Insolvency | Bankruptcy | Liquidation For Corporate and Individual. Existing Legal Framework and Scope of the 2016 Code

1. Insolvency & Bankruptcy Code, 2016

2. Insolvency- The inability
of an Individual OR a
Corporate Person to
pay their debt(s) when
they are due and
payable
Bankruptcy - When
an Individual is
declared incapable
of paying their dues
by a competent
Court of Law.
Liquidation – Process
of winding up of a
Corporate person.
What are Insolvency, Bankruptcy
and Liquidation?

3. ØChapter XIX & Chapter XX of Companies Act, 2013 - Revival and Rehabilitation of
Sick Companies and Winding Up of Companies (Not in force)
ØPart VIA, Part VII & Section 391 of Companies Act, 1956 - Revival and Rehabilitation
of the Sick Companies and Winding Up of Companies.
ØRDDBFI Act, 1993 -Recovery of debt(s) due to banks and financial institutions.
ØSARFAESI Act, 2002 - Regulates securitisation and reconstruction of financial assets
and enforcement of security interest.
ØSICA Act, 1985 - Detecting Sick and Potentially Sick companies and enforce
measures to prevent, ameliorate and provide remedy to them.
ØThe Presidency Towns Insolvency Act, 1909 - Law relating to Individual insolvency in
the Presidency towns (Bengal, Madras & Bombay)
ØThe Provincial Insolvency Act, 1920- Law relating to Individuals in India.
ØChapter XIII of the LLP Act, 2008 - Winding up and dissolution of Limited Liability
Partnerships.
Erstwhile Legislative Framework for
Corporate & Individual Insolvency

4. Impact of the
Code, 2016
Amending
Schedule
Existing Legislature
Amended XI Chapter XIX & Chapter XX of Companies Act, 2013
Amended V RDDBFI Act, 1993
Amended VII SARFAESI Act, 2002
Amended X Chapter XIII of the LLP Act, 2008
Amended VIII SICA Act, 1985
Repealed NA The Presidency Towns Insolvency Act, 1909
Repealed NA The Provincial Insolvency Act, 1920
Amended : Amending specific provisions under the Act which deals with
Insolvency/Bankruptcy/Liquidation.
Repealed : Completely Repealed
*Section 238 of the Code, 2016 states that in case of any inconsistency between any Act and the
Code, the provision of the Code shall prevail.

5. ØHighly fragmented legal framework WITH
ØMultiple judicial forums resulting in lack of clarity and certainty in
jurisdiction.
ØConcurrent/Overlapping jurisdictions encouraged appeals/stays
resulting in delayed decisions.
ØAverage time to resolve insolvency matters is 4.5 years. [Singapore 8
months , London 1 year]
ØIndia has the lowest recovery rate - 20% of the debt value [World Bank
Report, 2014]
ØLack of adequate and credible data regarding assets, indebtedness and
security situation of Companies.
Challenges in Existing Legal Framework

6. Ecosystem under the 2016 Code
Insolvency and
Bankruptcy
Board of India
Insolvency
Professional
Agency
Information
Utilities
Adjudicating
Authorities and
Appellate
Tribunals
Insolvency
Professionals

7. THE INSOLVENCY
AND BANKRUPTCY
CODE, 2016
INSOLVENCY
RESOLUTION AND
BANKRUPTCY FOR
INDIVIDUALS AND
PARTNERSHIP FIRMS
INSOLVENCY
RESOLUTION AND
LIQUIDATION FOR
CORPORATE
PERSONS Corporate Person means a Company,
a Limited Liability Partnership, or any
other person incorporated with limited
liability under any law for the time
being in force but shall not include
any financial service provider such as
a Bank.
Scope of the 2016 Code

8. Who can file for Corporate Insolvency
Resolution?
Financial Creditor
Operational Creditor
Corporate Debtor
Who is a Financial Creditor?
Financial creditor means any person to whom a
financial debt is owed and includes a person to
whom such debt has been legally assigned or
transferred to. Financial debt means a debt along
with interest, if any, which is disbursed against the
consideration for the time value of money.
Who is an Operational Creditor?
Operational creditor means a person to whom an
operational debt is owed and includes any person to whom
such debt has been legally assigned or transferred.
Operational debt means a claim in respect of the provision
of goods or services including employment or a debt in
respect of the repayment of dues arising under any law for
the time being in force and payable to the Central
Government, any State Government or any local authority.
Who is a Corporate Debtor?
Corporate debtor means a corporate person who owes a
debt to any person.
Corporate person means a company as defined in clause
(20) of section 2 of the Companies Act, 2013, a limited
liability partnership, as defined in clause (n) of sub-
section (1) of section 2 of the Limited Liability Partnership
Act, 2008, or any other person incorporated with limited
liability under any law for the time being in force but shall
not include any financial service provider.

9. Corporate Insolvency Resolution - Steps
Default (Minimum Threshold Rs 1 Lakh)
Petition with the Adjudication Authority
Appoint the Interim Resolution Professional
Formation of Committee of Creditors
Appointment Confirmed by Committee of Creditors
Resolution Professional to Prepare Information
Memorandum
Resolution Plan Proposed by Creditors
Resolution Plan approved by Creditors Committee
with 75% majority by value
Resolution Plan Approved
by Adjudication Authority Liquidation
Next Day
Approve or Reject
Petition within 14
days
Appointment to be
confirmed within 20
days of
appointment
Within 180 days or
such extended
period, not
exceeding 90 days
Compulsory Liquidation of Corporate
Debtors in the Event the resolution
has not been agreed within 180 days
or such extended period

10. A 75% majority of the creditor's committee does
not approve of the resolution plan .
The NCLT rejects the resolution plan submitted
to it on technical grounds.
The debtor contravenes the agreed resolution plan and
an affected person makes an application to the NCLT to
liquidate the corporate debtor.
The creditor's committee does not approve a
resolution plan within 180 days (or within the
extended 90 days
Grounds for Liquidation for Corporate Person

11. Waterfall Mechanism – Priority for
payment of Claims under Liquidation
Order of Priority for Distribution of Assets:
•Insolvency related costs
•Secured creditors and workmen dues up
to 24 months.
•Other employees’ salaries/dues up to 12
months.
•Financial Debts (unsecured creditors)
•Government Dues (up to 2 years)
•Any remaining debts and dues
•Equity

12. Steps of Voluntary Liquidation
Declaration by majority Directors via affidavit stating:
a. The company has no debts and is able to pay existing debts
b. Purpose of liquidation is not to defraud
Documents to be attached with the declaration:
a. Audited financial statements
b. Record of business operations for the last 2 years
c. A report of valuation of assets
Passing of Special Resolution within 4 Weeks of the Declaration:
a. To liquidate the company
b. To appoint the insolvency Professional as liquidator.
*2/3 Majority of Creditors (if any) must approve the Special Resolution within 7 Days
Notifying the ROC and the Board within 7 days of resolution or approval by the creditors.
Initiate Liquidation process as per the Code
Liquidator to make application to the Adjudicating Authority to pass dissolution order on completion of the Liquidation.
Adjudicating Authority to pass an order dissolution . The order shall be placed with the concerned Authority with which
the Corporate Debtor is registered within 14 days
Steps of Voluntary Liquidation
Declaration by majority Directors via affidavit stating:
a. The company has no debts and is able to pay existing debts
b. Purpose of liquidation is not to defraud
Documents to be attached with the declaration:
a. Audited financial statements
b. Record of business operations for the last 2 years
c. A report of valuation of assets
Passing of Special Resolution within 4 Weeks of the Declaration:
a. To liquidate the company
b. To appoint the insolvency Professional as liquidator.
*2/3 Majority of Creditors (if any) must approve the Special Resolution within 7 Days
Notifying the ROC and the Board within 7 days of resolution or approval by the creditors.
Initiate Liquidation process as per the Code
Liquidator to make application to the Adjudicating Authority to pass dissolution order on completion of the
Liquidation.
Adjudicating Authority to pass an order dissolution . The order shall be placed with the concerned Authority with
which the Corporate Debtor is registered within 14 days
Voluntary Liquidation

13. ØFor individuals and unlimited partnerships
ØThe minimum default amount is INR 1000 (USD 15) and above.
ØThe Code envisages three distinct processes in case of
insolvency:
a. automatic fresh start
b.insolvency resolution process
c.bankruptcy
ØThe Adjudicating Authority for Individual/Partnership insolvency
resolution process is the Debt Recovery Tribunal .
Insolvency Resolution and Bankruptcy for Individuals and
Partnership Firms
ØFor individuals and unlimited partnerships
ØThe minimum default amount is INR 1000 (USD 15) and above.
ØThe Code envisages three distinct processes in case of
insolvency:
a. automatic fresh start
b.insolvency resolution process
c.bankruptcy
ØThe Adjudicating Authority for Individual/Partnership insolvency
resolution process is the Debt Recovery Tribunal .

14. Fresh Start for Individuals
ØAn eligible debtor who is unable to pay his debt shall be entitled to make an
application either personally of through resolution professionals for a fresh start
resulting in discharge of his qualified debts.
ØThe fresh start process is only available to individual insolvency.
ØThe resolution professional appointed by Debt Recovery Tribunal (DRT)shall
examine merits of the fresh start application and shall submit the report to DRT for
its decision
What is the Eligibility Criteria of the Debtor
(a) the gross annual income does not exceed Rs 60,000/-
(b) the aggregate value of the assets does not exceed Rs. 20,000/-
(c) the aggregate value of the qualifying debts does not exceed Rs.
35,000/-
(d) not an un-discharged bankrupt
(e) does not own a dwelling unit
(f) a fresh start process, insolvency resolution process or bankruptcy
process is not subsisting
(g) no previous fresh start order made in the preceding twelve
months
What are Qualified Debts? - Qualified debt are debts all kinds of dues excluding
(a) an excluded debt;
(b) a debt to the extent it is secured; and
(c) any debt which has been incurred three months prior to the date of the
application.
What are Excluded Debts?
- Excluded debt means—
Øfine imposed by a court or tribunal
Ødamages for negligence, nuisance or breach of a
statutory, contractual or other legal obligation;
Ømaintenance to any person
ØStudent loan.

15. Individual Insolvency Resolution Process for Individual and
Partnership Firms
ØAn application to initiate an insolvency resolution process shall be
made by the debtor himself or by the creditors though the insolvency
resolution professionals with the Debt Recovery Tribunal.
ØPartners of a partnership firm shall not be allowed to apply for an
insolvency resolution process unless a joint application is filed by the
majority of the partners of the partnership firm.
ØThe creditor and the debtor shall have to arrive at an agreement as
to the repayment plan which shall be approved by the 75% of the
financial creditors.
ØOnce the plan is finalized, it is placed with DRT to finalize and pass an
order accordingly. Once approved, it becomes binding on the parties.
ØOn rejection, process of Bankruptcy follows.

16. ØThe bankruptcy of an individual can be initiated only after the
failure of the insolvency resolution process.
ØThe bankruptcy trustee (insolvency professional) shall be
responsible for the administration of the estate of the bankrupt
and shall , pay the claims based on the priority defined by the
code.
Bankruptcy for Individuals and Partnership Firm

17. SL. Key Aspects of the Insolvency and Bankruptcy Code
1 Debtor in possession’ to a ‘Creditor in control’ regime.
2 Resolve insolvencies in a strict time-bound manner – 180 days (extendable
up to 270 days) of Moratorium
3 Clearly defined ‘order of priority’ or the waterfall mechanism
4 The waterfall to render government dues junior to most others is significant.
5 Protect workers’ Interests – Prioritizes the payment of workmen dues.
6 Formation of Information Utilities to reduce information asymmetry between
the various participants involved in the insolvency procedures

18. ØEstablishment of new infrastructure such as the Board and CLT/DRT
ØRequirement of trained and competent insolvency professionals.
ØPossibility of delay because of disputes and appeals
ØPossibility of Government intervention.
Operational/Legal Issues

19. Major facelift to the existing regime relating to restructuring and insolvency and
bankruptcy in India.
It promises to provide the one, big missing piece in the existing jigsaw of laws in the
form of establishing a framework for time–bound resolution for delinquent debts.
Induces a balanced approach of rehabilitation and recovery.
To safeguard interest of the stakeholders, promote entrepreneurship and to
increase the flow of capital into the economy.
The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform,
which will give a quantum leap to the functioning of the credit market.
The passing of this Code and implementation of the same will give a big boost to
Ease of Doing Business in India.
Conclusion