Contract-II, Unit-5.pptx by Smt.Sowmya.K

Unit-V
Concept of insolvency and bankruptcy; acts of insolvency –transfer of property to third person; transfer to defraud creditors; absconding to defeat the creditors; adjudication as insolvent; imprisonment; insolvency petition; appointment of interim receivers; duties of debtors; order of adjudication; proceedings consequent on adjudication; annulment of adjudication; realization of property; distribution of property; Provincial Insolvency Act, 1920; Insolvency Acts of states

1. CONTRACT-II UNIT-V By Smt.Sowmya.K M.A., LL.M Principal SBRR Mahajana Law College Mysore, Karnataka

2. Unit-V Concept of insolvency and bankruptcy; acts of insolvency –transfer of property to third person; transfer to defraud creditors; absconding to defeat the creditors; adjudication as insolvent; imprisonment; insolvency petition; appointment of interim receivers; duties of debtors; order of adjudication; proceedings consequent on adjudication; annulment of adjudication; realization of property; distribution of property; Provincial Insolvency Act, 1920; Insolvency Acts of states 2 Smt.SOWMYA.K SBRR Mahajana Law College

3. Key features of Insolvency and Bankruptcy Code -2016 An act to 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 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. Need of the Code 1. Improve ‘Ease of Doing Business’ ranking for India. 2. The stressed assets in the Indian banking system have peaked at US$ 150 billion or over Rs. 10 lakh crores (15% of gross advances) 3. Heightened focus on the resolution of the problem by the Reserve Bank of India (RBI) and the Supreme Court. The previous RBI Governor had stated that “Our intent is to have clean and fully provisioned bank balance sheets by March 2017”. 4. There is a dire need of capital today – not just for stressed companies but for growth in general. 5. Long time for resolution and recovery; Doing away with a fragmented framework. 6. The average life of cases recommended for restructuring in 2002 was 7 years and the average life of cases recommended for winding up to the court was 6.5 years. 7. Improve the confidence of the International investor in the debt market. 3 Smt.SOWMYA.K SBRR Mahajana Law College

4. Meaning: In layman's terms, ‘Insolvency’ is a situation where an individual or organization has more debts than available assets and is unable to meet its immediate obligations. ‘Bankruptcy’ on the other hand is a legal status accorded to an individual or an institution, who cannot pay back its debts. A system of resolving commercial insolvency existed before Insolvency and Bankruptcy Code, 2016 stemmed from the failures of existing laws to effectively deal with the insolvency procedures. A unified statute governing the insolvency and bankruptcy of various organizations did not exist in India. The provisions relating to the insolvency of corporations were disintegrated amongst various laws, namely The Companies Act,1956, the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), The Code of Civil Procedure, 1908, Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909. 4 Smt.SOWMYA.K SBRR Mahajana Law College

5. Salient features of insolvency and bankruptcy code. The two statutes, the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909 governed instances of individual bankruptcy which existed during the British reign. The Companies Act of 1956 had a provision of winding up of a company if it was unable to meet its debt obligations in addition to the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) in an around the year 1980 for the rehabilitation of sick companies, precisely for companies whose net worth had become negative. However, the act did not prove to be highly efficient for recovering debt. Therefore, it was ultimately repealed. The RDDBFI Act seeks to provide for the establishment of Tribunal and Appellate Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. Moreover, the Board for Industrial and Financial Reconstruction and the Appellate Authority for Industrial and Financial Reconstruction have also been dissolved. In between 2008 to 2014, Banks had lent indiscriminately leading to a very high Non-Performing Asset (NPA) ratio. The NPA grew from approximately 2 % to 5% in 2015. This led to a prompt action by the government, the first step towards the birth of the Insolvency and Bankruptcy Code, 2016.                                     5 Smt.SOWMYA.K SBRR Mahajana Law College

6. Timeline of the Insolvency and Bankruptcy Code, 2016 ·     2015 -       21stDecember - The Insolvency and Bankruptcy Code, 2015 was introduced by the Finance Minister, Mr. Arun Jaitley in the Lok Sabha. -       23rd December - The Code was referred to a Joint Committee of Parliament. ·     2016 -       28thApril - The Joint Committee of Parliament submitted its recommendations and modified code based on its suggestions. -       5thMay-The modified code was passed by Lok Sabha. -       11thMay- The Code was passed by Rajya Sabha -       28thMay-The code received the assent of the then President Pranab Mukherjee. It was notified in The Gazette of India. -       1stDecember-The Code became effective.   Effects of The Insolvency and Bankruptcy Code, 2016 ·     The Code repeals the Presidency Towns Insolvency Act, 1909, and Provincial Insolvency Act, 1920. ·     It amends eleven legislations including, Indian Partnership Act, 1932, The Companies Act, 2013, The SARFAESI Act, 2002 amongst a few. ·     It is a compendious Code enacted as the Preamble states, to consolidate and amend the laws related to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound procedure. ·     It does not allow the Civil Courts to interfere with the application pending before the adjudicating authority, thereby reducing the mounting arrears of litigations.                    Smt.SOWMYA.K SBRR Mahajana Law College 6

7. Features of  Insolvency and Bankruptcy Code 2016 ·     Features of IBC 2016 lays down a separate insolvency resolving procedure for companies, individuals as well as partnerships. The code lays down a most period of time for finishing the procedure. ·     The code has an overriding effect on all other prevailing laws relating to Insolvency & Bankruptcy in the country. ·     It sees a drift from the existing ‘Debtor controlled’ to a ‘Creditor in control’ regime. ·     There is a clear and unambiguous process to be followed. ·     The code encompasses one chain of authority.  ·     An Insolvency and Bankruptcy Board of India, was established on October 1, 2016 with the Head office being located at New Delhi. It aims to oversee the insolvency proceedings in the country and regulate the entities (Insolvency Professionals, Insolvency Professional Agencies and Information Utilities) registered under it. It also writes and enforces rules for transactions, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code. ·     The National Company Law Tribunal (NCLT) has been constituted to be the adjudicating authority for insolvency resolution and liquidation of Companies, Limited Liability Partnerships (LLPs). Eleven benches of the National Company Law Tribunal (NCLT) have been set up in different states under Part II, Chapter VI of the Code. The DRT (Debt Recovery Tribunal) is the adjudicating authority for partnership firms and individuals. ·     The Bankruptcy process is to be resolved within a stipulated time period of 180 days, extendable for another 90 days (270 days in total) for the Company. ·     A qualified Insolvency professional acts as an intermediary and takes over as the manager and oversees the process. ·     It also provides for establishment of insolvency professionals agencies to enrol and regulate insolvency professionals as its members in accordance with the code and regulations. ·     It also provides for the establishment of Information Utilities (IUs) which function as a databank to collect, collate and disseminate financial information and to facilitate insolvency resolution. This is considered to be an eccentric feature of the code. ·     The priority for distribution of liquidation proceeds has been provided under a waterfall mechanism to aid the steady resolution process. ·     The Code has not adopted the UNCITRAL model, however it provides for provisions enabling governments to enter into agreements and treaties with governments of foreign countries.   Smt.SOWMYA.K SBRR Mahajana Law College 7

8. The IBC Act 2016 is a federated legislation that dispenses a structured and time bound mechanism thereby promising a reform in the arena of Insolvency and Bankruptcy laws in the history of our country. It is the first huge step towards facilitating business practices in India. Quick resolution of business withers away the possibility of capital being squandered on weak business entities. It is a boon for our country as India is a developing as well as capital starved country and the Code aims as well as succeeds to ensure the upliftment of the economy of India.   Smt.SOWMYA.K SBRR Mahajana Law College 8

9. Understanding the Code Differentiation Insolvency; Bankruptcy; and Liquidation Why is it a Code? “Code” is usually known as a collection or compendium of laws. It refers to a systematic and comprehensive compilation of laws, rules or regulations that are consolidated and classified according to a particular subject matter. Smt.SOWMYA.K SBRR Mahajana Law College 9

10. Inception of Insolvency Laws in India Presidency Towns Insolvency Act, 1909 Provincial Insolvency Act, 1920 SICA, 1985 RDDBI, 1993 SARFAESI, 2002 COMPANIES ACT, 2013 IBC, 2016 Smt.SOWMYA.K SBRR Mahajana Law College 10

11. Impact on other statutes Repealed Acts Presidency Town Insolvency Act, 1909; and Provisional Insolvency Act, 1920 Some of the amended Acts Sick Industrial Companies (Special Provisions) Repeal Act, 2003; Recovery of Debts Due to banks and financial institutions Act, 1993; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and Companies Act, 2013 Smt.SOWMYA.K SBRR Mahajana Law College 11

12. Key Features Applicable to both corporate and non-corporate persons; Allow creditors, whether secured; unsecured; financial or operational; domestic or international to initiate a resolution processes thereby aiming for an early detection of the fraud; Establishes time-bound moratorium on acceleration and enforcement of debts against the company; The resolution professionals can replace the existing management during insolvency proceedings; Provides for time-bound viability assessment mechanisms, liquidation processes and distribution waterfalls; Provides for penalties on promoters for asset diversion leading up to liquidation; The provisions of the Code overrides SARFAESI Act, 2002; An inability to pay debt will no more be a ground for winding up under the Companies Act; Voluntary Liquidation shall be subject to provisions of the Code; and Chapter governing Revival and Rehabilitation of Sick Companies of Companies Act 2013, stands omitted. Smt.SOWMYA.K SBRR Mahajana Law College 12

13. ‘Debtor-in-possession’ to ‘Creditor-in-possession’ The Courts are being conscious vis-a-vis piercing the corporate veil for default; The Code aims at bringing the defaulters to book by empowering creditors to initiate the process at an early stage for replacing the management; The Code provides for takeover of management by insolvency professionals nominated by the creditors. Professionals to have the flexibility to bring in turnaround specialists and consultants to achieve the desired business results; The Code provides for liquidation of a company at the earliest opportunity to minimise the losses for debtors as well as shareholders. Smt.SOWMYA.K SBRR Mahajana Law College 13

14. Vaish Associates Privileged & Confidential Applicability, Scope & Structure Applicability STRUCTURE In entirety, the Code has 255 sections which are divided into 5 Parts as given below Part I Preliminary (Definitions) Part II Insolvency Resolution and Liquidation for Corporate Persons Part III Insolvency Resolution and Bankruptcy for individuals and Partnership Firms Part IV Regulation of Insolvency Professionals, Agencies and Information Utilities Part V Miscellaneous (enables amendments in other statues such as Companies Act 2013) Schedules (11 Schedules) Provides for amendments to be carried out in other statues All kinds of: Corporate Enterprises; Limited Liability Partnerships; Partnership Firms; and Individuals. Scope Insolvency; Liquidation; Voluntary Liquidation (solvent insolvency); and Bankruptcy

15. Framework of the Code Regulator Adjudicator Insolvency and Bankruptcy Board of India (IBBI) National Company Law Tribunal Debt Recovery Tribunal Corporate Entities Non-Corporate Entities Companies/LLPs Individuals and Partnership Firms Insolvency Professional Agencies; Insolvency Professionals; and Information Utilities Smt.SOWMYA.K SBRR Mahajana Law College 15

16. Broad CIRP-Process Collation of claims and constitution of committee of creditors by Interim Resolution Professional Appointment of Resolution Professional in the creditors meeting held within 7 days of constitution of committee of creditors Resolution Professional to prepare Information Memorandum Resolution Applicant to prepare (on the basis of Information Memorandum) and submit resolution plan to Resolution Professional for examination & further submission for approval of committee of creditor Resolution plan approved by committee Resolution plan rejected by committee NCLT approves plan NCLT rejects plan Liquidation process starts Admission of application and appointment of Interim Resolution Professional Smt.SOWMYA.K SBRR Mahajana Law College 16

17. Moratorium When can NCLT declare Moratorium? What does Moratorium includes: - institution/continuation of suit or proceedings against the corporate debtor; - transferring or disposing off any asset by the corporate debtor; - any action to foreclose/recover any security interest created by corporate debtor vis-à-vis property including any action under SARFAESI, 2002; and - recovery of any property by an owner where property is occupied/ is in possession of corporate debtor. Moratorium shall cease to be in effect: on completion of CIRP; or when resolution plan is approved by NCLT during the CIRP period; or - where liquidation order is passed Smt.SOWMYA.K SBRR Mahajana Law College 17

18. Public Announcement When a public announcement shall be given? An insolvency professional shall make a public announcement in Form A within 3 days from the date of his appointment as an IRP. The public announcement shall be published – In one English and one regional language newspaper with wide circulation at the location of the registered office and principal office; On the website of corporate debtor On the website, if any, designated by the Board for the purpose Smt.SOWMYA.K SBRR Mahajana Law College 18

19. Waterfall Mechanism Insolvency resolution and liquidation cost Secured creditor (in case he has relinquished security) Wages and unpaid dues to employees (other than workmen) for a period of 12 months preceding liquidation commencement date Unsecured creditors Central and State government dues Any remaining debts or dues Preference shareholders, if any Equity shareholders or partners, as the case may be Workmen’s dues ( for period of 24 months preceding liquidation commencement date) + In case of liquidation, the asset of the corporate debtor will be sold and the proceeds will be distributed amongst the creditors in the following order of priority:- + Secured creditor for an unrealised amount for enforcing security interest Smt.SOWMYA.K SBRR Mahajana Law College 19

20. Interim Resolution Professional (“IRP”) NCLT shall appoint an IRP within fourteen days from the insolvency commencement date. From the date of appointment of the IRP- the management of the affairs of the corporate debtor shall vest in the IRP; the powers of the board of directors or the partners of the corporate debtor, shall stand suspended and be exercised by the IRP; Role of IRP the officers and managers of the corporate debtor shall report to the IRP and provide access to documents of the corporate debtor as may be required by IRP the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of IRP in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional. The interim resolution professional shall make every endeavor to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. Smt.SOWMYA.K SBRR Mahajana Law College 20

21. Duties of IRP From the date of appointment of the IRP- collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made; constitute a committee of creditors file information collected with the information utility. take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets The personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor shall extend all assistance and cooperation to IRP The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors Smt.SOWMYA.K SBRR Mahajana Law College 21

22. Powers of IRP IRP has been vested with the powers to- Appoint accountants, legal counsels who may provide specialist advice to the IRP; Enter into contracts on behalf of the corporate debtor or to amend/ modify the contracts which were entered into before the commencement of the CIRP; Raise interim finance; Issue instructions to the personnel of the corporate debtor to keep the corporate debtor as a going concern; Take all such actions as are necessary to keep the corporate debtor as a going concern. IRP has to manage the operations of the corporate debtor as a going concern to enable him to protect and preserve the value of the property of the corporate debtor. The IRP may sell unencumbered assets of the corporate debtor, other than in the ordinary course of business, if he is of the opinion that such a sale is necessary for a better realization of value. Smt.SOWMYA.K SBRR Mahajana Law College 22

23. Resolution Professional (“RP”) The committee of creditors, may, in the first meeting, by a majority vote of not less than 75% of the voting share of the financial creditors, either resolve to appoint IRP as RP or to replace IRP by another RP. RP shall conduct the entire C orporate I nsolvency R esolution P rocess (“CIRP”) and manage the operations of the corporate debtor during CIRP period; The RP shall give notice of each meeting of the committee of creditors to— (a) members of Committee of creditors; (b) members of the suspended Board of Directors or the partners of the corporate persons (c) operational creditors or their representatives if the amount of their aggregate dues is not less than ten per cent of the debt. Duties of RP Preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor The RP shall prepare an information memorandum containing relevant information as specified by IBBI for formulating a resolution plan. The RP shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority. Initiation of Liquidation Smt.SOWMYA.K SBRR Mahajana Law College 23

24. Role of IRP/RP in Insolvency Resolution Process for Corporate Persons Public Announcement by IRP within 3 days of his appointment in FORM A. Submission of Proof of Claims by creditors, workmen and employees to IRP in FORMs B,C,D,E as may be applicable. Verification of Claims by IRP within 7 days of receipt Constitution of Committee of Creditors (“COC”) Where corporate debtor has no financial debt, COC shall consist of- 18 largest operational creditors by value 1 workmen representative 1 employee representative IRP to file Report certifying constitution of COC to NCLT within 30 days of his appointment IRP to convene first meeting of COC within 7 days of filing the report IRP to appoint 2 registered valuers within 7 days of his appointment to determine the liquidation value of corporate debtor IRP shall provide the Liquidation value to COC in electronic form IRP/RP shall submit Information Memorandum in electronic form to each member of COC RP shall present all Resolution plans that meet requirements of Code to COC for its consideration RP on instruction of COC may apply for Extension of CIRP period before NCLT. By sending pdf file to [email protected] Smt.SOWMYA.K SBRR Mahajana Law College 24

25. Delving into the Code Insolvency resolution process costs. amounts due to suppliers of essential goods and services amounts due to person whose rights are prejudicially affected on account of moratorium expenses incurred on or by IRP to the extent ratified expenses incurred on or by RP fixed by COC other costs directly relating to CIRP and approved by COC Resolution plan shall identify specific sources of funds that will be used to pay- CIRP costs and provide that CIRP costs to be paid in priority Liquidation value due to operational creditors and provide for such payment in priority to any financial creditor Liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favor of the resolution plan Smt.SOWMYA.K SBRR Mahajana Law College 25

26. Delving into the Code Assets and Liabilities on Insolvency Commencement Date Audited Financial Statements(“FS”) for last 2 FY’s and provisional FS up to not earlier than 14 days from application list of creditors with names, claim and security interest Related party debts due to/from corporate debtor details of guarantees Details in Information Memorandum details of partners/members holding at least 1% stake in corporate debtor details of material litigation and ongoing investigation initiated by government and statutory authorities number of workers/employees and liability towards them the liquidation value the liquidation value due to operational creditors other information which RP deems relevant to the COC Smt.SOWMYA.K SBRR Mahajana Law College 26

27. Broad Liquidation Process Appointment of Liquidator Formation of Liquidation Estate Consolidation of claims Verification of claims Admission or Rejection of claims Determination of value of claims Appeal by the Creditor to the NCLT, within 14 days of rejection of claims Liquidator to scrutinise Preferential, under-valued and extortionate credit transactions Distribution of assets and dissolution of Corporate Debtor Smt.SOWMYA.K SBRR Mahajana Law College 27

28. Initiation of Liquidation Where the RP, at any time during the CIRP but before confirmation of resolution plan, intimates the NCLT of the decision of the committee of creditors to liquidate the corporate debtor, NCLT shall pass a liquidation order RP appointed for CIRP shall act as the liquidator for the purposes of liquidation unless replaced by NCLT Duties of L iquidator to verify claims of all the creditors to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor to evaluate the assets and property of the corporate debtor and prepare a report to carry on the business of the corporate debtor for its beneficial liquidation to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract to draw, accept, make and endorse any negotiable instruments in the name and on behalf of the corporate debtor to take out, in his official name, letter of administration to any deceased contributory and to do in his official name any other act necessary for obtaining payment of any money due and payable from a contributory or his estate to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities to perform such other functions as may be specified Smt.SOWMYA.K SBRR Mahajana Law College 28

29. CASE STUDY A Ltd. (Company) is engaged in the manufacturing of Sponge Iron, TMT bars and Galvanized wires. It has availed various credit facilities from a total of 19 secured creditors with an outstanding debt of Rs.1500 crore . Due to adverse market conditions, its financial position took a downturn and hence it filed a reference with the Board for Industrial and Financial Reconstruction (BIFR). The reference was duly registered. During the proceedings before BIFR, one of the secured creditors, after taking consent of the other creditors of the company, filed an application for abatement of the reference before BIFR. Meanwhile, one of the unsecured creditors filed an application before BIFR for the impleadment in the proceedings. The BIFR dismissed the said application due to non-prosecution. Subsequently, upon coming into force of the Insolvency and Bankruptcy Code (IBC), 2016, the company filed an application for initiation of Corporate Insolvency Resolution Process (CIRP) before National Company Law Tribunal (NCLT) on 09.12.2016. However, in the first meeting of the Committee of Creditors held on 05.01.2017, the financial creditors of the company decided to liquidate the company. Immediately after this decision, but before intimating the decision to the NCLT, one of the financial creditors of the company applied to Resolution Professional (RP) giving proof of his claim and seeking his inclusion in the Committee of Creditors. Smt.SOWMYA.K SBRR Mahajana Law College 29

30. CASE STUDY Can the creditors initiate SARFAESI action against the company? a) Yes, if they constitute more than 75% of the total financial debt. b) Yes, with the consent of the Liquidator. c) Yes, with the consent of the National Company Law Tribunal (NCLT). d) No, they cannot In case one of the secured creditors realizes its security interest and such realization is not sufficient to pay its outstanding debts, can he recover the balance amount? a) The balance amount will be ignored. b) The balance amount will be paid at par with dues to the Central Government and the State Government. c) The balance amount will be paid at par with other secured creditors. d) The Balance amount will be paid at par with unsecured creditors. In case the liquidation process is initiated, the unsecured creditor who filed an application before BIFR for impleadment shall be paid: a) as per claim accepted by the liquidator in accordance with priorities specified in the Insolvency and Bankruptcy Code, 2016. b) as per the amount of its claim before BIFR. c) as per the amount of its claim made before the liquidator. d) as per the order of Debt Recovery Tribunal. In case the secured creditor faces resistance from company for enforcement of security interest, such secured creditor may apply to: a) Adjudicating Authority b) Debt Recovery Tribunal c) Liquidator d) High Court What is the priority of payment to workmen dues in case of liquidation? a) Pari passu with secured creditors and employees b) Pari passu with secured creditors and insolvency costs c) Pari passu with secured creditors d) Pari passu with financial creditors Smt.SOWMYA.K SBRR Mahajana Law College 30