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 The Code has repealed around eleven laws and provides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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