THE INSOLVENCY AND BANKRUPTCY CODE 2016

THE INSOLVENCY AND BANKRUPTCY CODE, 2016The Parliament has recently passed the crucial The Insolvency and Bankruptcy Code, 2016 (IBC). The same is now an 'Act' post the Presidential ascent on 28th May 2016. However, it will be implemented only after it is notified by the Central Government.

This enactment paves the way for the complete overhaul of the Insolvency and Bankruptcy mechanism in India, which at present is governed primarily through the provisions of SICA and the Companies Act. The other enactments like RDDB Act (DRT Act) and the SARFAESI will continue to remain in force.

For the purpose of implementing the IBC, it is necessary to put in place the enabling infrastructure i.e. Insolvency Regulator, Insolvency Professional Agencies, Insolvency Professionals and Information Utilities etc. which may take some time and unless these structures are put in place the IBC will not be notified. This may take at least 6 -12 months' time. Upon notification of IBC, the SICA Repeal Act will also be notified and BIFR/AAIFR will cease to exist.

In the meanwhile, the Government, in exercise of the powers conferred U/s 1 (3) of the Companies Act 2013, has w.e.f 01st June 2016, notified several positions of the Act of 2013 including those relating to the Constitution of the NCLT and NCLAT and dissolution of the Company Law Board (CLB). Accordingly, eleven benches of NCLT have been constituted with district territorial jurisdiction and the CLB stands dissolved w.e.f 1st June 2016.

The NCLT will initially deal with the CLB matters and also the provision relating to Class Action Suits, investigation of a Company's account, freezing of assets shall be governed by NCLT and appeals therefrom would be before NCLAT. All the matters relating to Compromise, Arrangement, Winding up, Reduction of share capital will continue to be under the purview of High Court, which would subsequently get transferred to NCLT, as and when the relevant provisions are notified by the Central Government. On notification of the IBC, the cases relating to restructuring and revival pending before the BIFR/AAIFR shall abate and fresh Corporate Insolvency Resolution Process (CIRP) applications will have to be filed before the NCLT.

Although the code is applicable to Companies, Limited Liability Partnerships (jointly defined as Corporate persons (CP) under the IBC) and to other Partnership Firms, and Individuals, but presently we have restricted ourselves in dealing with some of the salient features of IBC and the procedures involved for Insolvency Resolution/ Liquidation of Corporate Persons and the same are set out below:

Adjudicating Authority (AA) NCLT/NCLAT for Companies and LLPs and where CIRP or liquidation of a Corporate Person is pending before NCLT an application relating to Insolvency Resolution or Bankruptcy of a Personal Guarantor of a Corporate Debtor shall also be filed before the NCLT. For other individual and partnership firms, the Adjudicating Authority would be DRT / DRAT.

Corporate Person (CP) / Corporate Debtor (CD) A company incorporated under Companies Act as well as LLP as defined under LLP Act, 2000 would be treated as CP and a CP who owes a debt to any person will be called a CD.

Insolvency Regulator (IR) The Code proposes to establish an Insolvency Regulator to be called as The Insolvency and Bankruptcy Board of India to regulate the Insolvency Professionals, Insolvency Professional Agencies and Information Utilities and powers to appoint RPs in case the NCLT asks them to appoint an RP.

Insolvency Professionals (IP) The Code proposes to create a new class of professional to be called as Insolvency Professionals to conduct the insolvency process and to manage the affairs of Corporate Debtor (CD) (the Corporate Peron i.e. the Distressed Borrower Company/LLP) during the Corporate Insolvency Resolution Process (CIRP).

Insolvency Professional Agencies (IPA) Insolvency professional agencies will develop professional standards, code of ethics and be first level regulator for IPs leading to development of a competitive industry for such professionals.

Information Utilities (IUs) The code proposes to set up information utilities which would col lec t , col late, authenticate and disseminate f inancial information from companies/LLPs/Partnership Firms/individuals and financial and operational creditors of such entities.

Initiation of Corporate Insolvency Resolution Process (CIRP) Any creditor (whether financial or operational) of the Corporate Debtor (CD) may initiate CIRP by filing an application to Adjudicating Authority (NCLT) for commencing the process of resolution (restructuring/revival) of the Corporate Debtor. The application for CIRP shall be filed by the Financial Creditors (FC) u/s 7; by the Operational Creditor (OC) u/s 9 and/or by the CD u/s 10.

Process for Insolvency Resolution

I. Post the fling of application for initiation of CIRP the AA (NCLT) shall, within a period of 14 days, take a decision on the admission of the same or reject the said application. The CIRP shall be deemed to have commenced from date of admission of the said application and the entire process has to be completed with 180 days (extendable by 90 days) from the date of admission of CIRP application.

ii. Upon commencement of the CIRP the AA (NCLT) shall, by an order, declare a moratorium till the completion of CIRP (maximum 180-270 days) prohibiting initiation of any suit or continuation of any suit or proceeding or execution of any judgment or decree against the CD (section 14(1)(a)), disposal or alienation, in any manner by the CD of its assets or legal

rights or beneficial interest in them (section 14(1)(b)), any action u/s 13(4) of SARFAESI by the secured lenders (section 14(1)(c)), recovery of any property which is in possession of the CD, whether or not owned by CD (section 14(1)(d). However the declaration of moratorium shall not result in suspension or termination of essential goods or services to the CD (Section 14(2)).

iii. Within 14 days of commencement of CIRP, the AA (NCLT) shall appoint an Interim resolution professional (IRP), as proposed in the application for initiation of CIRP and also cause a public announcement of the initiation of CIRP and

The code proposes to set up

information utilities which would collect,

collate, authenticate and

disseminate financial

information from companies / LLPs / Partnership Firms

/ individuals and financial and

operational creditors of such

entities.

call for submission of claims by the creditors of CD (section 13). From the date of appointment of IRP, the management of affairs of CD shall vest in the IRP and the powers of Board of Directors / partners of the CP shall stand suspended.

iv. The IRP shall collate all the claims received against CD and constitute a Committee of Creditors (CC) comprising all the Financial Creditors of the CD (irrespective of them being differently secured). As such, there is no concept of class of Creditors (1st Charge/2nd Charge/ unsecured) amongst the FCs. The CC shall within seven days of its constitution, with a super majority vote, resolve to appoint the Interim RP as the Resolution Professional (RP) or replace him with another RP to run the CIRP.

v. The RP shall manage the affairs of the CD and also prepare an Information Memorandum (IM) about the CD in the prescribed manner for the formulation of resolution plans. Any person (called a Resolution Applicant) can file a Resolution Plan in response to the IM prepared and circulated by the RP. The Resolution Plans for the Corporate Debtor filed by various Resolution Applicants shall be examined by the RP and placed before the CC.

vi. A resolution plan, if approved by the CC (by 75% or more voting share of FC), shall be submitted by the RP to the AA (NCLT) for its approval. The AA (NCLT), after satisfying itself that the resolution plan as approved by CC is compliant with the requisites of section 30(4) of the Act (i.e. approved by 75% or more of the voting share of FC, provision for payment of dues to OC which is not lower than the amount which the OC would be eligible to get in the event of liquidation etc.) shall approve the plan (section 31(1)) or in case it does not satisfy the criteria then it may reject the said plan (section 31(2)).

The Liquidation Process

i. In case the resolution plan is rejected by the AA (NCLT) for non-compliance with the requisites of section 30(4) or no plan is received within the stipulated time frame of 180 days or 270 days, the AA (NCLT) may pass orders for liquidation of the CD and issue a public announcement to that effect. (Section 33)

ii. The AA may also direct liquidation of CD in the event the RP communicates to the AA that even during the pendency of the CIRP, the CC has decided to liquidate the company, or on determination by the AA (on an application filed by any person) that the provisions of resolution plan have been contravened by the CD.

iii. Upon passing of order of liquidation of CD by the AA the RP shall act as Liquidator and shall receive and collect claims of creditors, verify them and accordingly accept or reject the same and run the liquidation process in accordance with the provisions of the IBC.

Distribution of Assets in case of Liquidation

The Code also provides for priorities [waterfall] wherein the proceeds from the realization of assets of the CD are to be distributed to its creditors in case of liquidation. The priority as envisaged in the code is as follows:

a. Insolvency Resolution Process costs and liquidation costs paid in full;

b. the following debts which shall rank equally between and among the following:

(i) Workmen dues for the period of twenty-four months preceding the liquidation commencement date; and

The IRP shall collate all the claims received against CD and constitute a Committee of Creditors (CC) comprising all the Financial Creditors of the CD (irrespective of them being differently secured).

(ii) Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

c. wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

d. financial debts owed to unsecured creditors;

e. the following dues shall rank equally between and among the following:

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

f. any remaining debts and dues;

g. preference shareholders, if any; and

h. equity shareholders or partners, as the case may be.

CROSS – BORDERINSOLVENCYThe code also covers certain provisions related to cases of Cross-Border Insolvency which envisage that:

a) The Central Govt. may enter into an agreement with the government of any country outside India for enforcing the provisions of insolvency code

b) Application of provision of insolvency code in relation to assets or property of corporate debtor or debtor, including personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.

As such it may be noticed that the code is a comprehensive attempt to try to restructure/ revive a Company in a time bound manner of 180-270 days and if no such Corporate Restructuring Plan is approved or implemented within the stipulated time, then the Company would go into liquidation. In case of liquidation of a Corporate Debtor, the Personal Guarantor can file for and be declared as an insolvent before the NCLT itself [Section 60(2)] and be free of the earlier debt / Personal Guarantee obligations and can restart his commercial life in due course without the obligation as a Guarantor haunting him forever.

A comprehensive attempt to try to

restructure/ revive a Company in a

time bound manner of 180-

270 days and if no such Corporate

Restructuring Plan is approved or implemented

within the stipulated time,

then the Company would

go into liquidation