Insolvency and Bankruptcy Code, 2016 CMA CS A. R. Joshi, Practicing Company Secretary & Insolvency Professional.

Contents Legal Position existing before introduction of the Code Preamble of the Code Legal Position existing before introduction of the Code Objectives of the Code Formation of IBBI, IPA, IU and Appointment of IP High powered expert Committee Section Wise Structure of the Code Impact on other Acts Applicability and Non Applicability of the provisions of the Code Salient Features of the Code Important Definitions in the Code Adjudicating Authorities Proceedings under the Act Moratorium Committee of Creditors Resolution Plan Preparation of Information Memorandum Preferential , Undervalued Transactions and defrauding Creditors

Legal Position existing before introduction of the Code 1) No single legal framework was available regarding recovery of debts. Existence of Multiple Laws for Companies as under :- Sick Industrial (Special Provisions) Act, 1985; Recovery of debts due to Banks and Financial Institutions Act, 1993; Securitization and Reconstruction of Financial Assets and Enforcement of Securities interest Act, 2002 (SARFAESI Act) and Companies Act, 2013 2) For Individuals :- Presidency Towns and Insolvency Act, 1909 Provincial Insolvency Act, 1920 Further, Different High Courts and District Courts were handling Insolvency and Liquidation matters of all entities including Companies, Individuals and Partnership Firms N

..continued Legal Position existing before introduction of the Code This resulted in multiple Jurisdiction under various statues. Cumbersome procedure running into years, resulting into loss in value of Assets. This has adversely affected recovery of debts and figure of NPA’s resulted into a very high figure of over Rs. 10 Lakh Crores equal to 11% of Bank debts. Actual figure of NPA’s is not less than Rs. 20 Lakh Crores. This badly affected the concept of ease of doing business. India’s Rank in this category was as poor as 130 out of 190 Countries. This compelled the Govt. to have comparative study of Insolvency laws prevailing in other Courtiers and to have effective laws in India. Expert committee was appointed for this purpose . N

High powered expert Committee 1) The Bankruptcy Law reform Committee was set up by GOI under the Chairmanship of Mr. T. K. Vishwanathan, to study the existing legal framework of insolvency laws in India and other developed Countries and submit the report. 2) The committee submitted its Interim report in February 2015 and final Report in November,2015 in two volumes Volume I -- Rational and Design of the code Volume II – Draft Code 3) This Draft code was introduced in Loksabha on 20th December 2015 and was referred to the Joint Select Committee of both Houses of Parliament. The Draft Code was passed in Loksabha on 5th May 2016 and Rajyasabha gave approval to the code on 11th May 2016 The assent of the President was granted on 28TH May 2016. Various provisions of the Code have been given effect on different dates

Impact on other Acts 1) With the implementation of code the following Acts have been repealed completely Sick Industrial(Special Provisions) Act, 1985 The Presidency Towns and Insolvency Act, 1909 The Provincial Insolvency Act, 1920 2) Other remaining Acts like Companies Act,2013, SARFAESI Act, 2002 have been suitably amended, the title of the DRT Act have been changed to Recovery of Debt and Bankruptcy Act, 1993 along with suitable changes in the Act 3) This code has overriding effect on all earlier legislations. Any case pending at DRT or High Court shall automatically transferred to NCLT after initiation of CIRP Process.

Preamble of the Code 1) To Prepare Resolution Plan in a time bound manner for maximization of value of Assets in order to balance the interests of all stakeholders a) Time bound Programme b) Proper balance between all the stakeholders including financial creditors, operational creditors including workmen and employees dues and corporate Debtor. C) Maximization of value of Assets of the Corporate Debtor by taking timely action and preparing proper Resolution Plan. N

Objective of Code To Consolidate and amend the laws relating to re-organisation and insolvency resolution of Corporate Persons, Partnership firms and individuals in time bound manner To Maximize the value of Assets of Such Persons during the period of Insolvency. To promote entrepreneurship and make available Bank Finance To shift the importance from debtors to creditors To create a new institutional framework, consisting of Insolvency and Bankruptcy Board of India (IBBI), Insolvency Professional Agencies (IPA), Insolvency professionals (IP), information utilities. The powers to Adjudicate matters of Corporate Debtors have been assigned to National Company Law Tribunal (NCLT), for appeals NCLAT. Thus, comprehensive machinery is created to handle effectively all the issues of Resolution Disputes.

Applicability of provisions of the Code THE CODE EXTENDS TO THE WHOLE OF INDIA : Only Part III ( i.e. relating to Individuals and Partnership firms) of this Code shall not extend to the State of Jammu and Kashmir. THE PROVISIONS OF THIS CODE SHALL APPLY TO – any company incorporated under the Companies Act, 2013 or under any previous company law ; (b) any other company/corporation governed by any special Act for the time being in force, ; (c) any LLP incorporated under the Limited Liability Partnership Act, 2008 ; (d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf ; and (e) partnership firms and individuals, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be. ( Not made effective as yet.)

Non applicability At present the Provisions of the code are not applicable to Financial Service Providers like Banks, FII, Insurance Companies and ARC etc. The code is not meant for co-operative societies.

Section Wise Structure of the Code This code at present is having 255 sections divided into FIVE PARTS as under PRELIMINARY (Section 1 - 3) INSOLVENCY RESOLUTION AND LIQUIDATION FOR CORPORATE PERSONS (Section 4 - 77) INSOLVENCY RESOLUTION AND BANKRUPTCY FOR INDIVIDUALS & PARTNERSHIP FIRMS. (Section 78 - 187) FORMATION OF IBBI AND REGISTRATION OF INSOLVENCY PROFESSIONALS, AGENCIES & INFORMATION UTILITY(Section 188 - 223) MISCELLANEOUS (Section 224 - 255) N

IBBI (Section 188-198) The Insolvency and Bankruptcy Board of India was established U/s 188 of the code on 1st October 2016. The Board is a body corporate having perpetual succession and common seal established by the Central Govt. having legislative, executive as well as quasi judicial powers and having its head office at New Delhi. Shri Madhusudan Sahoo was appointed as Chairperson for a period of 5 years. The basic objective of the Board is to regulate the functioning of the different entities like Insolvency professional Agencies established by ICAI, ICSI and ICMAI and to oversee the functioning of Resolution Professionals Powers and functions of IBBI : Registration of insolvency professional agencies. Accordingly all the three institutes have formed the IPA’s Specifying the regulations and standards for agencies and professionals Monitoring and carrying out inspections and investigations of these entities Laying down by regulations the curriculum for conducting examinations of the insolvency professionals and Registered Valuers. To oversee the working of Resolution Professionals by asking them to submit their report on frequent intervals.

IPA (Section 199 -205) IPA ICMAI, ICSI IPA, IPA of ICAI are frontline regulators registered with the Insolvency and Bankruptcy Board of India (IBBI) under the Insolvency and Bankruptcy Code, 2016. All these Agencies are registered under section 8 of the Companies Act, 2013 and have been promoted by the respective institutes and are their wholly owned subsidiaries. All these institutes have been vested with the power and authority inter alia to enroll, educate, train and also monitor the performance of its registered members as an Insolvency Professional.

…. Continued Functions of IPA Following are the functions of all the three IPA’s :- Grant membership to persons who fulfill all requirements set out in its byelaws on payment of membership fee; ii) Lay down standards of professional conduct for its members and to Monitor their performance; iii) Safeguard the rights, privileges and interests of insolvency professionals who are its members; iv) Suspend or cancel the membership of its members for not working diligently and as per the time schedule of IBBI and not reporting IPA and the Board from time to time.

Insolvency Professionals ( Section 206 to 208) Insolvency Professional is a key person under the IBC Code, who play as central role in the management and administration of entire insolvency resolution, liquidation and bankruptcy process. No person can work as insolvency professional without being enrolled as member of an Insolvency professional Agency and registered with the Board. These professionals are regulated through their respective IPA’s as well as they have to work under the strict supervision of the Board. The Insolvency professional is defined U/s 3 (19) of the Code as a person who is enrolled U/s 206 of the Code with IBBI.

….continued Insolvency Professionals Functions of Insolvency professionals :- The functions are wide and diverse in scope To resolve insolvency proceeding of corporate person or any other person. To work as bankruptcy trustee in an Individual Bankruptcy process. To work as Liquidator in the liquidation process of the Company.

Information Utilities ( Section 209 – 216) No person shall carry on its business as Information Utilities under this code without obtaining a certificate of registration from the Board. The Basic objective to form the Information Utilities is create a Public Platform with authenticity providing all the information to the stakeholders whenever required. As per the Directives of the RBI, all Banks and financial institutions have mandatorily to submit all the required data to IU failing which a heavy penalty can be levied. This information is of great value to all financial players who want to participate in the Resolution Plans

Salient Features of the Code 1 Who can apply – Creditors (both financial and operational),Corporate entities through its Board of Directors. 2 When – On occurrence of default of minimum of Rs 1 Lakh or any amount as prescribed by Central Government upto Rs 1 Crore. 3 Classification of creditors – Financial creditors (‘persons to whom financial debt is due’) and Operational creditors (Creditors for Supply of goods or services, employee dues and Govt Dues etc.) 4 Timelines – resolution process to complete within 180 days extension may be granted by adjudicating authority by another period of maximum 90 days, failing which the adjudicating authority shall pass the order of liquidation - 2 years time limit for liquidation. Further after submission of application, scrutiny to be completed within 7 days and within 14 days matter to be admitted or rejected by Adjudicating Authority i.e. NCLT. N

Time period under the code 180 days 90 days (Maximum) 270 days FAST TRACK : 45 days (One time) 135 days 90 days Adjudicating Authority after admission of application shall, by an order Declare a Moratorium Cause a Public Announcement Appoint Interim Resolution Professional

Important Definitions in the Code 1) “corporate person” means a company as defined in sub clause (20) of section 2 of the Companies Act, 2013 2) “LLP” as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 3) “corporate debtor” means a corporate person who owes a debt to any person ; 4) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; 5) “ Dispute” includes suit or arbitration proceedings relating to The existence of amount of debt, The quality of goods or services The breach of a representation or warranty The Dispute should be raised by the Corporate debtor before making demand notice by OC.

….. Continued Important Definitions in the Code 6) “default” means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be ; 7) “charge” means an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage ; 8) “financial service” includes any of the following services, namely : – (a) accepting of deposits ; (b) safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so ; (c) effecting contracts of insurance ; (d) offering, managing or agreeing to manage assets consisting of financial products belonging to another person ; e) Underwriting contracts f) Providing Banking and Insurance Services N

..Continued Important Definitions in the Code 9) “person” includes – (a) an individual ; (b) a Hindu Undivided Family ; (c) a company ; (d) a trust ; (e) a partnership ; (f) a limited liability partnership ; and (g) any other entity established under a statute, and includes a person resident outside India 10) “financial creditor” any person to whom a financial debt is owed & Includes a person to whom such debt is legally assigned or transferred 11) “secured creditor” means a creditor in favour of whom security interest is created ;   N

..Continued Important Definitions in the Code 12) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person 13) “Operational Creditor” - A person to whom an operational debt is owed & - Includes any person to whom such debt is legally assigned or transferred N

...Continued Important Definitions in the Code 14) Related Party Section 5 (24) :- Related party in relation to corporate debtors is a. Director or partner of Corporate debtor or their relatives KMP of Corporate debtor or their relatives A LLP or a partnership firm in which a Director, partner or manager of the corporate debtor or his relative is a partner. A private or public Company in which a Director, partner or manager of the Corporate debtor is a Director and holds alongwith his relatives more than 2% of it share capital. Any person who controls more than 20% of voting rights in the corporate debtor on account of ownership or voting agreement. A body corporate which is a holding or subsidiary company of the corporate debtor. Creditors having such related party transactions can not be included in CoC.

Adjudicating Authorities 1) NCLT - Deal with insolvency and liquidation matters of Co. & LLP - Appeal to NCLAT 2) DEBT RECOVERY TRIBUNAL Deal with insolvency matters of individual & Partnership firm Appeal to DRAT Adjudicating Authorities

STEP WISE Proceedings under the CODe Occurrence of Default by corporate debtor /Individual/firm of any dues of financial creditor or operational creditor. (Minimum amount of Default should be Rupees One Lakh for Corporate debtor and Rupees One thousand for Individuals) Demand Notice by operational creditor in form no. 3 giving a period of 10 days from the date of receipt of the Demand Notice for making payment or giving details of payment already made. Thereafter, operational creditor can make application to initiate corporate insolvency resolution process against the CD in form no. 5 A financial Creditor can make direct application to NCLT to initiate corporate insolvency resolution process in form no. 1

….Continued Step wise Proceedings under the CODE A corporate debtor itself can also initiate corporate insolvency resolution process by making an application to NCLT in form no. 6 Following persons are not entitled to initiate Corporate Insolvency Resolution Process (CIRP) (Section 11) :- A Corporate debtor/ applicant already undergoing the CIRP Process A corporate debtor/applicant having completed the CIRP Process Twelve months preceding the date of filing of fresh application. A Corporate debtor/ applicant or a financial creditor who has violated the terms of resolution plan approved by NCLT twelve months before filing the date of a fresh application A corporate debtor/applicant on whom liquidation order is passed. After receipt of the application from any of the above persons, NCLT shall scrutinize the same and if some defect is found shall give a time period of 7 days to make corrections and file the application again. On receipt of the corrected application, NCLT shall within 14 days shall either admit the application or reject the same. After admission of the application by NCLT, it shall pass an order for appointment of Interim Resolution professional and shall declare moratorium.

Moratorium Once the application is admitted moratorium period starts immediately and it remains valid for 180 days which can be extended only once by a period of 90 days if approved by NCLT in some deserving cases only. Moratorium period prohibits :- the institution of suits, continuation of pending suits, execution of any judgment, decree, transferring any of its assets/any legal rights/beneficial interest therein, any action to enforce security interest created by the corporate debtor and recovery of any property which is in the possession of the Corporate debtor belonging to the third parties. The object of the moratorium is to give cooling period to enable the creditors and the corporate debtors to arrive at a manner and method of resolution of the financial difficulties faced by the corporate debtor and negotiate terms and conditions between corporate debtor and Creditors. During this period no further action can be taken by the creditors or other persons towards the recovery of the debt from the Corporate debtor, so that viability of the business is not further affected. During this period resolution plan is prepared by the resolution professional and get the same approved by COC with 66% voting by non interested financial creditors.

Committee of creditors After appointment of Interim Resolution Professional, he shall give a public notice and thereby invite claims from various types of creditors namely financial and operational (Workers and employees and dues of the Govt.) and scrutinize the claims and constitute committee of Creditors consisting of NON-RELATED financial creditors only within a period of one month. If there are no financial Creditor , then the Committee shall consist of maximum 18 largest operational creditors. This Committee shall take all decisions with 75% majority (Now 66% in major decision and 51% in regular routine matters) Powers of Management :- Powers of the Board of Directors and KMP shall cease to have an effect and shall be vested with IRP and afterwards, with resolution professional (RP). In the first meeting of Committee of Creditors, decision shall be taken to continue existing IRP as RP or appoint a new RP and appoint at least two registered valuers for valuation of assets of the corporate debtor. The Role of IRP is to kick start the corporate resolution process and his duty includes collection of claims against the corporate debtor, classify all the claims into different categories, collection of information pertaining to financial status of debtor, taking possession of all the assets of the corporate debtor and taking over the management of the corporate debtor. Entire staff of the corporate debtor shall extent co-operation to the IRP.

…. Continued Committee of creditors Powers of IRP (Section 20) :- 1. To constitute committee of creditors. 2. To appoint accountants, legal and other professionals as may be necessary 3. To enter into contracts on behalf of the corporate debtor 4. To raise interim finance without creating fresh security interest on the assets of the Company. 5. To issue necessary instructions to staff of the corporate debtor for keeping the corporate debtor as going concern.

Preparation of Information Memorandum (Section 29) One of the duties of the RP is to collect accurate information pertaining to the Assets and the financials of the Corporate Debtor which is necessary for preparing information memorandum. The Information Memorandum is basis on which the RP shall invite proposal for Resolution Plan from different parties including Third parties. (Bank, Financial Inst. ARC and other players in the financial markets) To provide the necessary financial data and other related data in physical/electronic form so as to enable the parties to prepare proper Resolution Plan. Every Resolution Applicant must undertake to keep confidentiality and avoid insider trading and to protect the intellectual rights and not to share the information with the third parties. The relevant information includes all financial and other information required for prepare resolution plan and shall include Financial of Information of CD All information relating to disputes by or the against debtors and any other matter as may be specified.

Resolution Plan ( Section 30) No strict definition of RP. However it means a Re-organisation plan being the process by which the financial well being and viability of corporate debtor’s business can be continued properly. The steps includes, Debt forgiveness Debt restructuring Sale of business or part of it on going concern basis The central idea of the Resolution Plan is to find out the financial viability of the corporate debtor and to take steps to further improve the same. The mandatory requirements of Resolution Plan Payment of Cost of CIRP process on priority basis. Repayment of debt of operational creditors of CD as provided under Section 53 Suitable arrangement for management of affairs of the CD after approval of Resolution Plan.

Resolution Plan … continued d) The implementation and supervision of Resolution Plan. e) Restructuring, Amalgamation & Merger of the CD with the third parties The RP shall ensure that, the Resolution Plan received from all the parties complies with the statutory requirements of the plan and after his scrutiny shall submit all Resolution Plans received by him to the Committee of Creditors. The COC shall study all the resolution plans and grant approval to most suitable plan with 75% majority (now it is modified to 66% as per new Amendment). After approval of Resolution Plan by COC, the RP shall submit the Resolution Plan to NCLT for its approval, NCLT may approve the Resolution Plan or reject the same within the statutory period of 180 days or if extension is granted, upto 270 days. If no Resolution Plan is submitted or submitted plan is rejected the NCLT shall order for liquidation of CD. If plan is approved Moratorium period gets over.

Preferential , Undervalued , Extortionate Transactions and defrauding Creditors (Section 43 ,45 , 49 and 50) During the course of Resolution Plan, if the IRP or RP finds that there are some suspicious transactions like Preferential Transactions (Giving undue influence to any one party), Undervalued Transactions (like giving gift to a person or entering into transactions with a person which involved transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the consideration provided by the corporate debtor during the relevant period, Further, If he finds some of the transactions defrauding the creditors like keeping assets of the Corporate debtor beyond reach of any person which entitled to make a claim against the CD. During the course of Resolution Plan , he should make representation to the Adjudicating authority by giving all the relevant details. If an IRP or RP fails to do this one of the members of CoC can make necessary complaint to Adjudicating Authority. Extortionate transaction involving receipt of financial and operation debt during the period of two years preceding the insolvency commencement date involving exorbitant payments to be made by the CD.

CMA CS A. R. Joshi arjoshiassociates@gmail.com