Business Environment under New

Insolvency Laws in India

INDIA & SOUTH ASIA TEXTILE SUMMIT, 2017

7TH JUNE, 2017
FOUR SEASONS, MUMBAI
MR. ISHTIAQ ALI
(FOUNDING PARTNER, ORBIT LAW SERVICES, INDIA)
 Purpose of Presentation

• To create awareness about the Default Management in doing Business

under New Insolvency Laws in India.
• To understand the Process to Exit from the Business or Rehabilitation
of the Business under New Insolvency Laws in India.

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Background for Introduction of Insolvency and
Bankruptcy Code, 2016 (“IBC”)
 Before the enactment of the Insolvency and Bankruptcy Code, 2016, there
was no single legal framework in India that dealt with insolvency and
bankruptcy.
The provisions relating to insolvency and bankruptcy were scattered over
many legislations viz:
 For Companies
a) Sick Industrial Companies (Special Provisions) Act, 1985 (dealing with the sick industrial companies),
b) The Recovery of Debt Due to Banks and Financial Institutions Act, 1993,
c) The Securitization and Reconstruction of Financial Assets and Enforcement of security Interest Act, 2002
and
d) The Companies Act, 2013
 For individuals
a) The Presidency Towns and Insolvency Act, 1909 and
b) The Provincial Insolvency Act, 1920

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 Jurisdiction
• High courts were handling the Liquidation proceeding of companies
• District courts or High courts, as the case may be, were handling
bankruptcy insolvency proceedings of individuals and partnership
firms.
• Multiple Jurisdictions were existed under various statutes for Debt
Recovery & Insolvency Resolution.
• Cumbersome Procedure for Rehabilitation of Business or to Exit
from the Business

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 OBJECTIVE OF IBC
To consolidate and amend various laws relating to reorganization and insolvency resolution of Corporate
persons /partnership /individual;
To provide Adjudicating Authority - National Company Law Tribunal (NCLT) for corporate persons and Debt
Recovery Tribunal (DRT) for firms and individual, for resolution of insolvency, liquidation and bankruptcy.
To Complete the Insolvency Process in time bound manner
Maximization of value of assets of persons
To promote Entrepreneurship
To make availability of credit and balance the interest of all the stakeholders in rehabilitation/restructuring of
business process
Introduction of insolvency professionals (“IP”) to ensure more professionalism and to bring efficiency in
resolution proceedings.
To establish the Insolvency and Bankruptcy Board of India (“Board”) for regulation of IP, Insolvency
Professional Agencies (“IPA”) and Information Utilities(“IU”)

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 ROLE OF INSOLVENCY PROFESSIONAL

 Insolvency professional (IP) is a person enrolled, under section 206

of IBC, with an insolvency professional agency as its member and
registered with the Board as an insolvency professional under section
207.
 IPs play a key role in the management and administration of the
entire insolvency resolutions, fresh start, liquidation and bankruptcy
process. [section 208 of IBC]

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 ROLE OF INSOLVENCY PROFESSIONAL
AGENCY
 Insolvency professional agency can be any person registered with the
Board under section 201 as an insolvency professional agency;
 IPA is :
 to promote the professional development of and regulation of IPs;
 to promote service of competent insolvency professionals to cater to the
needs of debtors, creditors, and such other persons, as may be specified;
 to promote good professional and ethical conduct amongst insolvency
professionals;
 to protect interest of debtors, creditors, and such other persons, as may be
specified.

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 THE ROLE OF INFORMATION UTILITY
 Information Utility (IU) is a person who is registered with the Board as an Information Utility
under section 210 of IBC.
 The purpose of IU is to manage submission and transmission of data pertaining to insolvency and
provide such services as may be specified including “core services” to any person, if such person
complies with the terms and conditions as may be specified by regulations.
 Core Services as defined under section 3 (9) 0f IBC are as under:
 accepting electronic submission of financial information in such form and manner as may be
specified;
 safe and accurate recording of financial information;
 authenticating and verifying the financial information submitted by a person; and
 providing access to information stored with the information utility to persons as may be
specified;

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 PERSONS COVERED UNDER IBC

 Sole Proprietorship or Individual

 Partnership
 Limited Liability Partnership (LLP)
 Private Company
 Public Company
 One person Company

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 APPLICATION OF IBC PROVISIONS

 Part II of IBC Relating to Insolvency Resolution And Liquidation

For Corporate Persons

 Part III of IBC Relating to Insolvency Resolution And Bankruptcy

For Individuals And Partnership Firms

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 ADJUDICATING AUTHORITY

 For Corporate Person - National Company Law Tribunal (NCLT)

 For Individuals And Partnership Firms - Debt Recovery Tribunal

(DRT)

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 Who can File Application for Corporate Insolvency Proceeding?

 Corporate Debtor
“Corporate Debtor” means a corporate person who owes a debt to any
person. [section 3 (8) of IBC]
 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. [section 5 (7)of IBC]
 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. [section 5 (20) of IBC]
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 Relevant Terms used in IBC

• Debt means a liability or obligation in respect of a claim •Financial debt means a debt along with interest, if any, which is disbursed
which is due from any person and includes a financial against the consideration for the time value of money and includes— (a)
debt and operational debt. [section 3 (11) of IBC] money borrowed against the payment of interest; (b) any amount raised by
acceptance under any acceptance credit facility or its de-materialised
• Claim means— (a) a right to payment, whether or not equivalent; (c) any amount raised pursuant to any note purchase facility or the
such right is reduced to judgment, fixed, disputed, issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the
undisputed, legal, equitable, secured or unsecured; (b) amount of any liability in respect of any lease or hire purchase contract which
right to remedy for breach of contract under any law for is deemed as a finance or capital lease under the Indian Accounting Standards
the time being in force, if such breach gives rise to a right
or such other accounting standards as may be prescribed; (e) receivables sold
to payment, whether or not such right is reduced to
or discounted other than any receivables sold on nonrecourse basis; (f) any
judgment, fixed, matured, unmatured, disputed,
amount raised under any other transaction, including any forward sale or
undisputed, secured or unsecured. [section 3 (6) of IBC]
purchase agreement, having the commercial effect of a borrowing; (g) any
derivative transaction entered into in connection with protection against or
• Operational debt means a claim in respect of the
benefit from fluctuation in any rate or price and for calculating the value of any
provision of goods or services including employment or a
derivative transaction, only the market value of such transaction shall be taken
debt in respect of the repayment of dues arising under any
law for the time being in force and payable to the Central into account; (h) any counter-indemnity obligation in respect of a guarantee,
Government, any State Government or any local indemnity, bond, documentary letter of credit or any other instrument issued by
authority. [section 5 (21) of IBC] a bank or financial institution; (i) the amount of any liability in respect of any
of the guarantee or indemnity for any of the items referred to in sub-clauses (a)
to (h) of this clause. [section 5 (8) of IBC]
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Process For insolvency resolution/liquidation of a
Corporate Debtor
→ Application To Be filed before NCLT by (a) Financial Creditor [ section 7 of IBC] , Operation
Creditor [ section 9 of IBC] and (d) Corporate Debtor [ section 10 of IBC] for insolvency
resolution and liquidation of Corporate Debtor.

 Timeline
Ideally corporate insolvency resolution process should be completed in 180 days. If it is fast track, it should be
completed in 90 days. (Section 12 & 56 of IBC)

 Moratorium
Once the application is admitted, a moratorium will be declared till the completion of the resolution process. During the
moratorium, no suits or proceedings can be filed or if filed, be proceeded against the corporate debtor/company; the
company cannot transfer its assets; no action under SARFAESI be taken. If an order for approval of resolution process or
for liquidation of the company is passed, the moratorium will cease to exist. (Section 14 of IBC)

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Public Announcement
Public announcement of the corporate insolvency resolution process made in such manner as may be directed in the rules.
[ Section 15 of IBC]
Interim Resolution Professional (IRP)
NCLT to appoint Interim Resolution Professional (IRP) within 14 days from the Insolvency Commencement date i.e. the
date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority
under sections 7, 9 or section 10, as the case may be. [ Section 16 of IBC]
Affairs to vest in IRP
From the date of his appointment, the affairs of the company will vest in the IRP; directors’ powers will be suspended; staff will
report to the IRP; financial institutions will act as per the instructions of the IRP. IRP may execute documents in the name of the
company and he may take actions as may be specified by Board; he can have access to books of account and other relevant
records of the company [ Section 17 of IBC].

Action by IRP
IRP will collect information with regard to the assets, finances and operations of the company for determining the
financial position; receive claims submitted by creditors; constitute creditors committee; take control of the assets of the
company. IRP will try to ensure that the company remains a going concern and will try to run the business by appointing
professionals, raising interim finance (any financial debt to be raised by the resolution professional during the insolvency
resolution process period) etc. [ Section 18 of IBC].
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Committee of Creditors (COC)
 Committee of creditors will take decisions based on majority which shall not be less than 75%.
 COC will hold first meeting within 7 days of constitution of COC.
 They may confirm the IRP as Resolution Professional (RP) in the first meeting or propose another name as RP which
will be decided by NCLT on confirmation from Board. [Section 21 of IBC].
Resolution Professional
 RP will do the acts/functions what IRP could do as per above.
 RP may file application for avoidance of transactions. Such transactions include transfers made by the company one
year preceding the filing of application by the company for resolution. The filing of application by RP for avoidance
will have no effect on the proceedings.
COC Decisions
 COC decisions are final and overriding with regard to
raising interim finance.
creation of security interest,
changing capital structure,
record any change in ownership interest of the company,
for debiting any account maintained by financial institutions,
related party transactions,
amending constitutional documents,
disposal of shares by any shareholder of the company,
Management change etc.

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 Information Memorandum (IM)
RP will prepare an information memorandum containing relevant information (financial position etc.)
as may be specified by Board (in rules).

 Resolution Plan
 Based on the IM, the company may submit a resolution plan to RP.
 RP will submit the resolution plan to COC. COC may approve the plan.
 The COC approved resolution plan will be submitted to NCLT.

 Approval of resolution plan by NCLT

If NCLT approves the resolution plan, the same is binding on the company, its employees, creditors,
guarantors and other stakeholders. NCLT may reject the resolution plan if the same is not in
accordance with section 30 (2 ) of IBC.

 Appeal
An appeal may be filed against the order of NCLT as above before NCLAT and then with Supreme
Court from the order of NCLAT. [Section 61, 62 of IBC]

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 Liquidation Process and Distribution of Sale Proceeds
 If NCLT rejects the resolution plan, liquidation order will be passed by NCL.
 COC can decide the liquidation of the company before NCLT passes an order on the resolution
plan, NCLT shall bound to pass an order for liquidation.
 Similarly, if the order approving the resolution plan is contravened by the concerned corporate
debtor, any person other than corporate debtor, whose interest are prejudicially affected by such
contravention , may file an application before NCLT for liquidation on which NCLT may pass
an order for liquidation of corporate debtor. [Section 33 of IBC]

 RP As the Liquidator
 When an order for liquidation is passed, RP shall act as liquidator and all the powers of the
board of directors and key managerial personnel shall vest in the liquidator.
 The liquidator shall act as per the overall instructions of the NCLT and do all things as are
required (section 35 of IBC).

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Liquidation Estate
 The assets of the company will be known as liquidation estate
 The liquidator shall hold the assets as fiduciary for the benefit of the creditors.
 The assets mentioned in section 36(4) of IBC are not considered as part of liquidation estate which are
as under :
assets owned by a third party which are in possession of the corporate debtor, including-
(i) assets held in trust for any third party;
(ii) bailment contracts;
(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;
(iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and
(v) such other assets as may be notified by the Central Government in consultation with any financial sector regulator;
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 corporate debtor as the case may be provided such assets are not held on
account of avoidance transactions that may be avoided under this Chapter;
assets of any Indian or foreign subsidiary of the corporate debtor; or
any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual
dealing between the corporate Debtor and any creditor

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 Claims
Within 30 days from the date of commencement of liquidation process, the liquidator shall collect claims from
creditors. The creditors may withdraw or vary their claim within 15 days of submission.[Section 38 of IBC]

 Disposal of Claims
The liquidator may after verification of the claims, accept or reject the claims and the aggrieved party may
approach NCLT against the decision of the liquidator[ Section 39, 42 of IBC].

 Distribution of Sale Proceeds

The proceeds from the sale of assets shall be distributed in the priority of
(i) costs of insolvency resolution process
(ii) workmen’s dues and dues of secured creditors on pari passu basis
(iii) unpaid dues of employees other than workmen
(iv) financial debts due to unsecured creditors
(v) government dues and debts due to secured creditors which are unpaid following enforcement of security
interest remaining debts and dues.[ Section 53 of IBC]

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Certain Transaction Not Valid
 Preferential transactions will be avoided by the order of NCLT.
Any transfer of property made (i) in favour of related parties ( as defined in Section 5 (24) of IBC) two years
preceding the commencement of insolvency resolution process; and (ii) in favour of any other person one year
preceding the commencement of resolution process, where such parties or persons stood guarantee/surety or
extended credit for antecedent financial debt or operational debt or other liability of the company, such transfers
shall be avoided for which the RP or the liquidator will make an application to NCLT.

 Undervalued transactions will be avoided by the order of NCLT.

Any transfer of property made (i) in favour of related parties two years preceding the commencement of insolvency
resolution process; and (ii) in favour of any other person one year preceding the commencement of resolution process,
where property transferred by way of gift or transfer for a value significantly less than the value of the consideration
provided by the company, such transfers shall be avoided for which the RP or the liquidator will make an application to
NCLT.
In both the above cases, NCLT may pass an order that the property so transferred shall be vested in the company as if no
transfer took place.

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Questions & Further Information
Orbit Law Services is a law firm with offices in New This document has been prepared for general
Delhi, Mumbai, Chennai and Vijayawada, India. The guidance only. It does not contain definitive
Firm’s partners have decades of experience and advice; please contact Orbit Law Services if
you would like more detailed information on
expertise and are often called upon to advise on
any item referred to.
complex legal issues in challenging business
environments. As trusted advisors, we have
represented a wide variety of commercial, industrial, Further Information
If you require further information, or wish to discuss
institutional and individual clients, including banks,
any of the above, you can contact:
financial institutions, large and mid-sized public
sector as well as private sector companies, Ishtiaq Ali
partnerships, business groups, and emerging Founding Partner
companies – nationally and internationally. T +91 (22) 61692222
M +91 9869022636
E [email protected]
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