Insolvency and

Bankruptcy
code
Dhiraj Dave
June 2017
Why Insolvency Code

• Improve ‘Ease of Doing Business’ ranking for India

• High Stress level in Banking System
• Release Capital quickly from system for productive re-usage
• The average life of cases recommended for restructuring in 2002 was 7
years and the average life of cases recommended for winding up to the
court was 6.5 years
• Consolidating various regulation under one umbrella
• Increasing share on bond in debt market in India
• Increasing confidence of international investor in Indian market
• Difficult regulation related to enforcement of security by Foreign lender
which increase cost of borrowing for Indian borrower
 Ease of doing business : India’s ranking

Recovery rate
Rank 2017 100
140 130 123 88.6 88.7 90.3
120 80 78.6
100 60 26
80
78 74 36.9 15.8 35.1
40 38.6
60 40
40 13 20
20 7 8
2
0 0

Recovery cost % of Estate

25
20 22 12
9 10
15 6
9 4 4 3.5
10
5
0

3
 What has changed?

• Insolvency test moved from ‘erosion of net worth’ to ‘payment default’

• Single insolvency and bankruptcy framework. Replaces SICA
• Time bound resolution process
• Advantage Creditor
- Shift of control from shareholders and promoters to creditors
- Provide confidence to lenders of their rights and their enforcement.
- Better symmetry of information flow between creditors and debtors
- Government dues would rank below to those of secured creditors and unsecured financial
creditors
• Insolvency Professional (IP) to take over the management and
operations of the borrower during the CIRP
• Focus to get back fraudulent diversion of assets, personal
contribution can be sought; imprisonment possible

4
 Insolvency and Bankruptcy Code Infrastructure

Insolvency and Bankruptcy Board

Insolvency Agency Information Utility

NCLT

Insolvency Professional

Committee of Creditor

Insolvent Entity

5
Corporate Insolvency Resolution Process

Default

Appointment of a resolution
professional

Moratorium period
(180/270 days)

Formation of committee of Creditors

75% of the No
creditor to
approve
Yes
Implementation of Resolution plan

Goes into Liquidation

 Corporate Resolution Timeline

IRP to constitute
CoC and submit Submission of plan
report
Application for
First CoC NCLT approval
Admission of Application, Public meeting
Moratorium Declared announcement

No of Days
-ve 14 0 14 16 21 30-44 37 51 65 150 170 180

NCLT Appoint Appoint 2 Valuer to Preparation of IM Initiation of

Filing of
Interim RP calculate liquidation value Liquidation
application to
NCLT Coc’s approval of
Creditor to
resolution plan
submit claims

7
 Corporate Liquidation : Priority of claims

Insolvency resolution Insolvency cost include funding cost for running the debtor
process and liquidation
cost as going concern
Secured creditor and Secured creditor can opt for SARFAESI Action, No clarity on
workman dues (upto 24
months) right of different class of creditor

Other Employee dues

(upto 12 months) Non Workman/ Contract labour

Financial debt of
unsecured Creditors ECB/ Fixed deposit

Government dues (upto

2 years) and unpaid SARFAESI lender residual claim
secured creditor

Any other remaining

Other dues of debtors
debt

Preference shareholder Having Priority over Equity

Equity shareholder Least priority class

8
 Key Role of Resolution Professional

• Appointed Resolution professional IP shall exercise all that power of

the board of director of the corporate debtor
- Board of Power of corporate debtor are suspended from IP appointment date
- Officer and manager of corporate debtor shall report to IRP/RP
- IRP/IP shall act and execute in the name and on behalf of corporate debtor all deed, receipts and
other documents

• Key role of Resolution professional

- Form Committee of Creditor
- Chair Committee of Creditor
- Prepare information memorandum and invite resolution plan
- Investigate financial affair of the company

• Key role of Liquidator

- Receive, verify and value claims of all the creditors, and settle such claims
- Take into his custody or control all the assets, and sell the assets
- Carry on the business of the corporate debtor for its beneficial liquidation
- Apply to the Adjudicating Authority for avoidance of transactions
-