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Vinod Kothari & Sikha Bansal Vinod Kothari & Company
Kolkata
1006-1009 Krishna Building 224 AJC Bose Road
Kolkata – 700017
Phone 033-22811276/ 22813742/7715
New Delhi B-49, Panchsheel Enclave, New Delhi 110017 Ph – 011-41315340 E: [email protected]
Mumbai 601-C, Neelkanth 98 Marine Drive Mumbai 400002 Phone 022-22817427
www.vinodkothari.com / www.india-financing.com Email: [email protected] / [email protected]
Copyright
The presentation is a property of Vinod Kothari & Company. No part of it can be
copied, reproduced or distributed in any manner, without explicit prior
permission.
In case of linking, please do give credit and full link.
Sequence of discussion
Need for Bankruptcy Law Reforms and the Bankruptcy Law Reforms Committee and its Reports
The Proposed Code
Insolvency Resolution Process & Liquidation for Corporate Entities
Journey of an Insolvency Professional: From Interim Resolution Professional to Liquidator
Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms
Adjudicating Authorities under the Proposed Code
Institutional and Regulatory Framework
Other Important Provisions
Need for bankruptcy law reforms
AND
the Bankruptcy law reforms committee
& its reports
Present insolvency regime in India
• Multiple laws – multiple fora
• Lack of holistic remedy
• Insolvency resolution framework for Individuals stagnant for over 100 years!
▫ The Presidency Towns Insolvency Act, 1909, covers the insolvency of individuals and of
partnerships and associations of individuals
The 1861 Indian High Courts Act led to the setting up of the High Court system in place of the
Presidency towns Supreme Courts, which also has jurisdiction over insolvency
▫ The Provincial Insolvency Act 1920, is the insolvency law for individuals in areas other than
the Presidency towns, deals with insolvency of individuals, including individuals as
proprietors
• Framework for resolution of Corporate bankruptcy is vegetating too
▫ Winding up provisions under the Companies Act, 1956 unchanged for nearly 6 decades;
▫ Limited liability partnerships are registered under the Limited Liability Partnership Act,
2008
▫ The Micro, Small and Medium Enterprise Development Act, 2006, registers MSMEs but does
not have provision for insolvency and bankruptcy
Other laws in place . . .
The SARFAESI Act, 2002 ▫ Enforcement of security interests by creditors is based on a “might is right” principle;
▫ Interests of stakeholders other than creditors get subdued
• The RDDBFI Act, ▫ Grants special rights to banks for recovery of debts
• SICA ▫ Revival – a central theme
▫ Applies to industrial companies only
▫ Moratorium provisions of SICA were widely used by defaulters to ward-off creditors‟ action
▫ Amendments pursuant to SARFAESI made SICA virtually irrelevant
• ARC Business Model ▫ Also based on “might is right” principle
• Informal framework (prominently based on RBI Guidelines) ▫ Corporate Debt Restructuring
▫ Joint Lenders Forum
▫ Strategic Debt Restructuring
▫ Huge volume of NPAs being handled
Present insolvency regime in India
Committees on bankruptcy reforms
in india (1/2)
1964 • 26th Report of Law Commission on Insolvency Laws • Recommended consolidation of extant two personal insolvency laws into one.
1981 • Tiwari Committee • Led to enactment of SICA
1991 • Narasimham Committee I • Led to enactment of the RDDBFI Act, 1993
1998 • Narasimham Committee II • Led to enactment of the SARFAESI Act, 2002
1999
• Justice Eradi Committee • Companies (Amendment) Act, 2002, proposed setting up of NCLT, provided for revival and
rehabilitation of sick companies • Never enforced
Committees on bankruptcy reforms in
india (2/2)
2001 • L. N. Mitra Committee • Proposed a Comprehensive bankruptcy code
2005 • Irani Committee • Amendments to RDDBFI and SARFAESI
2013
• Financial Sector Legislative Reforms Commission • Draft Indian Financial Code includes a “Resolution Corporation‟ for resolving
distressed financial firms.
2014
• The Bankruptcy Law Reform Committee (BLRC) under the Chairmanship of Mr. T.K. Vishwanathan
• The Insolvency and Bankruptcy Bill, 2015
Banking law reforms committee (BLRC)
• Mandate ▫ Set up by the Department of Economic Affairs, Ministry of Finance, by an office order
dated August 22, 2014
▫ Chairman: Mr. T.K. Vishwanathan
• Objective ▫ To study the “corporate bankruptcy legal framework in India”, and
▫ To submit a report to the Government for reforming the system
• Interim Report ▫ Submitted in February, 2015
▫ Intended to serve as an „Approach Paper‟ for the Insolvency Code.
▫ To suggest certain immediate reforms for improving the corporate insolvency regime in India
▫ (http://finmin.nic.in/reports/Interim_Report_BLRC.pdf)
• Final Report ▫ Submitted in November 4, 2015
▫ Two Parts: Volume I – Rationale and Design, and Volume II – Draft Insolvency and Bankruptcy Code
▫ Volume I: (http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf)
▫ Volume II: (http://finmin.nic.in/reports/DraftInsolvencyBankruptcyBil2015.pdf)
Major recommendations in the interim
report (1/2) • Recommendations for reform of the law applicable to corporate rescue
in India as proposed in the Companies Act, 2013: ▫ A simple liquidity based test for initiating rescue proceedings that facilitates
early recognition of financial distress and timely intervention without undermining the interest of the business under consideration
▫ Allow unsecured creditors representing a certain value of unsecured debt to initiate rescue proceedings
▫ Providing basic grounds to guide the discretion of NCLT in granting moratorium
▫ Reduce the timelines and streamline the process for assessing the viability of a business for determining whether the company should be rescued or liquidated
▫ Provide a fair and predictable mechanism for sanctioning a scheme of revival by introducing changes to provide for (a) equal treatment of the creditors of the same class (b) protecting the interests of non-consenting creditors; and prevent diversion of cash flow generated by a business after a scheme has been sanctioned.
▫ Provision for raising „rescue finance‟ and granting super-priority to such financers as part of a scheme of revival
Major recommendations in the interim
report (2/2) • Reforms in the law of liquidation of companies on the grounds of insolvency:
▫ Re-instate the debt enforcement function of the statutory demand test for winding up a company by clarifying that the such test does not require proof of factual insolvency (in commercial or balance sheet terms) as intended by the lawmakers, while providing appropriate safeguards to prevent misuse of the provision (including criteria for determining whether a debt is disputed or not)
▫ A separate declaratory provision that upholds the priority rights of secured creditors on their security interests notwithstanding anything to the contrary contained in any state or central law that imposes a tax or revenue payable to the Government by virtue of a specific statutory provision made as a first charge on the assets of the assesse
▫ Strengthening provisions on avoidance of certain transactions in winding up
• Reforms relevant to both rescue and liquidation ▫ Amend provisions relating to the NCLT and the NCLAT in line with the decisions of the Supreme
Court in Union of India v. Madras Bar Association and Madras Bar Association v. Union of India and make an appropriate representation before the Supreme Court in the next hearing of the challenge presently pending before the Court. Certain amendments have been identified by BLRC
▫ BLRC agrees with SEBI proposal to amend the Securities Contracts Regulation Act, 1956 to provide for safe harbour provisions on settlement and netting of transactions in stock exchanges and clearing corporations in the event of the insolvency of the clearing members and trading members in the interest of settlement finality in the capital markets.
• Examination of issues relating to insolvency resolution of MSMEs
Major recommendations in the final
report (1/2) • Institutional Infrastructure
▫ Insolvency and Bankruptcy Board of India an Insolvency Regulator (the Board)
▫ The Bankruptcy and Insolvency Adjudicator
NCLT for firm insolvency and liquidation; NCLAT being the appellate forum
DRT for individual insolvency and bankruptcy matters; DRAT being the appellate forum
▫ NCLAT to have appellate jurisdiction over orders passed by the insolvency regulator
▫ Bankruptcy and Insolvency Information Utilities
Entities licensed by the Board
For electronic collection of data under the Code, and release of statistical information as specified by the Board
▫ Insolvency Professional
Regulated and licensed professional
To manage the entire insolvency and bankruptcy process
May play any of the roles under the Code:
Resolution professional to resolve insolvency for a firm or an individual;
Bankruptcy Trustee in an individual bankruptcy process;
Liquidator in a firm liquidation process.
Major recommendations in the report
(2/2) • Insolvency Resolution Process for Legal Entities
▫ A single code for insolvency resolution of all legal entities
▫ A calm period, i.e. moratorium for creditors and debtors to negotiate the viability of the entity
▫ An adjudicating authority to ensure adherence to the process
▫ Process to be managed by Insolvency Professional
▫ All decisions on matters of business will be taken by a committee of the financial creditors. The Report says it upfront, “The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.”
▫ No prescriptions on solutions to resolve insolvency
▫ Default maximum period of 180 days, subject to one-time extension of 90 days.
• Fast-track insolvency resolution process ▫ For entities having less complex structure of assets and liabilities or size of operations.
▫ Insolvency likely to take a shorter time to resolve
• Liquidation ▫ Irreversible time-bound liquidation with defined pay-out prioritisation
▫ Covers liquidation of solvent companies as well
• Simplified process is envisaged for default by individuals ▫ Includes a concept “Fresh Start” where specified loans of a limited class of borrowers can be
waived, but this information about individual bankruptcy will reflect in the records of the individual.
The proposed code
Objectives of the proposed code
Higher levels of debt-financing across a wide variety of debt instruments
Low loss in
recovery
Low time to
resolution
Principles driving the design of
the proposed code
• The Code will facilitate the
assessment of viability of the
enterprise at a very early stage
• The Code will enable symmetry
of information between creditors
and debtors
• The Code will ensure a time-
bound process to better preserve
economic value
• The Code will ensure a collective
process
• The Code will respect the rights of all
creditors equally
• The Code must ensure that, when the
negotiations fail to establish viability,
the outcome of bankruptcy must be
binding
• The Code must ensure clarity of
priority, and that the rights of all
stakeholders are upheld in resolving
bankruptcy
Design of
the
proposed
code
The Insolvency
and Bankruptcy Code (Draft)
A Unified
Code Insolvency
Trigger; least cost on AA
Base of Information
Utilities
Adjudicator focuses on procedures
Regulated Industry of Insolvency
Professionals
A Regulator for
malleability and
efficiency
A calm period for insolvency resolution
Bankruptcy as an
outcome of insolvency resolution
Swift and efficient
bankruptcy resolution
Structuring of the proposed code (1/2)
Preliminary Part-I • Provides for Short title, extent, commencement, application of the Code and Definitions of terms used in the
entire Code
Insolvency Resolution and Liquidation for Corporate Persons Part-II • Divided into 7 Chapters • Covers Corporate Insolvency Resolution (CIR) Process, Liquidation Process, Fast Track CIR, Voluntary
Liquidation, AA, and Offences and Penalties
Insolvency Resolution and Liquidation for Individuals and Partnership Firms Part-III
• This Part too, is divided into 7 Chapters • Covers Fresh Start Process, Insolvency Resolution, Bankruptcy Order, Administration and distribution of the
bankruptcy estate, AA, and Offences and Penalties
Structuring of the proposed code (2/2)
Regulation of Insolvency Professionals, Agencies and Information Utilities Part- IV
• 7 Chapters • Deals with the institutional framework under the proposed Code – calls for
the establishment of the Board, discusses its powers and functions • Also covers IPs, IP Agencies, and Information Utilities • Inspection and Investigation of IP Agency has also been dealt with
Miscellaneous Part-V • Calls for repeal of certain enactments and savings • Requires amendments in certain enactments • Contains transitional provisions • Empowers the Central Governments to make Rules, and empowers the
Board to make Regulations.
Applicability and commencement
• Applies to whole of India ▫ Part III relating to insolvency and bankruptcy of individuals and partnerships is not
applicable in J&K
• To Commence as on the date as notified by the Central Government in the Official Gazette ▫ Piecemeal commencement possible
• Persons covered ▫ Companies incorporated under the Companies Act, 2013 or previous company law;
▫ Companies governed by any special Act, to the extent the provisions are consistent with that Act;
▫ LLPs
▫ Any other body corporate, incorporated under any Act for the time being in force, as the Central Government may specify;
▫ Partnership firms
▫ Individuals
• Extent ▫ The Code shall be applicable only to the extent of insolvency, liquidation or bankruptcy.
Major terms used in the proposed code
and their implications • Charge [Clause 3(4)]
▫ Interest or lien created on the property or assets of any person or any of its undertakings as security
▫ Includes a mortgage
• Claim [Clause 3(6)]
▫ A right to payment (fixed/disputed/secured/unsecured/legal/equitable/reduced to judgement or not)
▫ Right to remedy for breach of contract if such breach gives rise to a right to payment
• Corporate person [Clause 3(7)]
▫ Company under the Companies Act, 2013, LLP under the LLP Act, 2008, any person incorporated with limited
liability under any other law for the time being in force
▫ Excludes “financial service providers”
• Corporate debtor [Clause 3(8)]
▫ Necessarily a corporate person who owes a debt to any person
• Creditor [Clause 3(10)]
▫ To whom a debt is owed
▫ Includes financial creditor, operational creditor, secured creditor, unsecured creditor, decree-holder
• Default [Clause 3(12)]
▫ Non-payment of debt as and when become due and payable
▫ Is not repaid by the debtor/corporate debtor
• Financial service [Clause 3(16)] and Financial service provider [Clause 3(17)]
• Security Interest [Clause 3(28)]
Insolvency resolution process
&
liquidation
for
corporate entities
Major definitions used in the context
of corporate insolvency and
bankruptcy (1/2) • Dispute
▫ includes a suit or arbitration proceedings relating to the existence or the amount of debt;
the quality of goods or service
the breach of a representation or warranty
• Financial Creditor ▫ To whom a financial debt is owed ▫ Includes legal assignee or transferee of a financial debt
• Financial Debt • Initiation Date
▫ When the application for initiating corporate insolvency resolution process if filed before AA
• Insolvency Commencement Date ▫ Date of admission of application for corporate insolvency resolution
process
Major definitions used in the context
of corporate insolvency and
bankruptcy (2/2) • Insolvency Resolution Process Period
▫ 180 days commencing on the insolvency commencement date
▫ Ending on 180th day
• Liquidation Commencement Date ▫ Date on which proceedings for liquidation commence
• Operational Creditor ▫ To whom an operation debt is owed
▫ Includes legal assignee/transferee of such debt
• Operational Debt ▫ A claim in respect of provisions of goods or services including employment
▫ Dues payable to CG, State Government, local authority
• Resolution Applicant ▫ who submits a resolution plan to the resolution professional
• Voting Share ▫ Voting right of a single financial creditor in the committee of creditors
▫ Based on the proportion of the financial debt owed to such financial creditor in relation to the overall financial debt owed by the corporate debtor.
Abbreviations used in the presentation
▫ AA – Adjudicating Authority (which, under the Code, is NCLT) ▫ Board – Insolvency and Bankruptcy Board of India constituted
under the Code ▫ C.Dr. – Corporate Debtor ▫ CIR – Corporate Insolvency Resolution Process ▫ Crs. Committee: Committee of Creditors constituted by IRP under
the Code ▫ F.Cr. – Financial Creditor ▫ IP – Insolvency Professional ▫ IRP – Interim Resolution Professional ▫ O.Cr. – Operational Creditor ▫ Registrar – Authority under which the C.Dr. is registered ▫ RP – Resolution Professional
Corporate insolvency Resolution process:
initiation and commencement • Who can trigger?
▫ A financial creditor (solely or jointly), or
▫ An operational creditor, or
▫ The corporate debtor itself.
• When?
▫ Once the corporate debtor commits a default
▫ In case a financial creditor is the applicant, default may be in respect of a financial debt owed to any financial creditor
▫ In case of an operational creditor, the creditor has to deliver a demand notice before the CIR can be triggered.
The corporate debtor, in turn, has to show a dispute or show evidence of repayment to avoid initiation of CIR.
• How?
▫ By applying to AA, which under the Code is NCLT.
▫ Requisite documentation to be done.
• After-effect?
▫ AA either admits or rejects the application;
▫ If admitted, CIR commences and the date of admission of application is called the insolvency commencement date
• Who cannot initiate the process?
▫ a corporate debtor who is already undergoing CIR
▫ a corporate debtor who has completed CIR 12 months preceding the date of making of the application
▫ a corporate debtor or a financial creditor who has violated any of the terms of a resolution plan which was approved 12 months before the date of making an application .
▫ A corporate debtor in respect of whom a liquidation order has been made.
Initiation of CIR
Occurrence of Default by C. Dr.
Initiation of CIR
C. Dr. (itself) O. Cr. F. Cr.
Initiation of CIR by F.CR(S).
Occurrence of
Default by C.
Dr.
Notice to F. Cr. by
AA for
rectification of
defects
Ascertainment of
existence/non-
existence of
default by AA
Application by
F. Cr(s). to AA
Default exists +
Application
complete + No
disciplinary
proceeding against
proposed IRP?
Admission
of
Application
Defects
rectifie
d?
Rejection of
Application
No
No
Yes
Yes
Order
Communicate
d to F. Cr.
Order
Communicated to
F. Cr. and C. Dr.
Within 3
days of
receipt of
notice
Within 2
days Within 2
days
Commence
ment of CIR
Within 14
days
Initiation of CIR by O.CR. Application by
O. Cr. To AA
Demand
notice by
O.Cr. To C.
Dr.
Occurrence
of Default
by C. Dr.
C. Dr. shows
evidence of
repayment?
C. Dr. shows a
dispute?
Within
10 days
of
receipt
of
demand
notice
Application complete +
no repayment by C. Dr.
+ demand notice
delivered by O.Cr. +
no dispute notice
received by O. Cr./no
record of any dispute?
Rejection of
Application
Admission of
Application
Communication
to O.Cr. and
C.Dr.
No
No
No further
action
Yes
Yes
Commenceme
nt of CIR
Within 14
days
Initiation of CIR by C.DR. itself
Occurrence of Default by
C.Dr.
Application by C.Dr. to
AA
Rejection of Application
Admission of Application
Communication by AA to C.Dr.
Within 14 days
Commencement of CIR
Corporate insolvency Resolution process:
conduct (1/2) • On admission of application:
▫ Moratorium is declared by AA
Continues till completion of CIR
Automatically ceases, if at any time during CIR:
AA approves a resolution plan
AA passes an order for liquidation of corporate debtor.
▫ AA causes a public announcement of the initiation of CIR, and calls for submission of claims
▫ AA appoints an IRP within 14 days from insolvency commencement date
• IRP performs the following functions:
▫ the collection of claims,
▫ constitution of the committee of creditors and
▫ taking over the management of the operations and monitoring the assets of the entity in IRP.
• The Committee of Creditors:
▫ Constituted exclusively by “financial creditors”
Though the definition of creditors under the Code includes all – financial/operational/secured/unsecured.
In case, there is no financial creditor, composition of the committee shall be specified by the Board.
▫ All decisions to be taken by a vote of majority consisting of at least 75% of voting share;
▫ First meeting within 3 days of the constitution of the committee.
▫ Appoints RP in its first meeting
Corporate insolvency Resolution process:
conduct (1/2) • The Resolution Professional
▫ Conducts CIR
▫ Convenes and conducts all meetings of the committee of creditors
▫ Certain actions to be taken only with the prior approval of the committee of creditors
▫ Prepares information memorandum, on the basis of which the resolution applicant prepares the resolution
plan
• The Resolution Plan
▫ Is reviewed by RP, so that the plan confirms to specified requirements
▫ Selected resolution plans confirming to requirements are presented to the committee of creditors
Resolution applicant may attend the meeting of the committee where the resolution plan is presented, but cannot vote unless he
is a financial creditor.
▫ Approved resolution plan is submitted by RP to AA.
• Order of AA
▫ Admits the plan – moratorium ceases to exist, RP forwards all records relating to the conduct of the
corporate insolvency resolution process and the resolution plan to the Board
▫ Rejects the plan – liquidation to be ordered.
Once CIR commences . . . Commencemen
t of CIR
Public
announcement of
Initiation of CIR
Declaration of
Moratorium
Call for
submission of
Claims
Appointme
nt of IRP
by AA
Within 14
days of
Insolvency
Commencem
ent Date
Managem
ent of
affairs of
C.Dr.
Consolidation
of Claims
against C.Dr. 1st meeting of
Crs. Committee
Constitution of
Crs. Committee
Review of
Financial
Position of
C.Dr.
Appointment of
RP for Conduct
of CIR
Within 3 days
Max. 30 days tenure for IRP
Conduct of CIR by RP
Preparation of
Information
Memorandum by
RP
Submission of
Resolution Plan
by Resolution
Applicant
Review of
Resolution
Plan by RP
Approval of
a Resolution
Plan by Crs.
Committee
Selection of
Resolution Plan(s)
confirming to
specified
conditions
Presentation of
selected
Resolution Plan(s)
to Crs. Committee
Submission of
approved
Resolution Plan
to AA by RP
Review of
Resolution
Plan by AA
Order of
AA
Admit the
Resolution Plan
Reject the
Resolution
Plan
Maximum time for completion of CIR
• Default maximum period, called “Insolvency Resolution Process Period”
▫ Commences on the Insolvency Commencement Date
▫ Lasts for180 days
▫ One-time extension permissible to the extent of 90 days
Committee of Creditors to pass resolution by majority of 75% of the voting shares
Application to be filed by RP to AA
AA to determine the necessity of extension
Liquidation – when?
Order of Liquidation +
Public Announcement + Intimation to the
Registrar
On rejection of Resolution Plan
AA does not receive a Resolution Plan on or
before the expiry of the maximum time permitted
for CIR
Crs. Committee decides to liquidate C.Dr. at any time during CIR process, before
confirmation of any Resolution Plan
C.Dr. contravenes the Resolution Plan approved
by AA, and any other person being prejudicially
affected applies against such contravention
Commencement of Liquidation
Process
Liquidation – few points • Scope is limited under the Proposed Code
▫ Sole reason being insolvency
▫ Therefore, does not, in any way, affect the functionality of the compulsory winding up provisions
under the Companies Act
• Moratorium commences once a liquidation order is passed
▫ Not applicable to any proceeding pending in appeal before the Supreme Court or a High Court
▫ Suit or other legal proceeding on behalf of C.Dr. may be commenced by the liquidator with the
prior approval of AA
• Liquidation Estate and Liquidation Trust
▫ Inclusions and exclusions of the estate defined in sub-clauses (3) and (4) of clause 36
▫ Liquidator to be the fiduciary trustee of the trust, holding the assets therein for the benefits of the
creditors.
• Avoidance of transactions
▫ Preferential transactions
▫ Undervalued transactions
▫ Transactions defrauding creditors
▫ Extortionate credit transactions
• For liquidation process in a snapshot, see subsequent slides.
Liquidation estate Inclusions
• Assets over which C.Dr. has ownership rights.
• Assets in or not in possession of C.Dr.
including but not limited to encumbered assets
• Movable/Immovable tangible assets
• Intangible assets
• Assets in respect of which security interest has
been relinquished by a secured creditor
• Assets subject to the determination of
ownership by the court or authority
• Any assets or their value recovered through
proceedings for avoidance of transactions
• Any other property belonging to or vested in
the C.Dr. at the insolvency commencement
date
• All proceeds of liquidation as and when they
are realised
Exclusions
• Assets in possession of C. Dr., but owned by a
3rd party – assets held in trust, bailment
contracts, contracts for ‘use’ of assets and not
transfer of title, etc.
• Assets in security collateral held by financial
services providers and are subject to netting and
set-off in multi-lateral trading or clearing
transactions
• Personal assets of any shareholder or partner of a
C.Dr. , provided the assets are not held under
avoidance transactions
• Assets of any Indian or foreign subsidiary of
C.Dr.
• Any other assets as may be specified by the
Board.
Liquidation process
Commencement
of Liquidation
Process
Receipt and
Collection
of Claims
Rejection
of a Claim
Formation of
Liquidation Trust by
Liquidator
Verification
of Claims by
Liquidator
RP to act as
liquidator unless
replaced by AA
Moratorium
Within 30
days
Within the time
specified by the
Board
Admission
of a Claim
Communicati
on to Cr.
and C.Dr.
Appeal by
Cr. To AA
Within
3
days
Within 14 days of receipt of communication
Valuation of
Claims
Complete
Liquidation
Application by
Liquidator to AA
for Dissolution of
C.Dr.
Distribution of proceeds
from the sale of
Liquidation Trust assets
Order of
Dissolutio
n
Copy of the
Order to be
forwarded to
the Registrar
Within 7
days
Voluntary Liquidation • An application for voluntary liquidation of a corporate person registered
as a company shall meet the following conditions: ▫ a special resolution of the shareholders of the company requiring the corporate
debtor to be liquidated voluntarily; or
▫ a resolution of the shareholders of the company in a general meeting requiring the company to be wound of voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company, as the case may be;
▫ a declaration from majority of the directors of the company verified by an affidavit stating that – they have made a full inquiry into the affairs of the company and they have
formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets sold in the voluntary liquidation; and
the company is not being liquidated to defraud any person;
▫ audited financial statements and record of business operations of the company for the previous 2 years; and
▫ a report of the valuation of the assets of the company, if any prepared by a registered valuer
No occurrence of
default
Pre-condition
Initiation of Voluntary
liquidation proceedings by
CP
Conditions
for VL of a
Company Declaration of Solvency
by majority of
directors, supported by
specified documents
OR/SR by shareholders
to liquidate the Co. and
to appoint liquidator
Creditors‟ resolution
(2/3rd majority in value)
Notification to RoC
and the Board by the
Co.
Complete winding
up and liquidation
Application by
liquidator to AA for
dissolution of CP
Order of dissolution
by AA
Copy of order to be
forwarded to
Registrar
Conditions and
procedures as
specified by Board
Within 14 days
Date of
Commencement of
Liquidation
Proceedings
Within 2 days
of the
resolution(s)
OR: When the winding
up is a result of expiry of
the period of duration of
the Co. fixed by its
articles or on the
occurrence of any event
in respect of which the
articles so provide;
SR: In other cases
Volu
nta
ry L
iquid
ati
on
Within 4 weeks
Within 7 days
Fast Track IRP
• Meant for small corporate debtors –
▫ Those with assets and income below a level as may be notified by
the Central Government
▫ Those with such class of creditors or such amount of debt as may
be notified by the Central Government
▫ Other category as may be notified by the Central Government.
• Default completion time is 90 days from the insolvency
commencement date
▫ One-time extension of a maximum of 45 days permissible
▫ Necessity of extension to be determined by AA
Journey of an insolvency professional:
from interim resolution professional
to liquidator
Appointment of interim resolution
professional Initiation of CIR
by O.Cr.
O.Cr. may propose
the name of an IP
to act as IRP
AA ascertains if there is any
disciplinary proceeding against
proposed RP
F.Cr./C.Dr. to
propose the name
of an IP to act as
IRP
by F.Cr. or C.Dr.
O.Cr.
proposes
the name?
Disciplinary
proceedings
exist?
Application is
Rejected
Proposed/Recommended
IRP is appointed as IRP
Reference to Board by
AA for
recommendation of an
IP to act as IRP
Recommendatio
n from Board to
AA
Yes
No
Yes
No
Within
10
days
Within 14
days
Term of max. 30 days
from the date of
appointment
Appointment of resolution professional
Constitution of Crs.
Committee by IRP
Application to AA
for appointment of
proposed RP
1st meeting of Crs.
Committee
Intimation to IRP,
C.Dr., & AA
Propose to
replace the
RP
AA to direct the IRP to
continue as RP until
Board confirms
otherwise
AA forwards the
name to Board
Existing IRP
appointed as
RP?
Board
confirms
within
10
days?
AA
appoints
RP
No No
Yes Yes
Within 3 days
Application to AA
at any time during
CIR
Existing RP to act as RP
Accept the
application
Direct Crs.
Committee to
propose
another RP
Demonstrating
Commission of Acts
mentioned in Clause
27(1)
AA opines
there is prima
facie case
against RP?
Application to AA at
any time during CIR
Majority
75% of
voting shares
Proposal of
name to AA
AA forwards the
name to Board
Board
confirms?
Appointment
of new RP
alongwith
Review by AA:
Any disciplinary
proceedings
against RP?
Within 10
days
Within
14 days
Replacement of resolution professional
Replacement of RP by F.Cr./C.Dr Replacement of RP by Crs. Committee
Yes
Yes
No No
Yes No
Appointment of liquidator
Board proposes
name of another
IP to act as
Liquidator
AA may direct
Board to propose
another name for
Liquidator
AA may
replace RP
Existing RP to
act as
Liquidator
Liquidation
Order
Board
recommen
ds
replaceme
nt of RP?
AA
decides to
replace RP
Due to
rejection
of
Resolution
Plan?
AA confirms
appointment of
another IP as
Liquidator
Yes Yes
Yes
No
No
No
Insolvency resolution and
bankruptcy
for
Individuals & Partnership firms
Applicability
• Whole of India except J & K
• Inapplicable where amount of default is small
▫ Rs. 1000 or such amount as specified by CG, not exceeding
Rs. 1 lakh
• Covers
▫ Fresh Start
▫ Insolvency Resolution
▫ Bankruptcy order
Important definitions
• Bankruptcy debt ▫ Debt owed by the bankrupt as on bankruptcy commencement date,
▫ Debt for which the bankrupt may become liable after the bankruptcy commencement date, but before the discharge order
Provided the transaction in question was entered into before bankruptcy commencement date
▫ Interest which is a part of debt under clause 177
• Bankruptcy commencement date ▫ Date on which AA passes a bankruptcy order
• Excluded assets ▫ Excluded from the estate of the bankrupt
▫ Refer to personal assets of the bankrupt including LIC/pension plans, etc.
• Excluded debt ▫ Application for insolvency resolution process cannot be submitted in respect of excluded debts
▫ Is not a qualifying debt
• Qualifying debt ▫ In respect of which an application for fresh start may be made
▫ Max. limit is Rs. 35000.
▫ Excludes an excluded debt, secured debt, and any debt incurred 3 months prior to the date of application for fresh start.
Fresh Start: Eligibility Conditions
Maximum Gross Annual Income of
Rs. 60000
Maximum aggregate value of assets Rs.
20000
Maximum aggregate value of debts Rs.
35000
No dwelling unit Not an undischarged
bankrupt
No Fresh Start Process/Insolvency Process/Bankruptcy process subsisting
No Fresh Start Order in the last 12 months prior to the date of
application
Fresh Start Process
[Phase I: Admission of Debtor’s
Application]
Admission
Debtor unable to pay
debts
Application to
AA supported
by an
Affidavit
Appointment
of RP
Filed
personally
Order of AA
RP examines application.
Submits Report to AA
recommending
acceptance/rejection. Sends
copy of the report to debtor
Rejection
Filed
through RP
Eligibility
for FSO
Copy of order + copy of
application to creditors
State the amounts accepted as
Qualifying debts/other amounts
eligible for discharge for Fresh
Start
Challenge by
debtor/creditor;
application to AA
AA to pass
such orders as
deemed fit
Investigation,
acceptance/rejection
by RP
Objection, by
application to RP
Board may take
action against RP
Application
accepted Order of
AA Applicatio
n rejected
Order
forwarded
to Board
Within 10 days
Within 14 days
Within 2 days
Within 10 days of receipt
of copy of order
Within 10 days
Within 10 days
Within 14 days
Fresh Start Process
[Phase II: Discharge Order] Admission of Debtor‟s
Application
Moratorium commences in
respect of all debts
Submission of
the list
Discharge order
by AA
Moratoriu
m ends
To Board
RP prepares final list of
qualifying debts
At least 5 days prior to
end of moratorium
period 6 months
To IPA for
releasing
performance
security
Insolvency Resolution Process • Application to AA
▫ By debtor committing the default
Personally or through RP
In respect of a partnership firm, all or majority of the partners shall jointly apply; single partner is not eligible.
Only in respect of debts which are not excluded debts
An undischarged bankrupt, or a debtor already undergoing FSP, IRP or Bankruptcy order not eligible to apply.
Also, if there is an existing IRP, admitted during 12 months preceding the date of submission of application
▫ By creditor
Personally, or jointly with other creditors, or through RP
Against the firm or any one or more partners of the firm
Copy of application to the debtor
• Manner of appointment of RP
▫ Same as that in FSP
• Effect of filing application
▫ Commencement of interim-moratorium
To end on admission of such application
Insolvency Resolution Process: Phase I
Application to AA
Rejection Approval
Appointment of RP
RP examines application
Submission of report with
recommendations
Interim-
moratorium
commences
Treatment of application as
FSP Copy of Report to Debtor/Creditor
Within
10
days
Admission of Application
Order of AA
Creditor entitled to file for bankruptcy
order
Rejection of Application Within
14
days
Copy of order + Report of RP + Application to
creditors
Within
2
days
Insolvency Resolution Process: Phase II
Order of Admission of Application
Moratorium commences in respect of all debts
Creditors register claims with RP within last date specified in
notice
Preparation of repayment plan by debtor in
consultation with RP
Preparation of list by RP
Public notice by AA inviting claims from creditors
Withi
n 10
days
Within
10
days
Submission of repayment plan by RP
to AA alongwith his own report on the plan
Within 21
days from
last date for
filing claims
Meeting of creditors (if
called)
Order of AA, on the basis of
report
Copy of Report to creditors, debtor,
AA
Report on the meeting by RP
Approval
Rejection
Both debtor and creditor
entitled to file for bankruptcy
order
Binding on creditor
and debtor
To Board
To IPA for releasing performance
security
Insolvency Resolution Process: Phase III
Approval of
repayment plan
Implementation of
resolution plan
Completion of
repayment plan?
Report by RP to
AA
Premature end of
repayment plan
Notice of completion
and report by RP to all
persons bound by
repayment plan
Supervision
by RP
Within 14
days,
extendable
to max. 7
days Order by AA
Dr./Cr. whose
claims not satisfied,
eligible to apply
for a bankruptcy
order
Application for
discharge order
by RP to AA
Before
completion of
repayment plan
After
completion of
repayment
plan
Discharge
order by
AA
To the Board and
the IPA for
releasing
performance
security
Yes
No
Application for bankruptcy order
• To AA
• By a creditor, individually or jointly with other creditors • By debtor
▫ In case of a firm, application may be filed by any of its partners
• Within 6 months of the order passed by AA under clause 100(4), or 115(2), or 118(3), as the case may be (refer succeeding slide)
• Applicant may propose an insolvency professional to act as bankruptcy trustee
• Application shall not be withdrawn without the leave of AA • Interim moratorium commences once application is filed
▫ Terminates on bankruptcy commencement date
▫ Such interim-moratorium provisions not to apply to transactions notified by the Central Government in consultation with any financial sector regulator
Bankruptcy Order – When can be
applied for?
Bankruptcy Order by
AA
Application for IRP is rejected by AA
under Clause 100(4)
Order by AA recording rejection of repayment plan
by meeting of creditors (Clause
115(2)) Order of AA on
premature ending of the repayment plan under clause
118(3)
Creditor
entitled to file
application
Both debtor and
creditor entitled to
apply
The debtor or the
creditor, whose
claims have not
been fully satisfied
entitled to apply
Appointment of bankruptcy trustee
Nominate
another trustee
as replacement
Proposed Trustee
appointed as
bankruptcy trustee
Board
confirms?
Board nominates
a trustee
Appointment of
nominated trustee as
bankruptcy trustee
AA directs the Board
to nominate a trustee
AA seeks
confirmation
from the
Board
Name of
trustee
proposed in
the
application?
Within
2 days
Within
10
days
Within
10
days
Within
2 days No No
Yes
Yes
AA directs the Board
to nominate a trustee
Name of
trustee
proposed in
the
application?
Bankruptcy Order (1/2)
• By AA, within 14 days of nomination of bankruptcy trustee
• Effective till discharge of the bankrupt
• Effects
▫ the estate of the bankrupt to vest in the bankruptcy trustee
▫ the estate of the bankrupt to be divided among his creditors
▫ bar on a creditor to commence proceedings in respect of a debt claimed as bankruptcy debt
▫ right of a secured creditor to realize or otherwise deal with his security interest not affected
No entitlement to any interest in respect of debt after the bankruptcy commencement date no steps are taken to realise the security within 1 month from the said date.
• Annulment of bankruptcy order is possible under clause 142
Bankruptcy order (2/2)
Application for
bankruptcy
order
Nomination of
bankruptcy
trustee
Bankruptcy
Order by AA
Notice/Public notice
by AA inviting claims
from creditors
Within
14
days
Bankruptcy
commenceme
nt date
Withi
n 10
days
Bankrupt to submit
statement of financial
position to the bankruptcy
trustee if the application
was filed by a creditor
within 5 days
Creditors to
register claims with
bankruptcy trustee
Within
7 days
Preparation of
list of creditors
by trustee
Completion of administration and
distribution of the estate of
bankrupt
Approval of trustee‟s
report by Crs.
Committee and
determination of
whether bankruptcy
trustee shall be
released
Notice to summon
meeting of
creditors
Meeting
of
creditors
Within 14 days
of bankruptcy
commencement
date
Within 16 days
of bankruptcy
commencement
date
Report of the
administration by trustee
To be
presented
in
Within
7 days
The estate of the bankrupt
• Vesting
▫ In the bankruptcy trustee immediately from the date of his appointment
▫ Effective without any conveyance, assignment or transfer
• Inclusions in the estate
▫ All property belonging to or vested in the bankrupt at the bankruptcy commencement date
▫ Capacity to exercise powers over such property (or capacity to initiate proceedings for exercising such
powers) existing at the bankruptcy commencement date or before the date of discharge order
▫ Property, which by virtue of this law, is comprised in the estate
• Exclusions from the estate
▫ Excluded assets
▫ Property held on trust
▫ Assets as notified by the Central Government in consultation with financial regulator
Discharge order • Application by bankruptcy trustee to AA
• Earlier of – ▫ Expiry of 1 year from the bankruptcy commencement date
▫ Within 2 days of the approval of the committee of creditors of the completion of administration, if the said approval is accorded before the expiry of 1 year from the bankruptcy commencement date
• Effects ▫ Bankrupt is released from all bankruptcy debts
▫ In case the application for discharge is filed within 2 days of the creditors‟ approval, the discharge does not affect functions of the bankruptcy trustee
the operation of the provisions of Chapters IV and V of Part III
• These remain unaffected ▫ Right of the secured creditor to enforce his security for the payment of a debt from
which the bankrupt is discharged
▫ Bankrupt is not released in respect of debts incurred by means of fraud or breach of trust to which he was a party
▫ Bankrupt is not released from any excluded debt
Adjudicating authorities
under
the proposed code
Adjudicating authority for corporate
persons
• National Company Law Tribunal ▫ having territorial jurisdiction over the place where the registered office of the
company is located
• Appellate Authority is the National Company Law Appellate Tribunal ▫ Appeal to be filed within 45 days
▫ Extension of maximum 15 days allowed, provided there is „sufficient cause‟
• Appeal to Hon’ble Supreme Court ▫ Against orders of NCLAT on a question of law
▫ Within 60 days of receipt of NCLAT‟s order
• Jurisdiction of any Civil Court of authority barred
• Strict timelines for NCLT/NCLAT ▫ Reasons to be recorded for not passing orders within time limits specified in the
Code
▫ Non-obstante provisions – override the Companies Act, 2013
▫ President of NCLT/Chairperson of NCLAT may extend the period specified under the Code to a maximum of 10 days – reasons to be recorded
Adjudicating authority for individuals
and partnership firms • The Debt Recovery Tribunal (constituted under the RDDBFI Act)
▫ having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain
• Appellate authority is the Debt Recovery Appellate Tribunal ▫ Appeal to be filed within 45 days
▫ Extension of maximum 30 days possible, provided there is „sufficient cause‟
• Appeal to Supreme Court ▫ Against an order of DRAT, within 90 days
▫ Extension possible for further 30 days, in case there is „sufficient cause‟
• Jurisdiction of any Civil court or authority barred
• Abidance to timelines ▫ In case order is not passed by DRT/DRAT within specified timelines, reasons shall
be recorded in writing
▫ Chairperson of the DRAT may extend the timelines
▫ Extension limits not specified, unlike in the case of NCLT/NCLAT
Institutional and regulatory
framework
The framework consists of . . .
• The Insolvency and Bankruptcy Board of India
▫ Body corporate having head office at Mumbai
▫ Chairperson + 3 members representing Ministry of Finance, MCA, and Ministry of Law + 1 member
to be nominated by RBI + 5 members to be nominated by the Central Government
▫ primary functions of the Board will include registration of insolvency professionals, insolvency
institutions, information utilities, provide guidelines on the conduct of bankruptcy resolution, etc.
▫ If the Board does not perform an act within the time specified in the Code, the AA may condone the
delay – reasons to be recorded in writing.
• Insolvency Professional Agencies
▫ Registered with the Board – Certificate of Registration granted
▫ Enrols Insolvency Professionals as its members
• Insolvency Professionals
▫ To be necessarily enrolled with an Insolvency Professional Agency
▫ May be practically read as administrators (pre-liquidation stage) and liquidators (post-liquidation
order)
• Information Utilities
▫ storing financial information – this may be seen as electronic filing of defaults, security interests.
Other important provisions
Insolvency and bankruptcy fund
• Clause 224
• For insolvency resolution, liquidation, and bankruptcy of persons under the Code.
• To consist of the following amounts
▫ grants made by CG for the purpose
▫ the amount deposited by persons as contribution to the Fund
▫ the amount received in the Fund from any other source
▫ the interest or other income received out of the investment made from the Fund
• Administrator
▫ To be appointed by CG
Overriding law
• Clause 234
• “The provisions of this Code shall have effect,
notwithstanding anything inconsistent therewith
contained in any other law for the time being in force
or any instrument having effect by virtue of any such
law.”
Repeals and other laws affected
• Repealed ▫ The Presidency Towns Insolvency Act, 1909
▫ The Provincial Insolvency Act, 1920
• Amendments to ▫ The Indian Partnership Act, 1932
▫ The Central Excise Act, 1944
▫ The Income-tax Act, 1961
▫ The Customs Act, 1962
▫ The Recovery of Debts due to Banks and Financial Institutions Act, 1993
▫ The Finance Act, 1994
▫ The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
▫ The Sick Industrial Companies (Special Provisions) Repeal Act, 2003
▫ The Payment and Settlement Systems Act, 2007
▫ The Limited Liability Partnership Act, 2008
▫ The Companies Act, 2013
