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Banking and Finance

February, 2016

SUMMARY OF THE DRAFT INSOLVENCY AND BANKRUPTCY CODE

The Bankruptcy Law Reforms Committee (Committee) has proposed a
comprehensive Insolvency and Bankruptcy Code (Insolvency Code), which has
been placed for public consultation by the Central Government. The Insolvency Code
aims to provide a single comprehensive bankruptcy and insolvency law for all legal
entities and natural persons. The Insolvency Code seeks to provide greater clarity in
the law and facilitate the application of consistent and coherent provisions to different
stakeholders affected either by business failure or inability to pay debt and will
address the challenges being faced at present for swift and effective bankruptcy and
insolvency resolution. The Insolvency Code seeks to improve the handling of conflicts
between creditors and debtors, avoid destruction of value, distinguish malfeasance
vis-a-vis business failure and clearly allocate losses in macroeconomic downturns.

perform the role of a regulator for insolvency and bankruptcy matters similar to that
the Securities and Exchange Board of India performs for the securities market.

Salient features of the Insolvency Code

The National Company Law Appellate Tribunal (NCLAT) shall be the appellate
authority to hear appeals arising out of the orders passed by the Board in respect of
insolvency professionals or information utilities.

Insolvency Regulator
The Insolvency Code provides for establishment of an Insolvency and Bankruptcy
Board of India (Board) who will act as the insolvency regulator. The Board will

The Board will exercise regulatory oversight over insolvency professionals, insolvency
professional agencies and informational utilities. To perform the said regulatory
oversight, the Board will have all legislative, executive and quasi-judicial functions so
as to enable a well-functioning bankruptcy process in India. The Board will be
responsible for registration and monitoring of the insolvency professional agencies,
insolvency professionals and information utilities. The Board will frame and implement
various regulations and guidelines on matters relating to insolvency and bankruptcy
as may be required.

Insolvency Adjudicating Authority

The Adjudicating Authority will have the power to entertain applications for initiation
of insolvency and bankruptcy. The Adjudicating Authority will have judicial power to
oversee the insolvency resolution process and the liquidation process.
The Debt Recovery Tribunal (DRT) shall be the Adjudicating Authority with
jurisdiction over individuals and unlimited liability partnership firms. Appeals from the
order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).
The National Company Law Tribunal (NCLT) shall be the Adjudicating Authority
with jurisdiction over companies, limited liability entities and other entities with
limited liabilities. The jurisdiction of the NCLT shall be based on the registered office
of the debtor. Appeals from the order of NCLT shall lie to NCLAT.
The Supreme Court will have appellate jurisdiction over the orders of the DRAT or the
NCLAT.
Insolvency Professionals
The Insolvency Code proposes to regulate insolvency professionals and insolvency
professional agencies. The insolvency professionals and insolvency professional
agencies will require registration with the Board and will perform various functions
during the insolvency resolution process and the liquidation process.
Insolvency Information Utilities
The Insolvency Code proposes for establishment of information utilities which would
collect, collate, authenticate and disseminate financial information from listed
companies and financial and operational creditors of companies. Insolvency
Information Utilities will require registration with the Board. An individual insolvency
database is also proposed to be set up with the goal of providing information on
insolvency status of individuals.
Corporate Bankruptcy and Insolvency Processes
The Insolvency Code provides a speedy process for insolvency resolution and
liquidation for companies and other limited liability entities. The process is expected

to ensure early identification of distressed assets and possibility of revival of such

assets.

Insolvency Resolution Process:

It prescribes an insolvency resolution process with a strict timeline of 180 days with
one time extension of 90 days (Resolution Period). During the insolvency
resolution process, the creditors and debtor are required to discuss and deliberate on
viability of the business of the debtor. The creditors and the debtor will come up with
the restructuring / resolution plan during the Resolution Period if the business is
found to be viable.
The Insolvency Resolution Process can be initiated by a financial creditor, an
operational creditor or by the debtor itself by making an application to the
Adjudicating Authority. Upon admission of such application, the Adjudicating Authority
declares a moratorium, issues a public notice and appoints the resolution
professional. The declaration of moratorium on the debtor prohibits any institution or
continuation of litigation against the debtor, mandates maintenance of status quo of
the assets by the debtor and requires the creditors to refrain from enforcing any
security interest. During the Resolution Period, the entire management of the debtor
and custody of the assets of the debtor are placed in the hands of a resolution
professional to ensure the protection of the assets of the debtor. Further, the
resolution professional conducts the insolvency resolution process.
The resolution professional constitutes a committee of the creditors and conducts the
meetings of the creditors committee. The creditors committee has the power to
decide and approve the final solution by majority vote in the negotiations. The
majority vote requires approval of 75% of the creditors committee weighted by the
aggregate financial liabilities. It is to be noted that the creditors committee will
consist of only financial creditors and not operational creditors. Since, the viability of
the debtors business is to be assessed in discussion with the debtor such debtor will
also attend the meetings of the creditors committee. The creditors committee will
discuss all practicable solutions for keeping the entity as a going concern. The
Insolvency Code does not prescribe any specific or particular solutions which are
required to be discussed and deliberated. It will be upon the creditors and the debtor

to come up with viable solutions. The debtor can also prepare a resolution plan and
submit the same for consideration and approval of the creditors.

The proceeds of liquidation are required to be distributed in the following order of

priority:

The Insolvency Resolution Process will be closed on the expiry of the Resolution
Period. If a resolution plan is approved by the creditors, the Adjudicating Authority
will pass necessary order(s) and close the proceedings. Following this, the debtor and
the creditors will be required to implement the resolution plan.

(i)
(ii)

Liquidation Process:
In the event, no resolution plan is agreed upon within the Resolution Period or the
creditors have resolved to liquidate the debtor during the Resolution Period, the
Adjudicating Authority will pass an order for liquidation of the debtor. The insolvency
resolution professional shall act as liquidator for liquidation of the debtor. Once the
liquidation order is passed, no legal proceedings can be commenced or continued
against the debtor.

(iii)
(iv)

(a) financial debts owed to unsecured creditors; and

Rights of Secured Creditor during Liquidation Process

Upon commencement of the liquidation proceedings, a secured creditor will have
option:
(i)
(ii)

(v)

to relinquish its security interest to the liquidation trust and receive proceeds
from the sale of assets by the liquidator as per waterfall mechanism set out
in the Insolvency Code; or
to enforce and realize its security interest.

If the secured creditor chooses to enforce 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 and apply the proceeds received
from such enforcement to recover the debts due. The secured creditor can seek
necessary judicial assistance from the Adjudicating Authority if it faces any resistance
from any person for the enforcement of its security interest.

Distribution of Liquidation Proceeds Waterfall mechanism

the insolvency resolution process costs and the liquidation costs;

the following debts which shall rank equally between and among the
following:(a) debts owed to a secured creditor in the event such secured creditor has
relinquished security;
(b) workmens dues for the period of three months before the liquidation
commencement date;
wages and any unpaid dues owed to employees other than workmen for the
period of three months prior to the liquidation commencement date;
the following classes of creditors shall be paid equally between and among
the following:-

(vi)
(vii)
(viii)

(b) workmens dues in respect of the period of nine months beginning from
twelve months before the liquidation commencement date and ending
three months before the liquidation commencement date;
the following dues rank equally between and among the following :(a) 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;
(b) debts owed to a secured creditor for any amount unpaid following the
enforcement of security interest;
any remaining debts;
preference shareholders, if any; and
equity shareholders or partners, as the case may be.

Fast Track Corporate Insolvency

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

insolvency process will be required to be completed within a period of 90 days with a

one time extension of 90 days.

Voluntary Liquidation
In line with the voluntary winding up under the Companies Act, the Insolvency Code
prescribes a voluntary liquidation process. A body corporate can initiate its liquidation
based on its shareholders/partners resolution. The rights of secured creditors and the
distribution mechanism for liquidation proceeds shall be same as set out above.
Bankruptcy Processes for Individuals/partnerships
The Insolvency Code also prescribes an insolvency regime for individuals and
unlimited liability partnerships. As a precursor to a bankruptcy process, the
Insolvency Code envisages two distinct processes under this Part, namely, the Fresh
Start and Insolvency Resolution.

Fresh Start for Individuals having an outstanding debt of not more than Rs. 35,000/-:
In the Fresh Start process, the individuals with income and assets lesser than
specified thresholds shall be eligible to apply for a discharge from their qualifying
debts. Here, the specified thresholds are an annual gross income not exceeding Rs.
60,000 and aggregate value of assets not exceeding Rs. 20,000) and the qualifying
debts are debts up to Rs. 35,000. The resolution professional will investigate and
prepare a final list of all qualifying debts within 180 days from the date of application.
On the expiry of this period, the Adjudicating Authority will pass an order on
discharging of the debtor from the qualifying debts and accord an opportunity to the
debtor to start afresh, financially.

Insolvency Resolution Process for other Individuals:

An insolvency resolution process may be initiated by the creditor or the debtor. In the
Insolvency Resolution Process, the creditors and the debtor will engage in
negotiations to arrive at an agreeable repayment plan for composition of the debts
and affairs of the debtor, supervised by a resolution professional. The repayment plan
will require approval of a three-fourth majority of creditors in value.

The repayment plan may authorize or require the resolution professional to:
(a)
carry on the debtor's business or trade on his behalf or in his name; or
(b)
realize the assets of the debtor; or
(c)
administer or dispose of any funds of the debtor.
The repayment plan will be implemented in supervision of the insolvency
professional.

Bankruptcy Process
The bankruptcy of an individual can be initiated only after the failure of the resolution
process or non-implementation of repayment plan. The bankruptcy trustee is
responsible for administration of the estate of the bankrupt and for distribution of the
proceeds on the basis of the priority.
Transfer of Existing Proceedings
Upon enactment and notification of the Insolvency Code, the proceeding pending
before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) or
the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial
Companies Act, 1985, shall stand abated. However, a company in respect of which
such proceeding stands abated may make a reference to Adjudicating Authority
within 180 days from the date of commencement of this Insolvency Code.
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