An Analysis of the Model Question Paper for Limited Insolvency Examination (LIE), Tips for Preparation

Part I – Categorization of Questions

 The  questions that have been presented in the model LIE question paper in the following categories:-

a. IBC Concept Based Questions

This category of questions consists of questions that test the conceptual clarity of a candidate as regards the Code and the Rules and Regulations framed thereunder. An example of an IBC Concept Based question is

  1. When can a bank initiate a corporate insolvency resolution process in relation to a corporate debtor?

a. On determination of default by National Company Law Tribunal

b. Occurrence of default

c. On net-worth of the debtor becoming negative

d. On the bank classified the account as non-performing asset

The correct answer to this question is “b”. A bank can initiate the corporate insolvency resolution process in relation to a corporate debtor only on occurrence of a default.

The answer to this question can be found in sub sections (7) and (8) of Section 5 and Section 7(1) of the Code. Sub section (7) of Section 5 of the Code defines a “financial creditor” and sub section (8) of Section 5 of the Code defines a “financial debt”. The question is specifically asking as to when can a bank initiate the corporate insolvency resolution process. Bank falls under the category of financial creditor under the Code and any loan/ credit facility/other facility extended by a financial creditor qualifies as a financial debt.

Further Section 7(1) of the Code deals with the initiation of the corporate insolvency resolution process by a financial creditor and states that a financial creditor may file an application for initiating the corporate insolvency resolution process when default has occurred.

Hence in order to tackle IBC Concept Based questions, a candidate has to be extremely clear with respect to the legal concepts covered under the Code. In order to obtain conceptual clarity and the ability to tackle IBC Concept Based questions, I recommend a thorough study of the Code and the Rules and Regulations framed thereunder.

When I say study, I do not recommend learning by rote. Rather I recommend attempting to understand what the provisions are and discerning the legislative intent behind each provision of the Code.

b. IBC Procedure Based Questions

This category of questions consists of questions that test the knowledge of a candidate on the procedural aspects of the Code and the Rules and Regulations framed thereunder. An example of an IBC Procedure Based question is question no. 2 in the model paper-

  1. The Adjudicating Authority shall appoint an interim resolution professional within ____ days of the insolvency commencement date.

a. 07

b. 14

c. 21

d. 28

The correct answer to this question is “b”. The Adjudicating Authority shall appoint an interim resolution professional within 14 days of the insolvency commencement date.

The answer to this question can be found in Section 16(1) of the Code which states that the Adjudicating Authority shall appoint an interim resolution professional within fourteen (14) days from the insolvency commencement date.

Unlike IBC Concept Based questions, there is nothing to understand in order to tackle IBC Procedure Based questions as they are fairly technical and straightforward. The only way to tackle such questions is to learn by rote important compliances and the prescribed timelines with respect to the same under the Code and the Rules and Regulations framed thereunder.

c. Case Study Questions

Case study questions are purely application based questions on the Code and the Rules and Regulations framed thereunder. A situation is provided and it is followed by questions pertaining to the situation. There are five (5) questions pertaining to the case study that has been presented in the model question paper. As per the prescribed syllabus[3], the case study questions shall be on the following topics:-

  • Corporate insolvency resolution
  • Corporate liquidation
  • Fresh start
  • Individual insolvency resolution
  • Individual bankruptcy

The case study question as provided in the model LIE paper has been reproduced as under:-

(a) 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.

(b) 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.

(c) 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.

My primary observations regarding the case study are:-

  • The case study is detailed and comprehensive.
  • Even to understand what the situation in the case study is, one needs to be very thorough with the Code and the Rules and Regulations framed thereunder. (Conceptually as well as procedurally)
  • The case study also deals with other allied laws such as the Sick Industrial Companies Act, 1985 (as there is a mention of the Board for Industrial and Financial Reconstruction). So the candidate should also know about other legislations that previously dealt with corporate insolvency.
  • This case study contains elements of both the corporate insolvency resolution process as well as the liquidation process. So this case study is a mix of two processes covered under the Code.

There are two types of questions that follow the case study.

First category is the actual application based questions. An example of an actual application based question is question no. 87. Question no. 87 has been reproduced as under:-

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.

The correct answer is “b”. The answer to this question can be found in Section 53(1)(e) of the Code which states that the debts owed to a secured creditor for any amount unpaid following the enforcement of interest shall lie at par with dues to the Central Government and the State Government. To tackle this question one needs to be conceptually thorough with the Code and the Rules and Regulations framed thereunder. The section [i.e. Section 53(1)(e)] is straightly worded, but the question is framed in a way that it triggers thinking and calls for some investment of time and thought. In other words, it’s tricky. Over here the question is asking you whether or not the secured creditor can realize its balance amount. So in order to answer this question, you need to first know that a secured creditor can realize its balance amount under the Code and you will know whether or not a secured creditor can realize its balance amount under the Code only when you are conceptually thorough.

The second category of questions that follow the case study are technical questions where not much application of mind is required. For example question no. 90 in the model LIE paper. Question no. 90 of the model LIE paper has been reproduced as under-

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

The correct answer to this question is “c”. The answer to this question is to be found in Section 53(b) of the Code which states that the priority of payment to workmen dues shall rank pari passu with secured creditors in case of liquidation. There is not much of application of mind needed here as the question is fairly straightforward.

d. Questions on the report of the Bankruptcy Law Reforms Committee (BLRC)

As per the prescribed syllabus for the LIE, 5% weightage is given to questions on the BLRC Report. The model question paper contains four (4) questions on the BLRC Report. Out of the four, I am reproducing two questions that I thought are important as far as the BLRC Report is concerned.

The first question is question no. 53 from the model question paper-

The Code proposed by the Bankruptcy Law Reforms Committee provides for a …. for creditors and debtors to negotiate in an orderly and non-conflicted manner.

a) forum

b) calm period

c) committee

d) negotiation period

The correct answer is “b”. Now please note that this question has been framed in a very tricky manner. A primary reading of question no. 53 may make you think that you are doomed and that along with studying and memorizing the provisions of the actual Code, you have to also study and memorize the provisions of the Insolvency and Bankruptcy Bill, 2015 (the draft Code proposed by the BLRC).

I assure you, you are not. The answer to this question is to be found in the final report of the BLRC on Page 74 which speaks about a calm period for creditors and debtors to negotiate.

Hence in order to tackle questions such as this, one needs to study the entire BLRC Report very carefully, especially the important recommendations and suggestions made by the BLRC.

The second question is Question No. 52 from the model question paper-

The Financial Sector Legislative Reforms Commission has proposed a ……………which will intervene in the working of financial firms when they are distressed but still solvent.

a) Financial resolution corporation

b) Resolution corporation

c) Insolvency resolution corporation

d) Business resolution corporation

The correct answer to this question is “b”. This is again a tricky question. At the first instance it may seem to you as if this question is out of the prescribed syllabus. You may wonder what connection do the recommendations made by the Financial Sector Legislative Reforms Commission have with the Code and more importantly why is this question there in an exam for prospective insolvency professionals.

The answer to both your questions (first one being the answer to question no. 52 and the second one regarding why this question is there in the model LIE paper) can be found in paragraph 5.1 of the report of the BLRC. Paragraph 5.1 has been reproduced as under:-

“The Committee recommends that there is a single Code to resolve insolvency for all legal entities. The Code will not cover entities that have a dominantly financial function, whose resolution is covered by the Resolution Corporation in the draft Indian Financial Code, proposed by the Financial Sector Legislative Reforms Commission. In order to ensure legal clarity, the Committee recommends that provisions in existing law that deals with insolvency of all registered entities be replaced by this Code (companies and limited liability partnerships to begin with). Then, all questions related to insolvency of any legal entity in India will find an answer in a single Code.”

If you focus on the underlined portion in the abovementioned paragraph, it will be clear to you that the BLRC while recommending the Code also referred to other proposed legislations for insolvency resolution (i.e. Draft Indian Financial Code). The BLRC while proposing a draft Code categorically omitted insolvency resolution and liquidation of financial firms because they were covered by a proposed Resolution Corporation under the Draft Indian Financial Code.

It will be now clear to you as to why the recommendations of the Financial Sector Legislative Reforms Commission are important for prospective insolvency professionals from a limited perspective and the correct answer to question no. 52 from the model LIE paper of course.

e. Other categories of questions

This category of questions consists of concept based, technical questions and application based questions on topics apart from the Code and the Rules and Regulations framed thereunder and the BLRC Report. The other topics are as under:-

  • Companies Act, 2013
  • Limited Liability Partnership Act, 2008
  • Indian Contracts Act, 1872
  • Transfer of Property Act, 1882
  • Sale of Goods Act, 1930
  • Recovery of Debts due to Banks and Financial Institutions Act, 1993
  • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002
  • Corporate Debt Restructuring Scheme, Strategic Debt Restructuring and Scheme for Sustainable Structuring of Stressed Assets
  • General Awareness
  • Finance and Accounts

An example of a concept based question from the other categories of questions is question no. 59 from the model LIE paper. Question no. 59 has been reproduced as under:-

Which of the following matters requires a special resolution by a company?

a) Reducing share capital

b) Removal of a director

c) Acceptance of deposits

d) Appointment of a director

The correct answer to this question is “a”. The answer to this question can be found in sub section (1) of Section 66 of Companies Act, 2013. Special resolution is needed for reduction of share capital. The question is specifically asking as to for which below mentioned actions (i.e. the options) is a special resolution required. A candidate will be able to answer this question only if he is conceptually thorough with the Companies Act, 2013. A thorough study and more importantly conceptual clarity of the enabling section i.e. Section 66 of the Companies Act, 2013 is required.

An example of a technical question from the other categories of questions is question no. 65 from the model LIE paper. Question no. 65 has been reproduced as under:-

A limited liability partnership firm shall, within a period of six months from the end of each financial year, prepare ……… for the said financial year as at the last day of the said financial year.

a) statements of accounts

b) statements of assets and liabilities of partners

c) statements of accounts and solvency

d) statements of financial accounts

The correct answer to this question is “c”. Sub section (2) of Section 34 of the Limited Liability Partnership Act, 2008 states that every limited liability partnership shall within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as at the last day of the said financial year in such form as may be prescribed and that such statement shall be signed by the designated partners of the limited liability partnership.

This question is fairly technical. Not much of thought needs to be invested into this and in a way the question is fairly straightforward. All that one needs to do in order to tackle such question is to remember what compliance a LLP needs to do under the Limited Liability Partnership Act, 2008.

An example of an application based question from the other categories of questions is question no. 72 from the model LIE paper. Question no. 72 has been reproduced as under:-

B Ltd. has taken a loan from A Ltd. B Ltd. will not be considered as a ‘borrower’ under of the SARFAESI Act, 2002 in the event…….

a) B Ltd. is a non-financial company

b) A Ltd. is a financial company

c) A Ltd. and B Ltd. are financial companies

d) A Ltd. and B Ltd. are non-financial companies

The correct answer to this question is “d”. The answer to this question can be found in Section 2 (f) of the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI) that defines a borrower.

This question is fairly tricky. The options provided are also worded in a way that they appear to be interconnected and hence making it difficult to make an intelligent guess. Hence in order to tackle this question, one needs to be thorough with the definition of the term “borrower” under the SARFAESI.

Part II- Tips and Techniques for Preparation for the Limited Insolvency Examination

I suggest the following tips and techniques to prepare for the limited insolvency examination:-

  • Start by first mastering the bare acts of all the legal subjects covered in the syllabus. Read, re-read, revise and re-revise. Continuous reading and revision is the key.
  • Be prudent about the subjects you focus on. Let’s be realistic. It is impossible to know everything and to be 100% prepared. It’s impossible. Instead of making a problem out of it and creating a mental barrier, let us rather acknowledge this fact and use it to our advantage. I suggest that you prioritize the subjects in the following sequence:-
Rank in order of priority Subject
1 Insolvency and Bankruptcy Code, 2016
2 Rules and Regulations under the Code (All rules and regulations notified till 30thNovember 2016)
3 Report of the Bankruptcy Law Reforms Committee
4 Companies Act, 2013
5 Other topics under the LIE Syllabus
  • Ensure that you are thoroughly prepared as far as the Code and the Rules and Regulations framed thereunder are concerned. Memorize important compliances and the time period that has been prescribed for each compliance and documentation filing if any.
  • Focus on the minute details in the final report of the BLRC. Take a note of the key recommendations and observations made by the BLRC.
  • As far as the other law subjects are concerned, I suggest atleast three to four thorough readings of the bare acts. Keep a track of minute details such as any compliances and the time period specified for each compliance, documentation or any other steps that need to be taken.
  • For the non-legal subjects that have been covered in the syllabus such as finance and accounts and the part pertaining to economy in the module title General Awareness, you may refer to any general accounting and finance books. Get a grasp of the basic concepts. Do not delve into too much detail. You may also consider referring to my book (i.e. Guide to Insolvency Professional Examination) wherein you will find atleast 100 practice questions on these topics.
  • For topics such as Corporate Debt Restructuring Scheme, Strategic Debt Restructuring etc., you may read up the relevant RBI guidelines on this subject.

Source: ipleader.in/ Pranav Khatavkar

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