Decoding Insolvency & Bankruptcy Code

Transcription

1 Decoding Insolvency & Bankruptcy Code

2 Why is the code imperative today? What does it change for the borrowers? Lender inertia during the CIRP would mean liquidation invariably an economically inferior outcome as compared to resolution 2. Clarity on the insolvency framework will attract investors to invest into stressed/distressed situations 3. Moratorium clause to ensure smooth insolvencyresolution process 4. An open floor for submission of resolution plans should facilitate the approval of the best plan 5. The framework defines the role of the judiciary and leaves limited scope for a legal delay/deferral of the problem What does it change for the borrowers? 1. Any creditor can file an insolvency petition a default of INR 1 Lakh or more 2. Insolvency professional to takeover the management and operations of the borrower during the corporate insolvency resolution process 3. Borrowers to focus on liquidity ensure tight cash flow and monitoring to stay current on payments 4. Need to be proactive in identifying issues, communicating with lenders and developing/implementing a turnaround plan 5. In case of fraudulent diversion of assets, personal contribution can be sought; imprisonment possible What does it change for the lenders? 1. Right to control the borrower upon default and maximize recovery 2. Option to initiate the process even if the default is in respect of the debt of another lender 3. Need for more robust monitoring systems to enable judicious exercise of powers 4. Lack of lender consensus on resolution plan can push the borrower into liquidation 5. Clear priority of distribution (waterfall) upon liquidation; government dues subservient to those of secured creditors and unsecured financial creditors Why was the code needed 1. Reduce the time taken to resolve insolvency 2. Develop investor confidence 3. Eliminate confusion caused by a complex judicial framework 4. Address the NPA situation decisively 5. Develop the credit and bond market What does the code intend to change 1. Create a single insolvency and bankruptcy framework - Set up a clear and unambiguous process to be followed by all stakeholders in a timebound manner 2. Provide a commercial solution to a commercial issue 3. Allow genuine business failures a second chance 4. Clear and unambiguous process to be followed by all stakeholders in a time-bound manner 5. Provide confidence to lenders of their rights & enforcement INTEGRITY FIRST 2

3 National Company Law Tribunal (NCLT) Ecosystem Insolvency And Bankruptcy Board (IBBI) Insolvency Professional Agencies (IPA s) Insolvency Professionals (IP) Insolvent Entity Source: World Bank Report Information Utilities (IUS) Committee of Creditors (COC) Source: RBI IBB I apex body for promoting transparency & governance in the administration of the IBC; will be involved in setting up the infrastructure and accrediting IPs & IUs. IUs - Centralised repository of financial and credit information of borrowers; would validate the information and claims of creditors vis-à-vis borrowers, as needed. IPAs- professional bodies registered by the Board to promote and regulate the insolvency profession; these bodies will enrol IPs IPs- Licensed private professionals regulated by the Board; will conduct resolution process; to act as Liquidator/bankruptcy trustee; appointed by creditors and override the powers of board of directors. Adjudicating Authority (AA) - would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/ reject resolution plans, decide in respect of claims or matters of law/ facts thereof. COC- consists of financial creditors to who will appoint and approve actions of IPs INTEGRITY FIRST 3

4 Emergence of Insolvency Code Globally Bankruptcy and Insolvency Act Recovery rate (cents on the dollar): 87.4 Time taken (years): 0.8 Text 9.4 Singapore Bankruptcy Act Recovery rate (cents on the dollar): 88.7 Time taken (years): 0.8 United States of America 1978 Results Canada 1985 USA: Recovery Rate United Kingdom 1986 Singapore 1995 India 2016 United States Bankruptcy Code Recovery rate (cents on the dollar): 78.6 Time taken (years): 1.5 Text 4.4 Text 4.4 Text 4.4 Text 3.7 United kingdom Insolvency Act Recovery rate (cents on the dollar): 88.6 Time taken (years): 1 Insolvency & Bankruptcy Code Recovery rate (cents on the dollar): 26 Time taken (years): INTEGRITY FIRST 4

5 Current Status Ease of doing business ranking 130 out of 189 countries 72,841 cases pending in 33 debt recovery tribunals The stressed assets peaked at 10 lakh crore, 15% of gross advances in Cost of insolvency procedures amount to a 9 percent of the value of the estate. Average recovery rate of debtors is close to 26 cents per dollar. Average time taken for liquidation in India is 4.3 years INTEGRITY FIRST 5

6 Driving factors Shift of control from the defaulting debtor s management to its creditors Time bound resolution process to preserve the economic value entire process should be completed in 180 days (270 days in case of extension) Brings financial lenders to a platform enabling quick decision making and arriving at consensus quickly If negotiations fail to establish viability, the outcome of bankruptcy becomes binding No injunction can be granted by any court, tribunal or authority in respect to action taken by adjudicating authority Lender can initiate the process even if the default is in respect of the debt of another lender Creditor approved resolution professional is appointed ensuring unbiased decision making Clear and fair distribution of funds in case of liquidation, government dues not to get priority Protection of assets of secured borrowers with maximisation of realisation Positive support from government for realisation and resolution of NPAs Recent govt. ordinance authorises RBI to force banks to use IBC INTEGRITY FIRST 6

7 Challenges in the current code No Timeline for Disposal of Appeals Shortage of NCLT benches Lack of Consensus among Lenders Non Co-operative Management Expiration of Tenure of IRP Professional Absence of Information Utilities Shortage of Skilled Professionals High Cost of Bankruptcy Resolution Process Dilution of rights of Secured Creditors INTEGRITY FIRST 7

8 Resolution Process Application to Adjudication Authority Appointment of Interim Resolution Professional Moratorium Period Formulation of Credit Committee Formulation of Information Memorandum and Resolution Plan Resolution plan proposed by creditors YES Implement the Plan Resolution plan proposed by creditors 75% approve the proposed plan NO Liquidate the company INTEGRITY FIRST 8

9 Resolution Process Highlights Interim Resolution Plan Financial creditor applicant shall propose the name of an IRP in the application. It is optional for the operational creditor to propose the name of an interim IP Moratorium Interim Resolution Resolution Interim Plan PlanResolution Plan Resolution Plan Payment of insolvency resolution process costs. Pay liquidation value to operational creditor in 30 days and to dissenting financial creditor before other financial creditors. Management of affairs of the borrower after the plan is approved. Implementation and supervision of the approved plan. Fast Track Insolvency NCLT to declare moratorium from the insolvency commencement date until the completion of insolvency. Moratorium shall prohibit: 1. Institution of suits 2. Transfer of shares 3. Recovery of assets Moratorium Fast Track Insolvency For debtors with: Assets and income below a level Such class of creditors Other categories As may be notified by the central government (completed in 90 days) COC COC Voting Power Voting Power Consists of financial creditors only, excluding related parties. Will confirm or replace IRP as RP To approve several actions of RP. CoC can replace IP during CIRP by 75% approval. Only financial creditors have voting rights in the committee in the ratio of the debt owed. All decision of the committee shall be approved by 75% of financial creditors. If all members are not present at a meeting, a vote shall not be taken at the, and the RP can seek vote by an electronic voting system. Directors and operational creditors can attend the meeting but would not have any voting rights INTEGRITY FIRST 9

10 Liquidation process Liquidation Process Appointment of Liquidator Formation of Liquidation Estate Consolidation and Verification of claims Distribution of Assets Priority of Claims Costs and Expenses of Insolvency Workmen s dues for the period of twenty-four months & dues of Secured Creditors Wages any unpaid to the employees Dues to central government and state government Unsecured Financial Creditors INTEGRITY FIRST 10

11 Powers & Duties of Liquidators Duties of the Liquidators are as follows :- To receive and verify claims of creditors and admit or reject claims 01 To evaluate assets, property of CD 02 Protect and preserve assets, properties of CD 03 Carry on business of CD for its beneficial liquidation 04 File application for avoidance of preferential transactions, undervalued transactions, transactions for defrauding of creditors, extortionate credit transactions (normally INTEGRITY one year FIRST and two years if it is to related party)

12 Role of Insolvency Professional Duties of resolution professional as per Section 25 :- Takes custody and control of all assets of the corporate debtor - including the business records of the corporate debtor Raise interim finances subject to the approval of the committee of creditors Appoint accountants, legal or other professionals in the manner as specified by Insolvency Board 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 Continuation of business as a going concern on behalf of the corporate debtor. Acts as a liquidator unless replaced by the Adjudication Authority and performs the following functions: o o o o Verification and settlement of claims of creditors Evaluation of assets and property Measures to protect and preserve the assets and properties Sale of immovable property and actionable claims INTEGRITY FIRST 12

13 Legal Framework Adjudicating Authority The code has established two separate tribunals to adjudicate grievances related to insolvency, bankruptcy and liquidation of different entities under the law: i) NCLT will have jurisdiction over companies and LLPs ii) the Debt recovery Tribunal will have jurisdiction over individuals and partnership firms. Key Legal Differentiators Board Insolvency and Bankruptcy Board of India(IBB) is an apex body governing Insolvency and Bankruptcy Code The major function of the board is to exercise regulatory measures on insolvency professionals, insolvency professional agencies and information utilities. Agency Insolvency Professional Agencies (IPAs) would admit insolvency professionals as members. o Currently there are three IPAs Indian Institute of Insolvency Professionals of ICAI ICSI Insolvency Professional Agency Insolvency Professional Agency of Institute of Cost Accountants of India Topic Current Regime The Code What constitutes insolvency Class of creditors Inability to pay debt/erosion of net worth Secured and unsecuredseparate classes recognised Default of amount higher than INR 1 lakh Financial and operational no subclasses. Committee of creditors consists of financial creditors only Management during CIRP Liquidator RP under supervision COC Information Utilities The information utilities shall act as a regulated information agency which shall electronically record, maintain and provide access of financial information to the persons as may be specified e.g. creditors Preferential payments Exclusions from liquidation estate Institutional Framework Certain government dues had priority over secured debt N/A Fragmented. Spread across various authorities & forums Government dues rank after financial unsecured debt. Trade creditors rank below financial creditors Netting and set off recognised on financial control Amends and consolidates laws relating to insolvency and reorganization of companies, partnerships and individuals. NCLT is the AA for CIRP. Also envisages establishment of information utilities. Insolvency Professionals Insolvency professionals play a vital role in the insolvency and bankruptcy resolution process as envisaged by the Committee Insolvency professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process INTEGRITY FIRST 13