Overview of Insolvency and Bankruptcy Code

and Professional Opportunities

- Mohika Sinha
What is Insolvency?
“If you can pay your bills as and when they
become due and payable, you are 'solvent'.

If you cannot, you are insolvent.”

Insolvency vs Bankruptcy vs liquidation

Q - Why should one file for

bankruptcy when they
become Insolvent?

Answer:
Need for a
 Harassing phone calls and
new law
letters demanding payment
will cease.

 One can start sooner on

rebuilding their credit.
In a country like
India, where
Missed debt payments,
business entities and
defaults, repossessions,
not only
lawsuits will brings
also hurt their
revenue
credit, andand jobs
are more
but also creates to a
complicated to explain
a futuresense
lender than
of
bankruptcy.
economic
growth in the
country, it
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Inception of Insolvency Laws in India

PAGE 2
 Presidency towns
Insolvency Act, 1909

Provincial Insolvency Act, 1920

SICA, 1985

RDDBI 1993

SARFAESI
2002

Companies
Act, 2013

IBC 2016

Need for a new Law

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  Over three lacs crore rupees of public
money is stuck in NPA (non-performing
Assets).

 The World Bank says that resolving

insolvency takes over four years in India
and the average recovery is 25 cents to
the dollar.

 The sick industrial companies act SICA

and the Board of Industrial Financial
Reconstruction BIFR had failed to
speedily revive or liquidate companies
and recover assets.

 Too many projects were left

unmonitored even when costs increased.

 60,000 bankruptcy cases are pending

 System of official liquidator

unsuccessful

 Benefit of separate legal entity

Continuation of Non-Performing
assets in any economy leads to
locking of funds and physical
assets, which are a cause for big
concern for the lender who have
provided loan and financial
assistance to the NPA business
entity.

The bankruptcy law provides for suppliers to initiate

insolvency proceedings.
If no resolution is arrived at within 180 to 270 days,
the assets have to be auctioned off to recover dues

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The Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy code seeks to streamline and consolidate bankruptcy, insolvency and
liquidation laws in India was introduced on December 21, 2015 by Finance Minister, Mr. Arun Jaitley.
Subsequently after incorporation of several comments in both houses of the Parliament, It received
the assent of the president on May 28th, 2016.

It applies to whole of India excluding Jammu & Kashmir.

It deals with:

Companies
Partnerships
individuals Analysis
Entities Does not include financial firms Instead of continuing the existing
resolution regime the code seeks to
shift the responsibility on the shoulders
of the creditor to initiate the insolvency
resolution process (IRP) against the
corporate debtor. It empowers all class
Directs the incolvency
of the creditors (secured, unsecured
resolution process
lenders, employees and trade creditors,
Envisages for a fresh start
Resolution regulatory authorities) to trigger a
resolution process in case of non-
payment of valid claim. The code not
only provides for immediate
suspension of the board of directors
Insolvency Regulator and promoters powers in the company
Insolvency Resolution but also enables a stand still period
Professionals which provides stakeholders time to
Information Utilities facilitate discussion and arrive at a
Infrastructure Adjudicatory Authorities common resolution rather than
running independent process.

Adjudicating authority
Adjudicating authority would have exclusive jurisdiction to deal with insolvency related matters, no
injunction shall be granted by any court, tribunal or authority in respect of any action take, or to be
taken, in pursuance of any power conferred on the NCLT/DRT.

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 NATIONAL COMPANY LAW
Debts Recovery Tribunal
TRIBUNAL
DRT shall deal with individual
NCLT shall deal with the matters relating to
insolvency and partnership
corporate insolvency, LLP and enforcement
of personal guarantees related to corporate
debtors.

Persons who can initiate/ apply for IRP

 Financial Creditor
 Operational Creditor
 Corporate Applicant

Insolvency Resolution and Liquidation Process for

Corporates
If the default is above Rs.1 Lakh (may be increased up to Rs.1 Cr by the Government, by notification),
the creditor may initiate insolvency resolution process.

Default

Application with NCLT

Appointment of interim Insolvency Professional by

NCLT

Formation of Creditors Committee

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 Confirmation of appointment of IP by committee

IP to prepare Information Memorandum

Resolution plan to be prepared by creditors

Approval of resolution plan by creditors committee for

Resolution Liquidation

The process summarized:

1. The initiator applies to NCLT for initiating resolution process.
However, operating creditors are required to give demand notice of 10 days to corporate debtor
before approaching the NCLT. If corporate debtor fails to repay dues to operational creditor or
fails to show any existing dispute or arbitration, then the operational creditor can approach NCLT.

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 2. Corporate insolvency process shall be completed
within 180 days of admission of application by NCLT.
Upon admission of application by NCLT, Creditors’
claims will be frozen for 180 days, and NCLT will
hear proposals for revival and decide on the
future course of action.

3. NCLT appoints an interim Insolvency

Professional (IP) upon confirmation by the
Insolvency and Bankruptcy Board within 14 days of
acceptance of application. Interim IP holds office for
30 days only. Interim IP takes control of the debtor’s
assets and company’s operations, collect financial information of the debtor from information
utilities.

4. NCLT causes public announcement to be made of the initiation of corporate

insolvency process and calls for submission of claims by any other creditors.

5. After receiving claims pursuant to public

announcement, interim IP constitutes
the creditors’ committee.
Related parties amongst financial
creditors will not have any right of
representation, participation or voting.
Operational creditors should be part of
Creditors’ Committee (without voting
right) if their aggregate dues are not less
than 10% of the debt.

6. Creditors’ committee shall meet first

within seven days of its constitution and
decide by 75% of votes either to replace
or confirm interim IP as Resolution
Professional.

7. The creditors’ committee has to then take

decisions regarding insolvency resolution by a 75% majority voting.

8. If three-fourths of the financial creditors consider the case complex and require extension of time
beyond 180 days, the NCLT can grant a one-time extension of up to 90 days.

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 9. Resolution Professional to conduct entire corporate insolvency resolution process and
manage the corporate debtor during the period.

10. Resolution Professional shall prepare information

memorandum for the purpose of enabling resolution
applicant to prepare resolution plan. A resolution applicant
means any person who submits resolution plan to the
resolution professional. And upon receipt of resolution plans,
Resolution Professional shall place it before the creditors’
committee for its approval.

11. Once a resolution is passed, the creditors’ committee has to

decide the restructuring process that could either be a revised repayment plan for the
company, or liquidation of the assets of the company. If no decision is made during the resolution
process, the debtor’s assets will be liquidated to repay the debt.

12. The resolution plan will be sent to NCLT for final approval, and implemented once approved.

Fast Track Scheme

The Code has provided for a fast track insolvency resolution process in respect of corporate debtors,
qualification to be notified by the Government. The process shall be completed in 90 days (extendable by
maximum 45 days). Provisions of insolvency process apply to fast track insolvency. This will be an
enabler for start-ups and small and medium enterprises to complete the resolution process quickly and
move on.

Insolvency Resolution & Bankruptcy for Individuals

& Partnership Firms

For insolvency resolution of individuals and partnerships, there is no specific mandatory period within
which the resolution decision has to be taken. Reason attributable is that individual businesses are
varied and vastly different, with no standardized information about their activities. Moreover, a
corporate person can be liquidated but an individual cannot. He has to be declared bankrupt.

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 If the default is above Rs.1000 (may be increased up to Rs.1 lakh by
the Government, by notification), the Code applies to such
individuals and partnerships. The Code envisages following distinct
processes in case of insolvencies:

Automatic fresh start process wherein, the Code allows

discharge of qualifying debts thereby facilitating the debtor to start
afresh.
Insolvency resolution process– during which the creditors assess
whether the debtor’s business is viable to continue and the options for its rescue and resurrection
Bankruptcy: it is similar to liquidation proceeding. When insolvency process fails, creditors may apply
to distribute debtor’s estate to repay the debts

Liquidation Waterfall

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 Insolvency Resolution Process and Liquidation Costs

Secured Creditors +Workmen's dues

Employee's Wages (past 12 months)

Unsecured Creditors

Government Dues + Secured Creditors

(residual amount after enforcing securities)

Other remaining Debts

Shareholders
Equ
ity
Sha
reh
old
ers

Professional Opportunities under the Code

The code creates a host of professional opportunities for finance and legal professionals.
The role of professionals has expanded significantly under the regime of the code. Some of the
professional avenues that have opened for CA/CS/CMA are:

 Insolvency Professionals(IP)
 Information Utilities

Insolvency Professionals
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 IP’s are licensed
professionals authorized by
Insolvency Professional
Agencies (IPA’s) which take
up the roles of Interim
Resolution Professional/
Resolution Professional.

Liquidator/Bankruptcy
Trustee in the insolvency
resolution process of
different entities as have
been envisaged under the
Code.

Insolvency Professional
Agencies (IPA’s) are those
specialized bodies that are
statutorily authorized to
execute the task of
registration and governance
of Insolvency Professionals.

Eligibility

In order to be eligible for registration as an Insolvency Professional, a Professional has to fulfill the
following criteria:

Register with an IPA

Appear for and clear Limited Insolvency Examinsation (LIE) or National Insolvency
Examination (NIE)

Have a work experience of 10 years post enrollment as a CA/CS/CMA/Advocate

Above professionals are eligible to register for a limited period if they have been
practicing for 15 years post qualification

Information Utilities

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Information Utilities registered with the board shall collect, collate, authenticate and disseminate
financial information from any person including the financial and operational creditors of companies.

It shall maintain details of assets and liabilities of corporate debtors along with their defaults and
discharges.

Information Utilities are required to be public limited companies with minimum net worth of 50 crore.

Chartered Accountants are versatile and well equipped with knowledge hence capable to play significant
roles in these companies.

Food for thought

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