overview of the ib code, 2016 - vinod kothari
TRANSCRIPT
Overview of the IB Code, 2016
Vinod Kothari
www.vinodkothari.com
Email: [email protected] / [email protected]
Kolkata
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Mumbai
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COPYRIGHT
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Vinod Kothari & Company. No part
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AGENDA
Framework & highlights of the Code2
4
Significant Developments3
Directors’ position and liability
The Story so far1
Quarter No. of CIRPs initiated
Operational
Creditors
Financial
Creditors
Corporate
Debtors
Jan-Mar, 2017 7 8 22
Apr-Jun, 2017 58 37 34
July-Sep, 2017 100 94 39
Oct-Dec, 2017 67 66 14
Jan-Mar, 2018 89 84 22
Apr-Jun, 2018 129 99 18
July-Sep, 2018 132 95 16
Oct-Dec, 2018 153 106 16
Jan-Mar, 2019 166 187 21
Apr-Jun, 2019 154 127 13
July-Sep, 2019 177 183 9
Total 1232 1086 224
0
20
40
60
80
100
120
140
160
180
200
Jan-Mar,2017
Apr-Jun,2017
July-Sep,2017
Oct-Dec,2017
Jan-Mar,2018
Apr-Jun,2018
July-Sep,2018
Oct-Dec,2018
Jan-Mar,2019
Apr-Jun,2019
July-Sep,2019
No. of new CIRPs successfully initiated
OC FC CD
Insolvency filings
18%
11%
56%
15%
Status of CIRP cases as on 30.09.2019
Closed by review/appeal/ settle
Withdrawn
Liquidation
Approval ofresolution Plan
36%
22%
18%
24%
Time taken in ongoing cases
> 270 days > 180 days < 270
> 90 days < 180 days < 90 days
The resolution story
All data above for matters admitted
90%
6%4%
Status of liquidation cases on 30.09.2019
Ongoing
Final reportsubmitted
Closed bydissolution
1%
35%
15%16%
17%
16%
Time taken in ongoing cases
> two years
> 360 days
> 270 days < 360days
> 180 days < 270days
> 90 days < 180days
< 90 days
The liquidation story
The pathway to gloom (or doom)
SMA 0 SMA 1 SMA2
NPAInsolvency filingsBankruptcy
Scheme of Arrangement
Going concern sale
Corporate Death
Framework for
resolution of
stressed accounts
Review period-
30 days
Resolution period-
6 months
Revival-Survival
Some unique features of Indian insolvency law
• Distinction between operational and financial creditors
• Constitutionality already upheld, but advisability?
• Majority filings are by operational creditors - not even counting the numerous filings which get rejected or withdrawn on settlement
• Op creditors are not part of CoC
• Priority of operational creditors at no. 6 in the waterfall
• Since resolution mirrors liquidation priorities, CoC may use discretion not to pay any higher than liquidation values
• Section 29A
• Promoters and other defaulters are ousted
• Resolution
• Liquidation
• Going concern sale
• Schemes of arrangement during liquidation –NCLAT ruling
• Private asset sale by promoters u/s 52 –NCLAT ruling
• Hard timelines, failing which, liquidation
• Lots of liquidations have resulted from failure to meet resolution timelines
• May be, this was required to give us a cultural shock, but is this something which can continue to prevail?
Companies, LLPs, limited liability entities, except
financial services providers
Insolvency and Bankruptcy Code
Corporate Non-Corporate
Partnership FirmsIndividuals
Individuals without any
business#
Individuals having
business/ propriety
(Sole proprietorships)#
Personal Guarantors to
Corporate Persons
Minimum default
Rs. 1,000/-
Minimum default Rs. 1,00,000/-
Insolvency Resolution Liquidation
National Company Law Tribunal
Adjudicating Authority
Insolvency
ResolutionBankruptcy
Adjudicating Authority
Insolvency
ResolutionBankruptcy
Debt Recovery Tribunal
Adjudicating Authority
Adju
dic
ating
Aut
hori
ty
Debt Recovery
Appellate Tribunal
National Company Law Appellate
Tribunal
Appella
nt A
uthori
ty
Appellant Authority
Supreme Court
Apex Authority
Framework of IBC
#not yet notified
• Default made the basis of corporate insolvency resolution, not inability to pay
• First moratorium starts on admission
• 180 + 90 days
• < 330 days, inc. litgation
• Stays SARFAESI proceedings also
• Resolution Plan is the dominant element
• Creditors’ committee has an upper hand in resolution plan
• Affairs of the company comes under control of the Resolution professional
▫ Though entity remains a goingconcern
• Preparation of resolution plan and approval by creditors with 66% voting share
• Liquidation proceedings commence onrejection of resolution plan, or failure tosubmit it
• Moratorium on liquidation order
• Time-frame- 1 year
• Liquidator may seek extension
• Liquidation estate
• Avoidance of certain transactions
• Secured creditor may either relinquish securityinterest, or may enforce it
• Distribution:
• Governed by waterfall mechanism u/s 53
• Financial creditors given priority
• Government and other statutory dues
recede to item 5
• Dissolution
Corporate Insolvency Corporate Liquidation
Highlights of the Code
Default of payment > Rs.
1,00,000/-
Operational Creditor Financial Creditor Corporate Debtor
Demand Notice to CD
NO APPLICATION
Satisfactory
Response
Application for initiation of
CIRP
Appointment of Interim
Resolution Professional
Constitution of Committee of
Creditors
Appointment of RP
Resolution Plans Invited
No Resolution Plan receivedResolution Plans Received
Approved Failed
Resolved
Liquidation
14 days
21 days from initiation
30 days from initiation
Within 180/ 270 days*
*330 days including litigation
CIRP process
135 days from initiation
Inclusions
• Assets over which C.Dr. has ownership rights.
• Assets in or not in possession of C.Dr. including but
not limited to encumbered assets
• Movable/Immovable tangible assets
• Intangible assets
• Assets in respect of which security interest has
been relinquished by a secured creditor
• Assets subject to the determination of ownership by
the court or authority
• Any assets or their value recovered through
proceedings for avoidance of transactions
• Any other property belonging to or vested in the C.Dr.
at the insolvency commencement date
• All proceeds of liquidation as and when they are
realised
Exclusions
• Assets in possession of C. Dr., but owned by a party
• Assets held in trust, bailment, contracts
• Contract of use of asset; not title
• Assets in security collateral held by financial services
providers and are subject to netting and set-off in
multi-lateral trading or clearing transactions
• Personal assets of any shareholder or partner of a
C.Dr. , provided the assets are not held under
avoidance transactions
• Assets of any Indian or foreign subsidiary of C.Dr.
• Any other assets as may be specified by the
Board.
53
As per NCLAT Ruling in the recent,
PF dues, gratuity etc. are not
included in Liquidation Estate-
Moserbaer Karamchari Union vs.
SBI
Liquidation Estate
Group insolvency or Consolidation
Assets of the subsidiaries of Corporate Debtor
Assets of subsidiaries, Indian or foreign
subsidiaries- do not form part of liquidation
estate
Value of Enterprise > Value of Entity
• Assets, contractual rights, businesses may be split
across entities in the group
• so entangled that any entity in isolation
may be much less value
Can, in such cases, insolvency proceedings be
consolidated?
Types of Consolidation
Procedural
Co-ordinated proceedings-
Assets & entities remain intact
Substantive
Separation of legal entities breached altogether
ExceptionFraudulent transfers, where AA has inherent power to
reject preferential, undervalued, or fraudulent
transfers.
Rare
Distribution of assets: order of priority• The liquidation costs paid in full• debts which shall rank equally
▫ debts owed to a secured creditor in the event such secured creditor has relinquished security
▫ workmen’s dues for the period of 24 months preceding the liquidation commencement date• wages and any unpaid dues owed to employees
▫ other than workmen for the period of 12 months preceding the liquidation commencement date• financial debts owed to unsecured creditors• dues which shall rank equally
▫ amount due to the CG and the SG including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a
State, if any, in respect of the whole or any part of the period of 2 years preceding the liquidation commencementdate;
▫ debts owed to a secured creditor for any amount unpaid following the enforcement of security interest; any remaining debts and dues;
• preference shareholders, if any; and• equity shareholders or partners, as the case may be.
• Fees payable to liquidator shall be deducted proportionately from the proceeds payable to each class of recipient
120
Application for In. RP
10 days
14 days
21 days
Public Notice
7 days
30 days
21 days
Insolvency Process for Personal Guarantors
Within
10
days
Application for
bankruptcy order
Nomination of
bankruptcy trustee
Bankruptcy
Order by AA
Notice/Public notice by
AA inviting claims from
creditors
Within
14 days
Bankruptcy
commencement
date
Bankrupt to submit statement
of financial position to the
bankruptcy trustee if the
application was filed by a
creditor within 7 days
Creditors to register
claims with bankruptcy
trustee
Within 7
days
Preparation of list
of creditors by
trustee
Completion of administration and
distribution of the estate of bankrupt
Approval of trustee’s
report by Crs.
Committee and
determination of
whether bankruptcy
trustee shall be released
Notice to summon
meeting of creditors
Meeting of
creditors
Within 14 days of
bankruptcy
commencement date
Within 21 days of
bankruptcy
commencement
date
Report of the administration
by trustee
To be
presented in
Within 7
days
Interim-
moratori
um
Bankruptcy Process for Personal Guarantors
Significant developments
Financial Service Providers under IBC
• Introduction of IBBI (Insolvency and Liquidation
Proceedings of Financial Service Providers and
Application to Adjudicating Authority) Rules, 2019-
• Until now excluded from scope of IBC; Now included
u/s 227;
• Currently effective for NBFCs
• Asset size > Rs. 500 crores
Insolvency and Bankruptcy Process for Personal Guarantors
Significant developments
28.05.2016 26.04.2019 08.05.2019 15.11.2019 20.11.2019 01.12.2019
The IB Code,
2016 was
enacted
Draft Regulations for
Bankruptcy Process of
Personal Guarantors of
Corporate Debtor
Draft Rules for
Insolvency Process of
Personal Guarantors of
Corporate Debtor
Sections of the
Code & Rules for
Personal Guarantor
notified
Reg. for Personal
insolvency and
Bankruptcy Process
Provisions for Personal
Insolvency (along with
Rules and Reg.) shall be
effective
Recent rulingsHon’ble Supreme Court
Supremacy of CoCs-
Essar Steel India Limited vs. Satish Kumar Gupta
CoC given the upper hand-
• Priority of financial creditors upheld;
• CoC should balance interest of all stakeholders,
• It cannot be forced to ensure proportional payments to operational creditors disregarding sec 53.
Applicability of section 53 in Resolution Plans-
• In line with the IBC Amendment Act, 2019- Sec 53 to be applied in resolution plans
Applicability of Limitation-
Jignesh Shah & Anr Vs.Union of India & Anr – Supreme Court
The bar of limitation of three years would be attracted from the date when the default occur and not
from the filing of winding up petition
Recent rulingsHon’ble National Company Law Appellate Tribunal
M/s. Kotak Mahindra Prime Ltd.
Vs. Mr. Bijay Murmuria & Ors.-
Once the claim of a creditor is
taken into consideration in
Resolution Plan providing them same
treatment as has been given to the
other similarly situated Creditors,
the Creditor, thereafter cannot take
the benefit of Sec. 60(6) nor they
can take benefit of arbitration
proceeding for the same claim
M/s. B.R. Traders Vs.
Venkataramanarao Nagarajan
& Ors.
The CoC & the AA if they refused
to approve the Resolution Plans
filed and rejected the applications
for reconsideration of the same, no
interference is called for.
M/s. Next Orbit Ventures Vs.
Print House (India) Pvt. Ltd. &
Anr.
If one or other Resolution Plan is
found to be more viable & feasible
& will maximise the assets of the
Corporate Debtor, balancing all the
stakeholders by maximising the
assets of the Creditors & others, no
right accrues to any individual
Applicant(s) to stall such process.
Role, position and liability of directors• During insolvency, board of directors remain
in animated suspension
• Do not vacate offices; however, the control is taken over by the IRP/RP
• IRP/RP can utilise directors for governance-related matters, as considered desirable by him
• During liquidation, directors vacate offices automatically
• Hence, control of the company:
• With directors, when the entity is a going concern
• With creditors, during resolution, through IRP/RP
• With liquidator, during liquidation, under AA’s supervision
Liability of directors
Civil
Fraudulent Trading
Wrongful trading
Continuing to carry onbusiness despite anyreasonable prospect ofthe business surviving
Criminal
Provisions of IBC
Companies Act, 2013