circumstances, the Tribunal may appoint an interim administrator as the company administrator to perform such functions as the Tribunal may direct.

• The administrator thus appointed would be required to prepare a report specifying the measures for revival and rehabilitation of the identified sick industry. The measures that have been identified under the section 261 of the 2013 Act for the purpose of revival and rehabilitation of a sick company provides for the following options:

– Financial reconstruction

– Change in or takeover of the management

– Amalgamation of the sick company with any other company, or another company’s amalgamation with the sick company

• The scheme thus prepared, will need to be approved by the secured and unsecured creditors representing three-fourth and one-fourth of the total representation in amounts outstanding respectively, before submission to the Tribunal for sanctioning the scheme pursuant to the requirement of section 262 of the 2013 Act. The Tribunal, after examining the scheme will give

its approval with or without any modification. The scheme, thus approved will be communicated to the sick company and the company administrator, and in the case of amalgamation, also to any other company concerned.

• The sanction accorded by the Tribunal will be construed as conclusive evidence that all the requirements of the scheme relating to the reconstruction or amalgamation or any other measure specified therein have been complied with. A copy of the sanctioned scheme will be filed with the ROC by the sick company within a period of 30 days from the date of its receipt.

• However, if the scheme is not approved by the creditors, the company administrator shall submit a report to the Tribunal within 15 days, and the Tribunal shall order for the winding up of the sick company. On passing of an order, the Tribunal shall conduct the proceedings for winding up of the sick company in accordance with the provisions of Chapter XX

US companies - Chapter 7 Vs 11 - Liquidation Vs Rehabilitation

Salient Features of Chapter 7 bankruptcy

A Chapter 7 filing is a fresh start for the debtor, with a clean financial slate. After the debtor files under Chapter 7, a trustee is appointed to sell the debtor's assets. This is why Chapter 7 is called liquidation. However, not all assets are sold off. State and federal laws deem certain property exempt from such confiscation, such as an individual's primary residence or personal items like clothing. Once the debtor's assets are liquidated, the trustee pays certain creditors a portion of the money raised. It is important to note that not all creditors receive money from the liquidation proceeds. Many of the financial obligations are, therefore, forgiven or “discharged”. Certain debts are never (or rarely) discharged (forgiven), such as alimony, child support, student loans and taxes.

Chapter 7 is the most commonly used bankruptcy filing in the U.S. Once an individual or company has filed for bankruptcy under Chapter 7, they cannot file again for 7 years.

How Creditors are paid in Chapter 7 bankruptcy

Creditors with secured debt (loans backed by a specific asset e.g. auto loan) are paid first when the assets are sold off. Whatever assets and residual cash remain after all secured creditors are paid are pooled together to repay any outstanding creditors with unsecured loans e.g. bondholders and preferred shareholders.

Salient Features of Chapter 11 bankruptcy

Chapter 11 was originally intended for large corporations. However, individuals are also now allowed to file for bankruptcy under Chapter 11. Once a debtor files for Chapter 11 bankruptcy, a trustee is appointed to handle the bankruptcy. The trustee and the debtor work together to develop a repayment plan for the debtors outstanding loans. This plan is presented to the bankruptcy court, which decides whether to accept the plan, modify it or dictate an altogether new repayment plan. The repayment of outstanding loans usually occurs over 3 to 5 years. Note that the debtors assets are not liquidated under a Chapter 11 bankruptcy filing. So if the debtor is a business, they can continue to operate and potentially emerge from bankruptcy as a healthy company.

Other types of bankruptcy

Chapter 12 and Chapter 13 are the other kinds of bankruptcy filings. They are similar to each other except that Chapter 12 is for farmers and Chapter 13 for individuals. The main difference between Chapter 13 and Chapter 11 bankruptcy for an individual is the limit on amount owed. You can file under Chapter 13 only if you owe less than $336,900 in unsecured debt and less than $1,010,650 in secured debt.

How Creditors are paid in Chapter 11 bankruptcy

Debt is not absolved in Chapter 11. Only the terms of the loan are changed so that it is easier for the debtor to repay (e.g. extending the term of the loan or reducing the interest rate so that EMI is reduced.). It is also possible that the final repayment plan under a Chapter 11 filing reduces the debt obligations of the debtor. Under the repayment plan, creditors may recover an amount much lower than (about 50%) the outstanding loan amount. The remaining loan may be forgiven (discharged)

Withdrawal of IBC case based on consent terms

A Supreme Court Bench of Justice Rohinton Nariman and Justice Sanjay Kishan Kaul yesterday exercised powers under Article 142 of the Constitution to record consent terms between the parties post admission of the application under Insolvency and Bankruptcy Code, 2016.

The Mumbai Bench of NCLT had, in June 2017, initiated corporate insolvency resolution process against the corporate debtor, Lokhandwala Kataria Construction on an application filed by financial creditor, Nisus Finance & Investment Manager LLP under Section 7 of the Code.

Both parties to this application, however, approached the NCLAT after the case was admitted to record consent terms between them. The NCLAT refused to do so while observing Rule 8 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which which allows withdrawal of application only before its admission.

The Supreme Court, however, exercised powers under Article 142 of the Constitution to allow recording of consent terms. This way, the apex court has set a new precedent with respect to withdrawal of cases even after the case has been admitted by the NCLT.

https://barandbench.com/91473/

Small creditors use India's new bankruptcy rules to put the squeeze on big players - Sep 15 2017

MUMBAI: In late June, one of India's top wind power equipment makers, Inox Wind Ltd, was dragged into insolvency courts by a logistics handler over unpaid dues of $88,000. Two weeks on, the matter was settled, with dues paid off.

The case illustrates how small creditors and vendors, previously at the mercy of large debtors, are now using India's newbankruptcy code as a pressure ploy to secure payment of dues that would earlier have been all but impossible to recover.

India overhauled bankruptcy laws last year with the main goal of helping banks tackle a $150-billion bad loan issue that is crimping growth in the economy.

Less than a year on, insolvency professionals say it is vendors and small suppliers, also referred to as operational creditors, who are using the new rules as leverage to recover dues much more effectively than banks owed far larger sums.

"It is not necessarily a negative thing, but it was not the objective of the new code," said Ashish Chhawchharia, a partner at Grant Thornton who works on insolvency cases.

The new rules give any creditor owed 100,000 rupees ($1,560) the right to drag a multi-billion dollar company to court.

They lay out a stringent timeline for resolution, or force debtors into automatic liquidation, giving outsize influence to vendors and suppliers who would normally rank well below secured financial creditors, such as lender banks, in any bankruptcy process.

But they have also stirred fears of a tsunami of cases jeopardising the plans of banks with billions of dollars at stake, and which are forced to join such proceedings.

"If an operational creditor initiates a process, that basically brings in unwilling financial creditors, even if they do not deem it the right time or course of action," said leading insolvency lawyer Sumant Batra.

The court that handles such bankruptcy cases, the National Company Law Tribunal (NCLT), should first test the intent of any operational creditor making a bankruptcy plea, he added.

"NCLT has to hold an enquiry at the beginning to determine whether this has been filed only for recovery of debt, or whether this has been actually filed for a resolution or a liquidation process."

ERICSSON-RCOM
Swedish telecom equipment firm Ericsson became the first high-profile foreign vendor to use the tool, filing a petition this week to drag Indian telecom carrier Reliance Communications to insolvency courts over unpaid dues of $180 million.

By comparison, RCom, as the company is widely known, owes nearly $7 billion to its banks, who have agreed to a standstill over its servicing obligations until year end, while the company attempts to restructure.

RCom said it plans to challenge the Ericsson plea.

About 1,000 insolvency petitions have been triggered since early 2017, when the first case was admitted under the new rules, but consultant EY estimates about 80 percent of these were withdrawn following out-of-court settlements.

About 60 percent of the cases brought to the NCLT are initiated by operational creditors, industry estimates show.

Sanjay Ruia, a Mumbai chartered accountant who took a holiday tour operator to bankruptcy court over unpaid audit and advisory fees, said the law had made it easier for creditors like himself who would formerly have struggled to recover dues.

Still, many fear the arm-twisting tactics could make life tougher for secured financial creditors, who must make steep balance-sheet provisions for loans to borrower firms entangled in bankruptcy proceedings

IBC Act - Case Studies

VA TECH - operational creditor

The Chennai bench of the National Company Law Tribunal (NCLT) has ordered commencement of corporate insolvency resolution process against VA Tech Wabag, one of the pure play water technology majors. The process, initiated by Consolidated Construction Consortium (CCCL), a Chennai-based player in the construction and contracts of civil sector projects, was accepted by the NCLT after hearing both the parties.

The NCLT has appointed Pathukasahasram Reghunathan Raman as interim resolution professional (IRP) to carry out the proceedings within the stipulated time of 180 days. Sources said both the parties had a contractual dispute in terms of payment amounting to Rs 1.5 crore and CCCL had sought resolution of payment default through IRP.

The NCLT bench of Ch. Mohd. Sharief Tariq, member, judicial and S Vijayaraghavan, member technical had given VA Tech Wabag (corporate debtor) 15 days’ time on September 14 to settle the dues along with the interest with CCCL (operational creditor), when the bench pronounced a detailed order holding the case fit for insolvency process.

The bench, giving an opportunity to VA Tech Wabag, however, had made it clear that it will consider the case for admission, if the company failed to settle the outstanding amount.

When the matter came up on October 6, VA Tech Wabag counsel informed the bench that the corporate debtor was admittedly willing to pay only 50% of the principal amount and not willing to pay any interest. With CCCL counsel opposing the submission, NCLT ordered admission of VA Tech Wabag into the insolvency process.

The bench observed the default by debtor in making payment to the creditor was established and further fortified by the company’s admission to pay 50% of the principal amount, which CCCL refused to accept.

The IRP has been directed to take charge of the corporate debtor’s management immediately. It has also declared the moratorium which shall have effect from the date of the order till completion of the process. VA Tech Wabag officials were not immediately available for a comment.

Chennai-headquartered VA Tech Wabag, a listed company, is considered as an Indian multinational player in water and water treatment and recycling. It had recently won a Rs 386-crore design, build and operate order from the Bangalore Water Supply and Sewerage Board (BWSSB) for a 150 MLD sewage treatment plant (STP) at K&C Valley in Bengaluru.

SC ruling in Essar Steel case has restored order to the IBC process

By upholding the collective decision of the Committee of Creditors as paramount, the apex court has addressed a key reason for long-drawn litigations under the Insolvency and Bankruptcy Code

By ruling in the Essar Steel case that the Committee of Creditors (CoC) has the discretion to decide on the distribution of proceeds, the Supreme Court has brought huge relief to banks. Importantly, the SC has set aside the NCLAT order in this case that had prescribed a sharing arrangement treating all classes of creditors — secured, unsecured financial creditors and operational creditors — identically. The NCLAT order had worked out a blanket 60 per cent share of claims for all creditors, threatening the basic tenets of commercial law that accords priority to secured creditors. The SC has instead ordered that Arcelor Mittal’s ₹42,000-crore offer be distributed according to the resolution plan approved by the CoC in October last year, implying 92 per cent of secured financial creditors’ claims being settled — a big win for lenders. The SC ruling has also importantly put to rest ambiguity over several aspects of the IBC, setting a key precedent for future cases.

BHUSHAN STEEL

Between 2007 and 2014, Bhushan Power and Steel Limited (BPSL), via its directors, got huge loans. The company borrowed all these credits to meet working capital requirements, purchase of plant and machinery, and other expansion related activities. The company availed credit from 33 banks and other institutions. As a result, the total sum stood at 47,204 crores.

While the company saw good growth and fairly reasonable profits, they continuously skipped payment deadlines. Later on, it was revealed that the money was siphoned and diverted to 200 shell companies.

he Punjab National Bank (PNB) moved it for solvency, demanding the payment of dues and the borrowed sum. Bhushan Power and Steel had availed credit of Rs 4423 crores from PNB. Following the suit put forth by PNB, other lenders were also exposed to reality, and they went on to join the suit.

The company was soon under the radar of the Enforcement Directorate (ED), and a charge sheet was filed. The action was taken against its promoter Sanjay Singal under the Prevention of Money Laundering Act (PMLA).

Along with him, a few others were taken into custody, including certain bank officials for their part in the money laundering and its illegal diversion. Soon, Bhushan Power and Steel Limited were declared insolvent, and a bid requesting a proposal for the same was invited by the National Company Law Tribunal (NCLAT).

The NCLAT was happy with the bid of JSW Steel, who was also the highest bidder for the BPSL case. The Committee of Creditors (CoC) was also content with a 19,700 crore repayment proposal while taking a haircut of approximately 60% of their original loan amount.

The ED filed an opposition in the court for offering Bhushan Power and Steel Limited (BPSL) to JSW. However, at the end of the day, the rulings were made in favour of JSW Steel Limited. Following the acquisition, JSW will be the go-forward to become India's largest steel producer.

PREPACK RESOLUTION

Pre-packs are referred to as "expedited reorganization proceedings" by the United Nations Commission on International Trade Law (UNCITRAL), because they combine voluntary restructuring negotiations, in which a plan is negotiated and agreed to by the bulk of impacted stakeholders, with reorganization proceedings that are started without delay

In pre-pack, the defaulting company gets to submit a resolution plan rather than creditor driven insolvency process. The board of directors need to pass a declaration in prescribed form the company’s intention to file within a certain period of time (not more than 90 days).A members special resolution should approve the decision to initiate the pre-pack. The Committee of Creditors shall, by not less than 66% of the voting shares after considering its feasibility and viability and manner of distribution and other requirements, approve the resolution plan.

The approved pre-pack plan is to be filed with NCLT. NCLT has 14 days to admit or reject (if the application is not complete) it. The moratorium kicks in from the filing date and a public announcement of the prepack process is made by the NCLT. The pre-pack resolution process should be completed within 120 days. The ‘process’ simply means the approval of the resolution plan (which can be different from the base resolution plan) by creditors and its submission by the IP to the NCLT.

The IP, along with the usual functions during the normal insolvency resolution process seems to have one additional function during the pre-pack process – to monitor management of the affairs of the corporate debtor. The board, while remaining in control of the company, is required to ‘make every endeavour to protect and preserve the value of the property of the corporate debtor, and manage its operations as a going concern’ (s 54H(b)). There is also an option for the creditors to apply to change the control from management to IP, by a vote of at least 66% of the voting shares (s54J(1)). The NCLT will approve such a request if it finds gross mismanagement, or fraud or other issues.

Insolvency, Bankruptcy and Liquidation - IBC Act