The insolvency and bankruptcy
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Transcript of The insolvency and bankruptcy
The Insolvency & Bankruptcy Code 2016
Suchi AgarwalAssociate Director – Business Advisory Email – [email protected]
INDEXSl NO Particulars
1. Insolvency and Bankruptcy- Defined
2. Objective of Insolvency and Bankruptcy Code
3. Applicability
4. Understanding Few Terms
5. Insolvency Resolution Process for Companies/ LLPs
6. Insolvency Resolution Process for Individuals / Partnerships
7. Institutional Infrastructure
8. Other Acts dealing with Insolvency and impact of IBC on those Acts
Difference between Insolvency & Bankruptcy
Insolvency
• Insolvency occurs when an individual or a firm is unable to meet their financial obligations
• Insolvency is a state of affairs in which the financial difficulties of a company are such it is unable to run its business at its current pace
Bankruptcy
• Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor
OBJECTIVE OF INSOLVENCY AND BANKRUPTCY CODE
RESOLUTION TIME
Country In years
India 4.3
United States 1.5
United Kingdom 1
Malaysia 1
Singapore 0.8
Japan 0.6
Process Cost of Insolvency
An Indian entity on an average hasto spend 9 per cent of its estate as compared to 3.5 per cent in countries like Finland, Japan and Korea.
Recovery Rate
In India, the average recovery rate as a result of insolvency or liquidation is 25.7 per cent compared to more than 80 per cent in countries such as Finland, Japan, Germany and USA
Objectives of Code
• To offer a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms)
• Promote entrepreneurship
• Availability of credit
• Time bound resolution of insolvency matters
APPLICABILITY OF INSOLVENCY AND BANKRUPTCY CODE
Applicability
Section 2:
• company incorporated under the Companies Act, 2013 or under any previous company law
• any other company governed by any special Act
• any Limited Liability Partnership
• partnership firms and individuals
Default
DEFAULT
In case of Company and LLP
(CORPORATE DEBTOR)
In case of Partnership &
Individual
Minimum amount of Rs. 1,00,000/-
Minimum amount of Rs. 1000/-
Central Government can increase the amount of One Lakh to a max of One Crore and One Thousand to a max of One Lakh
UNDERSTANDING FEW TERMS
NEW TERMS
Financial Creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
Financial Debt incudes:i. Money borrowed against the payment of interestii. Any amount raised pursuant to the issue of bonds, debentures, loan
stock or any similar instrumentiii. The amount of any liability in respect of any lease or hire purchase
contract iv. Any counter indemnity obligation in respect of guarantee, indemnity,
letter of credit or other instrument of bank or financial institution
NEW TERMS
OPERATIONAL CREDITOR means any person to whom a operational debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
Operational Debt means a claim in respect of provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority
NEW TERMS
MORATORIUM
This operates as a 'calm period' during which there shall be no:
(a) institution of suits or continuation of pending suits or proceedings by any court of law, tribunal, arbitration panel or other authority;
(b) transfer, encumbrance, or disposal of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
INSOLVENCY RESOLUTION FOR COMPANIES/ LLPs
Companies/LLPs(Insolvency)
Insolvency Resolution & Revival
Liquidation
Voluntary Liquidatio
n
Fast Track Insolvency Resolution
Process
Corporate Debtor
(A) Insolvency Resolution Process (IRP) (Rescue & Revival)
Insolvency resolution process starts from the date of admission of the application which is called ‘insolvency commencement date’ and the process must be completed within 180 days of its commencement
Commencement
• A financial creditor (for a defaulted financial debt) or an operational creditor (for an unpaid operational debt) can initiate an IRP against a corporate debtor at the National Company Law Tribunal (NCLT).
Corporate Debtor
Moratorium
• The NCLT orders a moratorium on the debtor's operations for the period of the IRP.
Public Announcement NCLT shall make a public announcement of the IRP covering :
• Name and address of the corporate debtor under the IRP• Name of the authority with which the corporate debtor is
registered• Last date for the submission of claims• Details of the Insolvency Resolution Professsional who shall be
vested with the management of the corporate debtor• Penalties for false or misleading claims• The date on which the IR process shall close
Corporate Debtor
Appointment of Resolution Professional
• The NCLT appoints an insolvency professional or 'Resolution Professional' to administer the IRP.
• Take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors
• Shift of control from the defaulting debtor's management to its creditors, where the creditors drive the business of the debtor with the Resolution Professional acting as their agent.
Corporate Debtor
Creditors Committee and Revival Plan
• The Resolution Professional identifies the financial creditors and constitutes a creditors committee.
• Operational creditors above a certain threshold are allowed to attend meetings of the committee but do not have voting power.
• Each decision of the creditors committee requires a 75% majority vote. Decisions of the creditors committee are binding on the corporate debtor and all its creditors
• The creditors committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan or liquidation within a period of 180 days (subject to a one-time extension by 90 days).
Corporate Debtor
(B)Liquidation
• If the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor.
• Other scenarios for liquidation:i. A 75% majority of the creditor's committee resolves to
liquidate the corporate debtor at any time during the insolvency resolution process.
ii. The creditor's committee does not approve a resolution plan within 180 days (or within the extended 90 days)iii. The NCLT rejects the resolution plan submitted to it on
technical groundsiv. The debtor contravenes the agreed resolution plan and an
affected person makes an application to the NCLT to liquidate the corporate debtor
Liquidator to admit or
reject claim
Liquidator to distribute
assets
Liquidator to make
application to NCLT
NCLT to order
dissolution
IRP to be appointed
as Liquidator
Liquidator to form
Liquidation Estate
Liquidator to consolidate
claimsLiquidator to verify claims
LIQUIDATION
VOLUNTARY LIQUIDATION
Declaration from the directors verified by an affidavit that the company has no debts or that it shall be able to pay its debts from the proceeds of assets sold in the liquidation and that the company is not being liquidated to defraud any person
Special Resolution to be passed in the general meeting resolving voluntary liquidation and appointment of Insolvency Professional to act as the liquidator
Where the company owes any debt to any person, creditors representing 2/3rd in value of the debt of the company shall also approve the resolution
Liquidator to form Liquidation estate, consolidate claims and distribute assets
Liquidator to make an application to NCLT
Dissolution of corporate debtor by NCLT order
FAST TRACK IRP
Can be made by:
A company/ LLP with assets and income below a level as may be notified by Central Govt
A company/ LLP with such class of creditors or such amount of debt as may be notified by Central Govt
Such other category of corporate persons as may be notified by the Central Govt.
IRP to be completed within 90 days with single extension of upto 45 days, if needed.
Distribution of assets
1. Insolvency Resolution Process Costs to be paid in full2. (a) Workmen dues for the period of 24 months preceeding the
liquidation commencement date (b) debts owed to a secured creditor
3. Wages and any unpaid due to employees other than workmen for the period of 24 months preceeding the liquidation commencement date
4. Financial debts owed to unsecured creditors5. Amount due to Central Govt or State Govt for the period of 24
months preceeding the liquidation commencement date6. Any remaining debts or dues7. Preference shareholders , if any; and8. Equity shareholders or partners as the case may be.
INSOLVENCY RESOLUTION FOR INDIVIDUALS/ PARTNERSHIP FIRMS
Individuals/Partnership(Insolvency)
Fresh StartInsolvency
Resolution & Discharge Order
Bankruptcy Order
Individuals/Partnership
(A)Fresh Start Process
• Eligible debtor can apply to the Debt Recovery Tribunal for discharge from qualifying debts not exceeding a specified threshold, allowing them to start afresh.
• Insolvency Resolution Professional on being satisfied about the correctness of the debts and the financial status of the debtor make a list of qualifying debts and report to the Debt Recovery Tribunal (DRT). DRT shall then pass a Discharge Order.
Individuals/Partnership
Eligible Debtor:
Whose gross annual income does not exceed Rs 60,000;
Whose total value of assets does not exceed Rs 20,000;
Whose total value of qualifying debts does not exceed Rs 35,000
Who does not own a dwelling unit, whether encumbered or not;
There is no pending bankruptcy proceeding against him.
Qualifying Debt means any amount due including interest owed under any contract but does not include a secured debt or debt incurred 3 months prior to making application for fresh start process
Individuals/Partnership
(B) Insolvency Resolution
A defaulting debtor or a creditor can make an application either himself of through Insolvency Resolution Professional
Preparation of a repayment plan by the debtor, for approval of creditors.
If approved, the DRT passes an order binding the debtor and creditors to the repayment plan
ON completion of the repayment proceedings, discharge order is given by DRT
If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order wherein Bankruptcy trustee shall be appointed and the estate of the debtor shall vest with him till discharge orders are given by DRT
INSTITUTIONAL INFRASTRUCTURE
Institutional Infrastructure
Insolvency and Bankruptcy Board of India
• Overseeing the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities
• Regulating the insolvency process• Consists of :
• A Chairperson• Three members not below the rank of joint Secretary or
equivalent, one of each to represent the Ministry of Finance, the Ministry of Corporate Affairs and Ministry of Law, ex-officio
• One member to be nominated by the Reserve Bank of India, ex-officio
• Five other members to be nominated by the Central Government, of whom at least three shall be the whole-time members
Institutional Infrastructure
Information Utilities
• Information utilities collect, collate, authenticate and disseminate financial information of debtors in centralised electronic databases
• Such information would be available to creditors, resolution professionals, liquidators and other stakeholders in insolvency and bankruptcy proceedings
Adjudicating Authorities
• For Corporate Insolvency: NCLT, NCLAT and Supreme Court
• For Individual and Other Persons: DRT, DRAT and Supreme Court
Institutional Infrastructure
Insolvency Resolution Professionals
• Intermediaries who would play a key role in the efficient working of the bankruptcy process
• Consists of Class of regulated but private professionals having minimum standards of professional and ethical conduct
• Verifies the claims of the creditors
• Constitutes a creditors committee
• runs the debtor's business during the moratorium period and helps the creditors in reaching a consensus for a revival plan
• Acts as a liquidator and bankruptcy trustee
New Professionals
Insolvency Professional
Enrolled as a Member of Insolvency
Professional Agency
Registered with Insolvency and
Bankruptcy Board of India
The Board will specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field, as it deems fit, which can be appointed as Insolvency Professionals
OTHER ACTS DEALING WTH INSOLVENCY AND IMPACT OF IBC ON SUCH ACTS
Impact of IBC on existing Legislations
Act Purpose Adjudicating Authority
Existing Provision
Impact of IBC
Sick Industrial Companies (Special Provisions) Repeal Act, 2003
To repeal the Sick Industrial Companies (Special Provisions) Act 1985
Board of Industrial and Financial Reconstruction (BIFR)
- • Any appeal made to Appellate authority or any reference made, inquiry pending before the BIFR• Any proceeding pending before Appellate Authority or BIFR
shall stand abated and can be referred to NCLT under IBC
Limited Liability Partnership Act 2008
Regulates Limited Liability Partnerships in India
National Company Law Tribunal
Section 64, clause (c): A LLP may be wound up by the Tribunal, if the LLP is unable to pay its debts
This shall be omitted
Indian Partnership Act 1932
Regulates Partnership firms in India
Registrar of Firms
A firm has to be compulsorily dissolved in case of adjudication of all or all except one as insolvent.
This shall be omitted
Impact of IBC on existing Legislations
Act Purpose Adjudicating Authority
Existing Provision
Impact of IBC
Recovery of Debts Due to Banks and Financial Institutions Act, 1993
Legislature in ensuring speedy recovery of bank dues
Debt Recovery Tribunal
Debt Recovery Appellate Tribunal
- • Establishment of Debt Recovery Tribunal (DRT) and its benches as per IBC• Establishment of Debt Recovery Appellate Tribunal (DRAT) and its benches as per IBC• Powers of DRT and DRAT shall be as per Schedule III of IBC•Applications made to the Tribunal shall be dealt with the manner as provided under IBC
Securitisation and Reconstruction of Financial Assets and Enforcement Security Interest Act, 2002
Recovering Non Performing Assets (NPAs) of Banks and FIs
Debt Recovery Tribunal
Debt Recovery Appellate Tribunal
- Resolution process shall be as per IBC
Impact of IBC on existing Legislations
Act Existing Provision Impact of IBC
Companies Act 2013
- • Definition of Winding up inserted u/s 2(94A) as winding up under this Act or liquidation under the IBC, as applicable
Section 8(9) : Any asset remaining after winding up of the Company, it shall be transferred to another Sec 8 Company or its proceeds after sale shall be credited to Rehabilitation and Insolvency Fund
Insolvency and Bankruptcy Fund shall be substituted in place of Rehabilitation and Insolvency Fund
Wherever in the Act mention as ‘liquidator’ or ‘on the liquidator’
Appointed under this Act or under the IBC, shall be inserted
Section 253 to 269 : Revival and Rehabilitation
These shall be omitted
Section 270: Modes of Winding Up
Voluntary Winding up shall be omitted
Impact of IBC on existing Legislations
Act Existing Provision Impact of IBC
Companies Act 2013
Circumstances of winding up by tribunal
The following circumstances shall be omitted:• if the company is unable to its debts• if Tribunal has ordered winding up under Revival and Rehabilitation of Sick companies
Section 272: Petition for winding up
winding up on petition by creditors shall be omitted
Section 275 : Company Liquidator and their appointment
The liquidator shall be appointed by the Tribunal amongst the Insolvency Professionals under IBC
Part II : Voluntary Winding Up (Section 304 to 323)
This shall be omitted
THANK YOU
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