Decoding Insolvency & Bankruptcy Code · 2017-08-28 · Emergence of Insolvency Code –Globally...

Decoding

Insolvency & Bankruptcy Code

Why is the code imperative today?

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Lender inertia during the CIRP would mean liquidation – invariably an economically inferior outcome as compared to resolution2. Clarity on the insolvency framework will attract investors to invest into stressed/distressed situations3. Moratorium clause to ensure smooth insolvency-resolution process4. An “open floor” for submission of resolution plans should facilitate the approval of the best plan5. The framework defines the role of the judiciary and leaves limited scope for a legal delay/deferral of the problem

1. Reduce the time taken to resolve insolvency2. Develop investor confidence3. Eliminate confusion caused by a complex judicial framework4. Address the NPA situation decisively5. Develop the credit and bond market

1. Any creditor can file an insolvency petition a default of INR 1 Lakh or more2. Insolvency professional to takeover the management and operations of the borrower during the corporate insolvency resolution process3. Borrowers to focus on liquidity – ensure tight cash flow and monitoring to stay current on payments4. Need to be proactive in identifying issues, communicating with lenders and developing/implementing a turnaround plan5. In case of fraudulent diversion of assets, personal contribution can be sought; imprisonment possible

1. Create a single insolvency and bankruptcy framework - Set up a clear and unambiguous process to be followed by all stakeholders in a time-bound manner2. Provide a commercial solution to a commercial issue3. Allow genuine business failures a second chance4. Clear and unambiguous process to be followed by all stakeholders in a time-bound manner5. Provide confidence to lenders of their rights & enforcement

1. Right to control the borrower upon default and maximize recovery2. Option to initiate the process even if the default is in respect of the debt of another lender3. Need for more robust monitoring systems to enable judicious exercise of powers4. Lack of lender consensus on resolution plan can push the borrower into liquidation5. Clear priority of distribution (waterfall) upon liquidation; government dues subservient to those of secured creditors and unsecured financial creditors

Why was the code needed

What does the code intend to change

What does it change for the lenders?

What does it change for the borrowers?

What does it change for the borrowers?

Ecosystem


Source: World Bank Report Source: RBI

Insolvency Professional Agencies (IPA’s)

Insolvency Professionals (IP)

Insolvent Entity

Insolvency And Bankruptcy Board (IBBI) IBB I– apex body for promoting transparency &

governance in the administration of the IBC; will be involved in setting up the infrastructure and accrediting IPs & IUs.

IUs - Centralised repository of financial and credit information of borrowers; would validate the information and claims of creditors vis-à-vis borrowers, as needed.

IPAs- professional bodies registered by the Board to promote and regulate the insolvency profession; these bodies will enrol IPs

IPs- Licensed private professionals regulated by the Board; will conduct resolution process; to act as Liquidator/bankruptcy trustee; appointed by creditors and override the powers of board of directors.

Adjudicating Authority (AA) - would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/ reject resolution plans, decide in respect of claims or matters of law/ facts thereof.

COC- consists of financial creditors to who will appoint and approve actions of IPs

Information Utilities (IUS)

Committee of Creditors (COC)

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Emergence of Insolvency Code – Globally


Text 9.4

Results

USA: Recovery Rate

Text 3.7

Text 4.4

Text 4.4

Text 4.4

United States of America

1978

Canada

1985

Bankruptcy and Insolvency Act

Recovery rate (cents on the dollar): 87.4

• Time taken (years): 0.8

United States Bankruptcy Code



United Kingdom

1986

Singapore

1995

India

2016

United kingdomInsolvency Act


• Time taken (years): 1

Singapore Bankruptcy Act



Insolvency & Bankruptcy Code

Recovery rate (cents on the dollar): 26


Current Status


Ease of doing business ranking 130 out of 189 countries

72,841 cases pending in 33 debt recovery tribunals

The stressed assets peaked at 10 lakh crore, 15% of gross advances in 2015.

Cost of insolvency procedures amount to a 9 percent of the value of the estate.

Average recovery rate of debtors is close to 26 cents per dollar.

Average time taken for liquidation in India is 4.3 years

Driving factors


Shift of control from the defaulting debtor’s management

to its creditors

Time bound resolution process to preserve the economic value –

entire process should be completed in 180 days (270 days in case of

extension)

If negotiations fail to establish viability, the

outcome of bankruptcy becomes binding

No injunction can be granted by any court, tribunal or authority

in respect to action taken by adjudicating authority

Lender can initiate the process even if the default is in respect of

the debt of another lender

Creditor approved resolution professional is

appointed ensuring unbiased decision making

Clear and fair distribution of funds in case of liquidation, government dues not to get

priority

Protection of assets of secured borrowers with maximisation of

realisation

Positive support from government for realisation

and resolution of NPAs

Recent govt. ordinance authorises RBI to force banks to

use IBC

Brings financial lenders to a platform – enabling quick decision making and arriving at consensus

quickly

Challenges in the current code

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1 3 5 7 9

Expiration of Tenure of IRP Professional

Absence of Information

Utilities

Shortage of Skilled

Professionals

High Cost of Bankruptcy Resolution

Process

4 6 8

Shortage of NCLT benches

Lack of Consensus among

Lenders

Non Co-operative Management

2

No Timeline for Disposal of

Appeals

Dilution of rights of Secured Creditors

Resolution Process


Application to Adjudication

Authority

Appointment of Interim Resolution

ProfessionalMoratorium Period

Formulation of Credit Committee

Formulation of Information

Memorandum and Resolution Plan

Resolution plan proposed by creditors

NO Liquidate the company

YESImplement the

Plan

Resolution plan proposed by

creditors

75% approve the proposed plan

Resolution Process – Highlights

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Interim Resolution

Plan

Resolution Plan

Fast Track

Insolvency

Moratorium

COCVoting Power

Interim Resolution Plan

• Financial creditor applicant shall propose the name of an IRP in the application.

• It is optional for the operational creditor to propose the name of an interim IP

Moratorium

COC

Resolution Plan

Fast Track Insolvency

Voting Power

Interim Resolution

Plan

• NCLT to declare moratorium from the insolvency commencement date until the completion of insolvency.

• Moratorium shall prohibit:1. Institution of suits2. Transfer of shares3. Recovery of assets

• Consists of financial creditors only, excluding related parties.

• Will confirm or replace IRP as RP• To approve several actions of RP.• CoC can replace IP during CIRP by 75%

approval.

• Payment of insolvency resolution process costs.• Pay liquidation value to operational creditor in 30 days and

to dissenting financial creditor before other financial creditors.

• Management of affairs of the borrower after the plan is approved.

• Implementation and supervision of the approved plan.

For debtors with:• Assets and income below a level• Such class of creditors• Other categories

As may be notified by the central government (completed in 90 days)

• Only financial creditors have voting rights in the committee in the ratio of the debt owed.

• All decision of the committee shall be approved by 75% of financial creditors.

• If all members are not present at a meeting, a vote shall not be taken at the, and the RP can seek vote by an electronic voting system.

• Directors and operational creditors can attend the meeting but would not have any voting rights

Liquidation process

Priority of Claims

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Liquidation ProcessAppointment of

LiquidatorFormation of Liquidation

EstateConsolidation and

Verification of claimsDistribution of Assets

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• Costs and Expenses of Insolvency

521 43

• Workmen’s dues for the period of twenty-four months & dues of Secured Creditors

• Wages any unpaid to the employees

• Dues to central government and state government

• Unsecured Financial Creditors

Powers & Duties of Liquidators

Duties of the Liquidators are as follows :-

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02

03

04

To receive and verify claims of creditors and admit or reject claims

Protect and preserve assets, properties of CD

Carry on business of CD for its beneficial liquidation

To evaluate assets, property of CD

05File application for avoidance of preferential transactions, undervalued transactions, transactions for defrauding of creditors, extortionate credit transactions (normally one year and two years if it is to related party)

Role of Insolvency Professional

Duties of resolution professional as per Section 25 :-

• Takes custody and control of all assets of the corporate debtor -including the business records of the corporate debtor

• Raise interim finances subject to the approval of the committee of creditors

• Appoint accountants, legal or other professionals in the manner as specified by Insolvency Board

• Invite prospective lenders, investors and any other persons to put forward resolution plans

• Present all resolution plans at the meetings of the committee of creditors

• Continuation of business as a going concern on behalf of the corporate debtor.

• Acts as a liquidator unless replaced by the Adjudication Authority and performs the following functions:

o Verification and settlement of claims of creditors

o Evaluation of assets and property

o Measures to protect and preserve the assets and properties

o Sale of immovable property and actionable claims


Legal Framework


Adjudicating Authority • The code has established two separate

tribunals to adjudicate grievances related to insolvency, bankruptcy and liquidation of different entities under the law:

i) NCLT will have jurisdiction overcompanies and LLPs

ii) the Debt recovery Tribunal willhave jurisdiction over individualsand partnership firms.

Board• Insolvency and Bankruptcy Board of

India(IBB) is an apex body governing Insolvency and Bankruptcy Code

• The major function of the board is to exercise regulatory measures on insolvency professionals, insolvency professional agencies and information utilities.

Agency• Insolvency Professional Agencies (IPAs)

would admit insolvency professionals as members.

o Currently there are three IPAs

– Indian Institute of Insolvency Professionals of ICAI

– ICSI Insolvency Professional Agency

– Insolvency Professional Agency of Institute of Cost Accountants of India

Information UtilitiesThe information utilities shall act as a regulated information agency which shall electronically record, maintain and provide access of financial information to the persons as may be specified e.g. creditors

Insolvency ProfessionalsInsolvency professionals play a vital role in the insolvency and bankruptcy resolution process as envisaged by the Committee Insolvency professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process.

Topic Current Regime The Code

What constitutes insolvency Inability to pay debt/erosion of net worth

Default of amount higher than INR 1 lakh

Class of creditors Secured and unsecured-separate classesrecognised

Financial and operational – no subclasses.Committee of creditors consists of financial creditors only

Management during CIRP Liquidator RP under supervision COC

Preferential payments Certain government dues had priority oversecured debt

Government dues rank after financial unsecured debt. Trade creditors rank below financial creditors

Exclusions from liquidation estate

N/A Netting and set off recognised on financial control

Institutional Framework Fragmented. Spread across various authorities & forums

Amends and consolidates laws relating to insolvency and reorganization of companies, partnerships and individuals. NCLT is the AA for CIRP. Also envisages establishment of information utilities.

Key Legal Differentiators

Decoding Insolvency & Bankruptcy Code · 2017-08-28 · Emergence of Insolvency Code –Globally...

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