Corporate insolvency in India - Interpreting the I&B Code Presented by: Khushroo B. Panthaky Chartered Accountant, Bombay 18 June 2017 – ICAI, Aurangabad

Contents why is the Code imperative today? what are the highlights of the Code? what does the Code intend to change? what is the Insolvency eco-system? what are the potential challenges in implementation? how does the Code compare to UK legislation? what are the opportunities for us?

Why is the Code imperative today? improve ‘Ease of Doing Business’ ranking for India. address the NPA situation decisively reduce the time taken to resolve insolvency eliminate confusion caused by a complex judicial framework develop investor confidence – credit/bond or equities

Salient features of the Code shift from balance sheet to cash flow test approach adopted – “Creditor in control” exclusive jurisdiction of Adjudicating Authority – NCLT & DRT initiation of CIRP – Lenders; Operational Creditors or Corporate Debtor moratorium starts immediately upon admission (within 14 days of application) liquidation in case CIRP fails cross-border insolvency not adequately covered

What the Code intends to change? Code makes a clear distinction between insolvency and bankruptcy allow genuine business failures a second chance provide a commercial solution to a commercial issue Code ensures certainty in the process of resolving insolvency provide confidence to lenders of their rights and their enforcement

What does it change for the lenders? more powers with lenders when faced with default and promoters stayed in control protection from existing and imminent litigation need closer monitoring of borrowers businesses need to work closely with all major lenders – in consortium or otherwise internal processes need to be streamlined clear priority of distribution (waterfall) upon liquidation

What does it change for the borrowers? low thresholds for initiation of insolvency proceedings loss of control over management and operations during the resolution process borrowers to focus on liquidity and minimise payment delays need for more transparent and proactive relationship with lenders strong penalties for fraudulent diversion of assets

How can the Code help fast-track resolution? lender inertia during resolution process to have severe consequences make it attractive for investors to invest into stressed/ distressed situations moratorium clause shall ensure smooth insolvency resolution process competitive platform for best results for the company limited role of the judiciary and Code has over-ride priority over any other conflicting law in the country

Insolvency and Bankruptcy Ecosystem Insolvency Bankruptcy Board of India (IBBI) Apex body governing Insolvency and Bankruptcy Code will set up the necessary infrastructure and accredit IPs & IUs Adjudicating Authority (AA) AA would have be exclusive jurisdiction to deal with insolvency related matters. National Company Law Tribunal (NCLT) would be AA for Corporate and LLP insolvency Debt Recovery Tribunal (DRT) would be AA for individual or partnership insolvency Insolvency Professional Agency (IPA) Professional bodies registered by IBBI to promote and regulate insolvency profession. IPAs would admit IPs as members Currently there are three IPAs registered under the 3 major professional institutes - ICAI; ICSI and Cost Accountants Information Utility (IU) Centralised repository of financial and credit information of borrowers IUs will validate the information and claims of creditors Committee of Creditors (COC) Consists of financial creditors who will appoint and supervise actions of IP’s; approve the resolution plan etc Where no lenders or all related parties, operational creditors can constitute CoC Insolvency Professionals (IP’s) Licenced professionals registered with IPA and regulated by IBBI; will conduct the resolution process; act as Liquidator; appointed by creditors and will assume powers of the board of directors

Challenges in implementation no timeline for disposal of appeals shortage of NCLT benches shortage of skilled professionals non co-operative management lack of consensus among lenders high cost of bankruptcy resolution process interplay of other regulators like SEBI, RBI and MCA

How does the Code measure with the UK? Key similarities: creditors drive the process; licensed IPs run the process any creditor or the debtor can initiate the process moratorium provided during the insolvency period clear waterfall of payments outlined during liquidation multiple IPAs (or equivalent) regulated by a Board Key differences: creditors’ involvement during the insolvency process performance security/bond to be provided by the IP voting rights of creditor classes and approval by majority deadline for the completion of the CIRP and/or liquidation remuneration of liquidator

Restructuring services to Lenders Milestones Grant Thornton services Level of distress Key actions Performing debt Signs of stress Distress Recovery Insolvency Contingency & options Restructuring Review of business Monitoring Pre-lend reviews Raising debt Attempt to refinance facility and avoid potential losses Debt advisory and structuring Review of specific risks or exposures (eg tax or pension liabilities) Independent business review & feasibility studies On-going monitoring procedures Review of covenant compliance Commercial due diligence Set up internal processes and internal norms to deal with Insolvency Code Financial restructuring Operational restructuring Separation of assets Financial modelling Refinance of facility – debt advisory Execution of insolvency procedures Pre-packs (informal) Liquidation Interim Management Fund raising and M&A Asset recovery, Fraud, Disputes and Investigations Insolvency and asset recovery Enhance or protect collateral to minimise exposure Monitoring and on-going strategy Pre-lend support Customer introduction Facility granted Borrower stress Borrower distress Exit – potential losses Facility stress Planned exit

CONCLUSION Questions?