Insolvency & Bankruptcy Code 2016

A brief guide to the new Insolvency & Bankruptcy Code 2016 which was passed by the Lok Sabha on 5th May, 2016.

1. THE INSOLVENCY & BANKRUPTCY CODE 2016

2. Important terms Financial creditor - Any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. Financial Debt Includes; Money borrowed against the payment of interest Any amount raised pursuant to the issue of bonds, debentures, loan stock or any similar instrument The amount of any liability in resect of any lease or hire purchase contract Any counter indemnity obligation in respect of guarantee indemnity letter of credit or other instrument of bank or financial institution.

3. Operational creditor Means any person to whom a operational debt is owed and includes a person to whom such debt has been legally assigned or transferred to. Operational Debt; a claim in respect of provision of goods or services including; employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

4. moratorium This operates as a calm period during which there shall be no; Institution of suits or continuation of pending suits or proceedings by any court of law, tribunal, arbitration panel or other authority; Transfer, encumbrance or disposal of by the corporate debtor any of its assets or any legal right or beneficial interest therein; The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. The supply of essential goods or services to the corporate debtor as may specified shall not be terminated or suspended or interrupted during moratorium period.

5. Application scope and structure Application Corporate Enterprises Limited Liability Partnerships Partnership Firms Individuals Scope Insolvency Liquidation Voluntary Liquidation Bankruptcy Structure The Code has 225 Sections divided into 5 parts as below. PART I Preliminary Definitions PART II Insolvency resolution and liquidation for corporate persons PART III Insolvency resolution and Bankruptcy for Individuals & Partnership Firms PART IV Regulation of Insolvency Professionals Agencies and Information Utilities PART V Misc. Enables Amendments in other statutes PART VI (Schedules) Provides for Amendments to be carried out in other statutes

6. Insolvency resolution process for companies & llp Application of Default to NCLT REJECTED ACCEPTED (Insolvency commencement date) Initiation of Moratorium ( S.13 & S.14 ) Appointment of Interim Resolution Professional by NCLT (30 Days Term) ( S.16) . Public Announcement (S.15 ) ( 14 Days ) Submission of Plan to NCLT Implementation of Plan Liquidation [S.33] Constitution of Committee of Creditors by Interim RP (S.21) which shall appoint the Resolution Professional (S.22) within 7 Days Plan Rejected/No Resolution Plan [S.31 (2)] Plan Accepted [S.31 (1)] Application of aggrieved party after contravention of plan Within 30 Days By financial Creditor (S.7 ), operational creditor( S.9)/ corporate debtor itself (S.10) Within 14 Days Within 180 Days (Extended up to further 90 Days) [ S.12 ] Fast Track ; Within a period of 90 Days which may extend to not more than 45 Days. Minimum 75% Vote Minimum threshold 1 Lakh Moratorium shall cease to have effect. Submission of Resolution plan by Resolution applicant to the Resolution Professional. (S.30) Resolution Professional shall present it to Committee of Creditors for Approval [S.30 (4) ] NCLT may give notice to rectify the defects within 7 days

7. Liquidation 75 % Majority of the creditors committee does not approve of the resolution plan. The NCLT rejects the Resolution plan submitted to it on technical grounds Debtor/Affected Person contravenes the agreed resolution plan and an makes an application to the NCLT. The creditors committee does not approve a resolution plan within 180 days (or within the extended period of 90 days) 1. INITIATION OF LIQUIDATION (S.33) 2. Appointment of Liquidator (S.34) Resolution Professional to be appointed as the Liquidator unless replaced by NCLT To be entrusted with all powers of BoD & Partners . 3.Liquidator to; identify/control & evaluate the assets of the debtor; Verify Claims of the creditors; carry on the business of the corporate debtor for beneficial liquidation (S.35) 4. Liquidator to form a Liquidation Estate. (S.36) EXCLUDE -Assets in possession of corporate debtors but owned by third parties. -Assets in security collateral held by financial service providers. -Personal assets of shareholders or partner of corporate debtor. -Assets of subsidiaries of corporate debtor(Domestic/International) -Any other assets as may be specified by the IBBI INCLUDE -Assets over which the CD has ownership rights. -Assets that may/may not be in possession of the CD, including encumbered assets -Tangible assets(movable & immovable) -Intangible assets(IPs ,Securities etc.) -Assets subject to determination by court. Assets recovered through proceedings for avoidance of transactions. -Assets in respect of which secured creditor has relinquished security interest -Any other property vested in the corporate debtor including realization proceeds from liquidation. 5. Liquidator to collect and verify claims from Creditors within 30 Days from commencement. (S.38 & S.39) 6. Liquidator to accept/reject claims and communicate within 7 days. (S.40) 7. Determination of valuation of claims (S.41) 8. Appeal against the decision of Liquidator to the NCLT within 14 days (S.42) 9. Liquidator to Scrutinize Transactions 10. Distribution of assets & Dissolution of Corporate Debtor (S.53 & S.54)

8. WATERFALL MECHANISM +

9. Voluntary liquidation s.59 Declaration by majority directors via affidavit stating The company has no debts and is able to clear existing debts. Purpose of liquidation is not to defraud Passing of Special Resolution within 4 weeks of Declaration To liquidate the company. To appoint the insolvency professional as the liquidator. Documents to be attached. Audited financial statements. Record of business operations for the last two years. A report of valuation of assets. 2/3 Majority of creditors (if any) shall approve the special resolution within 7 days. Notifying the ROC and the board within 7 days of resolution or approval by the Creditors. Initiation of liquidation process S ections 35-53 of Chapter III and Chapter VII shall apply. Liquidator to make an application to the NCLT for Dissolution. NCLT to pass an order of dissolution. NCLT shall forward to the concerned authority with which the CD is registered. within 14 days of the order.

10. Application for Initiating Fresh Start Process . Eligible debtor* personally/through IRP can apply to the DRT for discharge of Q ualified debts** .( S.80) Eligibility.* Gross annual income does not exceed 60k . The agg . Value of assets does not exceed 20k . The agg . Value of qualifying debts does not exceed 35k . Not an undischarged bankrupt. Does not own a dwelling unit, irrespective of whether it is encumbered or not; A fresh start or IRP or bankruptcy process is not subsisting. No fresh start order has been made in the preceding 12 months of the DOA. FRESH START – Individuals/One Person Company Initiation of Interim-Moratorium. ( S.81) Appointment of Resolution Professional. S.82 Qualified Debts** . a) A debt to the extent it is secured. c) Debt incurred 3 months prior to the application c) an excluded debt . Liability to pay for; [a) fine imposed by a tribunal/court. b) damages for negligence, nuisance or breach of statutory contract/other legal obligation. c) maintenance under any law for the time being in force. d) student loan e) any other debt as may be prescribed .] Examination of Application by RP and Submission to DRT. S.83 Within 10 days of appointment Order of Admission/Rejection of Application by DRT. Within 14 Days. S.84 Commencement of Moratorium. S.85 Application of Objection by Creditor & Examination by RP. S.86 May object on; a) inclusion of debt as qualifying debt. b) Incorrectness of details of the QD specified in the order. Application against decision of RP by Creditor/Debtor. S.87 Application for Revocation of Order u/s 84 by RP. ( S.91) Grounds: a) change in financial circumstances of the debtor, the debtor is ineligible for a fresh start process. b) non compliance by debtor under moratorium. Discharge from a) penalties in respect from QD from the DOA till DOO. b) interest including penal interest in respect of QD from the DOA till DOO. c) any other sums owed under any contract in respect of QD from DOA till DOO. Order. U/S.92 180 Days. Unless revoked under S.91

11. Insolvency resolution process for individuals/ OPc & partnership firms Application of Default to DRT. I nitiation of Interim-Moratorium . ( S.96) Admission/Rejection Order by DRT (S.100) By Debtor S.94, (in respect to debts which are not excluded debts) By Creditor S.95 Reject If rejected, the creditor is entitled to file for a bankruptcy order . Moratorium commences. S. 101 Appointment of Resolution Professional by the board within 10 days who will be provided with the application. S.97 Admission/Rejection of application by Resolution Professional & submission to DRT within 10 Days. S.99 Accept 14 Days Public Notice inviting claims S.102 Registering of Claims by Creditors S. 103 Debtor shall prepare the Repayment Plan containing a proposal. S.105 Repayment plan shall include; a) A justification for preparation of of such plan and reasons on the basis of which the creditors may agree upon the plan; b) provision for payment of fee to the RP; c) such other matters as may be specified. RP shall prepare list of creditors. S.104 Submission of Repayment Plan to DRT by RP within a period of 21 days from the last date of submission of claims us102. Meeting of Creditors. S.107 Along with a report RP shall decide the voting share to be assigned to each creditor. Creditor not entitled to vote in respect of a debt of an unliquidated amount. S.109 Ceases to have effect at the end of 180 days

12. Approval of Repayment Plan by Creditors. S.111 By a majority of more than three-fourth in value of the creditors in person or by proxy vote in the meeting. Resolution Professionals report on the meeting of creditors in respect to the repayment plan. S.112 Order of DRT on Repayment Plan. S.114 Reject Accept DRT may provide directions towards implementation. If the plan requires modification DRT may direct RP to re-convene the meeting. Creditors entitled to file for Bankruptcy. Implementation and supervision of repayment plan by RP. S.116 Completion of Repayment Plan. S.117 The RP shall within 14 days of the completion forward to the person who are bound by the repayment plan & DRT; a) a notice that the plan has been completed b) receipts of payments c) may also apply for extension of time for this purpose S.118 Repayment plan may come to an end prematurely if it has not been fully implemented. The debtor or the Creditor whose claims under repayment plan have not been fully satisfied may apply for bankruptcy. The RP shall apply to DRT for discharge order in relation to the debts mentioned in the repayment plan and DRT may pass such order. S.119

13. BANKRUPTCY ORDER FOR INDIVIDUAL/OPC AND PARTNERSHIP FIRMS If the IRP application is rejected by DRT U/S 100 (4) If DRT rejects the repayment plan U/S 115 (2) If the DRT passes an order that the repayment plan has not been implemented. U/S 118 (3) Application for Bankruptcy ( S.121) App. To be filed Within 3 months By Debtor who will propose an insolvency resolution professional as the bankruptcy trustee. S.122 By Creditor who will propose an insolvency resolution professional as the bankruptcy trustee. S.123 App. Shall be accompanied by; ( a) the records of insolvency resolution process undertaken under Chapter III of Part III; (b) the statement of affairs of the debtor in such form and manner as may be prescribed, on the date of the application for bankruptcy ; and (c) a copy of the order passed by the Adjudicating Authority under Chapter III of Part III permitting the debtor to apply for bankruptcy. App shall be accompanied by; (a ) the records of insolvency resolution process undertaken under Chapter III; (b) a copy of the order passed by the Adjudicating Authority under Chapter III permitting the creditor to apply for bankruptcy; (c) details of the debts owed by the debtor to the creditor as on the date of the application for bankruptcy; and (d) such other information as may be prescribed If the App. is in respect of secured debt it shall be accompanied with; (a) a statement by the creditor having the right to enforce the security that he shall, in the event of a bankruptcy order being made, give up his security for the benefit of all the creditors of the bankrupt; or (b) a statement by the creditor stating— ( i ) that the application for bankruptcy is only in respect of the unsecured part of the debt; and (ii) an estimated value of the unsecured part of the debt. The secured and unsecured part of the debt shall be treated as separate debt. Initiation of Interim Moratorium S.124 Appointment of Insolvency Resolution Professional as bankruptcy trustee. S.125 Bankruptcy Order S.126 Within 14 days of appointment of bankruptcy trustee. Shall continue to have effect till the debtor is discharged.

14. Statement of Financial Position submitted by the bankrupt to the bankruptcy trustee. S.129 Within 7 days from the bankruptcy commencement date. Public notice inviting claims from creditors within 7 days from the bankruptcy commencement date.. S.130 Where the bankrupt is a firm, its partners on the date of the order shall submit a joint statement of financial position of the firm, and each partner of the firm shall submit a statement of his financial position. Registration of Claims within 7 days of the publication of notice S.131 Preparation of list of Creditors by bankruptcy trustee within 14 days from the bankruptcy commencement date S.132 Meeting of creditors within 21 days from commencement of bankruptcy S.133 Every creditor mentioned in the list or his proxy shall be entitled to vote in respect of the resolutions in the meeting of the creditors in accordance with the voting share assigned to him . The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Board A creditor shall not be entitled to vote in respect of a debt for an unliquidated amount. Administration and distribution of estate of bankrupt. S.136 Discharge Order S.138 Shall release the bankrupt from all the bankruptcy debt: Provided that discharge shall not— (a) affect the functions of the bankruptcy trustee; or (b) affect the operation of the provisions of Chapters IV and V of Part III; or (c) release the bankrupt from any debt incurred by means of fraud or breach of trust to which he was a party; or (d) discharge the bankrupt from any excluded debt.

15. Priority of Payments of Debts S.178 The debts in each class specified shall rank in the order mentioned in that sub-section but debts of the same class shall rank equally amongst themselves, and shall be paid in full, unless the estate of the bankrupt is insufficient to meet them, in which case they shall abate in equal proportions between themselves . Unsecured creditors shall rank equally amongst themselves unless contractually agreed to the contrary by such creditors . Any surplus remaining after the payment of the shall be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the bankruptcy commencement date and shall rank equally irrespective of the nature of the debt . In the case of partners- partnership property shall be applicable in the first instance in payment of the partnership debts and the separate property of each partner shall be applicable in the first instance in payment of his separate debts. Where there is a surplus of the separate property of the partners, it shall be dealt with as part of the partnership property; and where there is a surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property. Fees shall be in proportion to the value of Estate of the Bankruptcy