PPT on NCLT presented byRaghu Babu, Mentor and Advisor, Samisti Legal LLP at Seminar on NCLT and IBC on July 28, 2017 at Hyderabad

1. Insolvency, Bankruptcy and Liquidation
3
Insolvency
a state in which
financial difficulties of
a company are such it
is unable to run its
business at its current
pace.
Liquidation
The process
of winding
up a
company
Bankruptcy
When a person is
legally declared
as incapable of
paying their
dues and
obligations
 Insolvency precedes bankruptcy and
liquidation follows bankruptcy.
 Insolvency warnings:
— drop in sales
— delay in payments
— Increasing reliance on credit
 Cash flow test : when cash flow "in"
is less than cash flow "out".
RAGHU@RNA-CS.COM / 28 July 2017

2. Banks in India are going through
unprecedented times with stressed
loan portfolio touching all-time high.
There is an apprehension that there
could be further significant additions
as many stressed loan accounts have
been disguised as standard.
Realizing the problem, RBI has
attempted to force banks to clean up
balance sheets and come out with
many regulatory steps aimed at
improving banks’ ability to deal with
such stressed accounts. However, such
frameworks have proved unsuccessful.
India currently has multiple laws to
deal with insolvency, which leads the
entire resolution process fragmented,
expensive and time-consuming with
very low recovery rate.
In this scenario, the Indian
Government has introduced the
Bankruptcy and Insolvency Code, 2016
which will consolidate the existing
frameworks and create a new
institutional structure.
The Code creates time-bound
processes for insolvency resolution of
companies and individuals which
thereby will help India improve its
World Bank insolvency ranking.
4RAGHU@RNA-CS.COM / 28 July 2017
Background

3. Current stress in the banking sector
March 2013 2014 2015 2016
Total
Gross NPA Ratio (%) 3.27 3.86 4.37 7.61
Net NPA Ratio (%) 1.72 2.17 2.48 4.63
Stressed Assets/advances (%) NA 9.75 11.01 11.5
March 2013 2014 2015 2016
Public Sector Banks
Gross NPA Ratio (%) 3.59 4.34 4.94 9.6
Net NPA Ratio (%) 1.99 2.53 2.9 6.1
Stressed Assets/advances (%) NA 11.04 12.68 14.5
March 2013 2014 2015 2016
Private Sector Banks
Gross NPA Ratio (%) 1.86 1.82 2.14 2.7
Net NPA Ratio (%) 0.52 0.63 0.87 1.3
Stressed Assets/advances (%) NA 4.29 4.59 4.5
Stressed assets in the banking system
Our intent
is to have clean
and fully
provisioned
banks’ balance
sheets by March
2017
All out of the court debt
restructuring processes like
CDR, SDR, S4A and 5:25 have
proved unsuccessful and bad
loans have piled up in the
system after their
implementation
Source:RBI
5RAGHU@RNA-CS.COM / 28 July 2017

4. Concerns of currently used options
Option Concern
CDR
 Lost charm after withdrawal of forbearance benefit by RBI from 1st April, 2015.
 Not helped much. Too many failures post CDR implies it deferred the inevitable.
5:25  Available for large cases and a few select industries only – Infrastructure and Core Industries.
SDR
 For old cases cannot be forced upon.
 Existing management may continue in disguise.
 Finding new promoter is always a challenge
 Banks not comfortable towards steep discount to debt and need for refinancing
S4A
 Current cash flows of company taken as basis to ascertain sustainable debt, so there are not
enough companies which can come under its purview
 Terms and conditions of the loan cannot be changed.
6RAGHU@RNA-CS.COM / 28 July 2017

5. Erstwhile Legal Framework
Presidency Towns Insolvency Act, 1909 / Provincial
Insolvency Act, 1920 / Indian Partnership Act
Applicable to individuals and partnerships
Companies Act, 2013 / Companies Act, 1956
Deals with rehabilitation / revival / winding up of companies
*only court supervised winding up available now under
the 2013 Act; other proceedings under the Code
Limited Liability Partnership Act, 2008 r/w. Limited Liability
Partnership (Winding up and Dissolution) Rules, 2012
No provisions for rehabilitation / revival of LLPs
SARFAESI / Recovery of Debt Due to Banks and
Financial Institutions Act,1993
Debt recovery / enforcement of security
No revival / rehabilitation of the defaulting entity
SICA Revival / rehabilitation of only sick industrial companies
CDR , JLF, SDR and S4A
Introduced by RBI as out of court process
No legal sanction
Due to the complexity of multiple laws, the entire resolution procedure is fragmented,
expensive and time-consuming with very low recovery rate.
7RAGHU@RNA-CS.COM / 28 July 2017

6. Some Statistics
8
Ease of doing business Rank 2017
0
5
10
15
20
25
Recovery Rate (in %)
100
90
80
70
60
50
40
30
20
10
0
Cost of liquidation (in %)
1.5 1.5
0.8
1
0.8
4
2
4.3
1.7
2.1
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
5
Time taken for liquidation (in years)
7 8 2
15
22
123
40
130
78 74
140
120
100
80
60
40
20
0
12
10
4
8 7
12
9
22.7
18
13
88.6
88.7
82.8 87.4
78.6
38.6 36.9 35.1
26
15.8

7. Why Code was needed?
9RAGHU@RNA-CS.COM / 28 July 2017

8. Objective of the Code
 The Insolvency and Bankruptcy Code, 2016 has been formed with the following objectives:
To promote
entrepreneurship;
To make
credit available;
To balance the interest of all
stakeholders by
consolidating and amending
the existing laws relating to
insolvency and bankruptcy;
To reduce the time of
resolution for maximizing
the value of assets.
10
Market needs freedom at a broadly three stages of a business – to start a business (free entry), to
continue the business (fair competetion) and to discontinue the business (free exit)
— M.S. Sahoo, Chairman – Insolvency and Bankruptacy Board of India
RAGHU@RNA-CS.COM / 28 July 2017

9. Key Highlights of IBC 2016
 The Code brings a paradigm shift from "Debtors in possession" to "Creditors in Control"
 Insolvency test moved from "erosion of net worth" to "payment default"
 Single insolvency and bankruptcy framework. It replaces/modifies/amends certain existing laws
 Time bound resolution process at each stage
 Establishment of Insolvency and Bankruptcy Board-a regulator as an independent body
 A clearly defined distribution of recovery proceeds
 Insolvency Professional to take over management and control of the Corporate Debtor
 Government dues would rank below the claims of other creditors
 Have provisions to deal with concealment, fraud and /or manipulation leading to fine and/or imprisonment
 Provide confidence to Lenders and Investors in the debt market
11RAGHU@RNA-CS.COM / 28 July 2017

10. Supreme Court (Question of law)
Corporate Persons
(Companies and
LLPs
Debt Recovery
Tribunal
Debt Recovery
Appellate Tribunal
Individuals / Partnerships
12
Legal Structure
National Company
Law Tribunal
National Company
Appellate Law Tribunal
RAGHU@RNA-CS.COM / 28 July 2017

11. Institutional Framework
The Insolvency and Bankruptcy Code, 2016 has introduced the following entities for
successful implementation and smooth function.
13
Insolvency and
Bankruptcy Board
of India (IBBI)
Adjudicating
Authority (AA)
Insolvency
Professionals
Agencies (IPA)
Insolvency
Professionals (IP)
Information
Utilities(IU)
 Regulatory
authority of IPA, IP,
and IU
 Empowered to
make regulations in
respect of all the
processes,
appointments,
procedures,
investigation,
monitoring, etc.
 The AA will
exercise
jurisdiction
during the
insolvencyand
liquidation
process.
 For corporates,
LLPs – NCLT is AA
 For individuals
and partnerships
– DRT is AA
 IPA are those
specialized
bodies/agencies
that will be
entrusted with
the task of
registration and
governance of IPs
 IPs are appointed
by IPA, who would
take on the roles
of Resolution
Professional/Liqu
idator/bankruptc y
Trustee in the
process of
different entities
 An IU is an agency
that is in charge of
collecting,
collating,
authenticating and
disseminating
financial
information
RAGHU@RNA-CS.COM / 28 July 2017

12. Financial Debt
14
"financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the
time value of money and includes -
 money borrowed against the payment of interest;
 any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;
 any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock
or any similar instrument;
 the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or
capital lease under the Indian Accounting Standards or such other accounting standards as may be
prescribed;
 receivables sold or discounted other than any receivables sold on nonrecourse basis;
 any amount raised under any other transaction, including any forward sale or purchase agreement, having
the commercial effect of a borrowing;
 any derivative transaction entered into in connection with protection against or benefit from fluctuation in
any rate or price and for calculating the value of any derivative transaction, only the market value of such
transaction shall be taken into account;
 any counter-indemnity obligation in respect of a guarantee, indemnity bond, documentary letter of credit or
any other instrument issued by a bank or financial institution;
 the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in
sub-clauses (a) to (h) of this clause;
RAGHU@RNA-CS.COM / 28 July 2017

13. Some key definitions
15
Debt
 A liability or obligation in respect of a claim which is due from any person and includes
financial debt and operational debt
Default
 Non-payment of debt when whole or any part or installment of the amount of debt
has become due and payable and is not repaid by the debtor or the corporate debtor,
as the case may be
Creditors
 Any person to whom a debt is owed and includes a financial creditor, an operational
creditor, an unsecured creditor and a decree holder
Financial
creditors
 Any person to whom a financial debt is owed and includes a person
 to whom such debt has been legally assigned or transferred to;
 Includes Secured and Unsecured Financial Creditors
Operational
creditors
 A person to whom an operational debt is owed and includes any person to whom such
debt has been legally assigned or transferred;
 Includes Secured and Unsecured Operational Creditors
RAGHU@RNA-CS.COM / 28 July 2017

14. CorporateApplicant
CIRP – Corporate Insolvency Resolution Process - 1
16
FinancialCreditor OperationalCreditor
 Filing of application on occurrence of
default;
 Based on the information from IU, other
financial creditor may file an application
aswell
 Deliver a default notice to the corporate
debtor on occurrence of default
 Filing of occurrence of default
Adequate reply Not adequate reply
Settlement of dues
Dispute
Along with the application, to furnish
record of default and to propose name
of interim resolution professional
Filing of
application
To ascertain the existence of default, if satisfied, it shall accept, or otherwise reject
Within 14 days
Prior torejection Accept
Suggest rectification Proceed with Phase II
Re-apply Reject Within 7 days
 Alongwith the application, to furnish
record of default and propose name of
interim resolution professional.

15. CIRP – Corporate Insolvency Resolution Process - 2
17
 Order of admission of
 application by NCLT;
 Declaration of moratorium;
 Public announcement as per the
order of NCLT;
 Appointment of Interim
 Resolution Process
Liquidation If contravention on implementation of resolutionplan
If planrejected
 Interim resolution Professional
to appoint committee of
creditors (financial creditors);
 First meeting of creditors;
 CoC may accept the IRP
appointed by NCLT or may
appoint a new RP;
 For any option, the NCLT is
required to be communicated.
 CoC to approve plan (75%) and
submit to NCLT;
 NCLT may accept / reject plan;
 Implementation of plan;
 Moratorium ceases here;
 RP to submit records to IU / IBBI
 RP to appoint Resolution Applicant;
 RA to submit Resolution plan basis
the IM;
 RP to examine and approve the
Resolution Plan and submit to CoC
for approval.
 RP to conduct the corporate
insolvency resolution process;
 As many number of CoC meetings
can be convened as necessary;
 RP shall prepare Information
memorandum.
The entire process shall be completed within Resolution Period (180 days; extendable by 90 days)
RAGHU@RNA-CS.COM / 28 July 2017

16. Insolvency commencement date Insolvency resolution process period
Insolvency
means the period of one hundred and
eighty days beginning from the insolvency
commencement date and ending on one
hundred and eightieth day or such period
extended by NCLT not more than 90 days.
means the date of admission of an application
for initiating corporate insolvency resolution
process by the Adjudicating Authority under
sections 7, 9 or section 10, as the case may be;
18RAGHU@RNA-CS.COM / 28 July 2017

17. COC - Committee of Creditors
The committee of creditors shall comprise all financial creditors of the corporate debtor:
 Related Party excluded and no right to participate or vote. If Consortium then each
financial creditor will have right
 If a creditor is both FC and OC then debt to be bifurcated for voting
 If assigned then assignee has voting right as original
19
Voting Share means the share of the voting rights of a single financial creditor in the
committee of creditors which is based on the proportion of the financial debt owed to such
financial creditor in relation to the financial debt owed by the corporate debtor
Apart from financial creditors following can attend but not vote
 Members of the suspended board
 One representative of the operational creditors (only if debt is more than 10% of total debt)
However, absence of them will not make meeting invalid
Committee of
Creditors
(COC)
Voting
Share
Who can
attend
RAGHU@RNA-CS.COM / 28 July 2017

18.  AA shall declare moratorium order on the insolvency
commencement date prohibiting –
— institution of suits or continuation of pending suits or
proceedings against the Corporate Debtor including
execution of any judgment, decree or order in any court of
law, tribunal, arbitration panel or other authority
— transferring, encumbering, alienating or disposing of any of
its assets or any legal right or beneficial interest
— recovery of any property by an owner or lessor
— action to foreclose, recover or enforce any security interest
created by the corporate debtor in respect of its property
including any action under the SARFAESI Act, 2002
 Moratorium shall have effect till the completion of the CIR
process or liquidation order
Moratorium
20RAGHU@RNA-CS.COM / 28 July 2017

19. Resolution Professional – Role
21
 Management of operations of Corporate Debtor as going concern
 Public Announcement seeking Creditors Claims
 Appointment of Registered Valuers
 Receive and Collate all the claims
 Verification and Admission of Claims
 Constitution of Committee of Creditors
 Conducting first meeting of Committee of Creditors
 Determining the Voting share of the Creditors
 Reporting and submitting information to NCLT
RAGHU@RNA-CS.COM / 28 July 2017

20.  Resolution Applicant – Company / Promoter / PE /
Competitor / Lender
 What can contain Resolution Plan – Hair cuts / waivers /selling
businesses or assets partly or fully / fresh infusion of funds /
change of management
 Selected resolution plans confirming to requirements are
presented to the committee of creditors
 Approved resolution plan is submitted by RP to AA
Order of AA
 Admits the plan – moratorium ceases to exist, RP forwards all
records relating to the conduct of the corporate insolvency
resolution process and the resolution plan to the IBBI
 Rejects the plan – liquidation to be ordered
Resolution Plan
22RAGHU@RNA-CS.COM / 28 July 2017

21. 23
Filing of
applicationto
NCLT
Admission of
application
0
3
Public
announcement
14
–ve14
Appointment
of IRP and
declarationof
moratorium
Appoint 2
registered
valuers
Creditors to submit
theirclaims
7 21
23
Submission of
records to NCLT
30
44
Circulation of
Information
memorandum
150
Submissionof
Resolution
Plan toRP
Approval of plan
by Committee of
creditors
Submissionof
plan to NCLT
180
Acceptance /
Rejection of plan
byNCLT
First
Committee
Creditors
meeting
IRP to
verify
claims
CIRP-3 – Time Chart
RAGHU@RNA-CS.COM / 28 July 2017

22. ORDER OF PRIORITY
A. Entire insolvency resolution process cost and liquidationcost
+
+
24
Distribution of Assets / Waterfall
B1
Workmen’s dues for the period of twenty-four months
preceding the liquidation commencement date
B2
Debts owed to a secured creditor in the event such
secured creditor has relinquished security in the
manner set out in section 52
C. Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding
the liquidation commencement date
D. Financial debts owed to unsecured creditors
E1. Any amount due to the Central
Government
and the State Government
E2. Debts owed to a secured creditor for any amount
unpaid following the enforcement of security interest
F. Any remaining debts and dues
G. Preference shareholders, if any
H. Equity shareholders or partners, as the case may be
RAGHU@RNA-CS.COM / 28 July 2017

23.  Lokhandwala Kataria Constructions Vs Nisus Finance Investment Manager LLP:
— After admission by NCLT Parties approached NCLAT for dismissing the case
— NCLAT rejected the appeal
— Parties approached Supreme Court and SC passed order in favour of them
 Essar Steel
— CIRP would have adverse impact on the business of the Company and Questioned the
validity of RBI directions at the Company’s current position
— Finally NCLT admitted the case for CIRP initiation
 ICICI Bank Vs Starlog Enterprises Ltd
— NCLAT imposed a penalty of Rs.50000 on ICICI for stating incorrect claim amount
— Set aside the order given by NCLT
 Sandira D’Souza & Others Vs Electrans Shipping Pvt. Ltd
Part of the claim is disputed before Labour Court by the Petitioner themselves.
Takeaways from decided cases
25RAGHU@RNA-CS.COM / 28 July 2017

24. Other Important Points
26
 161 companies have been admitted under CIRP
 Innoventive Industries Ltd is first company admitted on
17 Jan 2017 under CIRP against application filed by ICICI Bank
 Three earliest cases which were admitted sought for
extension of Insolvency Resolution Time line – UB
Engineering, Innovative Industries and Nicco Corporation
 Impeact to various stake holders
 Opportunities for Professionals
RAGHU@RNA-CS.COM / 28 July 2017

25. raghu@rna-cs.com
www.samistilegal.in
+91 984 802 7782
ADVOCATES AND LEGAL ADVISORS
RAGHU@RNA-CS.COM / 28 July 2017