Insolvency and Bankruptcy Code

 

The Insolvency and Bankruptcy Code, 2016 has recently come into force. It repeals the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. The preamble of the Code states that it is an Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation 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.

The provisions of the Code applies to:

• Any company incorporated under the Companies Act
• Any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act
• Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008
• Any other body incorporated under any law for the time being in force, as the Central Government may specify
• Partnership firms and individuals, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.

Where any corporate debtor (i.e. a corporate person who owes a debt to any person) commits a default (i.e. non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid), a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor. A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority (NCLT) when a default has occurred.  A default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

The financial creditor along with the application will have to furnish the following details:

• Record of the default recorded with the information utility or such other record or evidence of default
• Name of the resolution professional proposed to act as an interim resolution professional and
• Any other information as may be specified by the Board.

Resolution professional means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional.

The Adjudicating Authority within fourteen days of the receipt of the application will have to ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor. If the Adjudicating Authority is satisfied that a default has occurred and the application is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application. The corporate insolvency resolution process shall commence from the date of admission of the application.

The corporate insolvency resolution process is to be completed within a period of one hundred and eighty days from the date of admission of the application to initiate the process. The resolution professional can file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy five per cent of the voting shares which can then be extended by the Adjudicating Authority for a maximum of ninety days.

The Adjudicating Authority, after admission of the application shall, by an order:

• declare a moratorium
• cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims and
• appoint an interim resolution professional

The Adjudicating Authority shall by order declare moratorium for prohibiting:

• The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
• Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.
• Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
• 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 order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process. The Adjudicating Authority shall appoint an interim resolution professional within fourteen days from the insolvency commencement date. The term of the interim resolution professional shall not exceed thirty days from date of his appointment.

From the date of appointment of the interim resolution professional –

• The management of the affairs of the corporate debtor shall vest in the interim resolution professional.
• The powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional.
• The officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional.
• The financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional 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 vested with the management of the corporate debtor shall-

• Act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents.
• Take such actions, in the manner and subject to such restrictions, as may be specified by the Board.
• Have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor.
• Have the authority to access the books of account, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as may be specified.

The interim resolution professional will have the following duties:

• Collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to
  • business operations for the previous two years
  • financial and operational payments for the previous two years
  • list of assets and liabilities as on the initiation date; and
  • such other matters as may be specified
• Receive and collate all the claims submitted by creditors to him
• Constitute a committee of creditors
• Monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors
• File information collected with the information utility, if necessary; and
• 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 including:
  • assets over which the corporate debtor has ownership rights which may be located in a foreign country
  • assets that may or may not be in possession of the corporate debtor
  • tangible assets, whether movable or immovable
  • intangible assets including intellectual property
  • securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies
  • assets subject to the determination of ownership by a court or authority
• To perform such other duties as may be specified by the Board.

The interim resolution professional is to make every endeavour 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. After collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, he shall constitute a committee of creditors. The committee of creditors shall comprise all financial creditors of the corporate debtor. A related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors. Where the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them.

Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility or issued as securities provide for a single trustee or agent to act for all financial creditors, each financial creditor may

• Authorise the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share.
• Represent himself in the committee of creditors to the extent of his voting share.
• Appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the committee of creditors to the extent of his voting share, or
• Exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.

All decisions of the committee of creditors shall be taken by a vote of not less than seventy five percent of voting share of the financial creditors.

The resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period. It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.

The resolution professional shall undertake the following actions:

• Take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor
• Represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi judicial or arbitration proceedings
• Raise interim finances subject to the approval of the committee of creditors
• Appoint accountants, legal or other professionals in the manner as specified by Board
• Maintain an updated list of claims
• Convene and attend all meetings of the committee of creditors
• Prepare the information memorandum
• Invite prospective lenders, investors, and any other persons to put forward resolution plans
• Present all resolution plans at the meetings of the committee of creditors
• File application for avoidance of certain transactions, etc.

The resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely:

• Raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting.
• Create any security interest over the assets of the corporate debtor.
• Change the capital structure of the corporate debtor, including by way of issuance of additional securities, creating a new class of securities or buying back or redemption of issued securities in case the corporate debtor is a company.
• Record any change in the ownership interest of the corporate debtor.
• Give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting.
• Undertake any related party transaction.
• Amend any constitutional documents of the corporate debtor.
• Delegate its authority to any other person.
• Dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties.
• Make any change in the management of the corporate debtor or its subsidiary.
• Transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business.

A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan:

• Provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor
• Provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor
• Provides for the management of the affairs of the Corporate debtor after approval of the resolution plan
• Implementation and supervision of the resolution plan
• Not contravene any of the provisions of the law for the time being in force
• Conforms to such other requirements as may be specified by the Board.

The resolution professional shall present to the committee of creditors for its approval such resolution plans. The committee of creditors may approve a resolution plan by a vote of not less than seventy five per cent of voting share of the financial creditors. The resolution applicant may attend the meeting of the committee of creditors in which the resolution plan of the applicant is considered. But the resolution applicant shall not have a right to vote at the meeting of the committee of creditors unless such resolution applicant is also a financial creditor.

The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority. If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors meets the requirements then it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other  stakeholders involved in the resolution plan.

Where the Adjudicating Authority rejects the resolution plan for the noncompliance of the requirements specified therein, it will:

• Pass an order requiring the corporate debtor to be liquidated
• Issue a public announcement stating that the corporate debtor is in liquidation
• Require such order to be sent to the authority with which the corporate debtor is registered.

The order for liquidation is to be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator. Where the Adjudicating Authority passes an order for liquidation of the corporate debtor the resolution professional appointed for the corporate insolvency resolution process will act as the liquidator for the purposes of liquidation. On the appointment of a liquidator, all powers of the board of directors, key managerial personnel and the partners of the corporate debtor will cease to have effect and shall be vested in the liquidator.

Under the Code, the liquidator has the following powers and duties:

• Verify claims of all the creditors
• Take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor
• Evaluate the assets and property of the corporate debtor in the manner as may be specified by the Board and prepare a report
• Take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary
• Carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary
• Sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified to draw, accept, make and endorse any negotiable instruments including bill of exchange, hundi or promissory note in the name and on behalf of the corporate debtor, with the same effect with respect to the liability as if such instruments were drawn, accepted, made or endorsed by or on behalf of the corporate debtor in the ordinary course of its business, etc.

The liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process.  A financial creditor may submit a claim to the liquidator by providing a record of such claim with an information utility. An operational creditor may submit a claim to the liquidator in such form and in such manner and along with such supporting documents required to prove the claim as may be specified by the Board. The liquidator may, after verification of claims, either admit or reject the claim, in whole or in part.

The proceeds from the sale of the liquidation assets shall be distributed in the following order of priority:

• Insolvency resolution process costs and the liquidation costs paid in full
• Following debts which shall rank equally between and among the following:
  • workmen’s dues for the period of twenty four months preceding the liquidation commencement date; and
  • debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner as provided under the Code
• Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date
• Financial debts owed to unsecured creditors
• Following dues shall rank equally between and among the following:
  • any amount due to the Central Government and the State Government  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 two years preceding the liquidation commencement date
  • debts owed to a secured creditor for any amount unpaid following the enforcement of security interest
• Any remaining debts and dues
• Preference shareholders,  and
• Equity shareholders or partners

Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor. The Adjudicating Authority shall on application filed by the liquidator order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.

Regarding the trial of offences under the Code, it has been mandated that offences under the Code shall be tried by the Special Court established under Chapter XXVIII of the Companies Act, 2013. Further no Court shall take cognizance of any offence punishable under the Act, save on a complaint made by the Board or the Central Government or any person authorised by the Central Government. Provisions of the Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be deemed to be a Court of Session.

Central Government has also established a Board by the name of the Insolvency and Bankruptcy Board of India. The Board consists of the following members appointed by the Central Government:

• Chairperson
• Three members from amongst the officers of the Central Government not below the rank of Joint Secretary or equivalent, one each to represent the Ministry of Finance, the Ministry of Corporate Affairs and Ministry of Law, ex officio
• One member to be nominated by the Reserve Bank of India, ex officio
• Five other members to be nominated by the Central Government, of whom at least three shall be the whole time members

The Board has been mandated to perform the following functions:

• Register insolvency professional agencies, insolvency professionals and information utilities and renew, withdraw, suspend or cancel such registrations
• Specify the minimum eligibility requirements for registration of insolvency professional agencies, insolvency professionals and information utilities
• Levy fee or other charges for the registration of insolvency professional agencies, insolvency professionals and information utilities
• Specify by regulations standards for the functioning of insolvency professional agencies, insolvency professionals and information utilities
• Lay down by regulations the minimum curriculum for the examination of the insolvency professionals for their enrolment as members of the insolvency professional agencies
• Carry out inspections and investigations on insolvency professional agencies, insolvency professionals and information utilities and pass such orders as may be required for compliance of the Code
• Monitor the performance of insolvency professional agencies, insolvency professionals and information utilities and pass any directions as may be required for compliance of the Code
• Call for any information and records from the insolvency professional agencies, insolvency professionals and information utilities
• Publish information, data, research studies and other information
• Promote transparency and best practices in its governance.

The Code thus being a revolutionary piece of legislation will be tested for its effectiveness. The preparedness of the various stake holders in utlilising the provisions of the Code will also to be keenly observed.