THE INSOLVENCY AND BANKRUPTCY CODE, 2016 June 18, 2016 DSK Legal, Advocates & Solicitors

2. THE INSOLVENCY AND BANKRUPTCY CODE, 2016 June 18, 2016 DSK Legal, Advocates & Solicitors ‘The Insolvency and Bankruptcy Code, 2016’ Western India Regional Council (WIRC), Baroda Branch, The Institute of Chartered Accountants of India (ICAI) 2

3. Background and Purpose [Part 1/2] Prior to enactment of the Insolvency and Bankruptcy Code, 2016 (the “Insolvency Code”) the existing framework was governed by:- The Companies Act, 1956 and the Companies Act, 2013; The Sick Industrial Companies (Special Provisions) Act, 1985; The Recovery of Debts Due to Banks and Financial Institutions (“RDDBFI”) Act, 1993; The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (“SARFAESI”) Act, 2003; The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920; Regulations, directions, circulars, rules, notifications and guidelines of the Reserve Bank of India (“RBI”).

4. Background and Purpose [Part 2/2] Single consolidated framework for insolvency and bankruptcy resolution dealing with body corporates, partnerships and individuals; Time – bound resolution of insolvency and bankruptcy process so as to preserve the value of the corporate debtor as a going concern and the value and / or of the assets forming part of the corporate debtor; To enable the functioning of a robust debt / bond market.

5. Institutional Framework The Insolvency Code provides for the following institutional framework:- The Insolvency and Bankruptcy Board of India (the “Board”); Insolvency Professional Agencies; Insolvency Resolution Professionals; Information Utilities; Adjudicating Authorities:- National Company Law Tribunal (“NCLT”); National Company Law Appellate Tribunal (“NCLAT”); Debt Recovery Tribunal (“DRT”); Debt Recovery Appellate Tribunal (“DRAT”); Supreme Court.

6. Applicants who can trigger the process The Insolvency Code provides for three types of applicants who can trigger the corporate insolvency resolution process:- Financial Creditors; Operational Creditors; Corporate Applicants.

7. Corporate Insolvency Resolution Process [Part 1/5] The corporate insolvency resolution process under the Insolvency Code is a time – bound process. The process consists of the following phases:- Initiation of the corporate insolvency resolution process (“Phase I”): Phase I of the corporate insolvency process deals with the following:- Filing of the applications with the NCLT; Admission or rejection of the application; In case of rejection, the NCLT may allow the applicant to make changes and / or revisions to the application and re – apply. On re – application, the NCLT may admit or reject the application. Phase I for the different types of applicants who can trigger the corporate insolvency process are different. The timelines and the process broadly, for Phase I, relating to the different types of applicants who can trigger the corporate insolvency process are provided below:-

8. Corporate Insolvency Resolution Process [Part 2/5]

9. Corporate Insolvency Resolution Process [Part 3/5] Conduct of the corporate insolvency resolution process (“Phase II”): Phase II commences on the date of order of admission of the application by the NCLT. Phase II of the corporate insolvency process deals with the following:- Declaration of moratorium on initiation or continuation of suits, alienation of assets, enforcement of security interest; Issuance of public announcement w.r.t initiation of IRP and call for claims; Appointment of interim resolution professional; Appointment of the committee of creditors and appointment / confirmation of resolution professional by the committee of creditors; Information Memorandum-enable framing of of resolution plan; Presentation of resolution plans and approval of such plan.

10. Corporate Insolvency Resolution Process [Part 4/5] Phase IIhas to be completed within a time period of one – hundred and eighty (180) days from the date of commencement (i.e. admission of application), which may be extended by at most ninety (90) days (the “Resolution Period”); It is pertinent to note that all decisions of the committee of creditors shall be passed by a majority of seventy – five (75%) percent of the total voting share of the committee. The operational creditors shall be duly represented at such committee of creditors but shall not have any voting rights; Phase II is to be conducted as follows:-

11. Corporate Insolvency Resolution Process [Part 5/5]

12. Fast Track Corporate Insolvency Process The Insolvency Code further prescribes a fast track corporate insolvency process for the entities with less complex structuring or businesses. The Central Government will prescribe the classes of entities based on the assets and liabilities, amount of debt and other criteria, which will be subject to the fast track process. The fast track corporate insolvency process will be required to be completed within a period of ninety (90) days with a one – time extension of forty – five (45) days.

13. Corporate Liquidation Process [Part 1/6] As per the Insolvency Code, the corporate liquidation process is to be initiated on occurrence of the following:- Expiry of the Resolution Period (180 days; extendable by 90 days) and no resolution plans have been received; NCLT rejects the resolution plan; Prior to approval of the resolution process, by order of NCLT on intimation by the committee of creditors; Application by affected person(s) on the contravention of the approved resolution plan. Rights of secured creditors: Upon commencement of the liquidation proceedings, a secured creditor will have option to do either of the following:-

14. Corporate Liquidation Process [Part 2/6] to relinquish its security interest to the liquidation trust and receive proceeds from the sale of assets by the liquidator as per the order of priority of distribution of assets as set out in the Insolvency Code; or, to enforce and realize its security interest. It may:- Enforce, realize, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realized; Apply the proceeds received from such enforcement to recover the debts due; and / or, Seek necessary judicial assistance from the NCLT if it faces any resistance from any person for the enforcement of its security interest.

15. Corporate Liquidation Process [Part 3/6] Conduct of Liquidation: The liquidation shall be conducted as follows:- Appointment of the liquidator by order of NCLT; Declaration of moratorium on initiation of suits by the NCLT; Discharge of officers, employees and workmen shall be discharged, except when the business of the corporate debtor is continued; Issuance of public announcement; Formation of liquidation estate; Collection, verification, acceptance and / or rejection of claims; Orders by NCLT for cancellation of avoidable transactions etc.; Monetization of assets and distribution of proceeds; Dissolution of the corporate debtor.

16. Corporate Liquidation Process [Part 4/6]

17. Corporate Liquidation Process [Part 5/6] Distribution of Assets: The proceeds from the sale of the liquidation estate shall be distributed in accordance with the following waterfall mechanism / order of priority:- The insolvency resolution process costs and liquidation costs; The following debts which shall rank equally between and among the following:- Workmen’s dues for the period of twenty – four months preceding the liquidation commencement date; Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner as provided under the Insolvency Code; Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding to the liquidation commencement date;

18. Corporate Liquidation Process [Part 6/6] Financial debts owed to unsecured creditors; The following dues rank equally between and among the following:- Any amount due to the State Government and the Central Government in respect of the whole or any part of the period of two years prior to the liquidation commencement date; Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest; Any remaining dues and debts; Preference shareholders, if any; and Equity shareholders or partners, as the case may be.

19. Rights under SARFAESI, 2002 and RDDBFI, 1993 [Part 1/2] The Insolvency Code has amended the RDDBFI Act, 1993 to allow the DRT to entertain applications under the Insolvency Code i.e. insolvency and bankruptcy process for individuals and partnership firms. Invocation of personal guarantees shall be part of the corporate insolvency resolution process. Similarly, enforcement of security interest by the consortium of secured creditors and lenders under Section 13 (9) of the SARFAESI Act, 2002 has been made subject to the provisions of the Insolvency Code. In this regard, the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 has been introduced in the Lok Sabha and pending the report of the Joint Parliamentary Committee. A few of the salient features are:-

20. Rights under SARFAESI, 2002 and RDDBFI, 1993 [Part 2/2] It brings within the scope of the SARFAESI, 2002, the recovery mechanisms prevalent under the aegis of the Reserve Bank of India (RBI); It provides that RBI shall have the power to determine the policy, fees charged and regulation of ARCs; It enhances the rights of the ARCs and debenture trustees and provides several incentives for transfer / assignment of the debt including but not limited to exemption from payment of stamp duties, assignment of debt to asset reconstruction companies prior to classification of financial asset as Non – Performing Asset.

21. CONTACT DETAILS For further queries, please contact: Mr. Ajay Shaw, Partner, DSK Legal, Advocates & Solicitors 1203, One Indiabulls Centre, Tower 2, Floor 12 – B 841, Senapati Bapat Marg, Elphinstone Road Mumbai 400 013 India Tel: +91 22 6658 8000 E-mail: ajay.shaw@dsklegal.com

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