Insolvency resolution process & liquidation for corporate entities

Corporate insolvency Resolution 22 Corporate insolvency Resolution process: initiation and commencement Who can trigger? ▫ A financial creditor (solely or jointly), or ▫ An operational creditor, or ▫ The corporate debtor itself. When? ▫ Once there is occurrence of default on the part of the corporate debtor ▫ In case a financial creditor is the applicant, default may be in respect of a financial debt owed to any financial creditor ▫ In case of an operational creditor, the creditor has to deliver a demand notice before the CIR can be triggered. The corporate debtor, in turn, has to show a dispute or show evidence of repayment to avoid initiation of CIR. How? ▫ By applying to AA, which under part II is NCLT. ▫ Requisite documentation to be done. After-effect? ▫ AA either admits or rejects the application; ▫ If admitted, CIR commences and the date of admission of application is called the insolvency commencement date Who cannot initiate the process? ▫ a corporate debtor who is already undergoing CIR ▫ a corporate debtor who has completed CIR 12 months preceding the date of making of the application ▫ a corporate debtor or a financial creditor who has violated any of the terms of a resolution plan which was approved 12 months before the date of making an application . ▫ A corporate debtor in respect of whom a liquidation order has been made.

Snapshot of corporate insolvency 23 Snapshot of corporate insolvency resolution process (1/3) Pre-insolvency process ▫ Default by C.Dr. ▫ Initiation of CIR by F.Cr./ O.Cr./ Corporate applicant No time limit prescribed for filing an application before the AA ▫ Admission of CIR application by AA Order shall be communicated within 7 days of admission/ rejection of such application Insolvency and resolution process ▫ Commencement of CIR ▫ Declare moratorium by an order Shall be declared on the insolvency commencement date ▫ Cause a public announcement initiation of corporate insolvency resolution process and call for the submission of claims

Snapshot of corporate insolvency 24 Snapshot of corporate insolvency resolution process (2/3) ▫ Appointment of an IRP AA shall appoint an IRP within 14 days from the insolvency commencement date Term shall not exceed 30 days from the date of his appointment ▫ An IRP shall constitute a committee of creditors Comprising of financial creditors ▫ Hold 1st meeting of committee of creditors Within 7 days of the constitution of committee ▫ Appointment of RP ▫ Collection of claims and other relevant details ▫ Preparation of information memorandum by RP ▫ Submission of resolution plan by resolution applicant ▫ Acceptance of resolution plan by committee of creditors

Snapshot of corporate insolvency 25 Snapshot of corporate insolvency resolution process (3/3) ▫ Submission of resolution plan to AA ▫ Approval of resolution plan by AA ▫ CIR process shall be completed Within 180 days from the date of admission One time extension is allowed Not exceeding 90 days Post-insolvency process ▫ Moratorium shall cease from the date of completion of CIR process Date of passing an order approving the resolution plan OR order for liquidation ▫ Resolution professional shall forward all records relating to conduct of CIR process and resolution plan to the board

Conflict between the CIRP and MRU Act 26 Conflict between the CIRP and MRU Act Whether the provisions of the Code shall have overriding effect over the MRU Act? If yes, whether an application under the Code shall be accepted? ▫ In ICICI Bank Ltd. vs. M/s. Innoventive Industries Ltd., the NCLT held The Code has come into existence subsequent to the MRU Act. The non-obstante clause contained in section 238 of the Code shall prevail upon any other law for time being in force The notification issued under the MRU Act will not operate as a bar to passing an order under section 7 of the Code.

Initiation of CIRP 27 Occurrence of Default by C. Dr. Initiation of F. Cr. O. Cr. C. Dr. (itself)

Initiation of CIRP by F.CR(S). 28 Initiation of CIRP by F.CR(S). Default exists + Application complete + No disciplinary proceeding against proposed IRP? Occurrence of Default by C. Dr. Notice to F. Cr. by AA for rectification of defects No Within 7 days of receipt of notice Application by F. Cr(s). to AA Yes Yes Admission of Application Defects rectified? Within 14 days Ascertainment of existence/non-existence of default by AA No Rejection of Application Commencement of CIR Within 7 days Within 7 days Order Communicated to F. Cr. and C. Dr. Order Communicated to F. Cr.

Initiation of CIRP by O.CR. 29 Initiation of CIRP by O.CR. Application by O. Cr. To AA Application complete + no repayment by C. Dr. + demand notice delivered by O.Cr. + no dispute notice received by O. Cr./no record of any dispute? Yes Demand Occurrence of Default by C. Dr. notice by O.Cr. To C. Dr. No Notice to O. Cr. by AA for rectification of defects C. Dr. shows evidence of repayment? Within 10 days of receipt of demand notice Yes Within 7 days of receipt of Yes notice No Within 14 days C. Dr. shows a dispute? No Defects rectifie d? Admission of Application Yes No further No Commencement of CIR action Communication Rejection of Application to O.Cr. and C.Dr.

Initiation of CIRP by C.DR. itself 30 Initiation of CIRP by C.DR. itself Occurrence of Default by C.Dr. Application by C.Dr. to AA Notice to C.Dr. by AA for rectification of defects Application is complete Yes No Within 14 days Defects rectified? Admission of Application Communication by AA to C.Dr. Rejection of Application Commencement of CIR

Once CIRP commences . . . Commencement of CIRP 31 Within 14 days of Insolvency Commencem ent Date Declaration of Moratorium Public announcement of Initiation of CIRP Call for submission of Claims Appointment of IRP by AA Managem ent of affairs of C.Dr. Review of Financial Position of C.Dr. Consolidation of Claims against C.Dr. Within 7 days Appointment of 1st meeting of Crs. Committee Constitution of Crs. Committee RP for Conduct of CIRP Max. 30 days tenure for IRP

Appointment of resolution professional 32 Appointment of resolution professional Constitution of Crs. Committee by IRP Within 7 days 1st meeting of Crs. Committee Propose to replace the RP Application to AA for appointment of proposed RP AA forwards the name to Board Board confirms within 10 days? Yes AA to direct the IRP to continue as RP until Board confirms otherwise Existing IRP appointed as RP? No No Yes Intimation to IRP, C.Dr., & AA AA appoints RP

Conduct of CIRP by RP 33 Preparation of Submission of Selection of Resolution Plan(s) confirming to specified conditions Preparation of Submission of Review of Resolution Plan by RP Information Memorandum by RP Resolution Plan by Resolution Applicant Submission of approved Resolution Plan to AA by RP Approval of a Resolution Plan by Crs. Committee Presentation of selected Resolution Plan(s) to Crs. Committee Review of Resolution Plan by AA Admit the Resolution Plan Order of AA Reject the Resolution Plan

3 stages of corporate insolvency resolution 34 3 stages of corporate insolvency resolution Insolvency application accepted, plan not yet sanctioned ▫ Moratorium of SARFAESI action, any other action Resolution plan sanctioned ▫ Creditor action will depend on the resolution plan; resolution plan mandatory on all Liquidation proceedings ▫ Secured creditor staying in liquidation process Security interest relinquished, secured creditor cannot take enforcement action ▫ Secured creditor stays out of liquidation Security interest enforcement/SARFAESI permitted

Effect of Moratorium order 35 Effect of Moratorium order AA shall declare moratorium order on the insolvency commencement date prohibiting – ▫ institution of suits or continuation of pending suits or proceedings against the C.Dr. including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority ▫ transferring, encumbering, alienating or disposing of assets or any legal right or beneficial interest ▫ recovery of any property by an owner or lessor any of its ▫ action to foreclose, recover or enforce any security interest created by the C.Dr. in respect of its property including any action under the SARFAESI Act, 2002 Moratorium shall have effect till the completion of the CIR process or liquidation order

Effect of Moratorium order on 36 Effect of Moratorium order on SARFAESI Proceedings Code prohibits SARFAESI proceedings during moratorium period. Following circumstances might arise – ▫ Moratorium starts before sending notice under section 13 (2) Notice shall be served after completion of 180 days (or 270 days, if an extension is granted) ▫ Moratorium starts after sending notice under section 13 (2) to the borrower Fresh notice under section 13 (2) shall be served after completion of 180 days or 270 days, as the case may be. ▫ Moratorium starts after sending notice under section 13 (2) to the borrower + repossessing the asset Repossessed asset shall be sold only after completion of 180 days or 270 days, as the case may be. ▫ Moratorium starts after sending notice under section 13 (2) to the borrower + repossessing the asset + sale of repossessed asset Such secured creditor shall rank 5th in the waterfall priority to the extent of unsecured portion

Implementation of the resolution plan 37 Implementation of the resolution plan There is nothing in the Code for implementation ▫ Unlike non-corporate resolution, where implementation of repayment plan is under the aegis of the resolution professional Resolution plan is binding [sec 31 (1) ] ▫ On debtor ▫ Employees ▫ Members ▫ Creditors ▫ Guarantors ▫ Other stakeholders What is the effect of non adherence? ▫ In case of non corporate persons, failure to implements leads to bankruptcy