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THE INSOLVENCY AND BANKRUPTCY CODE, 2016

THE INSOLVENCY AND BANKRUPTCY CODE, 2016. Insolvency -insolvency is a financial state of being – one that is reached when one is unable to pay off debts on time. Bankruptcy -Bankruptcy is a legal process that serves the purpose of resolving the issue of insolvency. Preamble of the Code.

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THE INSOLVENCY AND BANKRUPTCY CODE, 2016

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  1. THE INSOLVENCY AND BANKRUPTCY CODE, 2016 Insolvency-insolvency is a financial state of being – one that is reached when one is unable to pay off debts on time. Bankruptcy-Bankruptcy is a legal process that serves the purpose of resolving the issue of insolvency

  2. Preamble of the Code • 1.(i) An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution • (ii) it relates to corporate persons, partnership firms and individuals; • (iii) in a time bound manner (Timeliness) • (iv) for maximisation of values of assets of such persons • (v) promote entrepreneurship • (vi) availability of credits • (vii) balance the interests of all the stakeholders including alteration in the order of priority of payment Govt. dues • (viii) establish an IBBI • (2) Based on UNCITRAL Legislative Guidelines

  3. Need for Insolvency and Bankruptcy Code, 2016 • (1) For Individual-(i) Presidency Towns Insolvency Act, 1909 and (ii) The provincial Insolvency Act, 1920. • (2) Corporate Debtors-Madras Petrochem Ltd. & Anr. V. BIFR & Ors, Supreme Court order dated 29.01.2016, (i) Matter registered under SICA (Special Provisions) Act, 1985 in 1989, (ii) BIFR recommended to High Court for winding up,(Iii) BIFR order was challenged in the AAIFR, which was dismissed; (iv) during liquidation proceedings, ICICI issued notice under SARFAESI; (v) co. filed Writ petition challenging the order of AAIFR; (vi) Delhi High Court stayed order of both BIFR and AAIFR orders;(vii) sale notice was challenged before DRT, then it was quashed; (viii) order was challenged in DRAT; (Ix) DRAT order was challenged in the Madras High Court; then Madras High Court set aside the DRAT order and sale was confirmed; (x) Supreme Court decided the matter on 29.1.2016 • (iii) No law for SMEs.

  4. Applicability of IBC CODE • 1. It extends to the whole of India except Part III of the Code relating to Individuals and Partnership Firms shall not extend to the state of Jammu & Kashmir; • 2. Any Company incorporated under the Companies Act, 2013 or previous law, co. governed by any Special Act; • 3. Any Limited Liability Partnership; • 4. Such other body incorporated under any law; • 5. Partnership firms and individuals.

  5. Adjudicating Authority • NCLT for: • (1)(a)Company • (b)Limited Liability Partnership, • (c) Such other body incorporated under any law for the time being in force • Debt Recovery Tribunal for: • (2)(i)Partnership Firms • (ii) Individuals

  6. Eligibility of initiation of CIRP • 1. Committing of default- Default means non payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor; [ (minimum rupees 1 lac in case of Co, LLP or body corporate (Sec.4). • “Debt”[Sec.3(11)] means a liability or obligations in respect of a claim which is due from any person and includes a financial debt and operational debt; it includes assignment of debt.

  7. Who can apply u/s 6 • 1. Financial creditor (sec 7), Operational Creditor (Section 9) and Corporate Applicant (sec.10) • 2.The persons defined in sub-section (23) of section 3 are eligible for filing application under this Code. “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 • Nikhil Mehta & Sons (HUF) & Orsv.M/s AMR Infrastructures. (ii) Trade union come with the purview of person-In the Supreme Court order J.K.Jute Mills Mazdoor Morcha v. JuggilalKamlapat Co. Ltd

  8. Financial Creditor u/s 7 1. Financial debt is a debt together with interest, if any, which is disbursed against time value of money. It is money that is borrowed or raised as per sec.5(8). 2. Disbursement has been made against consideration for the time value of money. In Dr. B.V.S. Laxmi v. Geomatrix Laser Solutions Pvt Ltd. 3. A Financial creditor either by itself or jointly with other financial creditors, or any other persons on behalf of the financial creditor may file application. In Nikhil Mehta & Sons (HUF) & Ors v. M/s AMR Infrastructures ( 4 applicants). 4. Financial Creditor includes assignment of debt. M/s VIP Finvest Consultancy Pvt. Ltd v/s M/s Bhupen Electronic Ltd. Home buyers also financial creditors. 5. Financial Creditor along with the application furnish record of the default recorded with the information utility or such other record or evidence of default. In M/s ICICI Bank Ltd v/s Starlog Enterprises Ltd (filed certificate and loan statement). .

  9. Section 7 • 6. Notice to be served to the Corporate Debtor on principle of natural justice. In Ranjit Karnal v. Bell Finvest (India) Ltd (NCLAT order). • 7. Pendency of petition of winding up proceedings is not bar for initiation of CIRP. In Alchemist Asset & Reconstruction Ltd v. Jaipur Metals & Electricals Ltd • 8. Matters referred to Arbitration Clause. In SREI Equipment Finance Ltd v. SreeMetaliks Limited • 9. Withdrawal of CIRP proceedings after admission of IBC application. LokhandwalaKataria Construction Pvt Ltd. v/s Nisus Finance& Investment Manager, LLP( W.e.f. second Amendment allow with 90% voting of COC, before publication of notice inviting EOI). • 10. Admission of application even if, the proceedings going under RDDB Act, 1993. Mr. Mahesh Kumar Surekha v/s SBER Bank

  10. Operational Creditors- (issuing notice u/s 8), (filing application u/s 9) • 1.Operational debt is with regard to selling goods or providing service. • 2. Code is not an act of recovery of money claim, it relates to reorganization and insolvency resolution of corporate persons. Dispute raised before receipt of notice. In K.K.Naga Prasad v. M/s Lanco Infratech • 3. IBC is not intended to be substitute to recovery forum, without existence of real dispute, IBC provisions can not be invoked. In Mobilox Innovations Ltd v. Kirusa Software Pvt. Ltd. • 4. An operational creditor may, on occurrence of default, deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment. Notice by operational creditor or by authorized representative. • 5. Corporate debtor shall with in a period of 10 days of receipt of demand notice or copy of invoice. Sec. 8(2)-(a) Existence of dispute; (b)(i) payment of unpaid operational debt; (b) record of payment of unpaid operational debt. Notice at the regd. Office. Dispute is inclusive. In MobiloxInnovaions Pvt. Ltd v. Kirusa Software Pvt. Ltd, In Macquire Bank Ltd. Vs. Shilpi Cables Technologies Ltd.

  11. Operational Creditors-(Issuing notice u/s 8), (filing application u/s 9) • 6. Rejection of application due to variation in demand notice and IBC application. In Kannan Graphics Pvt. Ltd v. Print Plus Pvt Ltd. • 7. After expiry of 10 days from date of delivery of notice or invoice, OC may file application to AA enclosing (a) copy of invoice; or demand notice (b) no notice of dispute by CD of unpaid debt; (c) a copy of bank certificate, it is recommendatory. In Macquarie Bank Ltd v/ Shilpi Cables Technologies Ltd (recommendatory & notice through advocate). • 8. Difference between financial creditors and operational creditors and reasons for different treatment. Supreme Court order in Swiss Ribbons Pvt Ltd & Anr. V. Union of India & Ors.

  12. Application by Corporate Applicant u/s 10 • 1. Corporate Applicant may file an application. Corporate Applicant as per Sec.5(5) means (a) corporate debtor; (b) a member or partner of the corporate debtor who is authorized to make an application; (c) an individual who is in charge of managing the operations and resources of the corporate debtor; (d) a person who has the control and supervision over the financial affairs of the corporate debtor. • 2. Corporate Applicant along with applicant shall include books of accounts and such other documents

  13. Admission/Rejection of Application by Adjudicating Authority u/s 60 r/w section 7(5), 9(4) & 10(4) 1. A default has occurred and application u/s 7(2) is complete, the AA admit the application otherwise reject application within 14 days. 2. AA shall give notice to the applicant to rectify the defect within 7 days of receipt of notice from AA. Supreme Court held in the matter of M/s Surendra Trading Co. v. JuggilalKamlapat Jute Mills that the period of removing the defect within 7 days is directory, till the objections are removed, the application would not be entertained. The period of 14 days for deciding by AA is mandatory. IBC Amendment Act, 2019, “Provided that if the AA has not ascertained the existence of default and passed an order under sub-sec.(5) with in such time, it shall record its reason in writing for the same”. 3. CIRP shall commence from the date of admission of the application. 4 Withdrawal of IBC proceedings after admission of application. LokhandwalaKataria Construction Pvt Ltd. v/s Nisus Finance& Investment Manager, LLP (P/38). ( W.e.f. second Amendment allow with 90% voting of COC, before publication of notice inviting EOI). 5 Limitation Act shall apply. In B.K.Educational Services Pvt. Ltd v. Prag Gupta & Associates (Supreme Court).

  14. Comparison between moratorium under CIRP u/s 14 and prohibition during liquidation u/s 33(5) 1. Prohibition for (a) institution of suit or continuation of pending suit; (b) transferring or disposing any assets; (c) any action or foreclose action including under SARFAESI; or (d) the recovery of any property by an owner or lessor. 2. The intention is to avoid interference of any creditor in preparation of Information Memoranda and safeguarding the assets. 3. Continue to supply of essential goods or services being corporate debtor is a going concern. Innoventive Industries Ltd v. MSED. 4. Moratorium is against the corporate debtor not against the guarantor. • 1. No suit or other legal proceedings shall be initiated by or against the corporate debtor without approval of AA u/s 33(5) • 2. A suit or other legal proceedings may be instituted by the liquidator with the prior approval of the AA. [Se.446(1) of 1956 Act)]. • 3. The object of the section is to safeguard the assets by bringing all the assets under the control of Tribunal, avoid embarrassment amongst creditors as well multiple litigation and distribution of sale proceeds. • 4. The prohibition is against the corporate debtor not against the directors, corporate guarantor.

  15. Comparison of Management of Affairs of CD by IRP/RP under CIRP and liquidator 1. The management shall vest in the IRP/RP. The powers of the Board of Director shall stand suspended not directors and be exercised by the IRP. Sec 17 2. The IRP shall collect all information relating to assets & liabilities, receive and collate all claims, constitute COC, take custody & control of assets u/s 18. 3. Personnel shall extend cooperation to IRP. 4. IRP may enter inter into or amend contracts, raise interim finance being going concern u/s 20 5, RP has to comply with all the provisions during CIRP. 1. Notice of liquidation shall be deemed notice of discharge u/s 33(7)[445(3)]. Only liquidator can initiate legal proceedings. 2. on the appointment of liquidator, all powers of the board, personnel, KMP shall vest in liquidator u/s 34(2). The personnel of the Corporate debtor shall extend all assistance and cooperation to the liquidator u/s 34(3) , if required.

  16. Comparison of claims under CIRP and liquidation 1. If application is admitted, further claimant has to file claims. In Vijay Kumar Jain v. DBS Bank Ltd. 2. Creditor who fails to submit the claims with stipulated period, may submit claim within ninetieth day of commencement date. Regulation 12(2). 3. IRP/RP shall verify claims with in 7 days from receipt of claims. Regulation 13(1) 4. In case of contingent claims, RP shall make the best estimate of the amount of claim. 5.No right of claim after assignment of loan. In Ajay Walia v. M/s Sunworld Residency Pvt Ltd. 6. The RP has to verify claims. • 1. A person who claims to be a stakeholder shall prove his claim for debt. • 2.The liquidator may call for such other evidence or clarification in support of the claim. • 3. In case of contingent claims, the liquidator shall make best estimate. • 4. Foreign claims shall be valued in Indian currency. • 5. Future claims will be adjusted.

  17. Corporate Insolvency Resolution Process • 1. CIRP is not recovery process to recover the dues of the creditors. IBC is an act relating to reorganization and insolvency resolution of corporate persons. In Prowess International Pvt Ltd. V. Parker Hannifin India Pvt. Ltd. • 2. Applicant has to bear the CIRP expenses, which is to be reimbursed by COC. In SBI v. SKC Retails Ltd (NCLAT). CIRP shall commence from the date of order. In ICICI Bank Ltd V. Starlog Enterprises Ltd. • 3 The powers of the Board of Director shall stand suspended not directors and be exercised by the IRP. But Directors have right to file appeal to NCLAT. In M/s Steel Konnet (India) Pvt. Ltd v. Hero Fincop Ltd. The management of the affairs of the corporate debtor shall vest in the IRP/RP. • 4)The officer of corporate debtor shall report to IRP and shall provide access to books. IRP/RP shall approach to financial institutions. • 5) IRP will collect information relating to assets, finance and operation for determining financial position of corporate debtor, take into custody assets, constitute committee of creditors, receive and collate claims and prepare Information Memorandum to invite EOI and submit resolution Plan to CoC.

  18. Corporate Insolvency Resolution Process • 6. Where appointment of RP is delayed, the IRP shall perform the functions of RP from the fortieth day of insolvency commencement date till a RP is appointed. [Regulation 17(3)] . • 7. The CIRP is to make an attempt by divesting the erstwhile management of its powers and vesting it in a professional agency, to continue the business of the corporate body as a going concern until a resolution plan is drawn up in which event the management is handed over under the plan so that the corporate body is able to pay back its debts and get back on its feet. In the matter of Innoventive Industries Ltd v. ICICI Bank and ANR (Supreme Court) • 8. Resolution Professional is duty bound to conduct CIRP with fairness and diligence, assist the AA, particularly when there is no opposite party, RP has greater responsibility. In DF Deutsche Forfait AG and Anr. V.v. Uttam Galva Steel Ltd and M/s Martin S.K.Golla, the IBBI held that the Resolution Professional did not debar the MD u/s 29A and did not comply with other regulations. • 9. The CIRP shall be completed with in a period of 180 days from the date of admission of application. Further extension of 90 days. The period recommended to extended 330 days including litigation, vide Companies (Amendment) Act, 2019.

  19. Committee of Creditors u/s 21 • 1. CoC shall comprise all financial creditors of Corporate debtor. The Related party shall not have any right of representation, participation or voting in the meeting of CoC. • 2. If there is no financial creditor, the FC are related parties to CoC, 18 largest operational creditors by value, one from workmen and one from employee shall be member. Reg.16(2). IRP shall file a report certifying constitution of committee to AA within 2 days of verification of claims. [Regulation 17] • 3. The First Meeting of the COC shall be held within 7 days of its constitution (Reg.17). The decisions of the CoC shall be taken by a vote of not less than 51% of voting share • 4. The CoC shall have the right to furnish financial information of CD during CIRP. If there is no COC, there is no Resolution Plan. Swift Shipping and Freight Logistics Ltd. • 5. The Resolution Professional during the course of CIRP shall not take actions without the prior approval of the CoC, • 6. The proposal shall be approved by the CoC by a vote of sixty-six percent of the voting share • 7. Adjudicating Authority can not interfere in the decision exercised by COC in approving Resolution Plan. In ICICI Bank Ltd v. Innoventive Industries Ltd. • 8. The IBC Amendment Act, 2019, “the CoC may take the decision to liquidate the corporate debtor, any time after its constitution under section 21(1) and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum”.

  20. Information Memorandum u/s 29 & Regulation 36 • 1. Resolution Professional shall submit Information Memorandum in electronic form to each member of the committee. • 2. Resolution Professional shall provide to the Resolution Applicant access to all relevant information in physical and electronic form, which require to prepare Resolution Plan. • 3. The information memorandum shall contain the details of the corporate debtor- • (a) assets & liabilities, ascertaining the values; • (b) the latest annual financial statements; • (c) audited financial statements for the last 3 financial years and the provisional financial statement for the current financial year; • (d) list of creditors containing name, amount claimed, amount admitted, security interest, if any (e) particulars of debts (f) details of guarantee given with respect to the debt (g) details of material litigation, ongoing litigations (h) other information etc. • (4) Resolution Professional shall provide other information asked by a member of Committee. Resolution Professional shall share the information to the Committee, Resolution Applicant

  21. Invitation for Expression of Interest under Regulation 36A • 1. Resolution Professional shall publish brief particulars of the invitation for expression of interest for interested and eligible prospective Resolution Applicant. • 2. The detailed invitation shall-(a) specify the criteria for prospective resolution applicant(b) state the ineligibility norms u/s 29A; (c) provide basic information; • 3. An expression of interest shall be unconditional and be accompanied by – • (a) an undertaking by the prospective resolution applicant that it meets the criteria under 25(2)(h); (b) an undertaking the prospective resolution applicant that it does not suffer from any ineligibility under section 29A to the extent applicable (d) undertaking of confidentiality • 4. Resolution Professional shall conduct due diligence in order to satisfy the provisions of (a) section 25(2)(h); (b) applicable provisions of section 29A, etc. • 5. Resolution Professional may seek any clarification or additional information or document from the prospective resolution applicant for conducting due diligence. • 6. Resolution Professional shall issue a list of prospective resolution applicants.

  22. Resolution Plan • 1.The Resolution Professional shall issue Information Memorandum, evaluation matrix and a request for Resolution Plans. Resolution Plan is a proposal that aims to provide a resolution to the insolvency, Its aims to maximization of value of assets. It needs to be approved by 66% of CoC. IBC (Amendment) Bill 2019 clarified that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger. • 2. Other than the mandatory requirement, the IBC does not restrict the form and manner of the a resolution plan. resolution plan shall identify the source of funds that will be used for payment. • 3. It provides for (a) payment of CIRP cost; (b) payment of debt of operational creditors , not less than the amount in the event of liquidation; (c) management of affairs after approval of the resolution plan; (d) implementation and supervision. • 4. A plan could therefore, involve the purchase of equity or assets of the corporate debtor, the infusion of the additional debt, the demerger of debtor’s businesses, financial “haircuts” taken by creditors or the extinguishment of some liabilities. The market at large, creditors, erstwhile promoters may propose Resolution Plans. • 5. The RP is mandatory bound to submit all the resolution plans, which mandatorily satisfies the compliances of the IBC to the CoC. Regulation 37, 38, 39. • 6. The resolution plan drawn up by the Resolution Applicant envisages any relief or concession from any State/Central Government/Authority, it s restricted only to the extent, the same is permissible under the respective laws/statues/policies. • 7. Providing of performance security in case of approval of resolution plan contd.

  23. Resolution Plan • 8. Resolution Plan shall comply with all the concerned Acts, Rules & Regulations circulars etc. otherwise rejection of Resolution Plan u/s 31 of the Code [31(1(i)(b)]. • 9. A person shall not be eligible to submit a resolution plan if such person, or any other person acting jointly or in concert with such other person (a) is an undischarged insolvent; (b) is willful defaulter; (c) an account of the corporate debtor or whom such person is a promoter, classified as non-performing assets. The person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon. M/s Essar Steel Ltd (Attraction of section 29A), M/s Binani Steel Ltd ( value Maximization) • 10. Resolution Professional shall examine each Resolution Plan received by him to confirm that Resolution Plan provides for (a) payment of insolvency resolution process cost (b) payment of debt of the operational creditor, which shall not be less than the amount to be paid to operational creditor in the event of liquidator; (c) provides for management of affairs of the corporate debtor after approval of Resolution Plan. In the matter of Binanai Cement Ltd, the NCLAT held inter-alia that there is no provision for settlement under IBC. Supreme Court confirmed. • 11. The IBC Amendment Code, 2019, “the authorized representative shall case his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty percent of the voting share of the financial creditors he represents, who have cast their vote”. • 12. Distribution of profit generated during CIRP on pro-rata basis between FC and OC. The IBC Amendment Code, 2019,”In sec.30(2)(b) provides for the payment of debt of operational creditors in such manner as may be specified by the Board, which shall not be less than –(a) in the even of liquidation; or (b) in accordance with priority u/s 53(1), whichever is higher and dissident financial creditors

  24. LIQUIDATION PROCESS (1).The Adjudicating Authority (NCLT) passes an order for liquidation u/s 33 where- • he does not receive resolution plan before the expiry of the insolvency resolution process period or maximum period permitted for completion of corporate insolvency resolution process u/s 12 or fast track process u/s 56; or • Rejects the resolution plan u/s 31 for non compliance of the requirement specified therein. The IBC Amendment Act, 2019, “the CoC may take the decision to liquidate the corporate debtor, any time after its constitution under section 21(1) and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum”. (2) Intimation by IRP about the decision of committee of creditors (3). Contravention of the resolution plan approved by the Adjudicating Authority, on the complaint of the application of aggrieved party

  25. Consequences of liquidation order • 1.Issue of public announcement of regarding liquidation • 2.Sending order to the concerned Registrar • 3.No suit or other legal proceedings shall be instituted by or against the corporate debtor • 4.Suit or other legal proceedings by the liquidator on behalf of corporate debtor with the prior approval of the NCLT • 5.Order deemed to be notice of discharge to the officers, employees and workmen except business is continued

  26. Comparison of Power & Duties of Resolution Professional u/s and liquidator u/s 35 • 1. The management of the affairs of the CD shall vest in the RP[17(1)(a)]. Responsible for complying with all the provisions under any law [Sec.17(2)(e)]. • 2. Collect all information relating to assets {sec.18(a)]. Take control and custody of assets [sec.18(f)] • 3. Enter/amend contract behalf of the corporate debtor, raise interim finance, issue instructions to employee [Sec.20(2)] • 4. Constitute CoC, • 5. RP may sell unencumbered assets, it shall not exceed 10% of the total claims admitted by IRP. Regulation 29(1) • 5. Approval of Resolution Plan • 1. To verify claims of all the creditors, to take into his custody or control all the assets. A creditor may withdraw or vary his claim within 14 days. [Sec. 38(5)]. • 2. Liquidator may accept/reject the claim, he shall record • 3.Subject to section 52, to sell the moveable and immoveable property and actionable claims by public auction or private contract. Carry on the business for beneficiary liquidation. Liquidator is the custodian of assets. • 4. Priorities for payment of sale proceeds.

  27. Comparison between Preferential transactions, Undervalued transactions and Extortionate credit transactions

  28. Secured creditors in liquidation proceedings u/s 52 • (1)A secured creditor in the liquidation proceedings u/s 52 may- • (2) (a) relinquish its security interest to the liquidation estate and receive by the liquidator • (b) realise the security interest-(i) inform the liquidator and (ii) identify the assets • (3) Liquidator shall verify the security interest before realizing by cr. • (4)Secured creditor may enforce, realise, settle, compromise • (5) Sale proceeds in excess of debts, return to the liquidator and apply the proceeds to recover the debts due to it. • (6) In case of resistance during this process from CD or any other person, the secured creditor may file an application to the AA. • (7) Excess to debt due to secured creditor, shall tender to liquidator • (8) Inadequate to repay debt amount, balance shall be paid by liquidator • (9) Insolvency process cost shall be deducted from the sale proceeds

  29. Distribution priority

  30. Thank You

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