Business Environment under New
Insolvency Laws in India
INDIA & SOUTH ASIA TEXTILE SUMMIT, 2017
7TH JUNE, 2017
FOUR SEASONS, MUMBAI
MR. ISHTIAQ ALI
(FOUNDING PARTNER, ORBIT LAW SERVICES, INDIA)
Purpose of Presentation
• To create awareness about the Default Management in doing
Business under New Insolvency Laws in India.
• To understand the Process to Exit from the Business or
Rehabilitation of the Business under New Insolvency Laws in India.
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Background for Introduction of Insolvency and
Bankruptcy Code, 2016 (“IBC”)
 Before the enactment of the Insolvency and Bankruptcy Code, 2016,
there was no single legal framework in India that dealt with insolvency
and bankruptcy.
The provisions relating to insolvency and bankruptcy were scattered
over many legislations viz:
 For Companies
a) Sick Industrial Companies (Special Provisions) Act, 1985 (dealing with the sick industrial companies),
b) The Recovery of Debt Due to Banks and Financial Institutions Act, 1993,
c) The Securitization and Reconstruction of Financial Assets and Enforcement of security Interest Act,
2002 and
d) The Companies Act, 2013
 For individuals
a) The Presidency Towns and Insolvency Act, 1909 and
b) The Provincial Insolvency Act, 1920
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 Jurisdiction
• High courts were handling the Liquidation proceeding of
companies
• District courts or High courts, as the case may be, were handling
bankruptcy insolvency proceedings of individuals and partnership
firms.
• Multiple Jurisdictions were existed under various statutes for
Debt Recovery & Insolvency Resolution.
• Cumbersome Procedure for Rehabilitation of Business or to Exit
from the Business
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OBJECTIVE OF IBC
 To consolidate and amend various laws relating to reorganization and insolvency resolution of
Corporate persons /partnership /individual;
 To provide Adjudicating Authority - National Company Law Tribunal (NCLT) for corporate persons and
Debt Recovery Tribunal (DRT) for firms and individual, for resolution of insolvency, liquidation and
bankruptcy.
 To Complete the Insolvency Process in time bound manner
 Maximization of value of assets of persons
 To promote Entrepreneurship
 To make availability of credit and balance
rehabilitation/restructuring of business process
the
interest
of
all
the
stakeholders
in
 Introduction of insolvency professionals (“IP”) to ensure more professionalism and to bring efficiency
in resolution proceedings.
 To establish the Insolvency and Bankruptcy Board of India (“Board”) for regulation of IP, Insolvency
Professional Agencies (“IPA”) and Information Utilities(“IU”)
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ROLE OF INSOLVENCY PROFESSIONAL
 Insolvency professional (IP) is a person enrolled, under section
206 of IBC, with an insolvency professional agency as its member
and registered with the Board as an insolvency professional under
section 207.
 IPs play a key role in the management and administration of the
entire insolvency resolutions, fresh start, liquidation and
bankruptcy process. [section 208 of IBC]
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ROLE OF INSOLVENCY PROFESSIONAL
AGENCY
 Insolvency professional agency can be any person registered
with the Board under section 201 as an insolvency professional
agency;
 IPA is :
 to promote the professional development of and regulation of IPs;
 to promote service of competent insolvency professionals to cater to
the needs of debtors, creditors, and such other persons, as may be
specified;
 to promote good professional and ethical conduct amongst
insolvency professionals;
 to protect interest of debtors, creditors, and such other persons, as
may be specified.
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THE ROLE OF INFORMATION UTILITY
 Information Utility (IU) is a person who is registered with the Board as an Information Utility
under section 210 of IBC.
 The purpose of IU is to manage submission and transmission of data pertaining to insolvency
and provide such services as may be specified including “core services” to any person, if such
person complies with the terms and conditions as may be specified by regulations.
 Core Services as defined under section 3 (9) 0f IBC are as under:
 accepting electronic submission of financial information in such form and manner as may
be specified;
 safe and accurate recording of financial information;
 authenticating and verifying the financial information submitted by a person; and
 providing access to information stored with the information utility to persons as may be
specified;
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PERSONS COVERED UNDER IBC






Sole Proprietorship or Individual
Partnership
Limited Liability Partnership (LLP)
Private Company
Public Company
One person Company
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APPLICATION OF IBC PROVISIONS
 Part II of IBC Relating to Insolvency Resolution And Liquidation
For Corporate Persons
 Part III of IBC Relating to Insolvency Resolution And Bankruptcy
For Individuals And Partnership Firms
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ADJUDICATING AUTHORITY

For Corporate Person - National Company Law Tribunal (NCLT)

For Individuals And Partnership Firms - Debt Recovery Tribunal
(DRT)
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Who can File Application for Corporate
Insolvency Proceeding?



Corporate Debtor
“Corporate Debtor” means a corporate person who owes a debt to
any person. [section 3 (8) of IBC]
Financial Creditor
“Financial Creditor” means any person to whom a financial debt is
owed and includes a person to whom such debt has been legally
assigned or transferred to. [section 5 (7)of IBC]
Operational Creditor
“Operational Creditor” means a person to whom an operational
debt is owed and includes any person to whom such debt has been
legally assigned or transferred. [section 5 (20) of IBC]
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Relevant Terms used in IBC
• Debt means a liability or obligation in respect
of a claim which is due from any person and
includes a financial debt and operational debt.
[section 3 (11) of IBC]
• Claim means— (a) a right to payment, whether
or not such right is reduced to judgment, fixed,
disputed, undisputed, legal, equitable, secured
or unsecured; (b) right to remedy for breach of
contract under any law for the time being in
force, if such breach gives rise to a right to
payment, whether or not such right is reduced
to judgment, fixed, matured, unmatured,
disputed, undisputed, secured or unsecured.
[section 3 (6) of IBC]
• Operational debt means a claim in respect of
the provision of goods or services including
employment or a debt in respect of the
repayment of dues arising under any law for
the time being in force and payable to the
Central Government, any State Government or
any local authority. [section 5 (21) of IBC]
• Financial debt means a debt along with interest, if any, which is
disbursed against the consideration for the time value of money and
includes— (a) money borrowed against the payment of interest; (b)
any amount raised by acceptance under any acceptance credit facility
or its de-materialised equivalent; (c) any amount raised pursuant to
any note purchase facility or the issue of bonds, notes, debentures,
loan stock or any similar instrument; (d) the amount of any liability in
respect of any lease or hire purchase contract which is deemed as a
finance or capital lease under the Indian Accounting Standards or such
other accounting standards as may be prescribed; (e) receivables sold
or discounted other than any receivables sold on nonrecourse basis;
(f) any amount raised under any other transaction, including any
forward sale or purchase agreement, having the commercial effect of
a borrowing; (g) any derivative transaction entered into in connection
with protection against or benefit from fluctuation in any rate or price
and for calculating the value of any derivative transaction, only the
market value of such transaction shall be taken into account; (h) any
counter-indemnity obligation in respect of a guarantee, indemnity,
bond, documentary letter of credit or any other instrument issued by
a bank or financial institution; (i) the amount of any liability in respect
of any of the guarantee or indemnity for any of the items referred to
in sub-clauses (a) to (h) of this clause. [section 5 (8) of IBC]
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Process For insolvency resolution/liquidation of a
Corporate Debtor
→ Application To Be filed before NCLT by (a) Financial Creditor [ section 7 of IBC] ,
Operation Creditor [ section 9 of IBC] and (d) Corporate Debtor [ section 10 of IBC]
for insolvency resolution and liquidation of Corporate Debtor.
 Timeline
Ideally corporate insolvency resolution process should be completed in 180 days. If it is fast track, it
should be completed in 90 days. (Section 12 & 56 of IBC)
 Moratorium
Once the application is admitted, a moratorium will be declared till the completion of the resolution
process. During the moratorium, no suits or proceedings can be filed or if filed, be proceeded against
the corporate debtor/company; the company cannot transfer its assets; no action under SARFAESI be
taken. If an order for approval of resolution process or for liquidation of the company is passed, the
moratorium will cease to exist. (Section 14 of IBC)
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 Public Announcement
Public announcement of the corporate insolvency resolution process made in such manner as may be directed in the rules. [
Section 15 of IBC]
 Interim Resolution Professional (IRP)
NCLT to appoint Interim Resolution Professional (IRP) within 14 days from the Insolvency Commencement date i.e. the date
of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under
sections 7, 9 or section 10, as the case may be. [ Section 16 of IBC]
 Affairs to vest in IRP
From the date of his appointment, the affairs of the company will vest in the IRP; directors’ powers will be suspended; staff will
report to the IRP; financial institutions will act as per the instructions of the IRP. IRP may execute documents in the name of the
company and he may take actions as may be specified by Board; he can have access to books of account and other relevant records
of the company [ Section 17 of IBC].
 Action by IRP
IRP will collect information with regard to the assets, finances and operations of the company for determining the financial
position; receive claims submitted by creditors; constitute creditors committee; take control of the assets of the company.
IRP will try to ensure that the company remains a going concern and will try to run the business by appointing professionals,
raising interim finance (any financial debt to be raised by the resolution professional during the insolvency resolution
process period) etc. [ Section 18 of IBC].
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 Committee of Creditors (COC)
 Committee of creditors will take decisions based on majority which shall not be less than 75%.
 COC will hold first meeting within 7 days of constitution of COC.
 They may confirm the IRP as Resolution Professional (RP) in the first meeting or propose another name as RP
which will be decided by NCLT on confirmation from Board. [Section 21 of IBC].
 Resolution Professional
 RP will do the acts/functions what IRP could do as per above.
 RP may file application for avoidance of transactions. Such transactions include transfers made by the company
one year preceding the filing of application by the company for resolution. The filing of application by RP for
avoidance will have no effect on the proceedings.
 COC Decisions
 COC decisions are final and overriding with regard to
 raising interim finance.
 creation of security interest,
 changing capital structure,
 record any change in ownership interest of the company,
 for debiting any account maintained by financial institutions,
 related party transactions,
 amending constitutional documents,
 disposal of shares by any shareholder of the company,
 Management change etc.
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 Information Memorandum (IM)
RP will prepare an information memorandum containing relevant information (financial position
etc.) as may be specified by Board (in rules).
 Resolution Plan
 Based on the IM, the company may submit a resolution plan to RP.
 RP will submit the resolution plan to COC. COC may approve the plan.
 The COC approved resolution plan will be submitted to NCLT.
 Approval of resolution plan by NCLT
If NCLT approves the resolution plan, the same is binding on the company, its employees,
creditors, guarantors and other stakeholders. NCLT may reject the resolution plan if the same is
not in accordance with section 30 (2 ) of IBC.
 Appeal
An appeal may be filed against the order of NCLT as above before NCLAT and then with Supreme
Court from the order of NCLAT. [Section 61, 62 of IBC]
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 Liquidation Process and Distribution of Sale Proceeds
 If NCLT rejects the resolution plan, liquidation order will be passed by NCL.
 COC can decide the liquidation of the company before NCLT passes an order on the
resolution plan, NCLT shall bound to pass an order for liquidation.
 Similarly, if the order approving the resolution plan is contravened by the concerned
corporate debtor, any person other than corporate debtor, whose interest are
prejudicially affected by such contravention , may file an application before NCLT for
liquidation on which NCLT may pass an order for liquidation of corporate debtor. [Section
33 of IBC]
 RP As the Liquidator
 When an order for liquidation is passed, RP shall act as liquidator and all the powers of
the board of directors and key managerial personnel shall vest in the liquidator.
 The liquidator shall act as per the overall instructions of the NCLT and do all things as are
required (section 35 of IBC).
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 Liquidation Estate
 The assets of the company will be known as liquidation estate
 The liquidator shall hold the assets as fiduciary for the benefit of the creditors.
 The assets mentioned in section 36(4) of IBC are not considered as part of liquidation
estate which are as under :
 assets owned by a third party which are in possession of the corporate debtor, including(i) assets held in trust for any third party;
(ii) bailment contracts;
(iii) all sums due to any workman or employee from the provident fund, the pension fund and the
gratuity fund;
(iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets;
and
(v) such other assets as may be notified by the Central Government in consultation with any financial
sector regulator;
 assets in security collateral held by financial services providers and are subject to netting and set-off in
multi-lateral trading or clearing transactions;
 personal assets of any shareholder or partner of a corporate debtor as the case may be provided such
assets are not held on account of avoidance transactions that may be avoided under this Chapter;
 assets of any Indian or foreign subsidiary of the corporate debtor; or
 any other assets as may be specified by the Board, including assets which could be subject to set-off on
account of mutual dealing between the corporate Debtor and any creditor
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 Claims
Within 30 days from the date of commencement of liquidation process, the liquidator shall collect
claims from creditors. The creditors may withdraw or vary their claim within 15 days of
submission.[Section 38 of IBC]
 Disposal of Claims
The liquidator may after verification of the claims, accept or reject the claims and the aggrieved
party may approach NCLT against the decision of the liquidator[ Section 39, 42 of IBC].
 Distribution of Sale Proceeds
The proceeds from the sale of assets shall be distributed in the priority of
(i) costs of insolvency resolution process
(ii) workmen’s dues and dues of secured creditors on pari passu basis
(iii) unpaid dues of employees other than workmen
(iv) financial debts due to unsecured creditors
(v) government dues and debts due to secured creditors which are unpaid following
enforcement of security interest remaining debts and dues.[ Section 53 of IBC]
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 Certain Transaction Not Valid
 Preferential transactions will be avoided by the order of NCLT.
Any transfer of property made (i) in favour of related parties ( as defined in Section 5 (24) of IBC) two years
preceding the commencement of insolvency resolution process; and (ii) in favour of any other person one
year preceding the commencement of resolution process, where such parties or persons stood
guarantee/surety or extended credit for antecedent financial debt or operational debt or other liability of
the company, such transfers shall be avoided for which the RP or the liquidator will make an application to
NCLT.
 Undervalued transactions will be avoided by the order of NCLT.
Any transfer of property made (i) in favour of related parties two years preceding the commencement of
insolvency resolution process; and (ii) in favour of any other person one year preceding the commencement of
resolution process, where property transferred by way of gift or transfer for a value significantly less than the value
of the consideration provided by the company, such transfers shall be avoided for which the RP or the liquidator
will make an application to NCLT.
In both the above cases, NCLT may pass an order that the property so transferred shall be vested in the company
as if no transfer took place.
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Questions & Further Information
Orbit Law Services is a law firm with offices in New
Delhi, Mumbai, Chennai and Vijayawada, India. The
Firm’s partners have decades of experience and
expertise and are often called upon to advise on
complex legal issues in challenging business
environments. As trusted advisors, we have
represented a wide variety of commercial,
industrial, institutional and individual clients,
including banks, financial institutions, large and
mid-sized public sector as well as private sector
companies, partnerships, business groups, and
emerging
companies
–
nationally
and
internationally.
This document has been prepared for general
guidance only. It does not contain definitive
advice; please contact Orbit Law Services if
you would like more detailed information on
any item referred to.
Further Information
If you require further information, or wish to
discuss any of the above, you can contact:
Ishtiaq Ali
Founding Partner
T +91 (22) 61692222
M +91 9869022636
E [email protected]
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