INSOLVENCY AND BANKRUPTCY CODE 2016 BY CMA G

INSOLVENCY AND BANKRUPTCY CODE 2016 BY CMA G N VENKATARAMAN INSOLVENCY PROFESSIONAL AND FORMER PRESIDENT ICAI AT COIMBATORE ON SATURDAY THE 10 TH OF AUGUST 2019

WHAT IS IBC ?

WHY IT IS NECESSARY?

• The object of the bill is to amend the laws of insolvency in force in the presidency towns and in the town of rangoon former British India. • So necessity of introduction of IBC 2016 because of inadequacy of present law. Thus even though India had an Insolvency law ever since 1848, with 170 years of existence, insolvency is even now considered as a taboo. There is a crying need to have a robust law which should enable turnaround of business entities in a given period of time and if there are no prospects for revival, the assets and other valuable resources must be put to Liquidation. This scheme is being introduced by IBC.

• Several legislative measures have focused securing the interest of banking sector particularly to solve NPAs amounting to thousand of crores locked up Recovery of Debt and Bankruptcy Act 1993, administered through Debt Recovery Tribunal and Appellate Tribunal this was also not adequate. In 2002 SARFAESI Act enabled banks and financial institution to sell mortgaged assets without waiting for clearance from the Court.

• The classification of NPA is issued by RBI. This measure was marred by delay in system because of writ jurisdiction of high court in vulnerable appeal before Debt Recovery Tribunal and Appellate Tribunal also. • In addition Board of Industrial and Financial Reconstruction (BIFR) was also being managed with Sick Industrial Companies Act 1985. The BIFR authority in Insolvency Resolution and Revival did not yield desired result. • In addition to, The sundry creditors started petitions for winding up of operations.

All the above made Government of India to think of a solution for a time bound resolution by De-coding all the present laws of Insolvency put one law in place, is result of introduction of INSOLVENCY & BANKRUPTCY CODE, 2016.

DECLINING STAGE OF AN ORGANIZATION ⦿ ⦿ ⦿ ⦿ Any business is an ‘organisation’. The word ‘organisation’ is derived from the word ‘organ’, which indicates that any ‘organisation’ has many properties of an ‘ organ’. Like any ‘organ’, the organization has to either grow or decay. Like any human body, some professions, businesses and industries, which obviously are organisations, are bound to be healthy and some to be sick. A healthy organisation can also become sick after some years. Some sick organisations will die, while some might recover. All startups cannot be successful. Some will succeed while some will fail. Some startups are genuine and may still fail. Some startups are bogus and intention is only to hoodwink the system and swallow public money. The sickness may be for variety of reasons- internal or external. It may be temporary or permanent. It can be chronic also. Every business decision cannot be right. Some business decisions are bound go wrong, which may lead to business failures. Market is merciless. Market rule is law of jungle i. e. ‘survival the fittest’. Weak and inefficient organisations will be weeded out. Some business people are honest and sincere while some are crooks. The crooks will have their own way of running organization, with ulterior motives, to swallow public money.

⦿ ⦿ CORPORATE DEATHS : If an organisation is not viable and is likely to be a perennially sick unit, best course is to allow it to die a natural death. A person on death bed, with practically no chance of recovery, kept alive by artificial means, is never a happy sight. Often ‘mercy killing’ is better than prolonging the agony. Vision of the code- The vision of law (as given in press release of Government of India) is to encourage entrepreneurship and innovation. Some business ventures will always fail, but will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead of being bogged down with decisions taken in the past.

Earlier statutory structure to deal with the issues ⦿ ⦿ ⦿ Earlier, the corporate companies were governed under Companies Act, 2013 (earlier 1956 Act). The sickness issues of companies were dealt with by High Courts. Experience with this legal structure was not very satisfactory, to say the least. Cases used to drag on for years leading to huge national waste of resources. The archaic provisions were not serving the purpose for which they were initially designed. Sickness of non-corporate bodies like partnership firms, individual, HUF etc. is presently governed under Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. These will be transferred to DRT when Insolvency Code Is made Applicable to them.

Insolvency and Bankruptcy Code, 2016 ⦿ The old and archaic provisions to deal with sickness arising out of financial difficulties have been replaced by Insolvency and Bankruptcy Code, 2016 (Insolvency Code, 2016 for short). As per preamble to the Code, the purpose of this Act is as follows- - Consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals - In a time bound manner - For maximization of value of assets of such persons - To promote entrepreneurship - Availability of credit - Balance the interests of all the stakeholders including alternation in the order of priority of payment of Government dues - Establish an Insolvency and Bankruptcy Board of India Intentions are sound- There is no doubt that intentions behind the law are sound. The law is well conceived. Let us hope that the law will be helpful in achieving the purposes for which it is conceived. Code applicable all over India with some exception relating to Jammu &Kashmir-The Insolvency and Bankruptcy Code, 2016 applies to whole of India. However, part III of the code, which deals with Insolvency Resolution and Bankruptcy for Individuals and partnership section 1(2) of Insolvency Code, 2016. ⦿

Origin of the Code For the above said purpose a Bankruptcy Law Reform Committee (BLRC) was set up by the Ministry of Finance under the Chairmanship of Mr. T. K. Vishwanathan, former Secretary General, Lok Sabha and Former Union Law Secretary on August 22, 2014. the Bankruptcy Law Reform Committee after its study on the legal framework submitted its report to the Government in November, 2015. On December 21, 2015 a bill named the insolvency and Bankruptcy Bill, 2015 was introduced in Lok Sabha and it was passed on May 5, 2016. after passing of the bill in Rajya Sabha on May 11, 2016, the assent of the president of India was accorded on May 28, 2016 for the Bill to become the Code.

22 Aug’ 14 : Constitution of Bankruptcy Law Reforms Committee (BLRC) under the Ministry of Finance Nov’ 15 : Insolvency and Bankruptcy Bill, 2015 drafted and submitted by BLRC 21 Dec’ 15: Bill was introduced in Lok Sabha 28 Apr’ 16: Report of the Joint committee was presented in Lok Sabha and was laid down in Rajya Sabha 5 May’ 16: Bill was passed by Lok Sabha 11 May’ 16: Bill was passed by Rajya Sabha 28 May’ 16: Received the assent of President of India and became Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016)

Difference between “ Insolvency” and “Bankruptcy” Insolvency is a financial position of one’s inability to pay the debts on time, wherein Bankruptcy on the other hand is a legal process for resolving the issue of insolvency. Insolvency is a situation which promotes one to file for bankruptcy. In simple terms, bankruptcy is the result of insolvency. However insolvency need not always lead to bankruptcy.

• The fundamental AIM of IBC 2016 law is to provide an opportunity to debtors to try an Insolvency Resolution Process. If within a specified time frame, the resolution process does not result in sanction of a resolution plan, IBC puts the debtor in Liquidation Mode so that the economic resources at the disposal of the debtor could be disposed of as profitably as may be possible to pay off the creditors and other stakeholders as much as possible and as soon as may be possible.

• The Adjudicating Authority and Appellate Authority under section 60 & 61 for the corporate persons is NCLT (jurisdiction of the corporate person’s registered office is situated). • There are 11 NCLT benches operating in India. Appeals to NCLAT from 30 -45 days which is setup only in New Delhi. • A final appeal under section 62 of IBC within 60 days can be filed with the Supreme Court on point of law only. The NCLT and NCLAT are administered under companies act sec. 407 to 429 all rules and procedure adopted in IBC 2016. •

• Civil courts not to have jurisdiction as per Sec. 63 of IBC which reads “ No civil Court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which National Company Law Tribunal or the National Company Law Appellate Tribunal has jurisdictions under this Code. Civil Court not to have jurisdiction”. • In addition sec 238 of the IBC which reads “the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”.

• For the present CIRP can be initiated by any persons against corporate persons. The Fundamental requirement is that there should be a default and the default should be undisputed. • Three types of applicants – Financial Creditors, Operational Creditors and Corporate Debtor. • Sec 4 of IBC 2016 Minimum default of rupees one lakh with certain rules, the affected person can appeal for initiation of CIRP to NCLT under section 7, 9 and 10 of IBC. • On admission of the application an IP will be appointed as an IRP for 30 days. • He has to issue public announcement in three days and call for claims and verify the claims and submit it to NCLT, within 14 days.

• Then formation of Committee Of Creditors and call first meeting of COC to appoint one RP with 75% vote which will be for 180 days including 30 days of IRP. • Resolution Professional has to complete CIRP within 180 days by Calling meetings of COC • Issuance of Information Memorandum • Issuance EOI for Resolution Plan •

• Any person can submit resolution plan expect promoters they are not allowed to bid, but Government of India is now thinking to include promoters also to bid with some restrictions. If resolution plan is not forthcoming the Co. C can ask for extension of the up to 90 days. • But NCLT can consider the request of COC sent through Resolution Professional for any number of days maximum 90 days for only one time extension.

• • Next stage if any resolution plan is not forth coming Co. C recommends through RP for liquidation. The NCLT considering this recommendation can order for liquidation of the company under section 33 IBC. RP is normally appointed by NCLT as liquidator and liquidation process has to be completed within 2 years-time. In extraordinary circumstances an extension may be given. Liquidation Process. • Calling for stakeholders to submit their claims. • Verification and determination of claims.

⦿ Take control Custody of all assets of Corporate Debtor as the Board of Directors and Officers are deemed discharged and All deemed retrenchment of all employees and Workmen. ⦿ Liquidator and NCLT will complete the process of selling the assets, recovering the money and distribution of assets, after all the assets are sold amounts has to be distributed by Liquidator under Liquidation Waterfall as per section 53 of IBC 2016.

Order of Priority of Payments in Liquidation LIQUIDATION WATERFALL Entire insolvency resolution process cost and liquidation cost Debts owned to secured creditors where security interest relinquished and workmen’s due for the period of 24 months proceeding liquidation. Wages and any unpaid dues owned to employees for the period of 12 months proceeding liquidation Debt owned to unsecured creditors Amounts due to central/ State Governments Secured creditors due after realizing of secured interest Other remaining debts/dues, if any Preference shareholders, if any Equity shareholders/partners

• • After distribution, Liquidator will write letter to NCLT to close the Corporate Debtor and write letter to ROC with this liquidation is completed. The above Law is in force for Corporate Persons in India. Where as the Insolvency Resolution of Individuals and Firms are enacted under section 78 to 183 of IBC 2016 (yet to be notified) and it is not applicable to Jammu and Kashmir. The GOI and IBBI may introduce through gazette notification for applicability of Sec 78 to Sec 183 of IBC 2016.

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 Laws as well 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 timebound manner – the evaluation and viability determination must be completed within 180 days. 5. Moratorium period of 180 days (extendable up to 270 days) for the company. Insolvency professional to take over the management 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 transactions 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 independent body for the administration and governance of Insolvency & Bankruptcy Law and Information Utilities as a depository of financial information. ALL THE ABOVE TO BE READ WITH AMENDMENTS PASSED BY PARLIAMENT AND GAZETTED ON 23 RD , 24 TH AND 25 TH JULY 2019.

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