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Insolvency and Bankruptcy

Code 2016
Regulations notified on 23
Nov 2016
Why is the Code an imperative today?

1. Improve ‘Ease of Doing Business’ ranking for India.

2. The stressed assets in the Indian banking system have peaked at ~US$ 150 billion or over Rs 10
lakh crores (~15% of gross advances)

3. Heightened focus on the resolution of the problem by the Reserve Bank of India (RBI) and the
Supreme Court. The previous RBI Governor had stated that “Our intent is to have clean and fully-
provisioned bank balance sheets by March 2017”.

4. There is a dire need of capital today – not just for stressed companies but for growth in general.

5. Long time for resolution and recovery; Doing away with a fragmented framework.

6. The average life of cases recommended for restructuring in 2002 was 7 years and the average life
of cases recommended for winding up to the court was 6.5 years.

7. Improve the confidence of the International investor in the debt market.

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‘Ease of Doing Business’ ranking as per World
bank
Rank 2016 Recovery rate % (cents on the dollar)
150 136
100 88.6 81.5 89.7 87.3 82.1
120 80
90 60
55 55 41.3 36.2 35.3
60 44 38 40 25.7
27 22.5
30 13 16 14 20
5
0 Brazil 0

Brazil
USA

China

China
Canada

USA

Canada
Singapore

Russia

Singapore

Russia
UK

India

UK

India
Australia

South Africa

Australia

South Africa
Time (years)
• As per the Doing business index 2016 released by
5 4 4.3
4
World Bank, India continues to fare the worst amongst
3 the BRICS nation.
2 1.7 2
2 1
1.5
1 • With 136th rank, India is far behind the developed
0.8 0.8
1 economies such as UK, US, and others.
0 • Among several requisites of an effective insolvency
Brazil

China
USA

Canada

Russia

India
UK

South
Singapore

Australia

Africa

regime, recovery is one of the most important


parameters.
• At 25.7 cents per dollar, India is ahead only of Brazil
amongst BRICS nation.
Source: www.doingbusiness.org
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What does the code intends to changes ?

1. Insolvency test moved from ‘erosion of net worth’ to ‘payment default’

2. Single insolvency and bankruptcy framework. Replaces Sick Industrial Companies (Special Provisions)
Repeal Act, 2003 and modifies / amends some provisions of other legislations like Companies Act, 2013,
SARFAESI etc.

3. Time bound resolution process

4. Clear and unambiguous process to be followed by all stakeholders. Shift of control from shareholders and
promoters to creditors

5. Provide confidence to lenders of their rights and their enforcement.

6. Better symmetry of information flow between creditors and debtors

7. Shift of jurisdiction to NCLT and DRT

8. Government dues would rank below to those of secured creditors and unsecured financial creditors

9. In case of fraudulent diversion of assets, personal contribution can be sought; imprisonment possible

10. Insolvency Professional (IP) to take over the management and operations of the borrower during the CIRP

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Journey of the Code thus far

The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11 May
2016, received Presidential assent on 28 May 2016.
It is expected to be implemented in early 2017.
Events Date/Month
Bankruptcy Law Reform Committee (BLRC) formed August 2014
Final report and draft bill submitted by BLRC November 2015
First draft presented in Parliament and then referred to Joint committee December 2015
Report of Joint committee presented to Lok Sabha April 2016
Code passed by Parliament May 2016
Responsibility for implementation given to MCA June 2016
Sections pertaining to IBBI, powers to make regulation etc. notified August 2016
IBB members appointed October 2016
Six draft rules and regulations issued for public comments:
• registration of IPs
• Registration of IPAs
• model Bye- laws October 2016
• Resolution process
• Liquidation process
• Application rules
Last date to submit public comments on draft regulations 31 October 2016

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Insolvency and Bankruptcy Code ecosystem

Insolvency and Bankruptcy Code ecosystem

IBB – apex body for promoting transparency & governance in the


administration of the IBC; will be involved in setting up the infrastructure
Insolvency and Bankruptcy and accrediting IPs & IUs.
NCLT – The Adjudicating authority

Board (IBB) IUs - Centralised repository of financial and credit information of


borrowers; would validate the information and claims of creditors vis-à-vis
borrowers, as needed.
IPAs- professional bodies registered by the Board to promote and
Insolvency Information regulate the insolvency profession; these bodies will enrol Ips
Agencies Utilities (IUs)
IPs- Licensed private professionals regulated by the Board; will conduct
(AA)

resolution process; to act as Liquidator/bankruptcy trustee; appointed by


creditors and override the powers of board of directors.
Insolvency
Professionals Adjudicating Authority (AA) - would be the NCLT for corporate
(IPs) insolvency; to entertain or dispose any insolvency application, approve/
Committee reject resolution plans, decide in respect of claims or matters of law/ facts
of Creditors thereof.
(CoC) CoC- consists of financial creditors to who will appoint and approve
Insolvent actions of IPs
entity

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Corporate Insolvency Resolution Process (CIRP) under
the Code
Default Committee of creditors (CoC)
min INR 1 lakh; even a single day • Consists of financial creditors only,
excluding related parties
Who can file the application? • To approve several actions of RP
• Financial & Operational creditors Resolution plan
(including Government & The resolution plan must provide for:
employees/workmen), and • payment of insolvency resolution process
Corporate debtor costs
Resolution Professional (IRP/ RP) • repayment of the debts of operational
• Financial creditor and/ or creditors
corporate applicant shall propose • management of the affairs of the
the name of an IRP in the borrower after the plan is approved
application • implementation and supervision of the
• All powers of the board and approved plan
management shall vest with the Voting power
IRP/ RP • Only financial creditors have voting power
Moratorium in the committee in the ratio of debt owed
Moratorium shall prohibit: • All decision of the committee shall be
• Institution of suits approved by 75% of financial creditors
• Transfer of assets
• Foreclosure, recovery or Fast track insolvency
enforcement under SARFAESI For debtors as may be notified by the central
• Recovery of assets government (completed in 90 days)

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Corporate Resolution process timeline
Corporate Resolution process timeline
Appoint 2 registered 1st CoC
valuer to calculate meeting
CoC’s approval of
Admission of liquidation value Preparation resolution plan
application Public Creditors to
submit claims of IM Initiation of
announcement liquidation
No. of days
Day –ve 14 37
0 16 21 51 65 180
14 150 170
30 to 44

Filing of Application
Declare IRP to constitute CoC Submission
application for NCLT
moratorium NCLT to appoint and submit report. of plan
approval
to NCLT interim resolution
professional

Key points to focus for the financial creditors:


• Approval or replacement of IRP
• Approve certain actions of IRP/RP
• Submit resolution plan based on information memorandum prepared by the RP
• It is the duty of resolution applicant and not of RP to prepare the Resolution plan; therefore creditors
may have to take independent consultant’s help.
• It is advisable that banks constitute a panel of industry experts whose help can be sought during the
insolvency resolution process

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Liquidation process under the Code
Liquidation order Reporting
Priority Waterfall of claims
Liquidation order will be passed if: • Preliminary report – within 30 days
• CIRP ends Insolvency resolution process from the date of the order;
• Plan not submitted to NCLT and liquidation costs • Progress report – within 15 days
• Plan not approved after end of every period of 3
• Decided by CoC Secured creditor & workmen months from the date of order
• Plan not properly implemented dues (upto 24 months) Insolvency and liquidation cost
Liquidation steps • Insolvency cost include interim
Other employee dues (upto 12 funding, cost of running the debtor
• Appointment of liquidator
months) as going concern (eg rent or salary
• Formation of liquidation estate
• No legal proceeding by or against of employees), cost of IP etc
Financial debts of unsecured • Liquidation cost include any cost
the debtor creditors
• Consolidation of claims incurred by liquidator during
• Distribution of assets liquidation period
Government dues (upto 2 years) Secured creditor in liquidation
• Dissolution of debtors (to be and unpaid secured creditors
Secured creditor has the option to:
completed within 2 years) • enforce and realise the security
Liquidator Any remaining debts and dues outside the Code, or
Liquidator shall: • relinquish its security interest and
• Form liquidation estate receive proceeds as defined in the
• take custody & control of all assets Preference shareholders, if any
priority of claim
• consolidate, verify, admit and • Distinction between rights of different
determine value of creditors claims Equity shareholders or partners, class of secured creditors (first vs
• Carry on the business for its as the case may be second charge, fixed vs floating
beneficial liquidation charge) not clarified
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Section :
Role and Responsibility of IP under
the Code

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What makes a good insolvency professionals?

Practical working knowledge of :

Cash flow
Company law Banking/ Finance
management

Stake holder
Insolvency law Negotiation skills
management

Valuation / Commercial and


Taxation
Sale of assets business

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Key Powers, Roles & Responsibilities as envisaged
under the Code
1. The appointed resolution professional IP shall exercise all the powers of the board of
directors of the corporate debtor.
• The powers of the board of directors of the corporate debtor, shall stand suspended and be
exercised by the IRP / IP
• The officers and managers of the corporate debtor shall report to the IRP / RP and provide
access to such documents and records of the corporate debtor as may be required
• The IRP / IP shall act and execute in the name and on behalf of the corporate debtor all
deeds, receipts, and other documents

2. Key powers and duties of Resolution professional


• form Committee of creditors
• Chain Committee of creditors
• prepare the information memorandum (IM) and invite resolution plans
• investigate the financial affairs of the company

3. Key powers and duties of Liquidator


• receive, verify and value claims of all the creditors, and settle such claims
• take into his custody or control all the assets, and sell the assets
• carry on the business of the corporate debtor for its beneficial liquidation
• form an estate of the assets which will be called the liquidation estate
• apply to the Adjudicating Authority for avoidance of transactions

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Regulations on Insolvency Professionals

The IBBI had notified “Insolvency and Bankruptcy Board of India (Insolvency Professionals)
Regulations, 2016” on 23rd Nov 2016. Salient features of the regulations are:
Insolvency • The Board shall conduct a ‘National Insolvency Examination’ and ‘Limited
Professionals Insolvency Examination’. The syllabus, format and frequency of the ‘Limited
Examination Insolvency Examination’, including qualifying marks, shall be published on the
website of the Board at least one month before the examination
Eligibility and • Any person resident of India who:
Qualification for • has passed National insolvency examination; or
registration of • has passed the Limited Insolvency Examination, and has 15 years of
insolvency experience in management, after graduation or
professionals • has passed the Limited Insolvency Examination and has ten 10 years of
(Reg 5) experience as a member of ICCA; ICSI; ICAI (Cost); and Bar council
Application for • An individual enrolled with an insolvency professional agency may make
registration application in to Board in form A with application fee of Rs 10,000
Registration for a • an individual who has been “in practice” for 15 years as a CA, CS, CA (Cost),
limited period (Reg and advocate
9) • Valid for a period of 6 months
• This is notwithstanding Regulation 5 (i.e without exams)
Recognition of IP • LLP, partnership firm, or a company if:
Entities (Reg 12) • a majority of the partners of the LLP or partnership firm or a majority of
whole time directors of the company are registered as insolvency
professionals.

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Liquidation remuneration table
The draft Insolvency and bankruptcy (liquidation of insolvent corporate persons) regulations 2016
specifies that remuneration of liquidator shall be determined by the Committee of creditors. However
where the committee does not determine the remuneration, the Adjudicating Authority shall
determine the remuneration of the Liquidator, which shall at the maximum of the below table:
Slab (in INR) Percentage for Percentage for Percentage for
first six months 6-12 months 12-24 months
Realisation of
Less than 1 crore 5% 3.75% 2.50%
1 crore, and up to any amount less than 10 crores 3.75% 2.80% 1.875%
10 crores and up to any amount less than 50 crores 2.5% 1.875% 1.25%
50 crores and up to any amount less than 100 crores 1.25% 0.94% 0.675%
100 crores and above 0.25% 0.19% 0.125%
And distribution of
Less than 1 crore 5% 3.75% 2.50%
1 crore, and up to any amount less than 10 crores 3.75% 2.80% 1.875%
10 crores and up to any amount less than 50 crores 2.5% 1.875% 1.25%
50 crores and up to any amount less than 100 crores 1.25% 0.94% 0.675%
100 crores and above 0.25% 0.19% 0.125%

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