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A Structured Overview of Corporate Insolvency Regime in India

What is the purpose of Insolvency and Bankruptcy Code 2016?
1. Th consolidate & amend the laws relating to insolvency & bankruptcy;
2. To fix the time periods for execution of the law in a time bound manner;
3. To increase the availability of credit;
4. To balance the interests of all stakeholders including alteration in the order of priority of payment;
5. To establish an Insolvency & Bankruptcy Board of India as a regulatory body for insolvency & bankruptcy law.
With the recent changes in the legal landscape of India, the Insolvency & Bankruptcy Code, 2016 (“Code”) is the biggest and major legal reforms in the recent times, which has curtailed the earlier extensive process of debt recovery and insolvency. The Code has repealed around eleven laws and provides a comprehensive and time bound mechanism to either put a distressed entity on a firm revival path or timely liquidation of assets.
The Adjudication Authority for companies shall be National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) and Supreme Court shall be the highest order of appeal or having jurisdiction to grant any stay or injunction in respect of matters within the domain of the NCLT and NCLAT.

Legislative journey so far!!!

Parties- Who can initiate Corporate Insolvency Process

      i.         Financial Creditor- Any person to whom a financial debt is owed & includes to whom such debts has been legally assigned or transferred. Financial debt means a debt along with interest, if any which is disbursed against the consideration for the time value of money.

    ii.          Operational Creditor- Any person to whom a operational debt is owed & includes to whom such debts has been legally assigned or transferred. Operational debt means a claim in respect of the 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
  iii.          Corporate Debtor- Any corporate person who owes a debt to any person. Corporate person means a Company as defined in S.2 (20) of the Companies Act, 2013; a limited liability partnership as defined in S. 2 (1) (n) of LLP Act, 2008 or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider by themselves can initiate the corporate insolvency process.

Admission by NCLT- The Code provides that the insolvency resolution shall have to be completed within 180 days (maximum one-time extension of 90 days allowed) from the date of admission of application for insolvency resolution. Once the application is admitted by the NCLT, the following consequences immediately will take place in respect of the corporate debtor:

a)     Moratorium- The NCLT would declare a moratorium prohibiting any suits against the debtor, execution of any judgement of a court or authority, any transfer of assets by the debtor, recovery of any property against the debtor. The moratorium will continue till the resolution process is completed.

b)     Power to manage the affairs of the corporate debtor rest with interim resolution professional (IRP)-  An interim Resolution Professional would be appointed by NCLT to manage the affairs of the corporate debtor within 14 days of the commencement of the resolution process. Board of Directors shall remain suspended and affairs of the company shall come under the control of the Resolution Professional. And, then a public announcement would be issued by the Insolvency professional giving details of the commencement of the process, asking all the creditors to submit their claims in the prescribed form along with proof of their claims.
However, erstwhile Board of Directors who are no longer in management, cannot even maintain an appeal on behalf of the corporate debtor.
1.      Process in the Corporate Insolvency Resolution
Ø  Collating Claims- The IRP has to collate all claims of creditors and determine the financial position of the corporate debtor and constitute a Committee of Creditors within 30 days of his appointment.
Ø  Committee of Creditors- It has to be formed within 7 days of its constitution and has to meet and appoint a resolution professional. It may continue with the IRP or appoint a new Insolvency Professional (“IP”). For this purpose, majority of at least 75% votes of the Committee should be obtained.
Ø  Role of IP and Operational Creditor-  The IP so appointed would act as chair person of the Committee, conduct the meetings of the Committee of Creditors. IP can raise interim finance for the corporate debtor and conduct the entire corporate insolvency resolution process and manage the operations. Operational creditors may attend the meetings of the Committee of Creditors but cannot vote. For the purpose of creating any security interest, changing the capital structure of the corporate debtor, appointing auditors or internal auditors, the IP can carry out these decisions only with the prior approval of 75 % of the Committee of Creditors.
Ø  Information Memorandum and Resolution Plan-  The IP should prepare the Information Memorandum which contain all financial and other details of the corporate debtor along with the liquidation  value of the assets, i.e. their realizable value if the corporate debtor to be liquidated. This should be done by two registered valuers after physical verification of the stock and the fixed assets of the corporate debtor. The resolution plan should provide for the payment of all costs associated with the insolvency resolution, i.e. repayment of debts, management of affairs, transfer of assets, reduction in amount payable, issuing securities, modifying any security interest, etc. Further the resolution plan should provide for specific sources of funds which would be used to pay all costs of the insolvency resolution process, liquidation value due to financial creditors who dissented to the plan. The resolution plan must also be approved by a 75% vote of the financial creditors.
Ø  Exemption from SEBI Regulation & Takeover Code- Takeover Code has been amended to permit issue of shares and takeover of listed companies under a resolution plan. Also preferential allotment provision and open offer process do not apply to a resolution plan formulated under the Code.
Ø  Submission of Plant to NCLT- After the approval of the Committee, the plan must be submitted to the NCLT for tis plan approval. If approved by NCLT, then it becomes binding on the corporate debtor, creditors and the employees etc. Further, the moratorium order  shall come to an end. On the other hand, if the plan is rejected by the NCLT, then a liquidation process is triggered.
Ø  Circumstances under which NCLT will pass liquidation order- In the event NCLT rejects the resolution plan or if a resolution plan has not been submitted to the NCLT within the maximum period of 180 days plus any extension, thereof it must order the liquidation of the corporate debtor or if the Committee of Creditors decide to liquidate the debtor, then also NCLT must pass a liquidation order.
2.      Duties & Power of the Resolution professional- If liquidation order is passed by the NCLT, the resolution professional becomes the liquidator for the liquidation purposes provided, NCLT does not replace him. The liquidator has various powers and duties under the Code and he can appoint professionals to assist him in the discharge of his duties. He must verify all the claims of the creditors and take custody of all assets of the debtor. The other duties of the resolution professional are as follows:
Ø  He must form a liquidation estate comprising of all assets owned by the corporate debtor and holds them in fiduciary capacity for the benefit of all the creditors.*
Ø  He must collect all creditors claims within 30 days of the commencement of the liquidation process and verify the same within 30 days from the last date for the receipt of claims.
Ø  He must determine the value of the claims admitted.
Ø  If the liquidator is of the opinion that a corporate debtor has given a preference to a particular creditor, then he must apply to NCLT for avoiding the same. He also has the power to disclaim any onerous property by applying to the NCLT.
Ø  He can also investigate the affairs of the corporate debtor to determine whether there have been any undervalued or preferential transactions which have led to ne creditor being preferred over the other.
Ø  The window of determining preferential treatment is 2 years before the insolvency commencement date for related parties and one year for other persons. Also during this period if certain transactions were undervalued, then the liquidators can apply to the NCLT for having the set aside.
Ø  He can also apply to the NCLT for setting aside any extortionate credit transactions entered into by the corporate debtor within 2 years preceding the insolvency commencement date.
Ø  The liquidator may make an itemized sale of the assets of the liquidation estate or make a slump sale or in proceeds or in parcels. The usual practice is to sale by auction.
3.      Priority for distribution of proceeds according to the Code- In the Code it has been mentioned that the priority would apply notwithstanding anything to the contrary contained in any other Central/State law as well as any contract to the contrary between the debtor and the recipients. The priority schedule is as follows:
Ø  Insolvency resolution process costs and the liquidation costs in full.
Ø  Workmen dues for 24 months preceding  the liquidation commencement date and debt  owed to a secured creditor  if he has relinquished his security shall among themselves rank equally.
Ø  Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date.
Ø  Financial debts owed to unsecured creditors.
Ø  The following dues shall rank equally between themselves:
Any amount due to the Central Government and the State Government for a period of 2 years preceding the liquidation commencement date, and debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.
Ø  Any remaining debts and dues.
Ø  Preference shareholders if any and
Ø  Equity Shareholders or partners, as the case may be.
The above priority distribution should be made within 6 months from the receipt of the proceeds after deducting the associated costs. If certain assets could not be sold, it may be given to the stakeholders after getting the approval from NCLT.
4.      Progress Report by the Liquidator- The liquidator shall submit progress reports to the NCLT starting from within 15 days from the end of his appointment and thereafter within 15 days from the end of every quarter of his tenure. It will also contain asset sale report, in case if any asset is sold.
5.      Completion of Liquidation- The liquidator shall liquidate the corporate debtor within 2 years. If he is not in a position to complete the same within the time period, then he must apply to the NCLT to continue the process. For getting additional time, he should submit the reasons and after completion, he must submit a Final report to the NCLT explaining how the liquidation was conducted and the process of how the assets have been liquidated. After all the assets have been completely liquidated, the liquidator must apply to the NCLT for dissolution of the corporate debtor. Once the NCLT passes an order, the body corporate would be dissolved from the date.
The Code is a step in right direction and while there will be nuances and controversies in dealing with the process, it is appreciated that during the short span of time, various landmark and unique decisions are delivered by NCLT, NCLAT and Supreme Court. It is premature to comment whether the Insolvency professional will be able to run and manage a corporate debtor (sick company) while its promoters could not run the same. However, in the time to come, these professionals will become experts in dealing with the process, as the Code has given full power and duties are assigned to the Insolvency Professionals. Though most of the creditors, banks/financial institutions bank upon on the process of this Code, certain creditors may invoke the Insolvency and Bankruptcy Code as a last resort.


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