Demystifying the Insolvency and Bankruptcy Code

TUSHA AGARWAL
(B.Com, ACS, LLB.,MBL)
 Understanding the Code

Differentiation

Insolvency is the
- Insolvency; inability of a person or
corporation to pay their
- Bankruptcy; and bills as and when they
become due and
payable.
- Liquidation

Why is it a Code? Bankruptcy is Liquidation is

“Code” is usually known as a when a person is the process of
collection or compendium of declared winding up a
laws. It refers to a systematic and incapable of corporation or
comprehensive compilation of paying their due incorporated
laws, rules or regulations that are and payable bills. entity.
consolidated and classified
according to a particular subject
matter.
 Inception of Insolvency Laws in India

Presidency
Towns
Insolvency Act,
1909

Provincial COMPANIES
Insolvency Act, IBC, 2016
ACT, 2013
1920

SICA, 1985 RDDBI, 1993 SARFAESI, 2002

TUSHA AGARWAL & CO..,

 Impact on other statutes

Repealed Acts

 Presidency Town Insolvency Act, 1909; and

 Provisional Insolvency Act, 1920

Some of the amended Acts

 Sick Industrial Companies (Special Provisions) Repeal Act, 2003;

 Recovery of Debts Due to banks and financial institutions Act, 1993;

 Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002; and

 Companies Act, 2013

 Key Features
• Applicable to both corporate and non-corporate persons;
• Allow creditors, whether secured; unsecured; financial or operational; domestic or
international to initiate a resolution processes thereby aiming for an early detection of
the fraud;
• Establishes time-bound moratorium on acceleration and enforcement of debts against
the company;
• The resolution professionals can replace the existing management during insolvency
proceedings;
• Provides for time-bound viability assessment mechanisms, liquidation processes and
distribution waterfalls;
• Provides for penalties on promoters for asset diversion leading up to liquidation;
• The provisions of the Code overrides SARFAESI Act, 2002;
• An inability to pay debt will no more be a ground for winding up under the Companies
Act;
• Voluntary Liquidation shall be subject to provisions of the Code; and
• Chapter governing Revival and Rehabilitation of Sick Companies of Companies Act
2013, stands omitted.
‘Debtor-in-possession’ to ‘Creditor-in-possession’

 The Courts are being conscious vis-a-vis piercing the corporate veil for
default;
 The Code aims at bringing the defaulters to book by empowering creditors
to initiate the process at an early stage for replacing the management;
 The Code provides for takeover of management by insolvency
professionals nominated by the creditors. Professionals to have the
flexibility to bring in turnaround specialists and consultants to achieve the
desired business results;
 The Code provides for liquidation of a company at the earliest opportunity
to minimise the losses for debtors as well as shareholders.
 Applicability, Scope & Structure
Applicability STRUCTURE
In entirety, the Code has 255 sections which
All kinds of:
are divided into 5 Parts as given below
- Corporate Enterprises;
- Limited Liability Part I Part II Part III
Prelimin Insolvency Insolvency
Partnerships; ary Resolution and Resolution and
- Partnership Firms; and (Definitio Liquidation for Bankruptcy for
ns) Corporate individuals and
- Individuals. Persons Partnership
Scope Firms
Part IV Part V
- Insolvency; Regulation of Miscellaneous Schedules
- Liquidation; Insolvency (enables (11 Schedules)
Professionals, amendments in
- Voluntary Liquidation Provides for
Agencies and other statues amendments
Information such as
(solvent insolvency); to be carried
Utilities Companies Act out in other
and 2013) statues
- Bankruptcy
 Framework of the Code

Regulator Adjudicator

Insolvency and Bankruptcy National Debt Recovery

Board of India (IBBI) Company Law Tribunal
Tribunal

 Insolvency Professional Corporate Non-Corporate

Entities Entities
Agencies;
 Insolvency Professionals; Individuals
Companies/LLPs
and
and
Partnership
 Information Utilities Firms
Corporate Insolvency Resolution Process: Initiation and
Commencement

 Who is entitled to initiate Corporate Insolvency Resolution Process?

 When can a Corporate Insolvency Resolution Process be initiated?

 How the process will be initiated?

 What are the after-effects of initiation?

 Who is not entitled to initiate CIRP?

 What is the timeline specified in the Code vis-à-vis completion of CIRP?

 Broad CIRP-Process
Admission of application and appointment of Interim Resolution
Professional

Collation of claims and constitution of committee of creditors by Interim

Resolution Professional

Appointment of Resolution Professional in the creditors meeting held

within 7 days of constitution of committee of creditors

Resolution Professional to prepare Information Memorandum

Resolution Applicant to prepare (on the basis of Information Memorandum)

and submit resolution plan to Resolution Professional for examination &
further submission for approval of committee of creditor
Resolution Resolution
plan plan
approved rejected by
by committee
committee
NCLT NCLT Liquidation
approves rejects process starts
plan plan
 Moratorium
 When can NCLT declare Moratorium?
 What does Moratorium includes:
- institution/continuation of suit or proceedings against the corporate
debtor;
- transferring or disposing off any asset by the corporate debtor;
- any action to foreclose/recover any security interest created by corporate
debtor vis-à-vis property including any action under SARFAESI, 2002; and
- recovery of any property by an owner where property is occupied/ is in
possession of corporate debtor.
 Moratorium shall cease to be in effect:
- on completion of CIRP; or
- when resolution plan is approved by NCLT during the CIRP period;
- or where liquidation order is passed
 Public Announcement
 When a public announcement shall be given?
 An insolvency professional shall make a public announcement in Form A
within 3 days from the date of his appointment as an IRP.
 The public announcement shall be published –
i. In one English and one regional language newspaper with wide
circulation at the location of the registered office and principal office;
ii. On the website of corporate debtor
iii. On the website, if any, designated by the Board for the purpose
 Waterfall Mechanism
Insolvency resolution and liquidation cost

In case of
Secured creditor (in case he + Workmen’s dues ( for period of 24
has relinquished security) months preceding liquidation
liquidation, the commencement date)
asset of the
Wages and unpaid dues to employees (other than workmen) for a
corporate debtor
period of 12 months preceding liquidation commencement date
will be sold and
the proceeds will
be distributed Unsecured creditors
amongst the
creditors in the Secured creditor for an unrealised
Central and State government +
following order amount for enforcing security
dues
of priority:- interest
Any remaining debts or dues

Preference shareholders, if any

Equity shareholders or partners, as the case may be

 Interim Resolution Professional (“IRP”)

NCLT shall appoint an IRP within fourteen days from the

insolvency commencement date.

Role of IRP
From the date of appointment of the IRP-
the management of the affairs of the corporate debtor shall vest in the
IRP;
the powers of the board of directors or the partners of the corporate
debtor, shall stand suspended and be exercised by the IRP;
the officers and managers of the corporate debtor shall report to the IRP
and provide access to documents of the corporate debtor as may be
required by IRP
the financial institutions maintaining accounts of the corporate debtor shall act on
the instructions of IRP in relation to such accounts and furnish all information
relating to the corporate debtor available with them to the interim resolution
professional.
The interim resolution professional shall make every endeavor to protect and preserve the value of the property of
the corporate debtor and manage the operations of the corporate debtor as a going concern.
 Duties of IRP
From the date of appointment of the IRP-

collect all information relating to the assets, finances and

operations of the corporate debtor for determining the
The interim resolution
financial position of the corporate debtor
professional shall after
collation of all claims
receive and collate all the claims submitted by creditors to him,
received against the
pursuant to the public announcement made; corporate debtor and
determination of the
constitute a committee of creditors
financial position of the
corporate debtor,
file information collected with the information utility.
constitute a committee of
take control and custody of any asset over which the corporate creditors
debtor has ownership rights as recorded in the balance sheet
of the corporate debtor, or with information utility or the
depository of securities or any other registry that records the
ownership of assets

The personnel of the corporate debtor, its promoters or any other person associated with
the management of the corporate debtor shall extend all assistance and cooperation to IRP
 Powers of IRP

IRP has been vested with the powers to- The IRP may sell
unencumbered
Appoint accountants, legal counsels who may provide specialist
assets of the
advice to the IRP;
corporate debtor,
Enter into contracts on behalf of the corporate debtor or to other than in the
amend/ modify the contracts which were entered into before ordinary course of
the commencement of the CIRP; business, if he is of
the opinion that
Raise interim finance; such a sale is
necessary for a
Issue instructions to the personnel of the corporate debtor to
better realization of
keep the corporate debtor as a going concern;
value.
Take all such actions as are necessary to keep the corporate
debtor as a going concern.

IRP has to manage the operations of the corporate debtor as a going concern
to enable him to protect and preserve the value of the property of the
corporate debtor.
 Resolution Professional (“RP”)
The committee of creditors, may, in the first meeting, by a majority vote of not less than 75%
of the voting share of the financial creditors, either resolve to appoint IRP as RP or to replace
IRP by another RP.

RP shall conduct the entire Corporate Insolvency Resolution Process (“CIRP”)

and manage the operations of the corporate debtor during CIRP period;

The RP shall give notice of each meeting of the committee of creditors to—
(a) members of Committee of creditors; (b) members of the suspended
Board of Directors or the partners of the corporate persons (c) operational
creditors or their representatives if the amount of their aggregate dues is not
less than ten per cent of the debt.
Duties of RP
Preserve and The RP shall prepare The RP shall submit Initiation of
protect the assets of an information the resolution plan Liquidation
the corporate memorandum as approved by the
debtor, including containing relevant committee of
the continued information as creditors to the
business operations specified by IBBI for Adjudicating
of the corporate formulating a Authority.
debtor resolution plan.
 Role of IRP/RP in Insolvency Resolution Process for Corporate Persons
Public
Announcement by IRP to appoint 2 Submission of Proof of Verification of Claims
IRP within 3 days registered valuers within Claims by creditors, by IRP within 7 days
ofhis appointment 7 days of his appointment workmen and of receipt
in FORM A. to determine the employees to IRP in
liquidation value of FORMs B,C,D,E as may
By sending pdf file to corporate debtor be applicable. Constitution of
public.ann@ibbi.gov.i Committee of
n Creditors (“COC”)

RP shall present all Resolution RP on instruction of COC

Where corporate debtor has
plans that meet requirements may apply for Extension
no financial debt, COC shall
of Code to COC for its of CIRP period before consist of-
consideration NCLT. • 18 largest operational
creditors by value
IRP/RP shall submit • 1 workmen representative
Information Memorandum in • 1 employee representative
electronic form to each
member of COC IRP to convene first
meeting of COC IRP to file Report
IRP shall provide the within 7 days of filing certifying constitution of
Liquidation value to COC in the report COC to NCLT within 30
days of his appointment
electronic form
 Delving into the Code

Insolvency resolution process costs.

amounts due to suppliers of essential goods
and services

amounts due to person whose rights are

prejudicially affected on account of Resolution plan shall identify specific sources
moratorium of funds that will be used to pay-

expenses incurred on or by RP fixed by COC CIRP costs and provide that CIRP costs to be
paid in priority
expenses incurred on or by IRP to the extent Liquidation value due to operational creditors
ratified and provide for such payment in priority to
any financial creditor
other costs directly relating to CIRP and
approved by COC Liquidation value due to dissenting
financial creditors and provide that such
payment is made before any recoveries
are made by the financial creditors who
voted in favor of the resolution plan
 Delving into the Code

Details in Information Memorandum

Assets and Liabilities on Insolvency Commencement Date
Audited Financial Statements(“FS”) for last 2 FY’s and provisional FS up to not earlier
than 14 days from application
list of creditors with names, claim and security interest
Related party debts due to/from corporate debtor
details of guarantees
details of partners/members holding at least 1% stake in corporate debtor
details of material litigation and ongoing investigation initiated by government and
statutory
number ofauthorities
workers/employees and liability towards them
the liquidation value
the liquidation value due to operational creditors
other information which RP deems relevant to the COC
 Broad Liquidation Process

Appointment of Liquidator

Formation of Liquidation Estate

Consolidation of claims

Verification of claims

Admission or Rejection of claims

Determination of value of claims

Appeal by the Creditor to the NCLT, within 14 days of rejection

of claims

Liquidator to scrutinise Preferential, under-valued and

extortionate credit transactions

Distribution of assets and dissolution of Corporate Debtor

 Initiation of Liquidation
Where the RP, at any time during the CIRP but before confirmation of resolution plan,
intimates the NCLT of the decision of the committee of creditors to liquidate the corporate
debtor, NCLT shall pass a liquidation order
RP appointed for CIRP shall act as the liquidator for the purposes of
liquidation unless replaced by NCLT
Duties of Liquidator
to verify claims to take into his to evaluate the to carry on to sell the immovable
of all the custody or assets and the business and movable property
creditors control all the property of of the and actionable claims
corporate
assets, property, the corporate debtor for its
of the corporate
to draw, accept, effects and debtor and debtor in liquidation
beneficial
make and actionable claims prepare a by public auction or
liquidation
endorse any of the corporate report private contract
negotiable debtor
instruments in
to take out, in his official name, to obtain any to perform
the name and on
letter of administration to any professional assistance such other
behalf of the
deceased contributory and to do in from any person or functions as
corporate debtor
his official name any other act appoint any professional,
may be
necessary for obtaining payment of in discharge of his duties,
any money due and payable from a obligations and specified
contributory or his estate responsibilities
 CASE STUDY

(a) A Ltd. (Company) is engaged in the manufacturing of Sponge Iron, TMT bars and
Galvanized wires. It has availed various credit facilities from a total of 19 secured
creditors with an outstanding debt of Rs.1500 crore. Due to adverse market
conditions, its financial position took a downturn and hence it filed a reference
with the Board for Industrial and Financial Reconstruction (BIFR). The reference
was duly registered. During the proceedings before BIFR, one of the secured
creditors, after taking consent of the other creditors of the company, filed an
application for abatement of the reference before BIFR.

(b) Meanwhile, one of the unsecured creditors filed an application before BIFR for
the impleadment in the proceedings. The BIFR dismissed the said application
due to non-prosecution.
(C) Subsequently, upon coming into force of the Insolvency and Bankruptcy Code
(IBC), 2016, the company filed an application for initiation of Corporate Insolvency
Resolution Process (CIRP) before National Company Law Tribunal (NCLT) on
09.12.2016. However, in the first meeting of the Committee of Creditors held on
05.01.2017, the financial creditors of the company decided to liquidate the
company. Immediately after this decision, but before intimating the decision to the
NCLT, one of the financial creditors of the company applied to Resolution
Professional (RP) giving proof of his claim and seeking his inclusion in the
Committee of Creditors.
 CASE STUDY
Can the creditors initiate SARFAESI action In case the liquidation process is initiated, the
against the company? unsecured creditor who filed an application before
a) Yes, if they constitute more than 75% of the BIFR for impleadment shall be paid:
total financial debt. a) as per claim accepted by the liquidator in
b) Yes, with the consent of the Liquidator. accordance with priorities specified in the
c) Yes, with the consent of the National Company Insolvency and Bankruptcy Code, 2016.
Law Tribunal (NCLT). b) as per the amount of its claim before BIFR.
d) No, they cannot c) as per the amount of its claim made before the
liquidator.
In case one of the secured creditors realizes its d) as per the order of Debt Recovery Tribunal.
security interest and such realization is not
sufficient to pay its outstanding debts, can he What is the priority of payment to workmen dues in
recover the balance amount? case of liquidation?
a) The balance amount will be ignored. a) Pari passu with secured creditors and employees
b) The balance amount will be paid at par with b) Pari passu with secured creditors and insolvency
dues to the Central Government and the State costs
Government. c) Pari passu with secured creditors
c) The balance amount will be paid at par with d) Pari passu with financial creditors
other secured creditors.
d) case
In The Balance amount
the secured will be
creditor paidresistance
faces at par with
from company for enforcement of security interest, such
unsecured creditors.
secured creditor may apply to:
a) Adjudicating Authority
b) Debt Recovery Tribunal
c) Liquidator
d) High Court
 Lets Discuss
Who approves the resolution plan:
a) Committee of creditors. What is the voting requirement for approval of
b) Insolvency Professional. resolution plan by creditors:
c) Adjudicating Authority. a) 85 percent of voting shares.
d) Insolvency and Bankruptcy Board of India. b) 60 percent of voting shares.
c) 75 percent of voting shares.
d) 90 percent of voting shares.

Who constitutes the committee of creditors:

Up to what duration can the notice period for calling
a) Insolvency professional.
the meeting of the committee of creditors be
b) Financial or operational creditor.
reduced:
c) Interim resolution professional.
a) Not less than 48 hours.
d) Adjudicating Authority.
b) Not less than 24 hours.
c) Not less than 12 hours.
d) Not less than 36 hours.

What is the term of appointment of interim resolution professional:

a) 30 days from the date of his appointment.
b) 14 days from the date of his appointment.
c) 20 days from the date of his appointment.
d) 10 days from the date of his appointment.
 Lets Discuss

What does the Code means for

International Creditors?

Will the Code deepen the bond market

including for municipal / masala bonds?

Whether financial creditor would like to On what grounds extension can be

opt to exercise their rights under SARFAESI granted by NCLT under the Corporate
or would prefer to stay in IBC? Insolvency Resolution Process? How far
the time lines are mandatory?
How are the corporates reacting upon IBC
becoming fully effective?
Issues regarding release of security by
the secured creditor to rank second in
the waterfall mechanism?

After initiation of proceedings can the

applicant withdraw the application on
account of settlement etc.
https://www.ibbi.gov.in/
 THANK YOU

For any further clarifications, you may contact –TUSHA

AGARWAL, PARTNER TUSHA AGARWAL & CO.,
(CSTUSHA@GMAIL.COM/ +91-7607724666).

Disclaimer: Please note that this presentation is based on the limited

information available with us. While every care has been taken to ensure
accuracy of this presentation, TUSHA AGARWAL & CO shall not assume any
liability / responsibility for any errors that might creep in. The material
herein does not constitute / substitute professional advice that may be
required before acting on any matter. Without our prior written consent,
this presentation shall not be quoted in whole or in part or otherwise
referred to in any document or delivered to any other person or entity.