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  1. INSOLVENCY AND BANKRUPTCY CODE, 2016 - Latest Developments in 2018 A Presentation by:- K.SENTHIL KUMAR M.Com.,M.A.,M.Phil.,M.B.A.,M.L.,FCMA.,ACS
  2.  Existing Mechanism – Inadequate & Ineffective :  No single Law dealing with IB in India;  overlapping jurisdiction  Painfully Slow Pace – Min 5 Yrs  Recovery rate is so less  More NPAs lying in Banks  High Process Cost of Insolvency  No Chance of Ease of Doing Business and Easy Exit 136 1 5 13 27 55 0 20 40 60 80 100 120 140 160 Insolvency Resolution World Bank Ranking
  3.  Promote Entrepreneurship  Improve Credit Availability  Avoid Prolonging Time  Interest of all Stakeholders  Minimize the Role of Adjudicating Authority  Lesser Compliance mechanism  Avoid Combination and Complication of many Laws
  4. JOURNEY OF THE IBC  21.12.2015- IBC Bill of 2015 -introduced in LS  23.12.2015 - IBC Bill of 2015 - Referred to Joint Committee of both Houses of Parliament  28.04.2016- IBC Bill of 2015 -Joint Committee placed its Report to both Houses of Parliament  05.05.2016- IBC Bill of 2015 -passed by LS 11.05.2016- IBC Bill of 2015 -passed by RS  28.05.2016- IBC, 2016 -Assented by President of India & Notified
  5. APPLICABILITY OF IBC,2016  Any Company incorporated under the Companies Act, 2013 or under any provisions of previous Acts  Any other Company governed by any Special Act  Any LLP incorporated under the LLP Act, 2008  Any other body, as notified by the Central Government  Partnership Firms  Individuals
  6. OBJECTS OF THE CODE • Creditor in control regime • Consolidates existing insolvency laws and amends other legislations • Overriding effect on all other laws inconsistent with the provisions of the Code • Time bound resolutions for evaluation and viability determinations of companies referred for CIRP • Clearly defined order of priority ( *waterfall mechanism) • Investigation of antecedent transactions in case of illegal diversion of assets of company • Establishment of IBBI as an independent monitoring body for administration and governance of the insolvency and bankruptcy law
  7. BASIC TERMS • Creditor • Debtor • Insolvency • Bankruptcy • Winding up • Liquidation • Dissolution
  8. WHO CAN INVOKE? Corporate Debtor (Sec.10) - A corporate person who owes a debt to any person Operational Creditor (Sec.9) - A person to whom an operational debt is owed & - Includes any person to whom such debt legally assigned or transferred Financial Creditor (Sec.7) - Any person to whom a financial debt is owed & - Includes a person to whom such debt legally assigned or transferred
  9. DEFAULT In case of Co. & LLP In case of Partnership & Individual Minimum amount of ` 1 lakh Minimum amount of ` 1 thousand Minimum amount of ` 1 lakh & ` 1 thousand can be increased upto ` 1 Cr & ` 1 lakh respectively by CG Where any Company or LLP commits- A default in paying its Financial debt Operational debt Then a financial creditor/ operational creditor/ Company & LLP itself May file an application, for initiating corporate insolvency resolution process with the Adjudicating Authority.
  11.  NCLT - Deal with insolvency matters of Co. & LLP - Appeal to NCLAT  Debt Recovery Tribunal - Deal with insolvency matters of individual & Partnership firm - Appeal as to DRAT Adjudicating Authority within 14 days of receipt of application, by an order - Admit the application Reject the application If it is complete If it is incomplete Adjudicating Authority shall before rejecting application, give notice to applicant to rectify defects in application within 7 days from the date of receipt of such notice Default occurred Default not occurred
  12. 180 days 45 days (One time) 270 days Adjudicating Authority after admission of application shall, by an order Declare a Moratorium Cause a Public Announcement Appoint Interim Resolution Professional FAST TRACK : 90 days 90 days (Maximum) 135 days TIME BOUND
  13.  Adjudicating Authority shall by order prohibit the following:  Institution/continuation/proceedings of suits including execution of any judgment, decree or order in any Court  Transferring, encumbering, alienating or disposing of assets/legal right/beneficial interest  Any action to Foreclosure, Recover or enforce any security interest created including any action under SARFAESI Act, 2002  Recovery of any property by owner or lessor where such property is occupied MORATORIUM EFFECT [Sec.14 (1) (A) – (D)]
  14. • Order of Moratorium made by Adjudicating Authority; - Start from Date of Admission of Application; • Cease to effect – Date of Approval of Resolution Plan or Liquidation Order MORATORIUM PERIOD [sec 14(1)] • Objective  Maximizing value of the Entity to Continue Operation  No additional stress on Business - Supply of essential goods or services to the Corporate Debtor as may be specified shall not be terminated or suspended or interrupted - Central Government in consultation with any financial regulator may specify such transactions. MORATORIUM EFFECT [Sec.14 (1) (A) – (D)]
  15. PUBLIC ANNOUNCEMENT  Public announcement contain following information:  Name & address of defaulted Corp. Debtor  Name of Registrar with which Corp. Debtor is incorporated or registered • Last date for submission of Claims • Details of Interim Resolution Professional - Management of Corporate Debtors - Responsible for Receiving claims • Penalties for False or Misleading Claims • Date on which the Insolvency Resolution Process close (i.e. 180 days from the date of admission of application)  Public Announcement shall be made in such manner as may be specified
  16. APPOINTMENT: Appointment by Adjudicating Authority within 14 days from Admission of Application Shall not exceed 30 days from date of Appointment Once IRP is appointed : Management of affairs of Corp. Debtor shall vest with IRP Powers of BOD/ Partners (LLP) shall stand suspended & will be exercised by IRP Officers & Managers of Corp. Debtor shall report to IRP FI maintaining accounts of Corp. Debtor shall follow instructions of IRP TENURE: INTERIM RESOLUTION PROFESSIONALS
  17.  Appointment by Committee of Creditors may in their first meeting  within 7 (Seven) days of Constitution of Committee  Resolve to appoint the Interim Resolution Professional as a Resolution Professional (OR)  Replace the Interim Resolution Professional by another Resolution Professional.  Resolution Professional shall conduct the entire Insolvency Resolution Process and manage the operations of the company during the corporate Insolvency Resolution Process Period.  Resolution Professional shall exercise all such powers and duties as are vested on the Interim Resolution Professional.  All Meetings of the Committee of Creditors shall be conducted by the Resolution Professional
  18. MEETING OF THE COMMITTEE OF CREDITORS • Convene & attend all meetings • Present all resolution plans at the meetings DOCUMENTS • Maintain an updated list of claims • Prepare the information memorandum RIGHTS • Take immediate custody and control of all the assets including business records of the company/LLP • Represent and act on behalf of the company/LLP with third parties DUTIES OF RESOLUTION PROFESSIONALS
  19.  CoC to replace the Resolution Professional any time during the pendency of IRP.  CoC may forward name of another Insolvency Professional to the Adjudicating Authority  The Adjudicating Authority shall forward name of proposed Resolution Professional to the Board for confirmation  On confirmation being received from the Board, appoint him as Resolution Professional REPLACEMENT OF RESOLUTION PROFESSIONALS
  20. The Interim Resolution Professional shall - Collate all claims Determine of financial position Constitute a Committee of Creditors– comprising of all Financial Creditors AND All decisions of Committee taken by vote of not less than 75% • Related Party: • If no Financial Creditor, CoC shall exercise with functions. • Shall not have any Right of Representation, Participation or voting • Position of Financial Creditor- Consortium Agreement : - Each Financial Creditor shall be the part of Committee. - Voting shares shall be on the basis of Financial Debts.
  21.  Position of Financial Creditor when he is an Operational Creditor:  shall be considered Financial Creditor to the extent of Financial Debts;  Voting Shares to the extent of Financial Debts;  Operational Creditor to the extent of Operational Debt;  Assignment of Operational Debt  If an Operational Creditor has assigned or legally transferred any Operational Debt to a Financial Creditor, the Assignee of Transferee shall be considered as an Operational Creditor to the extent of such assignment or legal transfer.  Determination of Voting Share by Financial Creditor  IBC Board may specify the manner of determining of voting share. COMMITTEE OF CREDITORS
  22.  Preparation of Information Memorandum for formulating a Resolution Plan  Providing to Resolution Applicant access to all relevant information  Resolution Applicant will submit a Resolution Plan to the Resolution Professional prepared as per Information Memorandum  Examination of Resolution Plan  Presentation of RP to CoC for Approval  Submitting Resolution Plan to Adjudicating Authority  Adjudicating Authority may by order approve the Resolution Plan;  Moratorium Period ends  R P will be binding on the Corp. Debtor, its Employees, Members, Creditors, Guarantors & other Stakeholders  If Resolution Plan not approved or - Not ready within 180 days or - Adjudicating Authority rejects the Resolution Plan  It will pass a Liquidation Order.  R P will act as a Liquidator and all the powers of the Board of Directors will
  23. The following debts will be paid in PRIORITY given below: Insolvency Resolution Cost & Liquidation Cost; Debts to Secured Creditor (who have relinquished their security interest) & Workmens’ dues (for 24 months before commencement); Wages & Unpaid Dues to employees (other than workmen) (for 12 months before commencement); Financial Debts to Unsecured Creditors; Workmen’s Dues for earlier period; Crown Debts and Debts to Secured Creditor following Enforcement of Security Interest; Remaining Debts; Preference Shareholders; Equity Shareholders or partners. WATERFALL MECHANISM UNDER IBC
  25. Time bound settlement of Insolvency. Banks & Asset reconstruction companies immediate gainers Comprehensive coverage- Companies, LLP, Individuals & more can be added Database of Serial Defaulters Protect workers
  26. Not a Magic – Benefits follow after 3-5 years from now.  To create Large pool of Insolvency Professionals.  Draft Procedural Rules for  Insolvency Professionals  Information Utilities  Establishment of several new institutional mechanisms.  High value of Performance Bond  Order of priority to Distribute Assets  Secured Creditors – why not upto Collateral Value?  Unsecured creditors have priority over Trade Creditors?  Government Dues – after unsecured creditors ?  Formation of Multiple Information Utilities – Information about a Company may not be available through a Single IUs  Insolvency & Bankruptcy Fund- manner of usage of the Fund ?
  27.  Interim Resolution Professional  Resolution Professional  To prepare Resolution plan  To Represent - Financial Creditor; - Operational Creditor; - Corporate Debtor before NCLT- DRT & NCLAT- DRAT  To represent the Winding Up cases before the Tribunal  To prepare scheme & seek approval from Tribunal for Revival & Rehabilitation of Sick Cos.
  29. LANDMARK DECISIONS Innoventive Industries Ltd. vs. ICICI Bank (Supreme Court Judgment dated 31st August 2017) • Supremacy of the Code over other laws • Application by financial creditor will have to be admitted once the debt was proved to be “due” • On appointment of a resolution professional, an erstwhile director of the corporate debtor cannot file a petition on behalf of the company • Who may prefer an appeal on behalf of the corporate debtor against an order of admission of an insolvency application? Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP (Supreme Court Judgment dated 24th July 2017) • Inherent powers under Article 142 of the Constitution invoked to permit parties to withdraw application post settlement
  30. Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. (Supreme Court Judgment dated 21st September 2017) • Insolvency Bill of 2015 included the term “bonafide” in the definition of dispute, the same was omitted in the Code • Scope of “dispute” was inclusive and not exhaustive • Once existence of a “real dispute” was established, the petition will have to be rejected by the NCLT Surendra Trading Company vs. Juggilal Kamalpat Jute Mill Company Limited & Ors. (Supreme Court Judgment dated 19th September 2017) • Held that the time limit of 7 days for removing defects is directory [provisos to Sections 7(5) and 9 (5)]
  31. Macquarie Bank Limited Vs. Shilpi Cable Technologies Limited (Supreme Court Judgment dated 15th December 2017) • Requirement to deliver a demand notice / invoice of unpaid operational debt mandatory • Requirement to file an affidavit or certificate from financial institution only directory • Procedural hurdles should not be imposed on creditors; domestic and foreign creditors ought not to be discriminated • Demand notice can be issued by an advocate
  32. IS LIMITATION ACT APPLICABLE? Overview of the IBC amendment Ordinance, 2018… Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Pvt. Ltd. (Supreme Court Order dated 23rd August 2017) • The question of limitation was left open Black Pearl Hotels Pvt. Ltd. vs. Planet M Retail Ltd. (NCLAT Judgment dated 17th October 2017) • Right to apply under the Code would accrue only on 1st December, 2016 when the Code came into force
  33. Is Limitation Act applicable to Tribunals? Ref: M.P. Steel Corporation vs. Commissioner of Central Excise (Supreme Court Judgment dated 23rd April 2015) • Bar of limitation applies to suits, appeals and applications before “Courts” and not quasi- judicial bodies (those that are part of judicial branch of the State) Post Amendment Ordinance, 2018: Section 238A: Limitation Act, 1963 applies to proceedings or appeals before AA, NCLAR, DRT and DRAT
  34. HOME BUYERS AS FINANCIAL CREDITORS KEY OBSERVATIONS OF THE INSOLVENCY COMMITTTEE: • “Time value” interpreted to mean price paid for the length of time for which the money has been disbursed • Insolvency Law Committee opined that monies so raised are a tool for raising finance for the project • Homebuyers to be treated on par with other financial creditors • Assocham Report - RERA as growth impetus: does the promise hold out on the ground? • RERA regulates and formalizes real estate sector; IBC restructures or liquidates the business • Apex Court steps in to secure homebuyers’ rights
  35. Post Amendment Ordinance, 2018: Sec. 5(8): Financial debt ………. (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; Explanation. - For the purposes of this sub-clause,- (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and…..” Sec. 21: Committee of Creditors ………. (6A) provides for manner of representation for other classes of creditors. Clarifications required Whether secured or unsecured creditors? Whether commercial real estate buyers are included?
  36. GUARANTORS UNDER IBC Alpha & Omega Diagnostics (India) Ltd. vs. ARCIL (NCLAT Judgment dated 31st July 2017) • Moratorium is applicable only on the assets of the corporate debtor that are reflected in the balance sheet • No moratorium can be claimed on the assets of the guarantor Post Amendment Ordinance, 2018: • Section 5(5A): corporate guarantor defined • Section 14: moratorium to not apply to a surety in a contract for guarantee to a corporate debtor
  37. PROMOTERS UNDER IBC Section 29A of the IBC (as amended on 18th January, 2018) (In)Eligibility criteria: • Layer 1 – the “person” is ineligible (wilful defaulter, disqualified director, etc.) • Layer 2 – connected person is ineligible (promoter of a company in which preferential or undervalued transactions have taken place and order made under Code by Adjudicating Authority, etc.) • Layer 3 – related party of a connected person • Layer 4 – person acting jointly / in concert with a person under the above 3 layers of ineligibility
  38. In the matter of Synergies Dooray Automative Limited (Hyderabad NCLT Order dated 2nd Aug. 2017 1st Resolution Plan approved under the Code
  39. • In 2005, Synergies Dooray’s (SDAL) lenders approved leasing out of company assets to Synergies Castings for 4 years • SDAL declared sick company in 2007 - lenders assigned their debts (93% of borrowings) to Synergies Castings in 2008 and 2011 • 92.93% of the debts assigned by Synergies Castings to NBFC, two days prior to Government notifying that SICA would be repealed • SDAL filed an Application under Sec. 10 of IBC for initiating CIRP Synergies Castings Limited Assigned 92.93% of its debt holding in SDAL Millennium Finance Limited (NBFC)
  40. • Post assignment of the debt, NBFC got a seat in the CoC with more than 75% voting share • EARC objected to the assignment agreements – questionable • RP submitted that resolution plan was in accordance with the Code • Resolution plan was admitted by NCLT with certain conditions • APPEAL FILED BY EARC PENDING IN THE NCLAT
  41. Examples where the bar derailed insolvency process: • VTB Bank led Numetal (Rewant Ruia, member of Ruia family of Essar) rendered ineligible to bid for Essar Steel • ArcelorMittal ineligible to bid for Essar Steel as Lakshmi Mittal (since dropped his name as promoter) was one of the promoters (while not in management) of KSS Petron and Uttam Galva. [provided all defaulting accounts of respective NPAs are regularized before submission of resolution plan] • Promoter of JSW Steel related to promoter of Monnet Ispat, for which JSW-AION Capital submitted their bid to take over the company, which was approved by the CoC. [neither JSW not Monnet invested in each other companies]
  42. Post Amendment Ordinance, 2018: Section 29A: • Ineligible to submit resolution plan if at the time of submission of plan has an NPA • The clause does not apply to persons who have acquired NPA pursuant to resolution plan approved under IBC, for a period of 3 years from the date of such approval Sec. 5(24A): • Related party in relation to an ‘”individual” defined
  43. THANK YOU!