Bankruptcy Code in India Overview , Challenges and Implications

Manu JaswalSenior Vice PresidentMizuho Bank Ltd

Global Association of Risk Professionals

July 2016

2

The views expressed in the following material are the

author’s and do not necessarily represent the views of

the Global Association of Risk Professionals (GARP),

its Membership or its Management.

Insolvency and Bankruptcy Code 2016 - An Overview

By: Manu Jaswal

Background:

• The Insolvency and Bankruptcy Code, 2016 (“Code” )has been passed by the Lok Sabha on May

5, 2016 and Rajya Sabha on May 11, 2016, however with a clause 1(3) stating that it shall come

into force on such date as the Central Government may notify the Official Gazette.

Why is it important ??

• India is a capital starved country and therefore it is essential that capital isn’t frittered away on

weak and unviable businesses.

• Today, bankruptcy proceedings in India are governed by multiple laws — the Companies Act,

SARFAESI Act, Sick Industrial Companies Act, and so on.

• The entire process of winding up is also very longwinded with courts, debt recovery tribunals

and the Board for Industrial and Financial Reconstruction all having a say in the process.

Current Status of Bad Loans

• To streamlines /consolidate /replace / amend existing laws (including theCompanies Act ) to become the overarching legislation to deal withCorporate Insolvency

• To cover individuals, companies, limited liability partnerships and partnershipfirms under common legislation and to make the process simpler and easyexit option for insolvent and sick firms.

• Enable quick and prompt action at early stages of debt default to maximisingthe recovery amount.

• To help India move up from its current rank of 130 in the World Bank’s easeof doing business index, since all reforms undertaken by 31 May areincorporated in the next ranking.

What Does Code Intends?

New Set up / Structure

• 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 Professionals/Agencies

•Will function as the regulator for all matters pertaining to insolvency and bankruptcy. Will exercise a range of legislative, administrative and quasi judicial functions. including 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 and Bankruptcy Board of

India (Board)

• 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.

Information Utilities

• 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.

• 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.

Adjudicating Authority

The Code has proposed a new waterfall mechanism for settlement of dues as follows

• insolvency resolution process costs;

• dues owed to secured creditors;

• dues owed to workers for a 12month

• period preceding the date on which liquidation was commenced (on par with dues owed to secured creditors);

• dues owed to other employees who are not workers for a 12month period preceding the date on which liquidation was commenced;

• dues owed to unsecured creditors;

• dues owed to any state government or central government;

• dues owed to a secured creditor for any unpaid amount following enforcement of the security (on par with dues owed to any state government or the central government);

• any remaining debts;

• preference shareholders; and finally equity shareholders or partners.

How Obligations would be Settled…

Timelines

• Creation of a new set of resolution institutions

• Appointment of Resolution professional

• Time bound resolution process

• Credit committee / Revival plan– 75% Majority vote

• Moratorium- all legal proceedings against such debtor should be stayed and no fresh suits, proceedings, recovery or enforcement action may be initiated against such debtor

• Asset Distribution mechanism- Change in the order of priority to distribute assets during liquidation.

Specific Steps / Changes

• Passed but not notified clause 1(3) states - It shall come into force on such date as the Central Government may, by notification in the Official Gazette

• Competent Insolvency professional / agencies and related infrastructure critical in success.

• Interplay of Existing Laws- all the key legislations are synchronized in order to ensure that there are no discrepancies or overlaps with existing laws.

• Practical implementation is important.- walk the talk.

Challenges and Task Ahead

Thank You

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s ®

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