1. INSOLVENCY AND BANKRUPTCY CODE, 2016 SERIES 4 of 6
LIQUIDATION PROCESS (PART – II)
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NEW DELHI
March 10, 2017

2. ABBREVIATIONS
AA – Adjudicating Authority
Act – Companies Act, 2013
Board – Insolvency and Bankruptcy Board of India
CIRP – Corporate Insolvency Resolution Process
Code – Insolvency and Bankruptcy Code, 2016
IP – Insolvency Professional
IRP – Interim Resolution Professional
RP – Resolution Professional

3. QUESTION 1 What is a preference transaction? ANSWER
A corporate debtor will be said to have entered into a preference transaction if at the relevant time:
there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and
such transfer has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets as mentioned in Section 53 of the Code.
Note:
A "creditor" means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

4. QUESTION 2
When will a transaction be considered a preferential transaction?
ANSWER
In any transaction entered into by the corporate debtor, a preference shall be deemed to be given at any relevant time, if—
Preference is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or
When a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
Note:
A transaction shall be a preferential transaction where the liquidator or the RP, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference to any persons referred to in sub-section (4) of Section 43 of the Code.

5. QUESTION 3
What transfers do not form a part of preference transactions?
ANSWER
The following transfers shall not be considered preference transactions;
Any transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
any transfer creating a security interest in property acquired by the corporate debtor to the extent that such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property and was registered with an information utility on or before 30 days after the corporate debtor receives possession of such property.
Note:
Any transfer made pursuant to an order of a court shall not preclude such transfer to be deemed as giving of preference by the corporate debtor.

6. QUESTION 3
The term ‘ordinary course of its business’ is very subjective and gives wide scope for different interpretations. In order to be within the ‘ordinary course of business’, a transaction must adhere to the practices and customs that are considered normal for an industry. It would not be unusual for businesses in the same industry to engage in transactions similar to a transaction under examination. Determining whether something is within the ordinary course of business or not can involve evaluating similar types of businesses and industries to see if they engage in similar types of transactions.
In the case of Dillip Kumar Swain v. Executive Officer, Cuttack, O.J.C. No. 920 of 1996, the Hon’ble High Court of Orissa, observed:
“Expression ‘in the ordinary course of business’ means in the usual course of routine of business. It is used to detect current routine of business. It is trite law that definition or interpretation given in respect of a particular entry has to be judged in the background of that statute itself and cannot always throw a guiding light in respect of other statutes. It has to be judged in the background and context in which it is used in a particular statute.”

7. QUESTION 4
What are the orders that can be passed by the AA in case of preference transactions?
ANSWER
In case of any application made by the RP or liquidator with reference to preference transactions, the AA may pass orders requiring or directing;
any property transferred in connection with the giving of the preference to be vested in the corporate debtor;
any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred;
the release or discharge (in whole or in part) of any security interest created by the corporate debtor;
any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct;
any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate;

8. QUESTION 4
for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and
for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference:
Any orders made by AA shall not affect any interest in property acquired in good faith and shall not require such good faith beneficiary to pay a sum to the liquidator or the resolution professional.
Note:
In case of ‘preferential transactions’ the AA has the power to reach out to the second or subsequent layer of acquirer of the assets whereas in case of an ‘undervalued transaction’ the AA can only reach out to the party acquiring the asset and not beyond such person.

9. QUESTION 5 What is an undervalued transaction? ANSWER
A transaction shall be considered as a undervalued transaction where the corporate debtor;
makes a gift to a person; or
enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.
Note:
The nature of a ‘preference transaction’ is such where the recipients of such transactions i.e., the surety, creditor or a guarantor are put in a beneficial position than they would be in event of distribution of assets under Section 53 of the Code (‘distribution of assets’). The nature of an ‘undervalued transaction’ is such that the consideration received for such transaction is of a significantly lesser value than the value of the consideration provided by the corporate debtor and is not in the ordinary course of business.

10. QUESTION 6
What is the relevant period during which a transaction must be entered into for it to be challenged as an undervalued transaction?
ANSWER
The relevant period is prescribed as two years preceding the insolvency commencement date for undervalued transactions entered into with a related party and one year preceding the insolvency commencement date for undervalued transactions entered into with all other persons.

11. QUESTION 7
Who may make an application with respect to an undervalued transaction and to whom shall such application be made?
ANSWER
If the liquidator or the RP on an examination of the transactions of the corporate debtor determines that certain transactions were made during the relevant period were undervalued, then the liquidator or the RP, as the case may be, shall make an application to the AA to declare such transactions as void and reverse the effect of such transaction.

12. QUESTION 8
What are the orders that can be passed by the AA in case of undervalued transactions?
ANSWER
In case of any application made by the RP or liquidator or creditor with reference to undervalued transactions, the AA may pass an order requiring;
any property transferred as part of the transaction to be vested in the corporate debtor;
release or discharge (in whole or in part) of any security interest granted by the corporate debtor;
any person to pay such sums, in respect of benefits received by such person, to the liquidator or the RP, as the AA may direct; or
the payment of such consideration for the transaction as may be determined by an independent expert.

13. QUESTION 9
What is the option available in the hands of a creditor, member or a partner of a corporate debtor, if an undervalued transaction has taken place and the liquidator or the resolution professional has not reported the same to the Adjudicating Authority?
ANSWER
In such circumstances, a creditor, member or a partner of a corporate debtor may make an application to the Adjudicating Authority to declare such undervalued transactions void and reverse their effect.
If the Adjudicating Authority, after examination of the application, is satisfied that an undervalued transactions had occurred and liquidator or the resolution professional, after having sufficient information or opportunity to avail information of such transactions did not report such transaction to the Adjudicating Authority, then it shall pass an order restoring the position as it existed before such transactions and reversing the effects and requiring the Board to initiate disciplinary proceedings against the liquidator or the resolution professional.

14. QUESTION 10
Who may make an application with respect to an extortionate credit transaction and to whom?
ANSWER
Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the RP, as the case may be, may make an application for avoidance of such transaction to the AA if the terms of such transaction required exorbitant payments to be made by the corporate debtor.

15. QUESTION 11
What is the option available in the hands of liquidator or the resolution professional in case of extortionate credit transaction?
ANSWER
Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the resolution professional may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor.

16. QUESTION 12
What are the orders that may be passed by the AA in case of an extortionate credit transaction?
ANSWER
In case of any application made by the RP or liquidator with reference to extortionate credit transactions, the AA may pass an order requiring;
restoring  of the position as it existed prior to such transaction;
setting  aside of the whole or part of the debt created on account of the extortionate credit transaction;
modification of the terms of the transaction;
any person who is, or was, a party to the transaction to repay any amount received by such person; or
any security interest that was created as part of the extortionate credit transaction to be relinquished in favour of the liquidator or the RP, as the case may be

17. QUESTION 13
What is the role of a secured creditor in liquidation proceedings?
ANSWER
During liquidation proceedings, a secured creditor may;
relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator during the distribution of assets, or
realise its security.
In the event the secured creditor is realizing its security, the secured creditor shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised. The liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either by the records of such security interest maintained by an information utility; or in the manner prescribed by the Board.

18. QUESTION 14
Are workmen given priority during the distribution of assets?
ANSWER
In case of insolvency resolution and liquidation for corporate persons, Section 53 (Distribution of Assets) provides for the order of priority wherein workmen's dues for the period of 24 months preceding the liquidation commencement date have been given equal priority as the debts owed to a secured creditor when the secured creditor has not realized security. This priority is immediately after the full payment of any insolvency resolution process costs and the liquidation costs.
In case, there are insufficient funds after the payment of resolution procedure and liquidation costs, to pay off these debts in full, the debts shall be paid in proportion to the value owed to the workmen and the secured creditors.

19. QUESTION 15
What is the order of priority of payment of debts on insolvency resolution and liquidation of a corporate person?
ANSWER
For the payment of debts and distribution of assets of a corporate person during the liquidation process, the following shall be used as the order of priority;
The insolvency resolution process costs and the liquidation costs shall be paid in full,
The following shall have equal priority (either both shall be paid in full or proportionately in case of lack of funds);
workmen's dues for the period of 24 months preceding the liquidation commencement date; and
debts owed to a secured creditor when the secured creditor has not realized security in the manner set out in section 52.
wages and any unpaid dues owed to employees for the period of 12 months preceding the liquidation commencement date;
unsecured creditors shall be paid with respect to the financial debts owed to them;

20. QUESTION 15
The following shall have equal priority (either both shall be paid in full or proportionately in case of lack of funds);
Any amount due to the Central Government or any State Government, if any, for the whole of or any part of 24 months prior to the liquidation commencement date; and
Any amount unpaid to secured creditors subsequent to the enforcement of security interest.
Any pending debts and dues;
Preferential shareholders; and lastly
The equity shareholders or  partners
Note:
Status of preference shareholders vis-à-vis secured creditor and unsecured creditors.
The Code has in the ‘order of priority’ placed the preference shareholders below the secured creditor and unsecured creditors.

21. QUESTION 16
Can contractual agreements be made to override the listed order of priority?
ANSWER
Any contractual arrangements disrupting the order of priority shall be disregarded by the Liquidator.

22. QUESTION 17
When does the dissolution of a corporate debtor take place?
ANSWER
The corporate debtor shall stand dissolved as below;
The liquidator shall make an application to the AA when the assets of corporate debtor have been completely liquidated.
AA shall pass on order on such application stating that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
Within 7 days of the date of such order, it shall be forwarded to the authority with which the corporate debtor is registered.
Note:
Any person aggrieved by the order of the AA under Part II of the Code, may prefer an appeal to the National Company Law Appellate Tribunal. The term ‘any person aggrieved’ has been used in a very broad manner in Section 61 of the Code.

23. Thank You
(voice over by)
Alak Desai,
Associate