A new Insolvency and Bankruptcy Code 2016

On 28 May 2016, the Insolvency and Bankruptcy Code 2016 (IBC) received
Presidential assent in India and was published in the Official Gazette. The
Government of India has notified several sections of the IBC for
commencement since then. On 1 December 2016, the sections of the IBC
related to resolution of corporate insolvency and corresponding regulations
made by the Insolvency and Bankruptcy Board of India (the Board) became
operational. While several critical provisions of the IBC (including those on
liquidation) are yet to be notified, the IBC signals a radical change in how future
reorganisations and formal liquidation will be conducted in India.
Introduction
Recent press reports indicate that
there are over 75,000 cases pending
in debt recovery tribunals across the
country. This number does not even
take into account the other cases
pending before the Board for
Industrial and Financial
Reconstruction under the Sick
Industrial Companies (Special
Provisions) Act 1985 or those pending
before various High Courts or the
National Company Law Tribunal.
Main aims of the new law
These huge pendency of cases is
attributed to the inefficiencies of the
patchwork of legislations that
governed corporate and personal
insolvency prior to the IBC. The main
aims of the IBC are therefore focused
on improving the time it takes to effect
either a rescue or liquidation and on
maximising the returns for
stakeholders. The appointment of an
insolvency professional to achieve
these aims is seen as key, as it seeks
to run the processes largely outside of
the court system. In addition, the IBC
hopes to promote entrepreneurship,
especially in relation to individuals
who will have access to a “fresh start”
bankruptcy process. The IBC
appears to take much of its inspiration
from international best practices and
is consistent with many bankruptcy
reforms taking place around the globe
at present.
Overview
In this briefing we focus on the
aspects which apply to corporates
only (i.e. companies, limited liability
partnerships etc) and look at some of
key themes:
1. Single track entry for both
corporate insolvency resolution
and liquidation
2. Appointment of a Resolution
Professional
3. Approval of the Resolution Plan
4. Fast track Resolution
5. 180 day moratorium
6. Priority of claims
7. Avoidance actions
8. Cross-border Insolvency
9. Implementation

Single track entry for corporate
insolvency resolution and
liquidation
Under the IBC, both the debtor and
creditors will be able to commence
the corporate insolvency resolution
process. The triggers are related to
defined liquidity tests, which are set
out in the legislation and depend upon
the types of claim that have caused a
default. Creditors are divided into two
types for the purposes of the IBC,
financial creditors (essentially those
who provide finance or credit, e.g.
banks) and operational creditors (e.g.
trade creditors, employees). Very
significantly, a default in payment of a
debt, however small it may be, is
sufficient for the creditor to be able to
apply to the Adjudicating Authority for
initiating the corporate insolvency
resolution process.
The sections of the IBC relating to
liquidation have not yet become
operational.
Appointment of a Resolution
Professional
No matter who commences the
corporate insolvency resolution
process, a Resolution Professional is
appointed to supervise the process.
This aspect of the reforms has clearly
taken its lead from the English
approach of appointing an
independent insolvency practitioner to
facilitate the insolvency resolution
process which is designed to free up
the courts from adjudicating on every
aspect of the process. Financial
creditors commencing the process
must nominate an interim Resolution
Professional, who must then be
approved by 75% of the financial
creditors by voting share. If
operational creditors initiate the
corporate insolvency resolution
process, then they have the option of
nominating an interim Resolution
Professional. However, if they do not
choose to do so then the Board (the
new regulator established to lay down
regulations under the IBC and
regulate the functioning of insolvency
professionals) will decide. Once an
interim Resolution Professional is
appointed, the responsibilities of
debtor’s management cease,
although they are required to
cooperate with and assist the
Resolution Professional during the
process. The Resolution Professional
has 180 days from the date of
admission of the application to initiate
the process to facilitate a resolution
plan to either restructure or liquidate
the debtor. This period may be
extended by a further 90 days in
complicated cases where the
Adjudicating Authority is of the
opinion that the process cannot be
completed in 180 days. The
Resolution Professional must consult
with a creditors’ committee on all
material matters such as disposals,
funding or settlements. The creditors’
committee comprises of financial
creditors only. While directors or
partners of the debtor and a
representative of the operational
creditors can attend the meetings of
the creditors’ committee, they cannot
vote at the meetings. If there are no
financial creditors or if all financial
creditors are related parties of the
debtor, then the creditors’ committee
shall consist of 18 largest operational
creditors by value and one
representative each of the workmen
and employees of the debtor.
Approval of the Resolution Plan
Any person, including a prospective
lender or investor, may put forward a
resolution plan in respect of the
debtor. The Resolution Professional
must ensure that the resolution plan(s)
(more than one plan can be put
forward) provides for (i) all costs of
the insolvency resolution process to
be paid in priority; (ii) operational
creditors to receive no less than they
would receive on a liquidation; (iii) the
management of the affairs of the
debtor; and (iv) implementation and
supervision of the resolution plan.
The Resolution Professional must
also ensure that no laws are
contravened and all other
requirements of the Board have been
satisfied. The resolution plan(s)
needs the approval of 75% of the
financial creditors by voting share and
the approval of the Adjudicating
Authority to be binding on all creditors.
If the debtor’s situation cannot be
resolved within the time allowed or
the creditors reject the plan for
resolution, the debtor is placed into
liquidation and the Resolution
Professional becomes the Liquidator
who must realise the assets and
distribute in accordance with a new
order of priority (see below).
As can be seen from the appointment
and approval process, financial
creditors have significant power and
influence in the process and
ultimately decide on whether the
debtor is restructured or placed into
liquidation.
Fast Track Corporate Insolvency
Resolution
For debtors that have assets or
income which fall below certain
financial thresholds (to be specified
by the Central Government), a fast
track procedure is available, which
provides for the resolution to take
place in a more condensed period of
90 days. The provisions relating to the
fast track procedure are yet to
become operational.

180 day moratorium
No doubt this aspect of the IBC takes
its inspiration from the US Chapter 11
process. The IBC does not set out a
prescribed form of resolution plan and
so the moratorium allows time to
formulate and negotiate a resolution
plan with the various stakeholders.
The moratorium is wide ranging and
protects the debtor from litigation or
other legal proceedings, enforcement
of security, third party owners and
lessors recovering their own property
and prevents suppliers from
terminating essential supplies to the
debtor. The moratorium continues
until the resolution order is passed or
the debtor is placed into liquidation.
In exceptional cases, the moratorium
can be extended for a further 90 days.
There does not appear to be any
option for those affected by the
moratorium to be able to seek relief,
although the Resolution Professional
is under an obligation to pursue
liquidation if it transpires that a
resolution is not likely.
Priority of claims
One of the main criticisms of the
current regime was that creditors of a
distressed debtor were often left with
competing claims launched in a
variety of separate procedures. The
IBC not only seeks to prevent this by
encouraging a collective resolution
procedure with the protection of a
moratorium, but also in the context of
liquidation, defines the order of
priority of claims.
The order is broadly as follows:
1. the costs of the insolvency
resolution and liquidation;
2. certain payments to workmen
and payments to secured
creditors (who also have the
option of realising their security),
which rank equally;
3. payments due to employees (e.g.
unpaid wages);
4. financial debts owed to
unsecured creditors;
5. government debts and debts due
to unpaid secured creditors,
which rank equally;
6. other creditors; and
7. shareholders.
Avoidance actions
The IBC also has avoidance rules for
transactions at undervalue,
preferences, transactions defrauding
creditors and extortionate credit
transactions. Challenges can be
made by either the Resolution
Professional or the Liquidator. There
are exemptions for transactions in the
ordinary course of business and
transactions carried out in good faith
and for value similar to those
applicable under the English
insolvency regime.
Cross-border Insolvency
The IBC treats foreign and domestic
creditors of a debtor alike. However,
the IBC summarily addresses
concerns that may arise in a cross-
border insolvency situation by
providing that the Central
Government may enter into
agreements with other countries for
enforcing the provisions of the IBC.
Where a debtor’s assets are located
outside India, the IBC empowers the
Adjudicating Authority to issue a letter
of request to a foreign court or
tribunal seeking its assistance.
Implementation
Much of the IBC relies upon the
appointment of an insolvency
professional and that professional
implementing the new regime
effectively. It is therefore perhaps not
surprising to see that an entire Part of
the IBC is dedicated to regulation of
insolvency professionals and
insolvency professional agencies
under the supervision and monitoring
by the Board. The Board has recently
notified regulations governing
insolvency professionals and
insolveny professional agencies. So
far, 2 insolvency professional
agencies have been registered with
the Board.
In addition on 1 June 2016, the
Government of India issued a
notification constituting the National
Company Law Tribunal (NCLT) and
National Company Law Appellate
Tribunal. The NCLT will be the
adjudicatory body for the corporate
aspects of the IBC. There are also
other practical aspects that the IBC
seeks to address and will rely upon by
way of infrastructure, including the
establishment of information utilities
which are essentially registers where
information about the debtor and the
progress of the insolvency resolution
process is maintained and available
to stakeholders. These aspects will
need to be up and running before the
IBC can result in comprehensive
reform.

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