SUMMARY OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016

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1 DSK Legal Knowledge Center Updates on May, 2016 Banking and Finance SUMMARY OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 The Insolvency and Bankruptcy Code ( Insolvency Code ), had been introduced in the Lok Sabha on December 21, The Insolvency Code was then referred by both Houses of Parliament for further deliberation to a Joint Committee of both Houses of Parliament ( JPC ). The Report of the JPC was placed before both Houses of Parliament on April 28, 2016 which suggested certain changes to the provisions of the Insolvency Code. The Insolvency Code, incorporating the revisions as suggested by the JPC, was passed by the Lok Sabha on May 5, 2016 and by the Rajya Sabha on May 11, The Insolvency Code aims to provide a single comprehensive bankruptcy and insolvency law for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner, in order to support credit markets and encourage entrepreneurship in India. The Insolvency Code seeks to provide greater clarity in the law by consolidating bankruptcy and insolvency law under a single legislation and facilitate the application of consistent and coherent provisions to different stakeholders affected either by business failure or inability to pay debt and will address the challenges being faced at present for swift and effective bankruptcy and insolvency resolution. The Insolvency Code seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure and clearly allocate losses in macroeconomic downturns. Salient features of the Insolvency Code Insolvency Regulator The Insolvency Code provides for establishment of an Insolvency and Bankruptcy Board of India ( Board ) who will act as the insolvency regulator. The Board will perform the role of a regulator for insolvency and bankruptcy matters similar to the role the Securities and Exchange Board of India performs for the securities market. Till the Board has been constituted in accordance with the provisions of the Insolvency Code, the Government of India may appoint any financial sector regulator to perform the functions of the Board. The Board will exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities. To perform the said regulatory oversight, the Board will have all legislative, executive and quasi-judicial functions so as to enable a well-functioning bankruptcy process in India. The Board will be

2 responsible for registration and monitoring of the insolvency professional agencies, insolvency professionals and information utilities. The Board will frame and implement various regulations and guidelines on matters relating to insolvency and bankruptcy as may be required. The National Company Law Appellate Tribunal ( NCLAT ) shall be the appellate authority to hear appeals arising out of the orders passed by the Board in respect of insolvency professionals or information utilities. Insolvency Adjudicating Authority The Adjudicating Authority will have the power to entertain applications for initiation of insolvency and bankruptcy. The Adjudicating Authority will have judicial power to oversee the insolvency resolution process and the liquidation process. The Debt Recovery Tribunal ( DRT ) shall be the Adjudicating Authority with jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT by the aggrieved person shall lie to the Debt Recovery Appellate Tribunal ( DRAT ) within a period of thirty days. The National Company Law Tribunal ( NCLT ) shall be the Adjudicating Authority with jurisdiction over companies and limited liability entities. The jurisdiction of the NCLT shall be based on the registered office of the debtor. Appeals from the order of NCLT by the aggrieved person shall lie to NCLAT within a period of thirty days. The Supreme Court will have appellate jurisdiction over the orders of the DRAT or the NCLAT and the aggrieved persons may file such appeals within a period of forty five days from such relevant order which period may be extended after providing sufficient reasons and condonation of delay. Insolvency Professionals The Insolvency Code proposes to regulate insolvency professionals and insolvency professional agencies. The insolvency professionals shall have to be members of insolvency professional agencies and such insolvency professional agencies will require registration with the Board in order to perform various functions during the insolvency resolution process and the liquidation process. The Board shall make model bye-laws which may be adopted by insolvency resolution agencies to ensure professional and ethical conduct of its members and that only competent persons are admitted as members. The Board shall recommend the insolvency professional to the Adjudicating Authority and shall ensure that no disciplinary proceedings are pending against such insolvency professional. Insolvency Information Utilities The Insolvency Code proposes for establishment of information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. Insolvency Information Utilities will require registration with the Board. Any person may submit information to these informational utilities on payment of a one time fee, and such person shall have the right to update such information, correct errors and make revisions. The Insolvency Code envisages a central depository or a network system of informational utilities so as to have a seamless network for the information being created and stored. The Insolvency Code also encourages interoperability of various information utilities to facilitate accessing of relevant information from such informational utilities. Corporate Bankruptcy and Insolvency Processes The Insolvency Code provides a speedy process for insolvency resolution and liquidation for companies and other limited liability entities. The process is expected to ensure early identification of distressed assets and possibility of revival of such assets. Insolvency Resolution Process: It prescribes an insolvency resolution process with a strict timeline of 180 days with one time extension of 90 days ( Resolution Period ). During the insolvency resolution process, the creditors and debtor are required to discuss and deliberate on viability of the business of the debtor. The creditors and the debtor will come up with the restructuring / resolution plan during the Resolution Period if the business is found to be viable. The Insolvency Code provides that the resolution professional shall monitor the implementation of the resolution plan and shall ensure that such resolution plan provides for management of the affairs of the corporate debtor,

3 repayment of debts of operational creditors and payment of insolvency resolution process costs. The Insolvency Resolution Process can be initiated by a financial creditor, an operational creditor or by the debtor itself by making an application to the Adjudicating Authority. Upon admission of such application, the Adjudicating Authority declares a moratorium, issues a public notice and appoints the resolution professional. The declaration of moratorium on the debtor prohibits any institution or continuation of litigation against the debtor, mandates maintenance of status quo of the assets by the debtor including prohibition on any transferring, encumbering, alienating or disposing of such assets and requires the creditors to refrain from enforcing any security interest. Further, the Insolvency Code clarifies that for computation of limitation period under the Limitation Act, 1963, the moratorium period shall be excluded. During the Resolution Period, the entire management of the debtor and custody of the assets of the debtor are placed in the hands of a resolution professional to ensure the protection of the assets of the debtor. Further, the resolution professional conducts the insolvency resolution process. The resolution professional constitutes a committee of the creditors and conducts the meetings of the creditors committee. The creditors committee has the power to decide and approve the final solution by majority vote in the negotiations. The majority vote requires approval of 75% of the creditors committee weighted by the aggregate financial liabilities. It is to be noted that in the creditors committee the financial creditors shall have voting rights whereas the operational creditors shall be represented in order to present their views and suggestions on the resolution process. Since, the viability of the debtor s business is to be assessed in discussion with the debtor such debtor will also attend the meetings of the creditors committee. The creditors committee will discuss all practicable solutions for keeping the entity as a going concern. The Insolvency Code does not prescribe any specific or particular solutions which are required to be discussed and deliberated. It will be upon the creditors and the debtor to come up with viable solutions. The debtor can also prepare a resolution plan and submit the same for consideration and approval of the creditors. The insolvency resolution plan may involve, raising of interim finance and creation of further security interest, in order for the company to preserve its status as a going concern. For raising of such interim finance, prior consent of the creditors is required to be obtained. However, the Insolvency Code clarifies that in instances where the value of the encumbered property is twice that of the interest of the secured creditor, such requirement of obtaining consent could be done away with keeping in mind the needs of all stakeholders. The Insolvency Resolution Process will be closed on the expiry of the Resolution Period. If a resolution plan is approved by the creditors, the Adjudicating Authority will pass necessary order(s) and close the proceedings. Following this, the debtor and the creditors will be required to implement the resolution plan, which plan shall be binding on all stakeholders. Liquidation Process: In the event, no resolution plan is agreed upon within the Resolution Period or the creditors have resolved to liquidate the debtor during the Resolution Period, the Adjudicating Authority will pass an order for liquidation of the debtor. The insolvency resolution professional shall act as liquidator for liquidation of the debtor. The liquidator shall receive assistance and cooperation from the debtor. Once the liquidation order is passed, no legal proceedings can be commenced or continued against the debtor. Since provident funds, pension funds and gratuity funds provide social safety net for workmen and employees, the proceeds from such funds have been secured and shall not be included in the liquidation estate assets. Rights of Secured Creditor during Liquidation Process Upon commencement of the liquidation proceedings, a secured creditor will have option: (i) (ii) to relinquish its security interest to the liquidation trust and receive proceeds from the sale of assets by the liquidator as per waterfall mechanism set out in the Insolvency Code; or to enforce and realize its security interest. If the secured creditor chooses to enforce its security interest, it may enforce, realize, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realized and apply the proceeds received from such enforcement to recover the debts due. The secured creditor can seek

4 necessary judicial assistance from the Adjudicating Authority if it faces any resistance from any person for the enforcement of its security interest. Distribution of Liquidation Proceeds Waterfall mechanism The proceeds of liquidation are required to be distributed in the following order of priority: (i) (ii) the insolvency resolution process costs and the liquidation costs; the following debts which shall rank equally between and among the following:- (a) workmen s dues for the period of twenty four months preceding the liquidation commencement date; (b) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner as provided under the Insolvency Code; (iii) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding to the liquidation commencement date; (iv) financial debts owed to unsecured creditors; (v) the following dues rank equally between and among the following :- (vi) (vii) (viii) (a) any amount due to the State Government and the Central Government in respect of the whole or any part of the period of two years prior to the liquidation commencement date; (b) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest; any remaining dues and debts; preference shareholders, if any; and equity shareholders or partners, as the case may be. Fast Track Corporate Insolvency The Insolvency Code further prescribes a fast track corporate insolvency process for the entities with less complex structuring or businesses. The Central Government will prescribe the classes of entities based on the assets and liabilities, amount of debt and other criteria, which will be subject to the fast track process. The fast track insolvency process will be required to be completed within a period of 90 days with a one time extension of 45 days. Voluntary Liquidation In line with the voluntary winding up under the Companies Act, the Insolvency Code prescribes a voluntary liquidation process. A body corporate can initiate its liquidation based on its shareholders/partners resolution. The rights of secured creditors and the distribution mechanism for liquidation proceeds shall be same as set out above. Bankruptcy Processes for Individuals/partnerships The Insolvency Code also prescribes an insolvency regime for individuals and unlimited liability partnerships. As a precursor to a bankruptcy process, the Insolvency Code envisages two distinct processes under this Part, namely, the Fresh Start and Insolvency Resolution. Fresh Start for Individuals having an outstanding debt of not more than Rs. 35,000/-: In the Fresh Start process, the individuals with income and assets lesser than specified thresholds shall be eligible to apply for a discharge from their qualifying debts. Here, the specified thresholds are an annual gross income not exceeding Rs. 60,000 and aggregate value of assets not exceeding Rs. 20,000) and the qualifying debts are debts up to Rs. 35,000. The resolution professional will investigate and prepare a final list of all qualifying debts within 180 days from the date of application. There shall a moratorium of 180 days during which there shall be maintenance of status quo of the assets by the debtor including prohibition on any transferring, encumbering, alienating or disposing of such assets. Further, an interim moratorium shall start from the date of filing of such application in relation to all the debts and shall expire on the date of admission or rejection of such application, as applicable. On the expiry of the said period of 180 days, the Adjudicating Authority will pass an order on discharging of the debtor from the qualifying debts and accord an opportunity to the debtor to start afresh, financially. Insolvency Resolution Process for other Individuals:

5 An insolvency resolution process may be initiated by the creditor or the debtor. In the Insolvency Resolution Process, the creditors and the debtor will engage in negotiations to arrive at an agreeable repayment plan for composition of the debts and affairs of the debtor, supervised by a resolution professional. The repayment plan will require approval of a three-fourth majority of creditors in value. The repayment plan may authorize or require the resolution professional to: (a) carry on the debtor's business or trade on his behalf or in his name; or (b) realize the assets of the debtor; or (c) administer or dispose of any funds of the debtor. The debtor may finalise a repayment plan in consultation with the resolution professional, whose report shall be submitted within 21 days to the Adjudicating Authority. Cross border Insolvency The Insolvency Code in light of the highly interconnected global economy and keeping in mind that several issues have arisen involving Indian financial firms having claims upon defaulting firms which are global, or vice versa, between multinationals has tried to deal with these issues at a preliminary level. In this regard, United Nations Commission on International Trade Law (UNCITRAL) and other international conventions have been considering inducting India in cross border insolvency regulation. The Insolvency Code enables the Government of India to enter into such international treaties and conventions and thereafter application of the provisions to assets and properties situated outside India, on the basis of the principles of comity and reciprocity Bankruptcy Process The bankruptcy of an individual can be initiated only after the failure of the resolution process or non-implementation of repayment plan. The bankruptcy trustee is responsible for administration of the estate of the bankrupt and for distribution of the proceeds on the basis of the priority. The insolvency resolution professional may be appointed as the bankruptcy trustee, after due confirmation from the Board. Transfer of Existing Proceedings and Amendment to Existing Laws Upon enactment and notification of the Insolvency Code, the proceeding pending before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) or the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies Act, 1985, shall stand abated. However, a company in respect of which such proceeding stands abated may make a reference to Adjudicating Authority within 180 days from the date of commencement of this Insolvency Code. The Insolvency Code has amended relevant provisions of the Indian Partnership Act, 1932, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Act, 1986 and the Companies Act, 2013 among others, in order to bring into force the provisions of the Insolvency Code.

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