Insolvency and Bankruptcy Code, 2016

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1 Insolvency and Bankruptcy Code, 2016 At present, there are multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India. The current legal and institutional framework does not aid lenders in effective and timely recovery or restructuring of defaulted assets and causes undue strain on the Indian credit system. Recognising that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the Government introduced the Insolvency and Bankruptcy Code Bill in November 2015, drafted by a specially constituted 'Bankruptcy Law Reforms Committee' (BLRC) under the Ministry of Finance. Trilegal worked with the BLRC to assist with the drafting of the bill. After a public consultation process and recommendations from a joint committee of Parliament, both houses of Parliament have now passed the Insolvency and Bankruptcy Code, 2016 (Code). While the legislation of the Code is a historical development for economic reforms in India, its effect will be seen in due course when the institutional infrastructure and implementing rules as envisaged under the Code are formed. The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11 May 2016, received Presidential assent on 28 May 2016 and was notified in the official gazette on the same day Structure of the Code - the Code has 255 sections which are divided into 5 Parts Part I - (Definitions) Part II - Insolvency Resolution and Liquidation for Corporate Persons Part III - Insolvency Resolution and Bankruptcy for individuals and Partnership Firms Part IV - Regulation of Insolvency Professionals, Agencies and Information Utilities Part Part V - Miscellaneous (enables amendments in other statues such as Companies Act 2013) Schedules (11 Schedules) Provides for amendments to be carried out in other statues Scope Insolvency; - Liquidation; - Voluntary Liquidation (solvent insolvency); and Bankruptcy APPLICABILITY WHOLE INDIA part III not applicable to EXCEPT J & K Any Company incorporated under the Companies Act, 2013 or under any provisions Any other Company governed by any Special Act Any LLP incorporated under the LLP Act, 2008 Any other body, as notified by the Central Government Partnership Firms Individuals Framework of the Code Regulator Insolvency and Bankruptcy Board of India (IBBI) Insolvency Professional Agencies;

2 Insolvency Professionals; and Information Utilities Adjudicator National Company Law Tribunal (NCLT) Corporate Entities Companies/ LLPs Debt Recovery Tribunal (DRT) Non-Corporate Entities Individuals and Partnership Firms Insolvency precedes bankruptcy and liquidation follows bankruptcy. 1. Insolvency, 2. Bankruptcy and 3. Winding up 4. Liquidation 5. Dissolution 6. Insolvency Professionals 7. Insolvency Professional Agencies Insolvency: a state in which financial difficulties of a company are such it is unable to run its business at its current pace. Liquidation: The process of winding up a company Bankruptcy: When a person is legally declared as incapable of paying their dues and obligations Insolvency Professionals: are those licensed professionals enrolled with Insolvency Professional Agencies and take on the roles of Interim Resolution Professional/Liquidator/Bankruptcy Trustee in the insolvency resolution of different entities. Insolvency Professional Agencies are those specialized bodies/agencies that are entrusted with the task of registration and regulation of insolvency professionals INSOLVENCY AND BANKRUPTCY BOARD OF INDIA The Insolvency and Bankruptcy Code, 2016 ( Code ) under Section 188 establishes a regulator called the Insolvency and Bankruptcy Board of India ( Board ). The Board is primarily entrusted with the monitoring and regulation of the insolvency sector in the Indian economy and regulation the entities as have been established under the Code. Need for enactment of The Insolvency and Bankruptcy Code, 2016? 1. to ensure revival before liquidation 2. Reduce the mounting of NPA s on Banks 3. Need of a unified code 4. to provide an easy exit for corporate RODE MAP OF CODE

3 IBC Bill of introduced in LS IBC Bill of Referred to Joint Committee of both Houses of Parliament IBC Bill of Joint Committee placed its Report to both Houses of Parliament IBC Bill of passed by LS IBC Bill of passed by RS IBC, Assented by President of India & Notified Effect after enactment of The Insolvency and Bankruptcy Code, Inter-play between SICA, RDDBI, SARFAESI and IBC -After IBC gets notified, SICA Repeal Act 2003 will come into force which will lead to dissolution of BIFR and the new cases will be handled by NCLT. -All pending matters before BIFR shall abate as the sickness/ insolvency criterion in IBC is very different from what is in SICA SARFAESI & RDDBI will hold the same force. But now secured creditors can approach under both SARFAESI and IBC as they found suitable. -Now adjudicating authority for the individuals will be DRT while the NCLT will be governing issues for corporate person. By virtue of IBC the voluntary winding up procedure has been shifted from Companies Act to IBC. WHO CAN INVOKE? Financial Creditor (Sec.7) - Any person to whom a financial debt is owed & - Includes a person to whom such debt legally assigned or transferred Operational Creditor - A person to whom an operational debt is owed & - Includes any person to whom such debt legally assigned or transferred Corporate Debtor (Sec.10) - A corporate person who owes a debt to any person Key Features - Applicable to both corporate and non-corporate persons (except financial service provider); - Allow creditors, whether secured; unsecured; financial or operational; domestic or international to initiate a resolution processes thereby aiming for an early detection of the fraud; - Establishes time-bound moratorium on acceleration and enforcement of debts against the company; - The resolution professionals will replace the existing management during insolvency proceedings; - Provides for time-bound viability assessment mechanisms, liquidation processes and distribution waterfalls; - Provides for penalties on promoters for asset diversion leading up to liquidation; - The provisions of the Code overrides SARFAESI Act, 2002; - Inability to pay debt will no more be a ground for winding up under the Companies Act; default means non- payment of debt or instalment; - Chapter governing Revival and Rehabilitation of Sick Companies of Companies Act 2013, stands omitted. Voluntary Liquidation shall be subject to provisions of the Code; and

4 Key Highlights - Resolution before Liquidation: If possible, the business should be revived before liquidation - Time bound process: Unlike previous practice, now the entire insolvency resolution process shall complete in at max 270 days - Information Utilities have been formed under the Code to provide timely dissemination of information to the concerned - Automatic liquidation if revival process does not complete within 180 or 270 days as the case may be - Creditors Voluntary winding up done away with - Shareholders have no say during the process of revival as well as resolution - Operational creditors with more than 10 percent aggregate exposure may participate during the CoC meetings INSOLVENCY CODE EFFECT ON OTHER ACTS 1. The Indian Partnership Act, The Central Excise Act, The Income Tax Act, The Customs Act, The Recovery of Debts Due to Banks and Financial InstitutionsAct, The Finance Act, The Securitisation & Reconstruction of Financial Assets & EnforcementOf Security InterestAct, The Sick Industrial Companies (Special Provisions) Repeal Act, The Payment and Settlement Systems Act, 2007 X The Limited Liability PartnershipAct, The Companies Act, 2013 Important terms under the Code 2 (7) Corporate person Company as defined in CA, 2013 An LLP [As per LLP Act, 2008] Any other person incorporated with limited liability under any law for the time being in force Excludes - Financial service provider 2(10) Creditor Any person to whom debt is owed Financial or operational Creditor / Decree holder 2(11) Default Non-payment of debt whole/part/installment 2 (27) Property Money, goods, actionable claims, every description of property Within & outside India Includes interest [present/future/vested/contingent] incidental to the property

5 4(6) Dispute Includes a suit or arbitration proceedings relating to the existence of the amount of debt; the quality of goods or service; or the breach of a representation or warranty; 4(13) Insolvency commencement date Date of admission of application for Corporate Insolvency Resolution process by NCLT 4(14) Insolvency resolution process period Period of 180 days beginning from the insolvency commencement date and ending on 180th day Corporate Insolvency Resolution Process Applicability - Minimum amount of default Rs.1 lac - CG may provide for higher minimum amount not beyond Rs. 1 Crore Who can initiate CIR process - Financial creditor - Corporate debtor itself - Operational creditor CORPORATE INSOLVENCY RESOLUTION PROCESS BY FINANCIAL CREDITOR Step 1- Financial Creditor itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before Adjudicating Authority on occurrence of Event of Default and propose the name of a Resolution Professional. [Section 7(1)] Step 2- Adjudicating Authority to ascertain existence of default from the records of information utility or other evidence furnished within 14 days of application and may either admit or reject the application. [Section 7(4)] Step 3- Corporate Insolvency Resolution Process to start from date of admission of the application. [Section 7(6)] Step 4- Declaration of Moratorium and Public Announcement [Section 13] Step 5- Public announcement of Corporate Insolvency Resolution process. *Section 14+ Step 6- Appointment of Interim Resolution Professional [Section 16] Step 7- Constitution of Committee of Creditors [Section 21] Step 8- Appointment of Resolution Professional by Committee of Creditors [Section 22] Step 9- Meeting of Committee of Creditors [Section 24] Step 10- Preparation of Information Memorandum [Section 29] Step 11- Submission of Resolution Plan by Resolution Professional [Section 30] Step 12- Approval of Resolution Plan [Section 31]

6 CORPORATE INSOLVENCY RESOLUTION PROCESS BY OPERATIONAL CREDITOR Step 1- Operational Creditor on occurrence of event of default to deliver a demand notice of unpaid operational debt or invoice demanding payment of the amount involved in default to Corporate Debtor. [Section 8(1)] Step 2- Corporate Debtor within 10 days of receipt of abovementioned Notice or Invoice to raise dispute or repay the operational debt. [Section 8(2)] Step 3- If operational creditor does not receive payment from corporate debtor or notice of dispute, operational creditor may file an application before Adjudicating Authority for initiation of corporate insolvency resolution process. [Section 9(1)] Step 4- The Adjudicating Authority may either admit or reject the application. [Section 9 (5)] CORPORATE INSOLVENCY RESOLUTION PROCESS BY CORPORATE APPLICANT Step 1- After Corporate Debtor commits default, Corporate Applicant can file an application for initiating corporate insolvency resolution process with the Adjudicating Authority. [Section 10(1)] Step 2- The Adjudicating Authority may admit the application if complete and may reject the application if it is incomplete. Before rejecting the application, the Adjudicating Authority may give notice of 7 days to rectify the application. [Section 10(4)] Step 3- Corporate Insolvency Resolution Process to commence from date of admission of the application. [Section 10(5)] Other steps such as declaration of moratorium, appointment of interim resolution professional, constitution of committee of creditors same as corporate insolvency resolution process by a financial creditor. LIQUIDATION PROCESS Step 1- Circumstances when a liquidation order can be passed [Section 33]:- - Resolution plan is not received before the completion of the insolvency resolution period OR If the resolution plan so proposed is rejected for non- compliance with requirements as mandated under Section If Committee of Creditors through the Resolution Professional informs the Adjudicating Authority its decision to liquidate the Corporate Debtor. - If the Resolution plan that is approved by the Adjudicating Authority is contravened by the Corporate Debtor. Step 2- Once liquidation order is passed, no suit or other legal proceedings shall be instituted against the corporate debtor. Suit or legal proceeding can be initiated against the Corporate Debtor with the permission of Adjudicating Authority. [Section 33] Step 3- Once Adjudicating Authority passes an order of liquidation, the Resolution Professional so appointed for the Insolvency Resolution Process shall be appointed as a liquidator. [Section 34] Step 4- Formation of liquidation estate by Liquidator [Section 36]

7 Step 5- Consolidation and verification of Claims [Sections 38 and 39] Step 6- Admission or rejection of claims by Liquidator. (Section 40) Step 7- Determination of the value of claims. [Section 41] Step 8- Distribution of Assets [Section 53] Step 9- Dissolution of Corporate Debtor [Section 54] When can an application be filed? Occurrence of default Operational creditor to deliver 10 days demand notice to corporate debtor After effects - NCLT either admits or rejects the application - If admitted, Corporate Insolvency Resolution commences and the date of admission of application is called the insolvency commencement date. Who cannot apply? - A corporate debtor who is already undergoing CIR - A corporate debtor who has completed CIR 12 months preceding the date of making of the application - A corporate debtor or a financial creditor who has violated any of the terms of a resolution plan - approved 12 months before the date of making an application - A corporate debtor in respect of whom a liquidation order has been made CIRP Process - Key points - Sec 3(20), 3(21) - Operational Creditor includes employees, Central and State Governments -Needs to give a 10-day notice to the debtor for repayment before taking action - Corporate Debtor - Defaulting company, its shareholder or management personnel can start proceedings by making a application to the NCLT upon occurrence of any default - Creditors in possession approach as against Debtors in possession approach - Potentially creates risk the minority creditors being mooted out - Threat of automatic liquidation can create strange results May push the recoverable companies into liquidation, thereby disrupting markets - Suspended BoD or partners eligible to attend meetings of Committee of creditors, but not eligible to vote CIRP: In brief Admission application of Public announc ement Appoint 2 registered valuer to calculate liquidation value Creditors to submit claims 1st CoC meeting Preparati on of IM CoC s approval of resolution plan Initiati on of liquid ation ve

8 Filing of applicatio n to NCLT Declare moratori um NCLT to appoint interim resolution professiona IRP to constitute CoC and submit report. RP to verify claims Submissio n of plan Application for NCLT approval CIRP: Phase I Financial Creditor Operational Creditor Corporate Applicant - Filing of application on occurrence of default; - Based on the information from IU, other financial creditor may file an application as well - Deliver a default notice to the corporate debtor on occurrence of default - Filing of occurrence of Alongwith the application, to furnish record of default and propose name of interim resolution professional. Adequate reply Settlement of dues Not adequate reply Filing of application Along with the application, to furnish record of default and to propose name of interim resolution professional Dispute Within 14 days To ascertain the existence of default, if satisfied, it shall accept, or otherwise reject Prior to rejection Accept Suggest rectification Proceed with Phase II Re-apply Reject Within 7 days CIRP: Phase II The entire process shall be completed within Resolution Period (180 days; extendable by 90 days)

9 Order of admission of application by NCLT; Declaration of moratorium; Public announcement as per the order of NCLT; Appointment of Interim Resolution Process Interim resolution Professional to appoint committee of creditors (financial creditors); First meeting of creditors; CoC may accept the IRP appointed by NCLT or may appoint a new RP; For any option, the NCLT is required to be communicated. RP to conduct the corporate insolvency resolution process; As many number of CoC meetings can be convened as necessary; RP shall prepare Information memorandum. RP to appoint Resolution Applicant; RA to submit Resolution plan basis the IM; RP to examine and approve the Resolution Plan and submit to CoC for approval. CoC to approve plan (75%) and submit to NCLT; NCLT may accept / reject plan; Implementation of plan; Moratorium ceases here; RP to submit records to IU / IBBI If plan rejected Liquidation If contravention on implementation of resolution plan Moratorium - The NCLT orders a moratorium on the debtor's operations for the period of the IRP. This operates as a 'calm period' during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor Moratorium - till the completion of the Corporate Interim Resolution process - 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 any of its assets or any legal right or beneficial interest.

10 - action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property. - including any action under the SARFAESIAct, recovery of any property by an owner or lessor DURING MORATORIUM Public announcement is done for the creditors to give the claim Creditors appoint Resolution Professional Resolution Professional to prepare Information Memorandum -- based on this the ResolutionApplicant will make the plan When can NCLT declare Moratorium? What does Moratorium includes: - institution/continuation of suit or proceedings against the corporate debtor; - transferring or disposing off any asset by the corporate debtor; - any action to foreclose/recover any security interest created by corporate debtor vis-à-vis property including any action under SARFAESI, 2002; and - recovery of any property by an owner where property is occupied/ is in possession of corporate debtor. Moratorium shall cease to be in effect - on completion of CIRP; or - when resolution plan is approved by NCLT during the CIRP period; or - where liquidation order is passed CIRP initiation: Operational Creditor and Corporate Debtor Documents to be furnished along with application Operational Creditor To be furnished along with application - a copy of the invoice demanding payment or demand notice delivered by the Operational Creditor to the Corporate debtor - an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt - a copy of the certificate from the financial institutions that there is no payment from debtor Documents to be furnished along with application Corporate debtor - its books of account and such other documents relating to such period as may be specified; and - May propose name of Resolution Professional to act as Interim Resolution Professional Liquidation of Corporate Person Liquidation Process: Phase III Trigger Event: -CoC does not agree on RP -CoC decides to liquidate -NCLT rejects plan -Debtors contravenes plan

11 RP should be appointed as the liquidator by NCLT, unless rejected by CoC. Powers of BoD / Partners vest with liquidators. Liquidator to identify the assets of the corporate debtor and form Liquidation Estate and hold such estate as fiduciary for the Creditors. Liquidator to collect claims from creditors within 30 days from commencement of liquidation. Liquidator to verify claims of secured creditors and discharge the secured payments. Secured creditors to identify assets offered to them as security against the sums owed to them. Liquidator to either admit or reject claims and communicate within 3 days of such admission or rejection. Liquidator to verify such claims within such time as may be specified by the Board (IBBI). Excess money realized by secured creditors from the liquidation of secured assets to be accounted and remitted to Liquidator). Any short recovery of secured debts by a secured creditor to be treated as unsecured debt and repaid in the specified order of priority. After paying off secured creditors, the unsecured debts are to be paid off in specified order of priority. If all the assets of the corporate debtor are completely liquidated, the liquidator shall apply for dissolution of corporate debtor before NCLT. NCLT to pass an order dissolving the C.Dr. from the date of such order. Copy of order to be filed w RoC within 7 days from the date of such order DISSOLVED Liquidation Estate (Section 36) Inclusions [Section 36(3)] - Any assets over which the corporate debtor has ownership rights - Assets that may/ may not be in possession of the corporate debtor, including encumbered assets - Tangible assets (movable/ immovable) - Assets subject to determination of ownership by Courts

12 - Intangible assets (such as IPs), securities, financial instruments, insurance policies, contractual rights - Assets recovered through proceedings for avoidance of transactions - Asset in respect of which secured creditor has relinquished security interest - Any other property vested in the corporate debtor on the insolvency commencement date - All realization proceeds of liquidation Exclusions [Section 36(4)] - Assets in the possession of corporate debtor but owned by third parties - Assets in security collateral held by financial service providers - Personal assets of shareholder or partner of corporate debtor - Assets of subsidiaries (Indian/ foreign) of the corporate debtor - Any other assets as may be specified by the IBBI Moratorium Again - The company cannot transfer its assets - Suits will be shifted to NCLT - SARFAESI action by any secured creditor cannot be stayed - The secured creditor will need to inform the liquidator and also prove he is a secured creditor. - A secured creditor also has the right to move separately and his enforce security under SARFAESI Act or relinquish his security right and become a part of the proceedings Distribution of Assets In case of liquidation, the assets of the corporate debtor will be sold and the proceeds will be distributed amongst the creditors in the following order of priority: 1. Government dues (including tax) rank lower than the unsecured creditors and wages as against the 1956 Act provisions, where after secured creditors and workmen dues, Government dues take preference on liquidation payouts. 2. Ring-fenced priority for workers Priority being awarded to salaries up to 24 months over all other creditors (including secured creditors) - Insolvency Resolution and Liquidation Cost - Secured Creditors + Workmen s dues - Wages and unpaid dues to employees - Unsecured Creditors - State Government and Central Government - Any remaining debts or dues - Preference Shareholders Equity Shareholders / Partners Remuneration of Liquidator The Insolvency and bankruptcy (Liquidation) regulations 2016 specifies that remuneration of liquidator shall be determined by the Committee of creditors. However where the committee does not determine the remuneration, the Adjudicating Authority shall determine the remuneration of the Liquidator, which shall at the maximum of the below table: VoluntaryWinding Up

13 - Member s & Creditor s winding-up distinction has been removed - Code has no provision for creditors voluntary winding up - Declaration from majority of the directors, verified by an affidavit stating that Company has no debt or it will be able to pay its debts in full; and Company is not being liquidated to defraud any person - Within four weeks of a declaration either: Special resolution at the general meeting; OR Ordinary resolution at the general meeting, as the case may be - Creditors representing 2/3rd in value of the debt of the company shall approve the winding up of the company - Notify RoC & the Insolvency and Bankruptcy Board of India - Voluntary liquidation process commences from date of passing of resolution The Code shall have an over riding effect where other laws, for the time being in force are inconsistent to this Code - It is specifically provided that civil courts or authority not to have jurisdiction once an application is filed under this code. - All criminal suits to be tried at Special courts under section 435 of the Companies Act, Provisions of Code of Criminal Procedure to apply. Transfer of proceedings to NCLT December 7 - MCA notifies thetpp Rules - MCA vide Notification no. G.S.R. 1119(E) issued the Companies (Transfer of Pending Proceedings) Rules, 2016 TPP Rules, 2016, in exercise of the powers conferred under section 431 (1) and (2) of the Companies Act, 2013 read with section 239 (1) of the Insolvency and Bankruptcy Code, The MCA has appointed two different dates on which the provisions of thetpp Rules, 2016 shall come into force. - December 15, 2016 Entire TPP Rules, 2016 except Rule 4 shall come into force; and - April 1, 2017 Rule 4 (which provides for pending proceedings relating to voluntary winding up) shall come into force. Winding up on inability to pay - While the proceedings of winding up on the ground of inability to pay debts, if transferred to NCLT, shall be dealt with in accordance with the provisions of the Code; - On the other hand, winding up on grounds other than inability to pay debts, if transferred to NCLT, shall be dealt with in accordance with the provisions of the Act, Winding up on Pending as on Yes Petition served no Transfer to NCLT under grounds of inability December 15, 2016 under Rule 26 of the Code to pay debts before HC? Company Court No yes New application under the Code, 2016 Remains with High Court under 1956 Act

14 - Winding up on grounds of inability to pay debts Pending as on December 15, 2016 before HC? New application under the Code, 2016 Petition served under Rule 26 of Company Court Rules/ Remains with High Court under 1956 Act Yes Yes No Transfer to NCLT under the Code No VoluntaryWinding Up Voluntary Winding up Remains with High Court under 1956 Act Pending as on April 1, 2017 before High Court New Application under the section 59 of the Code Yes No YES Voluntary Winding up Pending as on April 1, 2017 Remains with High Court under before High court? 1956 Act NO New Application under the section 59 of the Code Proceedings under SICA, 1985 Stages in proceedings under SICA Reference to BIFR / Appeal to AAIFR Scheme of revival BIFR suggests winding up NO Pending as on 1st December, 2016 No change NO Initiated on or before YES Abatement of proceedings YES Any appeals NO Fresh Application to NCLT / NCLAT NCLT under the Code 2016 Remains with High Court NCLT / NCLAT under Code, 2016 Stages of proceedings under SICA Reference to BIFR / Appeal to AAIFR Scheme of revival sanctioned BIFR suggests winding up Pending as on 1st December, 2016 Abatement of proceedings Fresh Application to NCLT / NCLAT under Code, 2016 Yes NCLT / NCLAT under Code, 2016 No No change Initiated on or before 15th December, 2016 Any appeals Remains with High Court under 1956 Act Yes No NCLT under the Code 2016 No Yes THE CODE at Glance

15 The Code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). The Government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation. Key Points 1. Corporate Debtors: Two-Stage Process To initiate an insolvency process for corporate debtors, the default should be at least INR 100,000 (USD 1495) (which limit may be increased up to INR 10,000,000 (USD 149,500) by the Government). The Code proposes two independent stages: Insolvency Resolution Process, during which financial creditors assess whether the debtor's business is viable to continue and the options for its rescue and revival; and Liquidation, if the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor. (a) The Insolvency Resolution Process (IRP) The IRP provides a collective mechanism to lenders to deal with the overall distressed position of a corporate debtor. This is a significant departure from the existing legal framework under which the primary onus to initiate a reorganisation process lies with the debtor, and lenders may pursue distinct actions for recovery, security enforcement and debt restructuring. The Code envisages the following steps in the IRP: (i) Commencement of the IRP A financial creditor (for a defaulted financial debt) or an operational creditor (for an unpaid operational debt) can initiate an IRP against a corporate debtor at the National Company Law Tribunal (NCLT). The defaulting corporate debtor, its shareholders or employees, may also initiate voluntary insolvency proceedings. (ii) Moratorium The NCLT orders a moratorium on the debtor's operations for the period of the IRP. This operates as a 'calm period' during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor. (iii) Appointment of Resolution Professional The NCLT appoints an insolvency professional or 'Resolution Professional' to administer the IRP. The Resolution Professional's primary function is to take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors. This is similar to the approach under the UK insolvency laws, but distinct from the "debtor in possession" approach under Chapter 11 of the US bankruptcy code. Under the US bankruptcy code, the debtor's management retains control while the bankruptcy professional only oversees the business in order to prevent asset stripping on the part of the promoters. Therefore, the thrust of the Code is to allow a shift of control from the defaulting debtor's management to its creditors, where the creditors drive the business of the debtor with the Resolution Professional acting as their

16 agent. (iv) Creditors Committee and Revival Plan The Resolution Professional identifies the financial creditors and constitutes a creditors committee. Operational creditors above a certain threshold are allowed to attend meetings of the committee but do not have voting power. Each decision of the creditors committee requires a 75% majority vote. Decisions of the creditors committee are binding on the corporate debtor and all its creditors. The creditors committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan or liquidation within a period of 180 days (subject to a one-time extension by 90 days). Anyone can submit a revival proposal, but it must necessarily provide for payment of operational debts to the extent of the liquidation waterfall. The Code does not elaborate on the types of revival plans that may be adopted, which may include fresh finance, sale of assets, haircuts, change of management etc. (b) Liquidation Under the Code, a corporate debtor may be put into liquidation in the following scenarios: (i) A 75% majority of the creditor's committee resolves to liquidate the corporate debtor at any time during the insolvency resolution process; (ii) The creditor's committee does not approve a resolution plan within 180 days (or within the extended 90 days); (iii) The NCLT rejects the resolution plan submitted to it on technical grounds; or (iv) The debtor contravenes the agreed resolution plan and an affected person makes an application to the NCLT to liquidate the corporate debtor. Once the NCLT passes an order of liquidation, a moratorium is imposed on the pending legal proceedings against the corporate debtor, and the assets of the debtor (including the proceeds of liquidation) vest in the liquidation estate. Priority of Claims The Code significantly changes the priority waterfall for distribution of liquidation proceeds. 1. After the costs of insolvency resolution (including any interim finance), secured debt together with workmen dues for the preceding 24 months rank highest in priority. 2. Central and state Government dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors. Under the earlier regime, Government dues were immediately below the claims of secured creditors and workmen in order of priority. 3. Upon liquidation, a secured creditor may choose to realise his security and receive proceeds from the sale of the secured assets in first priority. If the secured creditor enforces his claims outside the liquidation, he must contribute any excess proceeds to the liquidation trust. 4. Further, in case of any shortfall in recovery, the secured creditors will be junior to the unsecured creditors to the extent of the shortfall. 2. Insolvency Resolution Process for Individuals/Unlimited Partnerships For individuals and unlimited partnerships, the Code applies in all cases where the minimum default amount is INR 1000 (USD 15) and above (the Government may later revise the minimum amount of default to a higher threshold). The Code envisages two distinct processes in case of insolvencies: automatic fresh start and

17 insolvency resolution. Under the automatic fresh start process, eligible debtors (basis gross income) can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh. The insolvency resolution process consists of preparation of a repayment plan by the debtor, for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order. 3. Institutional Infrastructure (a) The Insolvency Regulator The Code provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (Board). Its role includes: (i) overseeing the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities; and (ii) regulating the insolvency process. (b) Insolvency Resolution Professionals The Code provides for insolvency professionals as intermediaries who would play a key role in the efficient working of the bankruptcy process. The Code contemplates insolvency professionals as a class of regulated but private professionals having minimum standards of professional and ethical conduct. In the resolution process, the insolvency professional verifies the claims of the creditors, constitutes a creditors committee, runs the debtor's business during the moratorium period and helps the creditors in reaching a consensus for a revival plan. In liquidation, the insolvency professional acts as a liquidator and bankruptcy trustee. (c) Information Utilities A notable feature of the Code is the creation of information utilities to collect, collate, authenticate and disseminate financial information of debtors in centralised electronic databases. The Code requires creditors to provide financial information of debtors to multiple utilities on an ongoing basis. Such information would be available to creditors, resolution professionals, liquidators and other stakeholders in insolvency and bankruptcy proceedings. The purpose of this is to remove information asymmetry and dependency on the debtor's management for critical information that is needed to swiftly resolve insolvency. Adjudicatory authorities The adjudicating authority for corporate insolvency and liquidation is the NCLT. Appeals from NCLT orders lie to the National Company Law Appellate Tribunal and thereafter to the Supreme Court of India. For individuals and other persons, the adjudicating authority is the DRT, appeals lie to the Debt Recovery Appellate Tribunal and thereafter to the Supreme Court