Insolvency and Bankruptcy code

Priority in Liquidation:
 Who can apply Creditors (both financial and operational), debtors, authorised members, person in
charge of managing the operations and who has control and supervision of the debtor
When upon payment default of a minimum of Rs 1 Lakh
Classification of creditors Financial creditors (persons to whom financial debt is due) and
Operational creditors (Trade creditors, employees etc.)
Timelines resolution process to complete within 180 (+90) days - failing which company liquidates
compulsorily - 2 years timeline for liquidation Snapshot of Insolvency and Bankruptcy Code 2016
The following are authorities through which the Insolvency and Bankruptcy Process would be
implemented under the Code:
(i) Insolvency and Bankruptcy Board of India (IBBI)
(ii) Insolvency Professional Agencies (IPAs)
(iii) Insolvency Professionals (IPs)
(iv) Information Utilities (IUs)
(v) Adjudicating Authorities: (a) For Corporate Persons (Companies & LLPs)- National Company Law
Tribunal (NCLT) having territorial jurisdiction over the place where the registered office of the corporate
person is located.
(b) For Individuals and Partnership Firms- Debt Recovery Tribunal (DRT) having territorial jurisdiction over
the place where the individual debtor actually and voluntarily resides or carries on business or personally
works for gain and can entertain an application under IBC 2016 regarding such person.
(vi) Appellate Authorities:
(a) For Corporate Persons (Companies & LLPs)- National Company Law Appellate Tribunal (NCLAT), any
person aggrieved by order of NCLT may file appeal to NCLAT within 30 days of such order.
(b) For Individuals and Partnership Firms- Debt Recovery Appellate Tribunal (DRAT), any person aggrieved
by order of DRT may file appeal to DRAT within 30 days of such order.
4. Civil court not to have jurisdiction: No civil court or authority shall have jurisdiction to entertain any suit
or proceedings in respect of any matter on which NCLT, NCLAT, DRT and DRAT has jurisdiction under this
Code.
5. Appeal to Supreme Court: Any person aggrieved by an order of the National Company Law Appellate
Tribunal or Debt Recovery Appellate Tribunal as the case may be, may file an appeal to the Supreme
Court on a question of law arising out of such order under this Code within forty-five days from the date
of receipt of such order.
6. IBC 2016 provides for two categories of Creditors: financial creditors and operational creditors. The
Code provides different process for recovery of debts by these creditors from the debtors;
7. The IBC 2016 deals separately for Corporate Insolvency (Part II of the Code) and Individual and
Partnership Bankruptcy (Part III of the Code);
8. Some of the persons as per section 11 of the IBC 2016 are not entitled to initiate insolvency resolution
process; As per Section 11 of the Code the following persons shall not be entitled to initiate the corporate
insolvency process:-
a) A corporate debtor already undergoing an insolvency resolution process; or
b) A corporate debtor having completed corporate insolvency resolution process 12(twelve) months
preceding the date of making of the application; or
c) A corporate debtor or a financial creditor who has violated any of the terms of resolution plan which
was approved 12 (twelve) months before the date of making of an application;
d) A corporate debtor in respect of whom a liquidation order has been made.
9. When Insolvency Resolution Process (IRP) starts, Adjudicating Authority (NCLT) declares Moratorium.
Then no suit or other legal proceeding shall be instituted by or against the corporate debtor, restricts
transferring the assets of corporate debtors and recovery of any property by an owner or lessor where
such property is occupied or in possession of the corporate debtor. Similar process is given for
Adjudicating Authority (DRT).
10 Where insolvency process fails, the Adjudicating Authority (NCLT) will pass an order under section 33
of the Code. Subject to section 52 (Secured Creditors in Liquidation Proceedings), when a liquidation
order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate
debtor;
11. Section 52 (Secured Creditors in Liquidation Proceedings) is unique provision in the IBC 2016 that
allows the secured creditor to relinquish its security interest to the liquidation estate and receive
proceeds from the sale of assets by the liquidator in the manner specified in section 53; or realise its
security interest in the manner specified in this section.
12. The order for liquidation under this section shall be deemed to be a notice of discharge to the officers,
employees and workmen of the corporate debtor, except when the business of the corporate debtor is
continued during the liquidation process by the liquidator.

What is Resolution Plan?

As per Section 30, the Insolvency Resolution Professional (IRP) within the prescribed time i.e. 180 days or
in case of extension 270 days, where Fast Track Resolution within 90 days or in case of extension 135
days, is required to submit his Resolution Plan to Adjudicating Authority (NCLT) prepared by him on the
basis of information memorandum.
The Resolution Plan should provide for:
(i) Payment of insolvency resolution costs;
(ii) Repayment of the debts to operational creditors;
(iii) Management of affairs of the Company after approval of the resolution plan;
(iv) Implementation and supervision of the resolution plan;
(v) Does not contravene provisions of the law for the time being in force; and
(vi) Conforms to such other requirement as may be specified by the Board.

When does Liquidation Process start under IBC 2016?

Section 33 of the Code provides:
(1) Where the Adjudicating Authority,
(a) before the expiry of the insolvency resolution process period or the maximum period permitted for
completion of the corporate insolvency resolution process does not receive a resolution plan; or (b)
rejects the resolution plan for the non-compliance of the requirements specified therein, it shall
(i) pass an order requiring the corporate debtor to be liquidated in the manner as laid down in Code;
(ii) issue a public announcement stating that the corporate debtor is in liquidation; and
(iii) require such order to be sent to the authority with which the corporate debtor is registered.
(2)Where the resolution professional, at any time during the corporate insolvency resolution process but
before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the
committee of creditors to liquidate the corporate debtor, the Adjudicating Authority shall pass a
liquidation order.
(3) Where the resolution plan approved by the Adjudicating Authority is contravened by the concerned
corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected
by such contravention, may make an application to the Adjudicating Authority for a liquidation order.
(4) On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the
corporate debtor has contravened the provisions of the resolution plan, its hall pass a liquidation order.
(5) When a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or
against the corporate debtor.
NCLT
National Company Law Tribunal
The National Company Law Tribunal was setup by the Central Government in 2016 under Section 408 of
the Companies Act, 2013. The National Company Law Tribunal has been setup as a quasi-judicial body to
govern the companies registered in India and is a successor to the Company Law Board. In this article, we
look at the National Company Law Tribunal, its functions and powers in detail.

Scope of National Company Law Tribunal

The National Company Law Tribunal (NCLT) consolidates the corporate jurisdiction of the Company Law
Board, Board for Industrial and Financial Reconstruction (BIFR), The Appellate Authority for Industrial and
Financial Reconstruction (AAIFR) and the powers relating to winding up or restructuring and other
provisions, vested in High Courts.

Hence, the National Company Law Tribunal will consolidate all powers to govern the companies
registered in India. With the establishment of the NCLT and NCLAT, the Company Law Board under the
Companies Act, 1956 has now been dissolved.

Advantages for National Company Law Tribunal

NCLT is a specialized court only for Corporates, i.e., companies registered in India.
This will be no more than a Tribunal for the Corporate Members.
NCLT will reduce the multiplicity of litigation before different forums and courts.
NCLT has multiple branches and is able to provide justice at a close range.
NCLT consists of both judicial and technical members while deciding on matters.
The time taken to windup a company is reduced.
Speedy disposal of cases will help reduce the number of cases.
NCLT & NCLAT have exclusive jurisdiction.
Jurisdiction of National Company Law Tribunal
The following are the National Company Law Tribunal benches and its respective jurisdictions:

NCLT, Principal Bench and NCLT, New Delhi Bench

NCLT, Ahmedabad Bench
NCLT, Allahabad Bench
NCLT, Bengaluru Bench
NCLT, Chandigarh Bench
NCLT, Chennai Bench
NCLT Guahati Bench
NCLT Hyderabad Bench
NCLT Kolkata Bench
NCLT Mumbai Bench
Powers of National Company Law Tribunal (NCLT)
The Tribunal and the Appellate Tribunal is bound by the rules laid down in the Code of Civil Procedure and
is guided by the principles of natural justice, subject to the other provisions of this Act and of any rules
that are made by the Central Government. The Tribunal and the Appellate Tribunal has the power to
control its own procedure.

Further, no civil court has the jurisdiction to consider any suit or proceeding with reference to any matter
which the Tribunal or the Appellate Tribunal is empowered to decide.

National Company Law Tribunal enjoys a wide range of powers. Its powers include:

Power to seek assistance of Chief Metropolitan Magistrate.

De-registration of Companies.
Declare the liability of members unlimited.
De-registration of companies in certain circumstances when there is registration of companies is
obtained in an illegal or wrongful manner.
Remedy of oppression and mismanagement.
Power to hear grievance of refusal of companies to transfer securities and rectification of register
of members.
Protection of the interest of various stakeholders, especially non-promoter shareholders and
depositors.
Power to provide relief to the investors against a large set of wrongful actions committed by
the company management or other consultants and advisors who are associated with the
company.
Aggrieved depositors have the remedy of class actions for seeking redressal for the acts/omissions
of the company which hurt their rights as depositors.
 Powers to direct the company to reopen its accounts or allow the company to revise its financial
statement but do not permit reopening of accounts. The company can itself also approach
the Tribunal through its director for revision of its financial statement.
Power to investigate or for initiating investigation proceedings. An investigation can be conducted
even abroad. Provisions are provided to assist investigation agencies and courts of other countries
with respect to investigation proceedings.
Power to investigate into the ownership of the company.
Power to freeze assets of the company.
Power to impose restriction on any securities of the company.
Conversion of public limited company into private limited company.
If the company cannot or has not held an Annual General Meeting as required under the
Companies Act or a required Extraordinary General Meeting, then the Tribunal has powers to call
for a General Meetings.
Power to alter the financial year of a company registered in India.

National Company Law Appellate Tribunal (NCLAT)

Appeal from order of Tribunal can be raised to the National Company Law Appellate Tribunal (NCLAT).
Appeals can be made by any person aggrieved by an order or decision of the NCLT, within a period of 45
days from the date on which a copy of the order or decision of the Tribunal.

On the receipt of an appeal from an aggrieved person, the Appellate Tribunal would pass such orders,
after giving an opportunity of being heard, as it considers fit, confirming, changing or setting aside the
order that is appealed against. The Appellate Tribunal is required to dispose the appeal within a period of
six months from the date of the receipt of the appeal.

(Newspaper article)

Its made headlines as the first case in which the National Company Law Tribunal has approved a
resolution plan. But thats not the most noteworthy feature of this judgment.
In 2005, Hyderabad-based company Synergies Dooray Automotive Ltd. leased its assets to a special
purpose vehicle Synergies Castings. Soon thereafter, Doorays lenders assigned their debts to this SPV.
But two years later, just before Dooray filed for insolvency (under the Sick Industrial Companies Act),
Synergies Castings transferred that debt to Millennium Finance, a non-banking financial company.

Prompt Corrective Action

PCA is only a tool under supervisory framework of rbi to maintain sound financial health of banks. PCA is
used to monitor certain performance indicators of the banks as an early warning exercise and is initiated
once such thresholds as relating to capital, asset quality etc. are breached. This helps nursing the banks to
health and also gives an opportunity to the RBI to pay focussed attention on these banks by engaging with
the management more closely in those areas.
prompt corrective action (PCA) framework, banks are assessed on three parameters: capital ratios, asset
quality and profitability. Failure to meet any of these norms could invite RBI action on these lenders,
which could include strictures on lending and branch expansion, change in management and reduction in
assets.

The first risk threshold under PCA would be triggered if the capital-to-risk assets ratio falls below the
minimum mandated 10.25%. Breaching this threshold would mean restrictions on dividend distribution or
remittance or profits; promoters would also be asked for capital infusion, said RBI.

RBI has also defined two more risk thresholdswhen the capital adequacy ratio falls below 7.75% and
below 6.25%. Each higher threshold brings more strictures such as stopping branch expansion, higher
provisions and even restrictions on management compensation and directors fees.

Apart from these mandatory actions, RBI has armed itself with discretionary powers such as winding up
the bank or merging it, which it would use when the highest risk threshold is breached

On asset quality, RBI has mandated a maximum net NPA ratio of 6%. A net bad loan ratio of more than
12% is the highest limit and breaching it could result in RBI asking lenders to sell assets, cut unsecured
exposures and so on.
RBI will also monitor leverage as an additional parameter under the framework.
CDR

Genesis of CDR Mechanism in India

There are occasions when corporates find themselves in financial difficulties because of factors
beyond their control and also due to certain internal reasons. For the revival of such corporates as
well as for the safety of the money lent by the banks and financial institutions, timely support
through restructuring of genuine cases is called for. However, delay in agreement amongst
different lending institutions often comes in the way of such endeavors. Based on the experience
in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional
mechanism for restructuring of corporate debt and need for a similar mechanism in India, a
Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve
bank of India on August 23, 2001 for implementation by financial institutions and banks.

The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on
Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of
approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining
25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking
accounts, syndication/consortium accounts, where all banks and institutions together have an
outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in
the books of member-creditors classified in terms of RBI's prudential asset classification
standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial
Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of
restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of
doubtful assets are covered under Category-II.

Reference to CDR Mechanism may be triggered by:

Any or more of the creditors having minimum 20% share in either working capital or term
finance, or
By the concerned corporate, if supported by a bank/FI having minimum 20% share as
above.

It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or
misfeasance, even in a single bank, can be considered for restructuring under CDR System.
However, Core Group, after reviewing the reasons for classification of the borrower as wilful
defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that
the borrower would be in a position to rectify the wilful default provided he is granted an
opportunity under CDR mechanism.

Structure of CDR System: The edifice of the CDR Mechanism in India stands on the strength of a
three-tier structure:
CDR Standing Forum
CDR Empowered Group
CDR Cell

Legal Basis of CDR

The legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the
Inter-Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required to
enter into the legally binding ICA with necessary enforcement and penal provisions. The most
important part of the CDR Mechanism which is the critical element of ICA is the provision that if
75% of creditors (by value) agree to a debt restructuring package, the same would be binding on
the remaining creditors.

Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell or
at the time of original loan documentation (for future cases). The DCA has a legally binding stand
still agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to stand
still and commit themselves not to take recourse to any legal action during the period. Stand Still
is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise
without any outside intervention, judicial or otherwise. However, the stand still is applicable only
to any civil action, either by the borrower or any lender against the other party, and does not
cover any criminal action.

Besides, the borrower needs to undertake that during the stand still period the documents will
stand extended for the purpose of limitation and that he would not approach any other authority
for any relief and the directors of the company will not resign from the Board of Directors during
the stand still period.
Letter of credit: processing technique

RBI GUIDEUNES ON NON-FUND BASED FACIUTIES

Reserve Bank of India has also issued detailed guidelines to commercial banks in respect of non-fund based
credit facilities. Some of the important points to be kept in view in this regard are discussed below:

Letters of Credit
 Bank should normally open letters of credit for their own customers who enjoy credit facilities with
them Customers maintaining current account only and not enjoying any credit limits should not be
granted L/C facilities except in cases where no other credit facility is needed by the customer.

The request of such customer for sanctioning and opening of letter of credit should be properly
scrutinised to establish the genuine need of the customer. The customer may be, required to submit a
complete loan proposal Including financial statements to satisfy the bank about his, needs and also
his financial resources, to mire the bills drawn under

Where a customer enjoys credit facilities with some other bank, the reasons for his approaching the
bank for sanctioning L/C limits have to be clearly stated. The bank opening L/C on behalf of such
customer should invariably make a reference to the, existing banker of the customer.

In all cases of opening of letters of credit, the bank has to ensure that the customer is able to retire the
bills drawn under L/C as per the financial arrangement already finalised.

Guarantees

The conditions relating to obligant being a customer of the bank enjoying credit facilities as discussed in
case of letters of credit are equally applicable for guarantees also. In fact, guarantee facilities also
cannot be sanctioned in isolation.

Financial guarantees will be issued by the banks only if they are satisfied that the customer will be in a
position to reimburse the bank in case the guarantee is invoked and the bank is required to make the
payment in terms of guarantee.

Performance guarantee will be issued by the banks only on behalf of those customers with whom the
bank has sufficient experience and is satisfied that the customer has the necessary experience and
means to perform the obligations under the contract and is not likely to commit any default.

As a rule, banks will guarantee shorter maturities and leave longer maturities to be guaranteed by
other institutions. Accordingly, no bank guarantee will normally have a maturity of more than 10 years.

Banks should not normally issue guarantees on behalf of those customer's who enjoy credit facilities
with other banks.