3. Understanding the Code
Vaish Associates Privileged & Confidential
Insolvency is the
inability of a person or
corporation to pay their
bills as and when they
become due and payable.
Liquidation is
the process of
winding up a
corporation or
incorporated
entity.
Bankruptcy is
when a person is
declared
incapable of
paying their due
and payable bills.
Differentiation
- Insolvency;
- Bankruptcy; and
- Liquidation
Why is it a Code?
“Code” is usually known as a collection
or compendium of laws. It refers to a
systematic and comprehensive
compilation of laws, rules or regulations
that are consolidated and classified
according to a particular subject matter.
4. KING OF GOOD TIMES – Really ???
Vaish Associates Privileged & Confidential
6. Why is it needed?
Vaish Associates Privileged & Confidential
Indian Banks have become immensely vulnerable
to ineffective & poor recovery mechanism on
corporate loans;
Gross NPAs of the banking industry rise from
2.4% to 4.8% from 2008 to 2015;
Restructured advances have increased from 1.2 %
in 2008 to 6.8 % in 2015;
Nearly 60,000 bankruptcy cases pending in courts;
World Bank Report – “4 years to wind up an ailing
company in India, almost twice as long as it does
in China, 1.5 years in other member countries of
OECD”; and
Recovery of debts – too low vis-à-vis other
countries.
7. • System of Official Liquidator has not been successful
• Banks can turn to separate DRT, partly staffed by Bank officials and overseen by the Ministry of Finance
• Both are overstretched with piles of files lying under pendency.
• Multiple adjudication fora arbitrage
• Reform process has so far taken the approach of "interim fixes designed to solve the problem at hand.”
• Benefit of Separate Legal Entity
Loopholes in existing laws
Vaish Associates Privileged & Confidential
9. Post IBC - Inter-play between SICA, RDDBI, SARFAESI and IBC
After IBC gets notified, SICA Repeal Act 2003 will come into force which will lead to dissolution
of BIFR and the new cases will be handled by NCLT.
All pending matters before BIFR shall abate as the sickness/ insolvency criterion in IBC is very
different from what is in SICA
SARFAESI & RDDBI will hold the same force.
But now secured creditors can approach under both SARFAESI and IBC as they found suitable.
Now adjudicating authority for the individuals will be DRT while the NCLT will be governing
issues for corporate person.
By virtue of IBC the voluntary winding up procedure has been shifted from Companies Act to
IBC.
Vaish Associates Privileged & Confidential
10. Same Product, New Packaging
Vaish Associates Privileged & Confidential
11. Key Features
Vaish Associates Privileged & Confidential
Applicable to both corporate and non-corporate persons (except financial service provider);
Allow creditors, whether secured; unsecured; financial or operational; domestic or international to initiate a
resolution processes thereby aiming for an early detection of the fraud;
Establishes time-bound moratorium on acceleration and enforcement of debts against the company;
The resolution professionals will replace the existing management during insolvency proceedings;
Provides for time-bound viability assessment mechanisms, liquidation processes and distribution waterfalls;
Provides for penalties on promoters for asset diversion leading up to liquidation;
The provisions of the Code overrides SARFAESI Act, 2002;
Inability to pay debt will no more be a ground for winding up under the Companies Act; “default” means non-
payment of debt or instalment;
Voluntary Liquidation shall be subject to provisions of the Code; and
Chapter governing Revival and Rehabilitation of Sick Companies of Companies Act 2013, stands omitted.
12. "financial service" includes any of the following services, namely:—
(a) accepting of deposits;
(b) safeguarding and administering assets consisting of financial products, belonging to
another person, or agreeing to do so;
(c) effecting contracts of insurance;
(d) offering, managing or agreeing to manage assets consisting of financial products belonging
to another person;
(e) rendering or agreeing, for consideration, to render advice on or soliciting for the purposes
of—
(i) buying, selling, or subscribing to, a financial product;
(ii) availing a financial service; or
(iii) exercising any right associated with a financial product or financial service;
(f) establishing or operating an investment scheme;
(g) maintaining or transferring records of ownership of a financial product;
(h) underwriting the issuance or subscription of a financial product; or
(i) selling, providing, or issuing stored value or payment instruments or providing payment
services;
Financial Services
Vaish Associates Privileged & Confidential
Definition- IBC, 2016
13. ‘Debtor-in-possession’ to ‘Creditor-in-possession’
Vaish Associates Privileged & Confidential
The Courts are being conscious vis-a-vis piercing the corporate veil for default;
The Code aims at bringing the defaulters to book by empowering creditors to initiate
the process at an early stage for replacing the management;
The Code provides for takeover of management by insolvency professionals
nominated by the creditors. Professionals to have the flexibility to bring in turnaround
specialists and consultants to achieve the desired business results;
The Code provides for liquidation of a company at the earliest opportunity to
minimise the losses for debtors as well as shareholders.
14. Vaish Associates Privileged & Confidential
Applicability, Scope & Structure
Applicability STRUCTURE
In entirety, the Code has 255 sections which are divided into
5 Parts as given below
Part I
Preliminary
(Definitions)
Part II
Insolvency
Resolution and
Liquidation for
Corporate Persons
Part III
Insolvency Resolution
and Bankruptcy for
individuals and
Partnership Firms
Part IV
Regulation of
Insolvency
Professionals,
Agencies and
Information Utilities
Part V
Miscellaneous
(enables amendments
in other statues such
as Companies Act
2013)
Schedules
(11 Schedules)
Provides for
amendments to be
carried out in other
statues
All kinds of:
- Corporate Enterprises;
- Limited Liability Partnerships;
- Partnership Firms; and
- Individuals.
Scope
- Insolvency;
- Liquidation;
- Voluntary Liquidation (solvent
insolvency); and
- Bankruptcy
15. Framework of the Code
Vaish Associates Privileged & Confidential
Regulator Adjudicator
Insolvency and Bankruptcy Board of India (IBBI)
National Company Law
Tribunal
Debt Recovery
Tribunal
Corporate Entities Non-Corporate Entities
Companies/
LLPs
Individuals and
Partnership Firms
Insolvency Professional Agencies;
Insolvency Professionals; and
Information Utilities
16. Corporate Insolvency Resolution Process: Initiation and Commencement
Vaish Associates Privileged & Confidential
Who is entitled to initiate Corporate Insolvency Resolution Process?
When can a Corporate Insolvency Resolution Process initiated?
How the process will be initiated?
Who is not entitled to initiate CIRP?
What is the timeline specified in the Code vis-à-vis completion of CIRP?
17. Broad CIRP-Process
Vaish Associates Privileged & Confidential
Moratorium, Collation of claims and constitution of committee of creditors by Interim Resolution Professional
Appointment of Resolution Professional in the creditors meeting held within 7 days of constitution of
committee of creditors (only financial creditors ; no related party voting)
Resolution Professional to prepare Information Memorandum
Resolution Applicant to prepare (on the basis of Information Memorandum) and submit resolution plan to
Resolution Professional for examination & further submission for approval of committee of creditors
Resolution plan
approved by
committee
Resolution plan
rejected by
committee
NCLT
approves plan
NCLT
rejects plan
Liquidation process
starts
Admission of application and appointment of Interim Resolution Professional within 14 days (tenure 30 days)
18. Moratorium
Vaish Associates Privileged & Confidential
When can NCLT declare Moratorium?
What does Moratorium includes:
- institution/continuation of suit or proceedings against the corporate debtor;
- transferring or disposing off any asset by the corporate debtor;
- any action to foreclose/recover any security interest created by corporate debtor vis-à-vis
property including any action under SARFAESI, 2002; and
- recovery of any property by an owner where property is occupied/ is in possession of
corporate debtor.
Moratorium shall cease to be in effect:
- on completion of CIRP; or
- when resolution plan is approved by NCLT during the CIRP period; or
- where liquidation order is passed
19. Broad Liquidation Process
Vaish Associates Privileged & Confidential
Appointment of Liquidator
Formation of Liquidation Estate
Consolidation of claims
Verification of claims
Admission or Rejection of claims
Determination of value of claims
Appeal by the Creditor to the NCLT, within 14 days of rejection of claims
Liquidator to scrutinise transactions
Distribution of assets and dissolution of Corporate Debtor
20. Waterfall Mechanism
Vaish Associates Privileged & Confidential
Insolvency resolution and liquidation cost
Secured creditor (in case he has
relinquished security)
Wages and unpaid dues to employees (other than workmen) for a period of 12 months
preceding liquidation commencement date
Unsecured creditors
Central and State government dues
Any remaining debts or dues
Preference shareholders, if any
Equity shareholders or partners, as the case may be
Workmen’s dues ( for period of 24 months
preceding liquidation commencement date)
+
In case of liquidation,
the asset of the
corporate debtor will be
sold and the proceeds
will be distributed
amongst the creditors
in the following order
of priority:- + Secured creditor for an unrealised amount for
enforcing security interest
21. Cross-border Insolvency
Vaish Associates Privileged & Confidential
The Code provides enabling provisions to address cross border insolvency issues, given the multi-
jurisdictional spread of assets of large corporate houses;
- the Central Government may enter into agreements with any other country for enforcing the
provisions of the Code and notify applicability of the same from time to time (BILATERAL
AGREEMENTS - Section 234);
- ability of the Adjudicating Authority to issue ‘letter of requests’ to the courts/authorities of other
countries for seeking information or requesting an action in relation to assets of debtor situated
outside India (RECIPROCAL ARRANGEMENTS Section 235).
The term ‘Property’ under section 3 (27) of the Code includes property of every description
situated in India or outside India.
22. Vaish Associates Privileged & Confidential
Conclusion
Defaulter’s will not be able to take ride over the multifora system governing laws;
Code has attempted to recognise the balance between excessive court intervention and
excessive power in the hands of creditors;
The Code focuses on time-bound remedy vis-à-vis recovery mechanism;
Recognising cross border insolvency will help developing international debt market in
India; and
Litmus test: How is it implemented?
23. THANK YOU
Disclaimer: Please note that this presentation is based on the limited information available with us.
While every care has been taken to ensure accuracy of this presentation, Vaish Associates Advocates
shall not assume any liability / responsibility for any errors that might creep in. The material herein
does not constitute / substitute professional advice that may be required before acting on any matter.
Without our prior written consent, this presentation shall not be quoted in whole or in part or
otherwise referred to in any document or delivered to any other person or entity.
New Delhi
1st , 9th & 11th Floor,
Mohan Dev Building
13, Tolstoy Marg
New Delhi-110001
Tel: 91 11 49292525
Fax: 91 11 23320484
E-mail: delhi@vaishlaw.com
Mumbai
106 Peninsula Centre
(Behid Piramal Chambers ,
Income tax Office
Dr. S.S. Rao Road, Parel
Mumbai-400012
Tel: 91 22 42134101
Fax: 91 22 42134102
E-mail:
mumbai@vaishlaw.com
Bangalore
565/B, 7th Main,
HAL 2nd Stage,
Indiranagar, Bengaluru-
560038
Email:
bangalore@vaishlaw.com
For any further clarifications, you may contact - NPS CHAWLA, Principal Associate
Vaish Associates Advocates(npschawla@vaishlaw.com / +91-9958535300).