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IBC and Admiralty Law

IBC and Admiralty Law

INTRODUCTION.

In rem admiralty proceedings and the insolvency of a ship owner is fraught with tension. The advantage of arresting a ship, which elevates a maritime claimant to the status of a secured creditor, sits uncomfortably with principles of insolvency law, which do not contemplate an action in rem and the peculiar consequences that follow from it.

Interaction Between Admiralty Courts And Company Courts: A Critical Analysis Of Raj Shipping Case

DETAIL ANALYSIS.

The conflict between these two special jurisdictions came to a head before the Bombay High Court, which in a recent judgement in Raj Shipping Agencies Vs Barge Madhwa and Anr, attempted to reconcile the irreconcilable.

FACTS OF THE CASE.

Arrest orders were passed by the Bombay High Court against vessels, whose owners were insolvent. The High Court issued a winding up order against one of the ship owners under the Companies Act, 1956 (“Companies Act”). In parallel, insolvency proceedings were commenced against another ship owner by the National Company Law Tribunal and a moratorium ordered against commencement or continuation of all proceedings against that owner and its assets under the Insolvency and Bankruptcy Code, 2016 (IBC).

The official liquidator in the winding up proceedings objected to the continuation of the admiralty actions without the leave of the Company Court under Section 446 of Companies Act, 1956. As regards the insolvency proceedings against the other vessel owner, the maritime claimants argued that the moratorium under the IBC would not prevent continuation of the admiralty actions in the Bombay High Court.

The questions of law that arose for consideration were: –

  1.   Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?
  2.   Whether leave under Section 446(1) of the Companies Act is required for continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed?

Issue 1: Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?

The Court after hearing elaborate submissions, observed that its endeavour would be to give effect to both statutes and their objectives so as to avoid conflict. The judgement proceeded to analyse the distinction between an action in rem under the Admiralty Act and an action in personam under IBC. The Court reasoned that an action in rem is not an action against the corporate debtor/owner of the ship or the assets of the corporate debtor/owner. It accordingly concluded that the moratorium under the IBC would not apply to an action in rem under the Admiralty Act for arrest of the ship and consequently would not prevent the commencement of admiralty proceedings.

However, with a view to avoiding a clash between the two jurisdictions, it ruled that an action in rem could be commenced but not continued, as this would defeat the moratorium and the very purpose of the insolvency process under the IBC. The Court held that a maritime claimant had a statutory right in rem that could not be subordinated to the IBC, which entitled it to arrest the ship, but not to continue proceedings, so as to give the corporate debtor the time and opportunity to be rescued/rehabilitated. Those maritime claimants who arrested the ship according to the Court, would be characterized as secured creditors for insolvency purposes.

According to the court, maritime claimants apart from being treated as secured creditors, should ordinarily be ascribed full value for their claim and the scheme of priorities under the Admiralty Act should be adopted in the resolution plan. The Court ruled that vessels arrested before the moratorium can only be released by the Admiralty Court, upon full payment of security.

The Court similarly reasoned that Section 33(5) of the IBC which bars the commencement or continuation of proceedings in liquidation, would not apply to an action in rem, as the claim is against the res and not against the corporate debtor.

Issue 2: Whether leave under Section 446(1) of the Companies Act is required for the continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed that owned the ship?

The Court observed that the Admiralty Act, 2017 is a consolidating enactment dealing with arrest of ships, maritime claims, judicial sale of ships and determination of priorities. The jurisdiction of the Admiralty Court was found to be special, unlike that of regular civil courts. A judicial sale of a ship by an Admiralty Court in a public auction is free from all prior claims, liens and encumbrances and the purchaser at the auction acquires a clean title free from any maritime liens, claims or encumbrances. This is unlike a sale of property conducted by the Company Court. The Court accordingly held that no leave of the Company court was required as the Admiralty Act, 2017 being a special enactment, would prevail over Companies Act, 1956.

 

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REMOVAL OF COMPANY LIQUIDATOR UNDER IBC

REMOVAL OF LIQUIDATOR

Under section 275 of the Companies Act, 2013 for the purposes of winding up of a company by the Tribunal, the Tribunal at the time of passing winding up order shall appoint an Official Liquidator or a liquidator from a panel maintained under sub-section (2) as the Company Liquidator. The sub-section (2) of section 275 was amended by the Insolvency Code, 2016, providing that the provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016. 

  1. Removal of the Liquidator:

The inherent powers of  NCLT – Rule 11 of the NCLT Rules, 2016 read with section 60 (5) C

  1. Rule 11 of the NCLT Rules is carefully worded
  2. Section 60 (5) C of Insolvency & Bankruptcy code 2016

 

An Overview of Liquidator under Companies Act, 2013

Section 60 (5) C

 Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—

 

(a)…

(b)…

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

 

11. Inherent Powers. – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”

It is important to note that these rules are not specific to a particular act or do not derive their powers solely to be made applicable to a particular act. These are general rules that govern the Tribunal, while dealing with cases brought before it – by any and all acts that have appointed the Tribunal to adjudicate on certain disputes. Therefore, it would be improper to say that the Tribunal cannot use its inherent powers. Considering how the Bankruptcy Law Reforms Committee (BLRC) wished to use the existing infrastructure in place, it is clear that the Tribunal was to be utilised to meet the ends of justice in adjudicating Insolvency matters of corporate persons.

Two important terms in the Preamble of the Insolvency and Bankruptcy Code, 2016 are time bound manner for maximisation of value of assets and balance the interests of all the stakeholders Removal and replacement of a Liquidator is an act that NCLT must undertake for the purpose of value maximisation of assets and to balance the interests of all the stakeholders.

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 cannot be drawn into picture here since, in Rule 2 of the said Rules, it is clearly mentioned that these Rules would be applicable to matters relating to Corporate Insolvency Resolution Process. The same rules define Corporate Insolvency Resolution Process to mean the resolution process for corporate persons under Chapter II of Part II of the Code. However, liquidation squarely falls in Chapter III of Part II of the Code. Therefore, arguments limiting use of NCLT’s inherent powers cannot be taken.

Section 276. Removal and replacement of liquidator: [Effective from 15-12-2016]

  1.  The Tribunal may, on a reasonable cause being shown and for reasons to be recorded in writing, remove the provisional liquidator or the Company Liquidator , as the case may be, as liquidator of the company  on any of the following grounds, namely:—

 

  • Misconduct;
  • fraud or misfeasance;
  • professional incompetence or failure to exercise due care and diligence in performance of the powers and functions;
  • inability to act as provisional liquidator or as the case may be, Company Liquidator;
  • conflict of interest or lack of independence during the term of his appointment that would justify removal.

 

 

  • In the event of death, resignation or removal of the provisional liquidator or as the case may be, Company Liquidator, the Tribunal may transfer the work assigned to him or it to another Company Liquidator for reasons to be recorded in writing.
  • Where the Tribunal is of the opinion that any liquidator is responsible for causing any loss or damage to the company due to fraud or misfeasance or failure to exercise due care and diligence in the performance of his or its powers and functions, the Tribunal may recover or cause to be recovered such loss or damage from the liquidator and pass such other orders as it may think fit.
  • The Tribunal shall, before passing any order under this section, provide a reasonable opportunity of being heard to the provisional liquidator or, as the case may be, Company Liquidator.

 

According to the Black’s Dictionary term Misfeasance includes ,strictly is not doing a lawful act in a proper manner, omitting to do it as it should be done; while malfeasance is the doing an act wholly wrongful;  and nonfeasance is an omission to perform a duty or a total neglect of duty. But “misfeasance” is often carelessly used in the sense of “malfeasance.”


  1. Section 16 of the General Clauses Act, 1897

“Power to appoint to include power to suspend or dismiss. Where, by any [Central Act] or Regulation, a power to make any appointment is conferred, then, unless a different intention appears, the authority having [for the time being] power to make the appointment shall also have power to suspend or dismiss any person appointed [whether by itself or any other authority] in exercise of that power.”

This is an important provision in understanding how NCLT has the inherent power to remove a Liquidator who has been appointed.

According to Woodroffe’s Book on Receivers, it is said:

“The power to terminate flows naturally and as a necessary sequence from the power to create. The power of the Courts to remove or discharge a Receiver whom it has appointed may be exercised at any stage of the litigation. It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.”

It was also noted by the Federal Court in Kutoor Vengayil Rayarappan Nayanar v. Kutoor Vengayil Valia Madhavi Amma

“It seems because of this statutory rule based on the principles mentioned above that in Order XL Rule 1 of the Code of Civil Procedure no express mention was made of the power of the court in respect of the removal or suspension of a receiver. The General Clauses Act has been enacted so as to avoid superfluity of language in statutes wherever it is possible to do so. The legislature instead of saying in Order XL Rule 1, that the court will have power to appoint, suspend or remove a receiver, simply enacted that wherever convenient the court may appoint a receiver and it was implied within that language that it may also remove or suspend him. If Order XL Rule 1 of the Code of Civil Procedure is read along with the provisions above mentioned, then it follows by necessary implication that the order of removal falls within the ambit of that rule…”

To further drive home the point that such an exercise of power to remove a receiver, is exercised by the inherent powers of a court, it was noted that:

In M.K. Subramania Iyer v. Muthulakshmi Ammal, held that.

“It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, .that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.” I take it, therefore, that the present petition is put in for the exercise of the inherent powers of the Court, though it does not come under any particular section or rule in the Code.

The same reasoning was also used in  Chacko v. Jaya Varma

The inherent powers of the court under the Code of Civil Procedure (CPC) are found in various sections The relevant section similar to the current issue is Section 151 CPC which reads as follows, “Nothing in this Code shall be deemed to limit or otherwise affect the inherent powers of the Court to make such orders as may be necessary for the ends of the justice or to prevent abuse of the process of the court.” Rule 11 of the NCLT Rules and Section 151 CPC are similarly worded. Therefore, even in the absence of a specific provision, NCLT can exercise its inherent powers along with Section 16 of the General Clauses Act to remove a Liquidator.

INITIATION OF LIQUIDATION:

Liquidation may be initiated under Section 33 of the Code when Adjudicating Authority (“AA”) either does not receive the Resolution Plan under Section 30(6) of the Code or the maximum period prescibed for corporate insolvency resolution process expires or in case where AA rejects the resolution plan under Section 31 of the Code. Further, the Committee of Creditors (“CoC”) may also, with at least 66 % votes, decide to liquidate the Corporate Debtor (“CD”) under Section 33(2), any time before the resolution plan is approved and the Resolution Professional intimates AA of such decision. Also, if the CD contravenes any terms of an approved resolution plan, any person whose interest is prejudicially affected by such contravention may apply for liquidation of CD.

AA while passing the order of Liquidation of CD, shall direct issuance of public announcement under Section 33(1) of the Code that the CD is in liquidation and require that such order is also sent to registering authority of CD, such as Registrar of Companies in case of companies.

MORATORIUM:

As in the Corporate Insolvency Resolution Process, moratorium kicks in on passing of the order of liquidation also. No suit or legal proceedings shall be instituted by or against the CD. However, the liquidator may file such proceedings on behalf of CD, with prior approval of AA.

DIRECTORS AND EMPLOYEES:

All powers of the Board of Directors, Key Managerial Personnel and the Partners of the CD, as the case may be, shall cease to have effect and shall vest with the Liquidator.

Furthermore, an order for liquidation shall be deemed to be notice of discharge to all employees of the CD. However, they may be retained where business of CD is proposed to be continued during the liquidation process.

All persons viz. Officers, Directors, Partners, Auditors, and Resolution Professional as well as those holding properties of CD have a duty to assist and cooperate with the Liquidator in managing the affairs of CD.

The CD is also required to add the phrase ‘In Liquidation’ after its name in all correspondence.

LIQUIDATOR AND FEES:

While passing the order of liquidation, AA is required to name an Insolvency Professional (IP) as Liquidator. In case any IP is already appointed as Resolution Professional for Corporate Insolvency Resolution Process, he may be continued or another IP can be appointed, subject to his consent for appointment and independence etc. There are provisions for his replacement in certain circumstances as mentioned under Section 34(4) of the Code.

Fee payable shall be decided by CoC under Regulation 39D of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, where they do not approve the resolution plan. Financial creditors are also required to advance sums required for liquidation cost over liquid assets available, which would be refunded with interest out of proceeds of liquidation. In all other cases, fees would be on percentage basis on realizations and distribution to stakeholders, as prescribed under Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations).

POWERS AND DUTIES OF A LIQUIDATOR:

A liquidator is required to oversee the entire process of liquidation, right from the liquidation order to the dissolution of the CD. He has to take custody of all the assets, evaluate them properly and dispose them in a transparent manner keeping in mind the objectives of the Code. In the interim, he has to preserve and protect them. He has to invite claims and verify them for consolidation. Thereafter, he may admit or reject the claims. He has to defend any suit, prosecution or other legal proceedings, civil or criminal, in the name and on behalf of the CD.

A creditor may appeal to the AA, against the decision of the liquidator, accepting or rejecting the claims within fourteen days of the receipt of such decision.

Liquidator has the power to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities. Furthermore, in case any clarification is required, AA’s direction can be obtained.

ROLE OF COC IN THE PROCESS OF LIQUIDATION:

In Punjab National Bank vs. Kiran Shah, the liquidator of ORG Information Ltd.1 , National Company Law Appellate Tribunal (NCLAT) held that after Liquidation order is passed, CoC has no role to play and they are merely claimant. They cannot even seek replacement of liquidator in absence of any such provision in law.

A Creditors Consultation Committee is required to be formed, but the liquidator is not bound by their advice.

The liquidator has the power to consult any of the stakeholders entitled to a distribution of proceeds. Further, record of such consultation would be available to all stakeholders for the sake of transparency. The liquidator also has the power to access any information systems for the purpose of admission and proof of claims and identification of the assets relating to CD from any source, such as information utility, credit information systems regulated under any law for the time being in force, any agency of the Central, State or Local Government including any registration authorities, data bank maintained by the Insolvency and Bankruptcy Board of India.

REPORTS:

Liquidator must prepare and submit the following as per Regulation 5 of the Liquidation Regulations:

  1. A preliminary report within 75 days of liquidation commencement date;
  2. An asset memorandum;
  3. Progress reports on quarterly basis;
  4. Sale report;
  5. Minutes of consultation with stakeholders; and
  6. The final report prior to dissolution to the AA.

Liquidator should also get accounts completed and brought up to date, wherever they are found incomplete. He is also required to maintain cash book and ledgers and various registers for assets, security and investment. Further, the liquidator is required to preserve physical and electronic copy of reports and books for 8 years after dissolution.

DISSOLUTION OF CORPORATE DEBTOR:

Where the assets of the CD have been completely liquidated, the liquidator shall make an application to the AA for the dissolution of such CD under Section 54 of the Code. Early dissolution can be applied for under Regulation 14 of the Liquidation Regulations any time after preliminary report is prepared, where it appears to liquidator that there are insufficient realizable assets to cover the liquidation cost and no further investigation into affairs of CD is required. Once order of dissolution is passed, same is required to be filed with authority where CD is registered.

 

Difference Between Operational And Financial Creditors

Difference Between Operational And Financial Creditors

INTRODUCTION.

“creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder”

The Insolvency and Bankruptcy Code, 2016 differentiates between financial creditors and operational creditors. Financial Creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations. 

Creditors

The Insolvency and Bankruptcy Code, 2016 (IBC) has consolidated and amended the laws relating to reorganization and insolvency of corporate persons, partnership firms and individual firms. The sole intention of this legislation is to facilitate resolution of corporate bankruptcy in a time bound manner.  The IBC has introduced new and distinct concepts of ‘Financial Creditor’ and ‘Operational Creditor‘ as opposed to the Companies Act, 2013 which merely introduced the term ‘creditor’, without any classification thereof.

Today, the maintainability of applications for initiating corporate insolvency resolution process chiefly depends on the applicant first satisfying the Tribunal that it falls either within the definition of ‘Financial Creditor’ or ‘Operational Creditor’ under the IBC. In this article, we are particularly discussing the Order dated 20th February 2017 passed by the Hon’ble National Company Law Tribunal, Principal Bench, New Delhi in Col. Vinod Awasthy v. AMR Infrastructure Limited1 whereby the Hon’ble Tribunal interpreted the definition of ‘Operational Creditor’ under the IBC to ascertain the applicability of the same to a flat purchaser.

Prior to discussing the aforesaid Order, it is imperative to first understand the definitions of ‘Financial Creditor’ and ‘Operational Creditor’ under the IBC.

A financial creditor is defined under Section 5(7) of the IBC to mean

a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred“.

An operational creditor is defined under Section 5(20) of the IBC to mean

any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred“.

In order to ascertain whether a person would fall within the definition of an operational creditor, the debt owed to such a person must fall within the definition of an operational debt as defined under Section 5(21) of the IBC.

Difference by the bankruptcy law 

Distinction between a financial creditor and operational creditor has been drawn by the Bankruptcy Law Reforms Committee in para 5.2.1 of its final report. It states:

Here, the Code differentiates between financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security. Operational creditors are those whose liabilities from the entity comes from a transaction on operations…The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.”

It is clearly evident that the lawmakers have chalked out distinct definitions of ‘financial creditor’ and ‘operational creditor’ and that they are not to be interpreted as inclusive or exclusive of each other.

Detailed differences between Financial Creditor and Operational Creditor

 

particulars.Financial Creditor.Operational Creditor.
Meaning Section 5 (7) – 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.

Section 5 (20) – 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.

Voting shareSection 5 (28) – Voting right of a

financial creditor is based on

the proportion of the financial

debt owed to such a financial creditor. The approval of

committee of creditor shall be

obtained by a vote of not less than

seventy five percent of the voting shares. 

Operational creditor shall not have

any right to vote at the meeting

of committee of creditors. 

Initiation of corporate

insolvency resolution

process

Section 7 (1) – On occurrence of a

default, a financial creditor shall

either by itself or jointly with other

financial creditors may file an

application for initiating corporate

insolvency resolution process

against a corporate debtor before

the Adjudicating Authority

Section 8 (1) – On occurrence of a

default the operational creditor

may, deliver a demand notice of

unpaid operational debtor copy of

an invoice demanding payment of

the amount involved in the default

to the corporate debtor. The

operation creditor may file an

application after the expiry of 10

days from the date of delivery of

the notice or invoice demanding

payment under sub-section (1) of

section 8, if the operational

creditor does not receive payment

from the corporate debtor or

notice of the dispute under subsection (2) of section 8. 

Appointment of IRPSection 7 (3) – The financial

creditor shall along with the

application furnish the name of the

resolution professional proposed

to act as an interim resolution

professional. 

Section 9 (4) – An operational

creditor may propose a resolution

professional to act as an

 interim resolution

professional. 

Constitution of

Committee of Creditors

Section 21 (2) – The committee of

creditors shall consist solely of

financial creditors, and all financial

creditors of the corporate debtor. 

Operational creditors shall not

form part of the committee. 

 

Hon’ble National Company Law Tribunal on ‘Operational Creditors’

In Col. Vinod Awasthy v. AMR Infrastructure Limited, the Hon’ble Tribunal while dismissing the Petition instituted under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) at the admission stage itself, decided the issue of whether a flat purchaser would fall within the definition of an ‘Operational Creditor‘ as defined under Section 5(20) of the IBC to whom an ‘Operational Debt’ as defined under Section 5(21) of the IBC is owed.

The Hon’ble Tribunal observed that the framers of the IBC had not intended to include within the expression of an ‘operation debt’ a debt other than a financial debt. Therefore, an operational debt would be confined only to four categories as specified in Section 5(21) of the IBC like goods, services, employment and Government dues. The Tribunal held that the debt owed to the Petitioner (a flat purchaser in this case) had not arisen from any goods, services, employment or dues which were payable under any statute to the Centre / State Government or local bodies. Rather, the refund sought to be recovered by the Petitioner was associated with the possession of immovable property.

The Hon’ble Tribunal while deciding the question of whether a flat purchaser could be considered an operation creditor considered the observations of the Bankruptcy Law Reforms Committee in paragraph no. 5.2.1 of the Final Report:

“Operational Creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by car mechanics and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease.”

The Hon’ble Tribunal held that the Petitioner had neither supplied goods nor had rendered any services to acquire the status of an ‘Operational Creditor’.

It was further held that it was not possible to construe Section 9 read with Section 5(20) and Section 5(21) of the IBC so widely to include within its scope, cases where dues were on account of advance made to purchase a flat or a commercial site from a construction company like the Respondent especially when the Petitioner had other remedies available under the Consumer Protection Act and the General Law of the land.

Supreme Court’s View

The difference between financial and operational creditors under the Code is not merely surficial – it is fundamental. If the crux of the insolvency regime is priorities, the priorities of the two in the distribution waterfall differ, even if both are unsecured. Is this a differentiation, or discrimination?  The differentiation, along with certain other provisions of the Code, was challenged before the Supreme Court in a bunch of petitions. 

In Swiss Ribbons Ltd. v. Union of India, the Supreme Court observed that :

“A perusal of the definition of ‘financial creditor’’ and ‘financial debt’ makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an ‘operational debt’ would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local

authority.” And, “financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less.” The difference between operational and financial debt/creditors was thus upheld by the Supreme Court. The most important consideration in determining whether a debt is a financial debt or an operational debt is to “intent of the parties”. Merely because a creditor claims interest for a delayed payment, does not imply that the debt is financial – in such transactions, interest is contemplated as a ‘penalty’ and not ‘returns’. Also, lending for time value of money does not necessarily involve ‘interest’. In order to qualify to be a financial debt, what matters is that the amount was disbursed against time value of money, whether or not expressed in terms of ‘interest’. Besides financial and operational debts, there can be other types of debts too – however, such other creditors are not entitled to initiate an application under the Code, but can file claims in the specified form.

 

INDIVIDUAL INSOLVENCY: UNDER THE IBC

INDIVIDUAL INSOLVENCY: UNDER THE IBC

Introduction 

The Insolvency and Bankruptcy code is a landmark piece of legislation providing a facelift to the existing regime in the areas of restructuring and the insolvency and bankruptcy in India. The code provided the biggest missing piece in the existing jigsaw of laws by establishing a framework for time-bound resolution for defaulting debts. The journey of the code is long-lasting as the code will go a long way in bringing an element of certainty and predictability to commercial transactions in the country thereby providing Ease of Doing Business. 

Insolvency process: IBC to have provisions dealing with individual insolvency, says IBBI chairman - The Financial Express

 

What are individual insolvency laws?

Any debtor who is an individual, sole proprietorship or a partnership firm can be governed by individual insolvency laws, when such debtor is unable to meet its obligations to its creditors. These laws give debtors relief by allowing them to go to the court to either restructure their debts or avail discharge from their duty to repay their debts after liquidating their assets and distributing the proceeds to creditors. 

The individual insolvency law has a more social perspective, as it aims to save an individual from being pressured by creditors and criticized by society. The goal is to provide relief to the individual so that he can resume his peaceful life. Thus, personal insolvency laws seek to strike a balance between the rights of debtors (by enabling them to be free of debt burdens) and creditors (by ensuring repayments to the extent possible).

Before IBC made its mark, the corporate insolvency law in India too, drew inspiration from personal insolvency law. The personal insolvency law, in turn, was contained in two centenarian (even older!) laws, namely, Presidency Towns Insolvency Act 1909 (PTIA) and Provincial Insolvency act, 1920 (PIA). 

Although the new code, IBC contains specific provisions for individual insolvency resolution, it has only been notified of corporate insolvency so far. Individual insolvency provisions in the IBC have only been operationalized for people who have provided guarantees for loans taken out by companies, not for other individuals or businesses (operating as sole proprietorships or partnership firms). Thus, creating lacuna in existing laws and eliminating the possibility of population getting benefitted by the unnotified provisions. So far, the Central Government and IBBI has come up with draft rules and regulations.  (INSOLVENCY RESOLUTION PROCESS FOR INDIVIDUALS AND FIRMS) REGULATIONS, 2017 IBBI/2017-1  

Insolvency resolution and bankruptcy for individuals and partnership firms

Part III of the code deals with the insolvency resolution and bankruptcy for individuals and partnership firms, where the amount of default is not less than Rs.1,000. The adjudicating authority of insolvency resolution for the individual and partnership firms would be the Debt Recovery Tribunal (DRT). The Notification dated 15th November 2019 (hereinafter “Notification”) of the Central Government brought into force provisions of the Part III of the IBC, providing for insolvency and bankruptcy for individuals and partnership firms was the basis for the writ petitions filed before the High Courts. The Notification brought into force Section 78 and 79 of the IBC relating to applicability of the insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than Rs. 1000 and definitions under Part III of the IBC respectively. Further, the said notification brought into force Section 94 to 187 of the IBC providing the framework for the initiation of insolvency resolution process and bankruptcy proceedings of individuals and partnership firms. Section 179 of the IBC provides for the Debt Recovery Tribunal to be the adjudicating authority in relation to insolvency matters of individuals and firms.

Part III of the code provides two methods for resolving the insolvency of individuals i.e. 1) Fresh start process , 2) Insolvency resolution process and , they are as follows:- 

Fresh Start Process 

Fresh start is a once‐in‐life‐time opportunity granted to the individual, to seek moratorium, phasing out obligations, etc. so that the individual may start his life afresh.

It provides an opportunity to a debtor who is unable to pay his debts to clear off his debts in a time-bound manner on fulfilling the prescribed condition for the fresh start of his qualifying debts. The applicability of this option is greatly limited by the very narrow monetary limits laid –annual income of Rs 60,000, and assets of Rs 20,000.

Fresh start application may be made by the debtor himself, provided the income and asset criteria are within the thresholds referred to above, and the “qualifying debt” for which the individual seeks relief is limited to Rs 35000/‐ .

The application for insolvency resolution may be led by the creditor or the concerned debtor himself. Once an application is led with DRT for initiating insolvency proceedings a Resolution professional shall be appointed to carry forward and supervise the entire process as prescribed in this chapter.

The prerequisites that need to be complied prior to making an application are as follows:

  1. The debtor should not be an undischarged bankrupt;
  2. The debtor should be undergoing fresh start process in relation to his debts;
  3. No insolvency resolution proceedings should be in process in relation to the debts against the debtor;
  4. The debtor should not be undergoing bankruptcy proceedings
  5. No insolvency resolution proceedings should have been admitted during the preceding twelve months to be counted from the date on which a fresh application is led for invoking insolvency resolution process.

Once all the prerequisites are met, an application may be submitted either by the debtor himself or by the resolution professional on behalf of the debtor. Pursuant to this, the code provides for an evaluation of the application by resolution professional, followed by a decision on its acceptance or rejection by the Debt Recovery Tribunal within 14 days of receiving the resolution professional’s recommendations on the application. Where the application is accepted by the DRT, the code provides for legal protection from both current as well as future legal proceedings against the applicant/debtor for a period of 180 days from the date of admission of application. 

However, importantly the code provides the creditors in such a situation that bestows on them a right to object any of the facts/grounds listed in an accepted application for fresh start .Such objections shall be submitted by the creditors to the resolution professional who shall then evaluate the accuracy and the importance of such objections. During the process, the resolution professional shall act as the main point of communication between the parties involved (Debtor/Creditor) and DRT. In the event of any change in financial circumstances which could make DRT change its decision on whether to accept or reject the initial application, then it shall be the duty of resolution professionals to ensure that DRT is informed of the relevant change.

Finally after resolution professionals have reviewed all the qualifying debts and compiled a final list of these qualifying debts then the DRT shall pass an order to discharge the debtors from all of the obligations with respect to these debts. Once the order is passed, then the fresh start process shall ultimately come to end thereby providing much-needed relief to the small-time debtors.

Insolvency Resolution Process

The process flow along with the relevant provisions related to the insolvency of individuals and partnership firms are enshrined in chapter III of part III of the Code. The provisions of the insolvency resolution process for individuals & partnership are similar to that of the corporate insolvency resolution process for corporate persons. Only the insolvency application of individuals & partnership firms is filed with DRT. 

The application for insolvency resolution may be filed by the creditor or the concerned debtor himself. Once an application is filed with DRT for initiating insolvency proceedings a Resolution Professional (hereinafter, “RP”) shall be appointed to carry forward and supervise the entire process as prescribed in this chapter. 

The Adjudicating authority shall on the basis of the received report decide whether to admit or reject the application as was initially submitted to it by the debtor or creditor. Once insolvency proceedings are ordered to be initiated by the DRT, a moratorium period shall commence and thereafter cease to be in effect at the end of one 180 days.

The creditors register their claims with the RP, who in turn, prepares a list of creditors. The debtor prepares a repayment plan in consultation with the RP. The RP then prepares a report on the repayment plan for submission to the AA – also stating whether  there is a necessity of summoning a meeting of creditors. Where the meeting of creditors is not summoned, the AA passes an order on the repayment plan as per report prepared by the RP. However, when the meeting of creditors is summoned, the repayment plan has to be approved by the creditors, the AA passes an order on the repayment plan on the basis of the report of the meeting, prepared by the RP.

Bankruptcy Process

Where the attempts to provide an individual debtor either a “fresh start” or an “earned start” fail, the last recourse left is an application for bankruptcy. Under 3 specified circumstances the debtor or the creditor(s) is/are eligible to make an application for bankruptcy order – (1) a resolution application is not admitted, (2) a repayment plan is not approved by creditors or the adjudicating authority, or (3) a repayment plan fails prematurely.

From the bankruptcy commencement date till his discharge, the bankrupt is an “undischarged insolvent” or “undischarged bankrupt” and faces several disqualifications under the Code as well as other laws; his after‐acquired property is also liable to be vested in the trustee.

Once an application is filed, an interim‐moratorium commences. A bankruptcy trustee is appointed to manage the process. Within 14 days of appointment of a bankruptcy trustee, the adjudicating authority passes a “bankruptcy order”. This date becomes the bankruptcy commencement date. The bankrupt is required to submit a statement of financial position within 7 days of the commencement date.

On the bankruptcy order being passed-

  1. the estate of the bankrupt vests in the bankruptcy trustee, 
  2. the interim‐moratorium ceases and a fresh moratorium starts, and 
  3. the bankrupt submits a statement of financial position (if so required).

 

The Bankruptcy Trustee performs the process similar to RP and constitutes the “committee of creditors”. The bankruptcy trustee administers and distributes the estate of the bankrupt in accordance with the provisions of Chapter V of Part III. The trustee notifies creditors to prove their claims, and values claims. He makes payment of interim dividend, and before distributing the final dividend, puts up a notice once again, requiring creditors to have one final opportunity to prove their claims.

The bankruptcy trustee applies to the adjudicating authority for a discharge order once the approval of  the committee of creditors is obtained or on the expiry of 1 year from the date of bankruptcy order, whichever is earlier. After discharge, the once‐bankrupt is a free man.

Conclusion 

This article aimed at understanding the need of individual insolvency laws, the process of individual insolvency and the applicability of the said laws as per the IBBI draft rules.

Although much has been said about corporate insolvency in India, personal insolvency laws have received little consideration. Individual insolvency provisions in the IBC have only been notified for personal guarantors for loans taken out by companies, not for other individuals or partnership firms. This must improve in order to provide better solutions for individuals and small businesses struggling with debt. The central government and IBBI have issued draft  rules for individual insolvency as part III of IBC. However, they have not yet been notified. For the easement of debt resolution of non-corporate entities these rules need to come into effect as early as possible.  

 

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSOLVENCY RESOLUTION PROCESS FOR INDIVIDUALS AND FIRMS) REGULATIONS, 2017

Eligibility for resolution professional (Regulation 3)

  1. An insolvency professional shall be eligible to be appointed as a resolution professional for an insolvency resolution process if he and all partners and directors of the insolvency professional entity of which he is a partner or director, or the insolvency professional entity of which he is a partner or director, are not associates of the debtor.
  2. An insolvency professional shall not be eligible to be appointed as a resolution professional if he, or the insolvency professional entity of which he is a partner or director, is under a restraint order of the Board.
  3. An insolvency professional shall not continue as a resolution professional if the insolvency professional entity of which he is a director or a partner, or any other partner or director of such an insolvency professional entity represents any other stakeholder in the same insolvency resolution process.

 Chapter II Proof of claims of creditors 

  1. Regulation 5 provides that a proof of claim should be submitted by the creditor to resolution professionals in lieu of Form 1
  2. Regulation 6 provides that resolution professional shall commence the verification of each claim as soon as it is received, and prepare a list of creditors reflecting the name of the creditors, amount claimed, amount admitted, and security interest in respect of the claims, if any, within the time period stipulated in Section 104 (2). Further under sub regulation (2) of regulation 6, the resolution professional shall file a report certifying the constitution of a committee of creditors on the preparation of the list of creditors, to the Adjudicating Authority under sub-regulation (1).
  3. Regulation 7 provides that A committee of creditors formed under Regulation 6(2) shall consist of the following members:
  1. ten largest creditors by value;
  2. one representative elected by all workmen other than those workmen included in sub-clause (a), if applicable; and
  3. one representative elected by all employees other than those employees included in sub-clause (a), if applicable.
  1. Regulation 9 provides that the resolution professional should prepare a statement of affairs that should include the following information – 
  2. debtor’s assets and liabilities for the previous three years;
  3. details of the excluded assets and excluded debts of the debtor;
  4. secured and unsecured debts with names of the creditors, and all requisite details for the previous three years;
  5. particulars of debt owed by debtor to associates of the debtor for the previous three years;
  6. guarantees given in relation to any of the debts of the debtor, and whether any of the guarantors is an associate of the debtor;
  7. Details of the financial statements for the business owned by the debtor, or of the firm in which the debtor is a partner, as the case may be, for the previous three years, if applicable;
  8. Details of the wealth tax statements filed by the debtor, if any, for the previous five years.

Chapter V- Voting by Creditors 

  1. Regulation 19 provides the method for calculation of voting share for the meeting of creditors it says that 
  1. A member of the committee under Regulation 7(1) shall having voting share in proportion of the debt due to such creditor or debt represented by a representative, as the case may be, to the total debt.
  2. The debt due to any creditor shall be calculated as on the insolvency commencement date, on the basis of the claims admitted.
  3. For the purposes of Section 109(3), an unliquidated debt shall mean a debt to which a value cannot be assigned by the resolution professional.

Explanation: For the purposes of sub-regulation (1), total debt is the sum of –

  1. the amount of debt due to the creditors listed in Regulation 7(1)(a);
  2. the amount of the aggregate debt due to workmen under Regulation 7(1)(b), if applicable; and
  3. the amount of aggregate debt due to employees under Regulation 7(1)(c), if applicable.

Chapter VI- Repayment plan 

  1. Regulation 22 provides the contents of repayment plan i.e. – 

The matters under Section 105(3)(c) that shall be provided for in a repayment plan include the following –

  1. the duration of the repayment plan;
  2. implementation schedule for the repayment plan, including the proposed dates of distributions to creditors, with estimates of their amounts;
  3. source of funds for the insolvency resolution process costs and their payment in priority to all other payments under the repayment plan;
  4. a minimum budget for the survival of the debtor and immediate family for the duration of the repayment plan;
  5. if the debtor has any business, the manner in which it is proposed to be conducted during the course of the repayment plan, and the role of the resolution professional;
  6. the manner in which funds held for the purposes of the repayment plan are to be banked, invested or otherwise dealt with, pending distribution to creditors;
  7.  a comprehensive list of all the creditors of the debtor;
  8. the functions which are undertaken by the resolution professional, including supervision and implementation of the repayment plan;
  9. variation of the terms of a contract or transaction involving the debtor;
  10. that excluded assets will not be transferred or sold;
  11. financing required for the insolvency resolution process; and
  12. terms and conditions for the discharge of the debtor

  2)   further sub regulation (2) says that A repayment plan may provide for the following-

  1. transfer or sale of all or part of the assets of the debtor, including treatment of excluded assets whose actual value exceeds the prescribed threshold value for excluded assets;
  2. administration or disposal of any funds of the debtor;
  3. satisfaction or modification of any security interest;
  4. reduction in the amount payable to creditors;
  5. curing or waiving of any breach of a debt due from the debtor;
  6. modification in the terms of payment of any debt due from the debtor;
  7. amendment of the partnership deed, if applicable;
  8. part of the income of the debtor to be used in the repayment of the debt, and the manner of calculating the income of the debtor;
  9. ratification of insolvency resolution costs which do not require approval of the committee of creditors under Regulation 28;
  10. the manner in which funds held for the purpose of payment to creditors, and not so paid on the end of the repayment plan, are to be dealt with; and

(k)  such other matters as may be required by the committee of creditors.

2)   further sub regulation (2) says that A repayment plan may provide for the following-

  1. transfer or sale of all or part of the assets of the debtor, including treatment of excluded assets whose actual value exceeds the prescribed threshold value for excluded assets;
  2. administration or disposal of any funds of the debtor;
  3. satisfaction or modification of any security interest;
  4. reduction in the amount payable to creditors;
  5. curing or waiving of any breach of a debt due from the debtor;
  6. modification in the terms of payment of any debt due from the debtor;
  7. amendment of the partnership deed, if applicable;
  8. part of the income of the debtor to be used in the repayment of the debt, and the manner of calculating the income of the debtor;
  9. ratification of insolvency resolution costs which do not require approval of the committee of creditors under Regulation 28;
  10. the manner in which funds held for the purpose of payment to creditors, and not so paid on the end of the repayment plan, are to be dealt with; and

(k)  such other matters as may be required by the committee of creditors.

Completion of the repayment plan (Regulation 26) 

  1. A repayment plan shall be complete when, in the opinion of the resolution professional, the debtor has complied with all obligations under the repayment plan within the duration of the repayment plan, and a notice to that effect has been issued under section 117(1)(a).
  2. The resolution professional may issue a notice of completion under section 117(1)(a) if the debtor has substantially complied with all obligations under the repayment plan.
  3. The Adjudicating Authority shall consider the notice and the report under section 117(1) in passing the discharge order.

 

 

 

 

 

Author: Mohit Mathur

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Option 3 Insolvency and Bankruptcy Code- Corporate Debt Recovery

CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

Kindly refer to the link in the title to access the full Act

STAGE-WISE PROCESS FOR INSOLVENCY:-

  1. In case a corporate debtor makes a default in repayment of dues of the creditors, the financial creditor/s, an operational creditor or a corporate debtor through Corporate applicant or any authorised member, a person who has the controlling capacity over the financial affairs of the corporate debtor has the power to start the insolvency resolution process. In order to initiate the resolution process, an application has to be made to National Company Law Tribunal (NCLT) under (Section 10, IBC, 2016 in case of Corporate Debtor, Section 7 and 9 of IBC, 2016 in case of Financial Creditors and Operational Creditors).
  2. A ten days demand notice under (Section 8(2) of IBC, 2016 in case of Operational Creditors) has to be given to the corporate debtor by the Operational Creditors before he approaches the NCLT under Section 9 of IBC, 2016). However, an operational creditor can directly approach the NCLT if the corporate debtor does not repay the outstanding dues or fails to show any existing difference. (Kindly refer to Section 8: Insolvency resolution by operational creditor. & Section 9: Application for initiation of corporate insolvency resolution process by operational creditor.)
  3. The new code states that the insolvency process of a Corporate Debtor must be concluded within 180 days from the date of initiation in the NCLT (Section 12, IBC of 2016). The claims of the Creditors shall be frozen for a period of six months on admission of application by NCLT. During this time, the NCLT shall listen to the options to revive and decide the future course of action. It is further clarified that unless a resolution plan is made or liquidation process is initiated, no legal claim shall be sought against the corporate debtor in any other forum or Court (Section 14 of IBC, 2016).
  4. When the application for insolvency is accepted under Section 7/9/10 of IBC, 2016 the NCLT within fourteen days appoints an Insolvency Resolution Professional (IRP) on receiving a confirmation from Board of Insolvency and Bankruptcy.The appointed IP then takes up the responsibility of the debtor’s properties and functioning. He also collects all the information that is relevant with regard to the financial condition of the debtor from information utilities. IP is appointed for a term of thirty days only within which he does all the necessary scrutinization (Section 18, IBC, 2016).
  5. The next step is to make a public announcement about the commencement of corporate insolvency process so that claims from any other creditors can also come forward, if any. A creditor’s committee is constituted by the IRP post receiving any claims by public announcement (Section 13 of IBC, 2016). In the event any financial creditor is a related party of the defaulting debtor, such a creditor will not have the right to represent, participate or vote in the committee of creditors so constituted by the IP. In order to be a part of the Creditor’s Committee, the average dues of the operational creditors must be at least ten percent of the debt. The Committee of Creditors shall first seven days of its incorporation decide through seventy five percent votes whether the interim IRP should be used as a Resolution Professional or should be replaced with someone else.
  6. After the Committee finalizes the Resolution Professional he is appointed by the NCLT (Section 16 of IBC, 2016). The Resolution Professional so appointed can be replaced anytime by the Creditor’s Committee with a majority of seventy five percent votes. In the interim, i.e. till the appointed of any new Resolution Professional, the Creditor’s Committee can take decisions with regard to insolvency resolution by seventy five percent majority voting.
  7. In the event majority (75%) of the financial creditors are of the view that the case is very complex and more time extension is required, the NCLT may grant a one-time extension of up to a maximum of 90 days over and above the pre decided tenure of 180 days. It shall be the sole responsibility of the Resolution Professional to manage and conduct the corporate insolvency resolution procedure during such a term (Section 18 of IBC, 2016).
  8. To enable the resolution applicant for preparing a resolution plan, the Resolution Professional shall compile a statistics note. A resolution applicant can be defined as an individual who has the duty and responsibility to submit a resolution plan to the Resolution Professional. The Creditor’s Committee further receives the plan from the Resolution Professional for its approval.
  9. On the resolution being approved, the next step by the Creditor’s Committee is to come up with options on restructuring which can be either coming up with a modified repayment plan or to simply liquidate the properties of the company in order to recover dues. If the Creditor’s Committee fails to take any binding decision with regard to the repayment by the debtor, the debtor’s assets are liquidated in order to pay back the creditors. If there is a plan prepared for resolution, the same shall be sent to NCLT for approval and implementation.

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Please Note:

The Supreme Court in Mobilox Innovations Private Limited (“Mobilox“) Vs. Kirusa Software Private Limited (“Kirusa“), considered questions raised as to the triggering of the Code when it comes to debts owed to operational creditors and as to what would constitute a ‘dispute’ entitling the debtor company to have the Adjudicating Authority reject the application.

Brief Facts

Kirusa issued a demand notice to Mobilox as an Operational Creditor under the Code, demanding payment of certain dues. Mobilox issued a reply to the demand notice (“Mobilox Reply“) inter alia stating that there exists certain serious and bona fide disputes between the parties and alleged a breach of the terms of a non-disclosure agreement by Kirusa. Kirusa filed an application under Section 9 of the Code (“Application“) before the National Company Law Tribunal, Mumbai (“NCLT“) for initiation of the corporate insolvency resolution process (“CIRP“) against Mobilox. This was dismissed by the NCLT, which expanded the scope of an ‘existing dispute’ under the Code to hold that a valid notice of dispute had been issued by Mobilox.

Kirusa filed an appeal before the National Company Law Appellate Tribunal (“NCLAT“), which allowed Kirusa’s appeal and inter alia, held that the notice of dispute does not reveal a genuine dispute between the parties. Mobilox filed an appeal before the Supreme Court impugning the order of the NCLAT.

 

Brief facts about The Insolvency And Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11 May 2016, received Presidential assent on 28 May 2016 and was notified in the official gazette on the same day.

Erstwhile legislative framework

  1. Chapter XIX & Chapter XX of Companies Act, 2013
  2. Part VIA, Part VII & Section 391 of Companies Act, 1956
  3. RDDBFI Act, 1993
  4. SARFAESI Act, 2002
  5. SICA Act, 1985
  6. The Presidency Towns Insolvency Act, 1909
  7. The Provincial Insolvency Act, 1920
  8. Chapter XIII of the LLP Act, 2008

Non-statutory guidelines/out-of-court mechanism:

  • Bilateral restructuring
  • One-time settlement
  • JLF/CDR/SDR
  • Sale of loan to ARC

New framework

The Insolvency and Bankruptcy code (Provisions of this Code to override other existing laws on matters pertaining to Insolvency and Bankruptcy)

“An act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

– Objective section of the Act

The Insolvency and Bankruptcy Code ecosystem

Insolvency and Bankruptcy Board (IBB)

NCLT – The adjudicating authority (AA)

IBB – apex body for promoting transparency & governance in the administration of the IBC; will be involved in setting up the infrastructure and accrediting IPs & IUs.

IUs – centralised repository of financial and credit information of borrowers; would accept, store, authenticate and provide access to financial data provided by creditors.

IPs– persons enrolled with IPA and regulated by Board and IPA will conduct resolution process; to act as Liquidator/ bankruptcy trustee; appointed by creditors and override the powers of board of directors.

Adjudicating authority (AA) – would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/ reject resolution plans, decide in respect of claims or matters of law/ facts thereof.

IPA – registered by the board shall enroll IPs.

Corporate Insolvency Resolution and Liquidation

Resolution timeline and process

Key highlights

Corporate insolvency resolution process

Application on default – Any financial or operational creditor(s) can apply for insolvency on default of debt or interest payment

Appointment of IP – IP to be appointed by the regulator and approved by the creditor committee. IP will take over the running of the Company.

From date of appointment of IP, power of Board of directors to be suspended and vested in the IP. IP shall have immunity from criminal prosecution and any other liability for anything done in good faith

Moratorium period – Adjudication authority will declare moratorium period during which no action can be taken against the company or the assets of the company. Key focus will be on running the Company on going concern basis. A Resolution plan would have to be prepared and approved by the Committee of creditors

Credit committee – A credit committee of creditors will be constituted. Related party to be excluded from committee. Each creditor shall vote in accordance to voting share assigned if 75% of creditor approve the resolution plan same needs to be implemented.

Liquidation process

Initiation – Failure to approve resolution plan within specified days will cause initiation of Liquidation. Debtor can also opt for voluntary liquidation by a special resolution in a General Meeting.

Liquidator – The IP may act as the liquidator, and exercise all powers of the BoD. The liquidator shall form an estate of the assets, and consolidate, verify, admit and determine value of creditors’ claims.

Order of priority for distribution of assets

  • Insolvency related costs
  • Secured creditors and workmen dues upto 24 months
  • Other employee’s salaries/dues up to 12 months
  • Financial debts (unsecured creditors)
  • Government dues (up to 2 years)
  • Any remaining debts and dues
  • Equity

Key aspects of the Insolvency and Bankruptcy Code

  1. IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.
  2. IBC aims at consolidating all existing insolvency related laws as well as amending multiple legislation including the Companies Act.
  3. The code would have an overriding effect on all other laws relating to Insolvency & Bankruptcy.
  4. The code aims to resolve insolvencies in a strict time-bound manner – the evaluation and viability determination must be completed within 180 days.
  5. Moratorium period of 180 days (extendable upto 270 days) for the Company. Insolvency profressional to take over the managemnent of the Company.
  6. Clearly defined ‘order of priority‘ or the waterfall mechanism.
  7. The waterfall to render government dues junior to most others is significant.
  8. Antecedent tranactions can be investigated and in case of any illegal diversion of assets personal contribution can be ordered by court.
  9. Introduce a qualified insolvency professional (IP) as intermediaries to oversee the Process
  10. Establishment of Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law; and Information Utilities as a depository of financial information.

The Code, at best, is a plan currently awaiting execution. Appropriate information-flow, establishment of a tribunal process and the provision to bring in responsible professionals. The Ministry of Finance has indicated that they are aiming to make IBC operational by 31 March 2017.

The IBC envisages a “creditor in control” regime with financial creditors exercising control through IPs in the event of a single default in repayment of any loan or interest. This can be effected without any notice and the law is very stringent as compared to the SARFAESI Act, 2002. As a result, stressed/ distressed corporates need to implement an accurate cash flow forecasting mechanism to identify mismatches of inflows with commitments on a timely basis. If there is a possibility of a potential default that can trigger IBC, an effective turnaround plan should be devised and communicated to all stakeholders in advance – including financial and operating creditors, employees, etc. Such a plan should include aspects of financial restructuring, operational improvement and sale of assets which can be monetised.

 The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.