IBC Notes PDF

DEFINITIONS Financial Creditor S.5(8) defines what financial debt is - debt along with interest, which is disbursed against the consideration for the time value of money. S.5(7) defines who is a financial creditor - A financial creditor is any person to whom a financial debt is owed, including...

DEFINITIONS Financial Creditor S.5(8) defines what financial debt is - debt along with interest, which is disbursed against the consideration for the time value of money. S.5(7) defines who is a financial creditor - A financial creditor is any person to whom a financial debt is owed, including a person to whom a financial debt has been legally assigned or transferred The Report of the Insolvency Laws Committee clarified that even authorized representatives L S of financial creditors, such as guardians, administrator or executor of estate, or debenture S trustee are eligible to initiate CIRP. L E C In Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd v Axis Bank Ltd, R C I the Hon’ble Supreme Court decided the question of whether a creditor who has been given security by the corporate debtor for a third-party debt can be considered a financial D Y creditor. The Court answered in the negative, holding that for a person to be considered the financial creditor of a corporate debtor, it has to be shown that the debtor owes him a financial debt. While a person having a security interest over the corporate debtor’s assets is TU definitely owed a debt, it is not a financial debt as defined under Section 5(8) of the Code. S In Pioneer Urban Land and Infrastructure Ltd v Union of India, the Supreme Court upheld M the constitutional validity of the provision considering allottees under real estate projects to A be financial creditors. A L L K In Palogix Infrastructure Pvt Ltd v ICICI Bank Ltd, the learned National Company Law Appellate Tribunal (NCLAT) held that a financial creditor can only act through an authorised U representative. Therefore, a general power of attorney holder cannot file an application under Section 7, unless he has been specifically authorised to do so by the financial creditor. D B Section 7 (1) – On occurrence of a default, a financial creditor shall either by itself or jointly A P J with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority. AOperational Creditor S.5(21) defines what operational debt is- a claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of dues arising under any law of the time being in force and payable to the Central Govt, any State Govt or any local authority S.5(20) defines who an operational creditor is- any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.  The Hon'ble Tribunal observed that the framers of the IBC had not intended to include within the expression of an 'operation debt' a debt other than a financial debt. Therefore, an operational debt would be confined only to four categories as specified in Section 5(21) of the IBC like goods, services, employment and Government dues. New Okhla Industrial Development Authority v. Anand Sonbhadra - Disbursement of debt is an essential ingredient for creation of a financial debt. Default Sec.3(12) of IBC, “default” means non-payment of debt when whole or any part or instalment of the amount of the debt has become due and payable and is not repaid by the debtor or the Corporate debtor, as the case may be. L S S Subsection 4 of section 7 states that the Adjudicating Authority shall ascertain the existence L E of a default from the records of information utility or on the basis of other evidence furnished R C by the financial creditor under sub-section (3). The provision reveals that default will be determined as per the submissions of the creditor or the records of information utility. The I aforesaid provision does not provide an opportunity to the debtor to put forth his case. C Y INITIATION OFDCIRP TU Initiation of CIRP S A M CIRP is the process of resolving the corporate insolvency of a corporate debtor in accordance A with the provisions of the Code. L CIRP may be initiated by: L K   D U a financial creditor under section 7 an operational creditor under section 9  A B corporate applicant of corporate debtor under section 10 of the Code. P J Minimum amount of default should be Rs.1 crore. ABy a Financial Creditor  As per Section 7(1) of the Code, an application for initiating CIRP can be filed individually by a financial creditor, or jointly with other financial creditors, or by a person on behalf of a financial creditor who has been empowered to do so by a notification of the Central Government.  Once an application has been received by the NCLT, it must ascertain the existence of the default within 14 days  If the NCLT is satisfied that a default has occurred, the application is complete, and there are no disciplinary proceedings against the proposed interim resolution  professional, it must admit the application. If these parameters are not satisfied, the application will be rejected  However, before rejecting the application, the NCLT will notify the applicant about its defects and allow the applicant an opportunity to correct them within 7 days from the receipt of the notice.  Section 7(3) of the Code mandates that the financial creditor shall, along with the application for initiating corporate insolvency resolution process, furnish a proof of default and the name of a resolution professional proposed to act as the interim resolution professional in respect of the corporate debtor By Operational Creditor Section 8 L S  the operational creditor has to deliver a demand notice or a copy of an invoice S E demanding payment of the debt in default to the corporate debtor. A “demand notice” L R C means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.  I The corporate debtor has a period of ten days from the receipt of the demand notice or C invoice to inform the operational creditor of the existence of a dispute regarding the D Y debt claim or of the payment of the debt by either giving an attested copy of record of transfer of money or attested copy of record that the OC encashed a cheque Section 9 TU S  M Section 9(1) of the Code provides that if the operational creditor does not receive A either the payment of the debt or a notice of existence of dispute in relation to the debt A L claim from the corporate debtor within a period of ten days from the date of receipt of the invoice or demand notice under section 8, he can file an application with the L K National Company Law Tribunal for initiating the insolvency resolution process in accordance with section 9 of the Code.  U Application has to be accompanied with - a copy of the invoice demanding payment D or demand notice, affidavit that there is no dispute, copy of any record along w A Binformation utility, any other proof that no payment of any unpaid operational debt ByJCorporate Applicant AP Who is a corporate applicant?  corporate debtor  a member or partner of the corporate debtor who is authorized to make an application for the CIRP under its constitutional document  a person in charge of managing the operations and resources of the corporate debtor  a person who has the control and supervision over the financial affairs of the corporate debtor S.10   In case of a default by corporate debtor, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.  The corporate applicant can only initiate the corporate insolvency resolution process upon the occurrence of a default and not on mere likelihood of inability to pay debts. Therefore, a corporate applicant cannot trigger the corporate insolvency resolution process prematurely to abuse the provisions of the Code. 1. Under section 10(3) of the Code, the corporate applicant is required to furnish, along with such application, i. the information relating to its books of account, ii. the information relating to the resolution proposed to be appointed iii. as an interim resolution professional, the special resolution passed by shareholders of the corporate L S S debtor or the resolution passed by at least three-fourth of the total approving filing of the application L E number of partners of the corporate debtor, as the case may be, R C Persons who cant file for CIRP C I  s.11 D Y 1. CD undergoing CIRP TU 2. CD who completed CIRP 12 months preceding the date of making the application S 3. CD or FC who violated the terms of the resolution plan which was approved 12 4. CD who has a liquidation order A M months before the date of making of an application A L L K U POWERS D AB RP S.25(1) J A P1. protect and preserve the assets of the CD 2. undertakes the following actions i. they can take immediate custody or control of all assets of the CD ii. represent and act on behalf of the CD in the case of involvement of any third party 3. they have the power to appoint accountants, or legal persons or any other persons 4. maintain an updated list of claims 5. to convene and attend all the meeting of the CoC 6. present resolution plans 7. raise interim finances subject to the approval to the CoC Duties  1. Manage operations of the CD 2. have the authority to enter into/ amend or modify contracts on behalf of the CD 3. to draw, accept or make or endorse a bill of exchange 4. has the authority to perform all acts on behalf or in the name of the CD Committee of Creditors  they have the supreme decision making body and decide the functioning of the CD  the take important decision in favour of their company  can approach AA in case of any foul play  can apply to the AA to change the IRP  they have the power to choose to proceed with liquidation of CD by not approving any resolution plan L S  they are empowered to exercise any commercial wisdom while making any decision S  for the CD L can reduce the notice period from 5 days to 24 hours if they feel required.E  C The committee of creditors ratifies the administrative decision taken by the resolution R  professional. C I The Committee of creditors also evaluates and approves the resolution plan with modification if any needed. D Y Interim Resolution Professional U S.18 of the Code ST A M 1. Collate information pertaining to the operations, assets and finances of the corporate A L debtor to understand its financial position; i. L K 2. Gather all the claims made by the creditors against the corporate debtor; 3. can require the following persons to report to him all matters in connection to the CD Board of Directors D U ii. iii. Promoters Members and partners of the CD A B iv. v. Auditors and any financial institution J 4. Can have the authority to access book of accounts, records or any relevant documents: AP i. depositories in securities ii. IU 5. can also appoint two registered valuers to calculate the liquidation value of the CD in accordance with the regulations prescribed. IBBI Established under S.188 of the Code. Unique regulatory body - because it overseas involved experts and transactions made by them. It creates and implements rules regarding insolvency and bankruptcy. It undertakes executive, quasi-legislative and concurrent quasi-judicial activities. Constitution of IBBI The Central Govt will appoint the members of the IBBI. They are as follows: 1. Chairperson (5 years term) 2. 3 members from among the officers of the Central Govt who are not under the rank of Joint Sec or equivalent to that 3. 1 Member each to represent the following:  Ministry of Finance  RBI 1. 5 members nominated by the Central Govt from which 3 members must be full-time L S S According to S.189, these members must be people of status, integrity and ability. They must be law, finance, accounting experts. L E All other members may be appointed again until they reach 65 years of age. R C Powers and Functions C I S.196(1) defines IBBI’s duties: D Y 1. Registering IPAs, IPs and IUs TU 2. S Renewing, withdrawing, suspending and or cancelling their registrations 3. 4. A M establishing minimum eligibility standards and regulations further inspection and investigation of these standards and regulations A L S.196(2) it provides the IBBI the authority to create model by-laws L K Extensive powers under S.196 D U 1. regulation and development of market practices relating to CIRP A B 2. liquidation process 3. individual insolvency and bankruptcy J AP IBBI v. Vig Associates Pvt Ltd & Ors. IBBI can keep tabs on IPs wherever they deem necessary and can also give instructions to ensure that the Code’s provisions are being followed. S.196(3) IBBI as authority equivalent to a civil court S.230 the IBBI may also grant any members or officers whatever authority they deem fit Regulatory Powers under S.240 cannot be transferred to any other person/body Regulatory Powers of IBBI (S.240) S.240(1) IBBI is authorized to make regulations IBBI has published rules and regulations:  IBBI (insolvency Professional) Regulations Has established a framework for adopting its regulations for IPs, IPAs and IUs. Calls for public input and economic research before passing any new regulations. These regulatory powers of the IBBI are to ensure transparency and promote stakeholder participation. Inspection and Investigative Power Ss. 217 - 220, L S  a complaint against any IPA, Ip or IU may be made S  E S.218 says that IBBI may direct any person to act as an investigative authority to L conduct an investigation or inspection if it suspects a breach has been committed.  C S.219 - IBBI is permitted to send a show cause notice to the pertinent service provider R  and act against it as per the regulation C I S.220- the IBBI may form a disciplinary committee composed of full time IBBI Y employees to review the findings of the investigative authority D sum equal to such gain TU They also has the power to order anyone who has violated the IBC and has gained to pay a CA Venkata Sivakumar v. IBBI & Ors S A M A L Petitioner was an insolvency professional and he challenged the power of the IBBI to levy a fee under the IBBI Regulation. Here the HC held that IBBI does provide major services, L K including those related to IPs and there is a string association between fees and services after looking at the numerous roles performed by the IBBI U D MORATORIUM A B J Under P CIRP A  S.14 The moratorium means a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor. Purpose of the Moratorium-  ensures that multiple proceedings are not taking place simultaneously  keeping the corporate debtor’s assets together during the CIRP  facilitating orderly completion of CIRP   ensure that the company may continue as a going concern Appears to be a complete bar against the institution or continuation of suits and any legal proceedings against the CD S.14 bars  institution of suits or continuation of pending suits  including execution of any judgement, decree or order in the court of law  transferring, encumbering, alienating, or disposing assets by CD  any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under SARFAESI  2002 recovery of any property by an owner or lessor where such property is occupied by or L S in the possession of the corporate debtor S P. Mohanraj & Ors. Vs. M/S. Shah Brothers Ispat Pvt. Ltd. L E R C  scope of the provision is v wide C I Haravtar Singh Arora Vs. Punjab National Bank & Ors. D Y all the proceedings pending before all court against the Corporate Debtor automatically TU comes to halt and cannot be decided. Therefore, the Resolution Professional is not required to take any further step. S M Initiation of CIRP against a subsidiary of a Corporate Debtor (under CIRP) will not be A hit by Section 14(1)(a) moratorium A L K Any amount received during the CIRP when the moratorium is in force, is the asset of the Corporate Debtor and RP has to deal with the same as per the provisions of the Code L D U Moratorium B under Part 3 J A AP S.96 If an application for initiating insolvency resolution process is filed u/S.94 and 95 then an interim-moratorium shall commence on the date of the application on relation to all the debts and shall cease to have effect on the date of the admission of such application. During the interim-moratorium period any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed and the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt. If IRP has been made in relation to a firm - interim moratorium shall operate against all the partners of the firm. S.101  if application is admitted under S.100 then a moratorium commences in relation to all debts and shall cease to have effect at the end of 180 days beginning from the date of admission of the application or the date the AA passes an order on the repayment plan. During moratorium period  any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed.  the creditors shall not initiate any legal action or legal proceedings in respect of any debt  the debtor shall not transfer, alienate, encumber or dispose of any of the assets or his legal right or beneficial interest therein; L S FRESH START PROCESS S L E by getting discharged from his debts. R C The purpose of these provisions is to help a help a person or firm in debt to make a fresh start C I S.80 says that a debtor who is unable to pay his debts and fulfils the conditions is entitled to Y make an application to discharge his qualifying debts D  Qualifying Debt S.79(19) TU S an amount due including interest or any other sum in respect of amounts owed under future time. A M any contract by the debtor for a liquidated sum either immediately or at a certain A L It does not include: o L K excluded debt o o D U a debt to the extent it is secured any debt incurred three months before date of application  B Excluded debt S.79(15) A o liability to pay fine imposed by a court or tribunal P J o damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation A o maintenance to any person under any law for the time being in force o student loan o any other debt Conditions to Apply for Fresh Start S.80(2) may be by the debtor himself or the RP.  gross annual income of the debtor does not exceed 60K rupees  aggregate value of the assets of the debtor does not exceed 20K rupees  the aggregate value of the qualifying debts does not exceed 35K rupees  he is not an undischarged bankrupt   he does not own a dwelling unit, irrespective of whether it is encumbered or not  a fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him  no previous fresh start order under this Chapter has been made in relation to him in the preceding 12 months of the date of the application for fresh start S.81(4) - how application is to be made  list of all debts owed by the debtor  interest and rate of interest  list of security in respect of the debts  debtor’s personal and financial details  financial information of the debtor and his immediate family up to two years prior to the date of the application L S  reasons for application S   particulars of legal proceedings L E confirmation that no fresh start process order has been made for him 12 months preceding R C S.81(1) - Interim Moratorium C I D Y interim moratorium commences as soon as application is made and shall cease to have effect U on the date of admission or rejection of such application. T Appointment of RP - S.82 S A M within 7 days of receipt of application, AA directs the Board to nominate a person A L within 10 days of this direction, The Board has to nominate a person L K Duties of RP - Ss. 93 and 208 D U S.83- Examination of application by RP A B The resolution professional shall examine the application made under section 80 within ten J AP days of his appointment, and submit a report to the Adjudicating Authority, either recommending acceptance or rejection of the application presumption - that the debtor is unable to pay his debts if:  information supplied indicates that he is unable to pay  there is no change in the financial circumstances of the debtor since the date of the application enabling the debtor to pay his debts S.83(6) Grounds for Rejection  does not satisfy conditions under S.80  the debts disclosed in the application by the debtor are not qualifying debts  debtor has deliberately made a false representation or omission S.84 within 14 days from the report of the RP, the AA has to accept or reject the application. S.85 moratorium shall commence from the date of admission S.86 - Objection by creditor and their examination by RP creditor can make objections within 10 days of the receipt of order under S.84 on the following grounds:  L S  inclusion of a debt as qualifying debt incorrectness of the details of the qualifying debt S RP shall examine and then accept or reject the objections within 10 days. L E R C S.86(7) on the basis of the examination the RP shall : C I   prepare an amended list of qualifying debts D Y make an application to the Adjudicating Authority for directions under section 90  U take such other steps as he considers necessary in relation to the debtor T S S.87- Application against decision of resolution professional A M application has to be made within 10 days to the AA on the following grounds:  A L that the resolution professional has not given an opportunity to the debtor or the  L K creditor to make a representation; RP colluded with another party in making a decision  U RP has not complied with the requirements of S.86 D B AA has to decide on the application within 14 days A J General Duties of the Debtor (S.88) AP 1. make available to the RP all information relating to his affairs, attend meetings and comply with the requests of the RP in relation to the fresh start process 2. Inform RP asap of an material error or omission in relation to the information supplied or any change in financial circumstances after date or application The debtor or the creditor can apply to replace the RP under S.89 to the AA. Revocation of order admitting application (S.91) 1. if due to any change in the financial circumstances of the debtor, the debtor is ineligible for a fresh start process  2. non-compliance by the debtor of the restrictions imposed under sub-section (3) of section 85 3. if the debtor has acted in a mala fide manner and has wilfully failed to comply with the provisions of the Chapter Discharge Order (S.92) RP has to submit a final list of qualifying debts to the AA at least 7 days before the moratorium ends. AA has to pass an order at the end of the moratorium period. Apart from the qualifying debts he is also discharged of the following liabilities during the period from the date of application till the date of order: L S S   any penalties in respect of the qualifying debts interest including penal interest in respect of the qualifying debts L E  any other sums owed under any contract in respect of the qualifying debts R C C I FAST TRACK CIRP Y Chapter IV U D It is for small corporates. S T A M S.55 - An application for fast track CIRP may be made in respect of the following corporate debtors: A L   L K CD with assets and income level as may be notified by the Govt a CD with such class of creditors or such amount of debt as may be notified by the  D U Central Government such other category of corporate persons as may be notified by the Central A B Government. J S.56 Time period for completion of Fast Track AP   within 90 days from the insolvency commencement date AA may extend it for a further 45 days if a resolution is passed at a meeting of the CoC and supported by a vote of 75% of the voting share.  Further extension is not allowed. Application for Fast Track Process S.57 May be filed by a CD or a creditor along with :  proof of existence of default  such other information to establish CD is eligible for fast track Procedure for the entire process is given under IBBI (Fast Track Insolvency resolution Process for Corporate Persons) Regulations, 2016. NCLT only comes into the picture at the time of final approval of the resolution plan. LIQUIDATION When insolvency proceedings commence against a company, there are two possible outcomes:  The sale of existing business as a going concern (insolvency resolution)  The sale of assets of the company (liquidation) L S Creditors of a sinking company should first explore the option to revive the company. When S revival or resolution is not feasible, then liquidation L E R C Liquidation brings the life a company to an end. Code does not allow liquidation of a firm C I directly. It only allows liquidation after resolution fails. Lawful life of a company comes to an end, ceases to exist as a separate legal entity. Formally dissolved and removed from the Register of Companies D Y Grounds for liquidation TU S  M Section 33 - Grounds for initiating liquidation of CD that has undergone CIRP: A o Where AA does not receive a resolution plan before expiry of CIRP A L o Where AA rejects the resolution plan for non-compliance o RP tells the AA that CoC has decided to liquidate the CD, approved by 66% of plan) L K voting share (any time after constitution and before approval of resolution D U o When there is a contravention of the resolution plan approved by the AA by the CD  B Zenith Ltd. v. Grand Foundry Ltd. A o liquidation order can be passed if scheme approved by BIFR under SICA is J not complied with AP o If CoC holds that CIRP cannot continue, then liquidation is to be initiated Once CoC rejects resolution plan, AA must initiate liquidation process Liquidation Order  Section 31  Will say the following 3 things: o Order requiring CD to be liquidated as per Chapter 3 of Part II o Issue a public announcement that CD is in liquidation o Require order to be sent to the Authority with which CD is registered  Effect of liquidation order (Section 33)  o No suit or legal proceedings by or against CD  Exception - liquidator may file suit on behalf of CD with prior approval of AA o Discharge of all employees of CD Appointment Of Liquidator  If there is an RP appointed under CIRP, he shall become the liquidator subject to the RP giving writing consent to the AA  AA will replace the RP when: o Resolution plan submitted by RP was rejected o IBBI recommends to AA that RP should be replaced o RP fails to submit his written consent to act as liquidator L S  PNB v. Kirah Shah NCLAT held that after liquidation order is passed, the CoC has S the liquidator L E no role to play and they are simply claimants whose matters are to be determined by  C Section 34(2) - all powers of company management will vest with the liquidator R  Section 34(8) C I o liquidator shall charge fee in proportion to the value of the liquidation estate assets o proportion given by IBBI o Fees is fixed by CoC before liquidation order D Y U o If fee not fixed, then according to IBBI regulations T S o Fees to be paid from the proceeds of the liquidation estate o This fees has priority over other payments during liquidation A M Powers and Duties L of Liquidator  K A to verify claim of all the creditors  L to take into his custody and control all the assets, property, and actionable claims of U the CD  D evaluate the assets and property of the CD in the manner as may be specified by the B IBBI  J Atake measures to protect and preserve the assets and properties of the CD carry on the business of the CD for its beneficial liquidation as he considers necessary A P conduct sale of the immovable and movable property and actionable claims of the CD by public auction or private contract  power to transfer such property to any person or body corporate  the liquidator can institute suits and defend the CD in any suit, prosecution, or other legal proceedings.  empowered to investigate the financial affairs of the CD to determine undervalued or preferential transactions  obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations or responsibilities.  invite and settle claims of creditors and claimants and distribute proceeds  apply to AA for such orders as may be necessary  section 35(2) allows the liquidator to consult any of the stakeholders entitled to distribution of proceeds under section 53. (not binding)   Under section 37 of the IBC, the liquidator has the power to access any information system(s) for the purpose of submission and admission of proof of claims and identification of the liquidation estate assets relating to the CD from a variety of sources  Any other duties assigned by IBBI  Liquidator cannot sell property to ineligible Resolution Applicant as defined under Section 29A Functions of Liquidator with respect to estate  Section 36(3) - gives inclusion definition of liquidation estate  Section 36(1) - duty of the liquidator to form an estate of assets for the process of  liquidation Liquidator keeps the estate as a security for the creditors L S  Powers of liquidator with respect to access to information S L E o Section 37 - liquidator has the authority to access any information system for the purpose of verifying claims and locating assets that are part of the CDs liquidation estate R C  if necessary Powers of liquidator with respect to claims I o Section 37(3) - duty of liquidator to provide these information to the creditors, C o This is known as Consolidation of claims D Y o Section 38 - liquidator collects the claim of all the creditors U o Done within 30 days of the date from when the liquidation began T S o Within 14 days of submitting a claim, creditors have a claim to withdraw it o Both FC and OC are to submit claims A M o Liquidator evaluates the claims in accordance with Section 39 o Power to demand for any documents or evidences from both the creditor and the CD A L o The IBBI specifies the time frame L K o Liquidator analyses, then he may accept or reject the claim - Section 40 o Section 41 - liquidator shall determine value of claims admitted D U o He appoints two registered valuers o Liquidator must give a written explanation for his decision A B J Liquidation Estate P AS.36(3) The liquidation estate comprises of all the liquidation estate assets, including the following: 1. assets over which the CD has ownership rights 2. assets that may, or may not, be in possession of the CD, including but not limited to encumbered assets 3. tangible assets, whether movable or immovable 4. intangible assets such as intellectual property, securities. 5. assets subject to determination of ownership by the court or another authority 6. any assets, or their value, recovered through proceedings for avoidance of transactions  7. any asset of the CD in respect of which a secured creditor has relinquished its security interest 8. any other property belonging to or vested in the CD on the insolvency commencement date 9. all proceeds of liquidation as and when realized S.36(4) - assets which will not form a part of the liquidation estate 1. assets owned by a third party that are in possession of the CD 2. assets in security collateral held by financial services providers 3. personal assets of any shareholder or partner of a CD 4. assets of any Indian or foreign subsidiary of the CD 5. S any other assets that may be specified by the IBBI L Admission, verification and proof of claimsS by liquidator L E R C  C I Section 38 provides that liquidator shall receive or collect claims of creditors within 30 days from the date of LCD   Section 39,40,41 D Y Form and manner of claim submission - given by Liquidation Process Regulations  TU Section 42 - creditor may appeal to the AA against the liquidator's decision to accept S or reject a claim within 14 days of the decision Secured Creditors A M Liquidation and Proceedings AL  L K Upon commencement of liquidation, secured creditors have two options: D U o Relinquish their security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator A B o Realize security interest in the manner given by Section 52 P J Realization and sale of assets A  He sell the property by public auction or private agreements  Mode and manner of such realization and sale as specified in Regulations  Sale of the CD or the businesses of the CD as a going concern is one of the manners of sale under Regulations WATERFALL MECHANISM  Section 59(1)   A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings  Company can also liquidate voluntarily if fixed period or event was specified in Articles of company for dissolution  Section 59(2) - voluntary liquidation - of a corporate person - IBBI gives procedural requirements and conditions  Initiation of Voluntary Liquidation o Declaration of insolvency  States that after full inquiry, company has no debt and if it has debts, it will be able to pay the debt through the liquidation proceeding  Company is not being liquidated to defraud any person o Within 4 weeks of declaration, there shall be:  A special resolution by shareholders in general meeting requiring company to be liquidated L S  a resolution of the members of the company in a general meeting S L E requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the C occurrence of any event in respect of which the articles provide that the R C insolvency professional to act as the liquidatorI company shall be dissolved, as the case may be and appointing an o Company shall notify ROC about IBBI about resolution within 7 days D Y o Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the U AA for the dissolution of such corporate person. T o The AA shall pass an order accordingly S TRANSACTIONS A M THAT CAN BE A L KSET ASIDE L U Preferential Transactions (Section 43) D  A B CD shall be deemed to have given a preference if: o There is transfer of property or any interest thereof of the CD for the benefit of P J a creditor, surety or a guarantor and A  o The above transfer has the effect of putting such person in a beneficial position than it would have been under Section 53 What is not preference: o Transfer made in ordinary course of business o Any transfer creating a security interest in property acquired by CD to the extent that:  Such security interest secures new value  Such transfer was registered with an IU within 30 days after CD receives possession of the property  Preference shall be deemed to be given at a relevant time if: o It is given to a related party within 2 years preceding ICD or o Preference is given to a person other than a related party during one year preceding ICD Undervalued Transactions (Section 45)  Transaction considered undervalued if: o Where CD makes a gift to a person o CD transfers one or more assets for a consideration, the value of which is significantly less than the value of consideration provided by the CD o AND these transactions must not have been in the ordinary course of business of the CD  Section 46 o relevant time if:  It is given to a related party within 2 years preceding ICD or  Preference is given to a person other than a related party during one  year preceding ICD L Section 47 - may make application to AA for order to reverse the effect of transaction S or declare it void S  Section 49 - considered as transactions defrauding creditors L E Extortionate Credit Transactions (Section 50) R C  Extortion of CD C I  Y If CD has been party to an extortionate credit transaction involving the receipt of D financial or operational debt in the 2 years preceding ICD, the liquidator shall make be made by the corporate debtor. TU an application to AA if the terms of such transaction required exorbitant payments to  S IBBI may specify circumstances in which a transaction will come under this section A M ESTATE BANKRUPTCY L A   L K Defined u/s. 79(9) of the Code Takes control of assets and distributes proceeds to creditors  U Estate refers to all such assets: D o Land A B o Building o Cash etc  J Are distributed to pay off the debt AP  Legal appointment of such a person is done through an adjudicating authority  As per 2019 Regulation Shall be entitled to fee in manner prescribed by committee o In all other cases not covered under Reg 4 (1), shall be entitled:  Fee as % of the amount realised from the estate of bankrupt and of the amount distributed from such realisation  Following functions are performed: o Can hold property o Can make contracts o Can employ people to assist him  Accountants  Advocates o Can execute a power of attorney o Realise the estate of the bankrupt person  o Distribute the estate in accordance with the debt ADJUDICATING AUTHORITY NCLT & NCLAT  The central Govt constituted the NCLT based on the recommendations of the Eradi Committee  Tribunals that adjudicate under the IBC  Sec 5(1) designates national company law tribunal (NCLT) as the AA  NCLT is constituted under the Sec 408 of the Companies Act 2013 for the resolution and liquidation of corporate persons L S  Section 60(1) of the IBC provides that the NCLT shall be the AA for the CIRP and S  liquidation of corporate persons, including CDs and their personal guarantors. L NCLT have benches all over India with each having the territorial jurisdiction E R C Role and Jurisdiction C I  Y Chapter VI of Part of IBC deals with the provisions pertaining to the AA for the corporate persons D  U It provides that the AA, in relation to insolvency resolution and liquidation of T corporate persons, including CDs and their personal guarantors, shall be the NCLT S that has territorial jurisdiction over the place where the registered office of a corporate  person is located. A M The AA admits the Corporate Debtor to insolvency (that is, starts its CIRP), and A L approves or rejects the resolution plan for the CD. If the plan is rejected, it passes an order for the liquidation of the CD, following which the CD is dissolved. T  K The AA also has the power and jurisdiction to pass orders to extend the CIRP period, L to seek cooperation from CD personnel, and to rule on avoidance applications filed by  D U the IP or against the rejection of claims by the liquidator Further, under section 60(5), the AA has the jurisdiction to entertain or dispose of: A Bo any application or proceeding by or against the CD or corporate person; o any claim made by or against the CD or corporate person, including any J claims filed by or against any subsidiaries situated in India; and AP o any question of priorities or any question of law or facts arising out of or in relation to the insolvency resolution or liquidation proceedings of the CD or corporate person under the IBC  Committee of Creditors of Essar Steel India Limited Through Authorized Signatory Vs. Satish Kumar Gupta & Others, in 2019 o the Supreme Court held that section 60(5)(c) of the IBC was like a “residuary jurisdiction” vested in the AA, and hence the AA had the right to decide all questions of law or fact arising out of or in relation to insolvency resolution or liquidation under the IBC. o However, it also said that such residual jurisdiction did not affect section 30(2) of the IBC, which circumscribes the jurisdiction of the AA when it comes to confirming a resolution plan, as mandated by section 31(1) of the IBC. APPELLATE AUTHORITIES  IBC provides for an authority, the NCLAT as well as a procedure for appealing the decisions of AA  Constituted under sec 410 of the Companies Act  It takes appeal against the orders from both IBBI and NCLT, Competition Commission of India  Offices in Delhi and Chennai and principal bench in New Delhi  Sec 61 - allows any person aggrieved by the orders of the AA to appeal to NCLAT – appeal filed within 30 days of receiving the order  Extended if sufficient reasons are shown on the grounds : o If the resolution plan contravenes any provisions of the IBC or any other law o Any material irregularity or fraud by the RP while exercising the powers during the CIRP or liquidation process L S S APPEAL TO THE SUPREME COURT L E  R C Section 62 - aggrieved by the order of the NCLT can approach the Supreme court   Filed within 45 days of receiving the order C I Grievance should be regarding the question of law arising out of the order  Extended for 15 days D Y U DRT (DEBT RECOVERYTTRIBUNALS) AND DRAT S A M  L The Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals A (DRATs) were established under the Recovery of Debts and Bankruptcy Act (RDB L K Act), 1993 with the specific objective of providing expeditious adjudication and recovery of debts due to Banks and Financial Institutions.  U At present, 39 Debts Recovery Tribunals (DRTs) and 5 Debts Recovery Appellate D Tribunals (DRATs) are functioning across the country. Each DRT and DRAT are  A B headed by a Presiding Officer and a Chairperson respectively. Insolvency and Bankruptcy Code give powers to DRTs to consider cases of Jbankruptcy from individuals and unlimited liability partnerships. AP  to facilitate the debt recovery involving banks and other financial institutions.  The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act also provides access to DRTs.  DRTs are empowered to go beyond the Civil Procedure Code and pass comprehensive orders. It can hear cross-suits, counterclaims and allow set-offs.  DRTs were empowered to adjudicate claims up to 20 lakhs.  After adjudication, the DRT issues order and Recovery Certificate, certifying the amount payable by the borrower. This is executed by Recovery Officers as per the procedure for recovery of income tax. JURISDICTION   DRTs can entertain applications from banks and financial institutions for recovery of debts which are due to them.  The banks may make an application to the Tribunal within the local limits of whose jurisdiction the defendant resides or carries on business.  The Act bars all other Courts from the adjudication of matters relating to debt recovery apart from the Supreme Court and High Court. PROCEDURE?  Banks need to make an application to the DRT which has jurisdiction in the region in which the bank operates and pay the required fees.  The defendant shall present a written statement of his defence before the first hearing  and set up a counter-claim during the course of the hearing. L S The Tribunal may, after giving the applicant and the defendant an opportunity of being heard, pass such interim or final order. S  L E The interim order passed against the defendant can restrict him from disposing or  transferring his property without the prior assent of the Tribunal. R C DRT after hearing both the parties and their submissions would pass the final C I judgment within 30 days from hearing. DRT will issue a Recovery Certificate within 15 days from the date of judgment and pass on the same to Recovery Officer.  Y The Tribunal may direct the conditional attachment of the whole or any portion of the property specified by the applicant. D  U The Tribunal may also appoint a receiver and confer him all powers to defend the suit in the court and to manage the property. T  S Where a certificate of recovery is issued against a company registered under the A M Companies Act, 1956 the Tribunal may order the sale proceeds of such company to be distributed among its secured creditors. A L L K D U EVOLUTION OF IBC A B J The insolvency law owes its origin to English law. The earliest insolvency legislation can be AP traced to S.23 and 24 of the Government of India Act 1800. Prior to the enactment of the IBC following were the legislations that dealt with insolvency. 1. Presidency Town Insolvency Act 1908 2. Provisional Act 1920 3. Recovery of Debt Due Bank and Financial Institutions Act 1993 4. Sick Industrial Companies (Special Provisions) Act 1985 5. SARFAESI Act 2002 The Indian Constitution set up in 1950 provides the expression such as “insolvency and bankruptcy” in the Concurrent List. On the other hand the term such “incorporation” and “liquidation of enterprises” are mentioned under the Union List.  With these powers the Parliament enacted the Companies Act in 1956. This Act had no definition for the terms insolvency or bankruptcy and dealt only with the inability to pay debt. In 2014, a significant effort at comprehensive bankruptcy reform was undertaken, when the MoF set up the Bankruptcy Law Reforms Committee. The mandate of the BLRC was to recommend an Indian Bankruptcy Code that would be applicable to all non-financial corporations and individuals and would replace the existing framework. The Committee then submitted a comprehensive draft of the IBC to the Government. The Code stipulates for a uniform law. Sick Industrial Companies (Special Provisions) Act 1985 It defined the concept of “Sick company” and “Potentially Sick company”. Sick company L S was any company that existed for at least 5 years and the accumulated losses exceeded or equaled net worth of any financial year. SICA failed due to its backward approach in dealingS with the bankruptcy. L E Provisions of SICA R C  C Mentioned the concept of sick company and potential sick company I  Y Definition - any company that existed for at least 5 years and the accumulated losses D which exceeded or was equal to the net worth for any financial year   TU SICA failed due to its backward approach in dealing with bankruptcy issues Board for Financial Reconsideration If debt exceeds 50% of capital - declared as sick company by BIFR S Issues with SICA A M  A L Scope of SICA was defined by terms such as sickness and industrial nature - Both  L K terms were very vague and did not give a solid restructuring exercise Only Board of Directors, Central Government, RBI, State level agencies, scheduled  D U banks could recommend companies to SICA - no other creditors could do it SICA did not set any deadlines for BIFR to complete investigation   A B Inadequate oversight of companies which exploited SICA SICA was only triggered when there was a loss of 50% of the companies' net worth - P J too late. However, trigger for liquidation only Rs. 500 ARDDBFI Act Under this Act, Tiwari Committee was constituted for the object of solving the problems of recovery by the banks, and the financial institutions, proposed establishment of the specialized tribunals called DRT and DRAT. The provisions of the Act did not apply to those banks and financial institutions where the amount due is 10 lakhs rupees. more than 2 years SARAFESI Act, 2002 enacted with the purpose of the enforcement of the security interest created in favour of only the secured creditor in accordance with the provisions of the Act. Major Drawback was there were no rights available to the unsecured creditors. L S S L E R C C I D Y TU S A M A L L K D U A B J AP