Categories: Uncategorized

Corporate Insolvency Resolution Process

1. Insolvency Procedure Simplified: MCA Releases New Draft Regulations under Insolvency and Bankruptcy Code

The Ministry of Corporate Affairs has released draft regulations for: (i) Registration of Insolvency Professionals (“IP”), (ii) Application to Adjudicating Authority, (iii) Liquidation for Corporate Insolvent Persons and, (iv) Model Bye-Laws for IP Agencies. The draft regulations inter alia cover following:

  • Eligibility criteria and procedure for registration as an IP, conduct of IP Examination, transitional registration from other professions viz. CA, CS etc. to IP, refusal to grant certificate of registration and its effects etc.
  • Procedure of making application to the Adjudicating Authority by sole financial creditor, operational creditor, corporate applicant, joint application by two or more financial creditors; demand notice by operational creditors and; appointment of interim resolution professional etc.
  • Procedure of Liquidation proceedings, declaration of conflict of interest by liquidators and other persons or professionals, appointment, powers and functions of liquidator, auditing of financial statements and accounts prepared by liquidator as a part of his reports, determination of claims made by creditors, manner of conduct of liquidation property, consultation with stakeholders, treatment and preference of equity shareholders etc.
  • IP Agencies to adopt comprehensive bye-laws on the lines of model bye-laws, the Code will have an overriding effect on the model bye-laws of the IP Agencies.

2. IIBBI Notifies the Regulations for Liquidation Process

The Insolvency and Bankruptcy Board of India notified the IBBI (Liquidation Process) Regulations, 2016 (“Regulations”) on December 15, 2016.

These Regulations provide the eligibility criteria for liquidators, fee structure of a liquidator, powers and functions of a liquidator, details of procedure for liquidation to be adopted by liquidator, manner of public announcements, receipt and verification of claims of stakeholders/creditors, the manner of realization of assets and security interest, and distribution of proceeds to stakeholders etc.

Some of the noteworthy points of the Regulations are:

  • The Regulations prohibit an insolvency professional to be appointed as a liquidator if he, and every partner or director of the insolvency professional entity of which he is a partner or director, are not independent of the corporate debtor.
  • A liquidator shall ordinarily sell the assets of the corporate debtor through an auction and private sale would be allowed only if the assets are perishable
  • A liquidator shall be entitled to such fees as has been decided by the committee of creditors.
  • The Regulations provide that the liquidator shall prepare and submit a preliminary report, progress report, asset memorandum, sale report, minutes of consultation with stakeholders and final report prior to liquidation, with the adjudicating authority i.e. NCLT.

3. Insolvency and Bankruptcy Code, 2016: “Means serious business”

Within a few months of commencement, the Insolvency and Bankruptcy Code, 2016 (“Code”) is now being looked upon as one of the greatest economic reforms with the potential to drastically improvise the existing pattern and structure of financing for corporations in the country, thereby facilitating ease of doing business.

The NCLT is receiving new cases for the initiation Corporate Insolvency Resolution (“CIR”) by the hour, not just from creditors but from debtors as well. The robust framework of the code has already led to the disposition of many cases by allowing the initiation of CIR and the process has been kicked off by the appointment of Insolvency Professionals/Agencies.

In some of the recently disposed off cases viz. Synergies Dooray Auto Ltd (“SDAL”) (23.01.2017 NCLT Hyderabad Bench: CP: 01/I&BP 2017) and UB Engineering Ltd (“UBEL”) (18.01.2017 NCLT Mumbai Bench: CP:01 I&B/2017), the debtors came forward for the initiation of the insolvency resolution process. Interestingly, both SDAL and UBEL having committed a default had pending proceedings against them under BIFR and the SARFAESI Act respectively. However, in both the instances the pending proceedings were dismissed and the resolution process was initiated

4. IBBI has invited public comments on Draft Regulations for Fast Track Corporate

IBBI has recently issued the draft regulations for Fast Track Insolvency Resolution of Corporate Persons. The draft provides for the conduct of Fast Track Insolvency Resolution Process under Chapter IV of Part II of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and specifies that the same will be applicable on eligible corporate debtors under Section 55(2) of IBC, 2016

Accordingly, a draft notification for eligible corporate debtors was also by IBBI. Comments on each provision of the draft regulations and draft notification are invited by 8th May, 2017.

5. IBBI notifies Regulations for Fast Track Insolvency Resolution for Corporate Persons

On June 15, 2017, the Insolvency and Bankruptcy Board of India (“IBBI”) has notified the IBBI (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (“Regulations”). The Regulations provide the process from initiation of insolvency resolution of eligible corporate debtors till its conclusion with approval of the resolution plan by the Adjudicating Authority (National Company Law Tribunal). Also, as against the normal time limit of 180 days in normal cases of insolvency resolution process for corporate persons under Insolvency and Bankruptcy Code, 2016 (“IBC”), the process in these cases shall be completed within a period of 90 days. However, the Adjudicating Authority may, if satisfied, extend the period of 90 days by a further period up to 45 days for completion of the process.

6. NCLT Distinguishes “Debt” from “Financial Debt” for triggering Insolvency Resolution

In a recent judgment dated January 23, 2017 decided by the Principal Bench of NCLT u/s 7 of Insolvency and Bankruptcy Code, 2016 (“Nikhil Mehta (HUF) vs AMR Infrastructures Ltd” (23.01.2017 NCLT Principal Bench: CP: 03/I&BP 2017) for the initiation of Insolvency Resolution process, the bench provided precedential guidelines in the matter. These guidelines would go on to provide more clarity for the future applications and the nature of liabilities under the ambit of the Insolvency and Bankruptcy Code, 2016.

The NCLT also went in depth to define Financial Debt as- “debt along with interest, if any, which is disbursed against the consideration for the time value of money”.

This judgment clarifies the above definition of Financial Debt whereby the payment is made over a period of time in a single or a series of payments and the income earned through such an instrument is a compensation for the “Time Value of Money”. Therefore, it has established that the definition of “Financial Debt” u/s 5 of the Insolvency and Bankruptcy Code, 2016 is different from that mentioned in the English Laws (Insolvency Act, 1986) where there is no exclusive element for debt laced with the consideration of time value of money.

The judgment recognizes income compensating for the Time Value of Money as a substantive ingredient to be satisfied for fulfilling requirements of the expression “Financial Debt” to trigger the initiation of Insolvency Resolution process.

7. NCLT admitted the corporate insolvency petitions filed by Operational Creditors

In a recent judgment passed in the matter of M/s DF Deutsche Forfait AG (“Deutsche”) and Anr. Vs. M/s Uttam Galva Steels Ltd. (“Debtor”) [C.P. No. 45/I&BP/NCLT/MAH/2017], the Mumbai Bench of National Company Law Tribunal (“NCLT”) has provided clarity on the eligibility of operational creditors to file a corporate insolvency resolution petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IB Code”).

As per Section 8 and Section 9 of the IB Code, an operational creditor can file a petition under section 9 only after serving a prior demand notice to operational debtor and after expiry of 10 days from the date of delivery of such notice. However, in case the Debtor, in its reply made within these 10 days, claims about existence of a dispute, operational creditor is restricted from filling a petition under Section 9 of the IB Code.

In the present case, the Debtor entered into a sales contract with AIC Handels GmBH (“AIC”) for purchase of prime steel billets from AIC. It was also agreed that on successful delivery of goods the Debtor will make payments to AIC against the bill of exchange drawn on and accepted by the Debtor. AIC had successfully delivered the goods to Debtor and had thereby raised two bills of exchange, which Debtor has unconditionally accepted.

However, as a risk management measure, AIC had entered into a discounting agreement with Deutsche, thereby assigning the entire debt to Deutsche. Deutsche had subsequently assigned part of its debts to Misr Bank Europe GmBH (“Misr”) through another forfeiting agreement. Accordingly, two letter of notification were issued to Debtor for informing the same of which the former was even confirmed by Debtor.

However, on failure of Debtor in making payments even after the maturity dates Deutsche and Misr had issued notice u/s 8 of the IB Code calling upon Debtor to pay the outstanding sum, to which Debtor made two replies within 10 days stating that its obligation to payment under the contract were dependent on payment by one Aartee Commodities Ltd. and that it has already filed a suit in Bombay High Court.

Accordingly, Debtor claimed that since it has already notified the existence of dispute in its reply, Deutsche and Misr were not having right to file an application u/s. 9 of the IB Code.

However, while admitting the case filed by Deutsche and Misr as operational creditors, NCLT held that since the case filed by Debtor was subsequent to receipt of notice u/s. 8 of the IB Code and as no suit or arbitration was filed before the notice u/s. 8 of the IB Code, Deutsche and Misr were eligible to file the petition.

8. Appeal against NCLT 1st order stands dismissed by NCLAT

NCLAT vide order dated May 15, 2015, in the matter of M/s. Innoventive Industries Ltd. v ICICI Bank & Anr. has upheld the decision of NCLT, Mumbai Bench (‘Adjudicating Authority’). NCLT had admitted the application filed under Section 7(1) of the Insolvency and Bankruptcy Code, 2016 (‘Code’) by a financial creditor.

The Hon’ble NCLAT observed that under Section 7(5) of the Code, the Adjudicating Authority is required to satisfy – (a) Whether a default has occurred; (b) Whether an application is complete; and (c) Whether any disciplinary proceeding is pending against the proposed Insolvency Resolution Professional, and once it is satisfied that the three criteria specified above are fulfilled, it is required to admit the case. The Ld. NCLAT bench also disregarded the contention of the Appellant that the Respondent should have obtained permission or consent of Joint Lenders Forum (“JLF”) to the present proceeding absence of which will adversely affect loan of other members and held that the Adjudicating Authority is not required to look into any other factor other than the above mentioned three criteria, including the question whether permission or consent has been obtained from one or other authority, including the JLF.

9. NCLAT tells off NCLT, Allahabad Bench on its laidback approach towards the essence of the Code – May 1, 2017

The National Company Law Appellate Tribunal, in the matter of JK Jute Mills Company Limited vs. Surendra Trading Company, held that following the timeline of 180 days for completion of interim resolution process (Corporate Insolvency) is mandatory. Since time-bound completion of processes forms the essence of the Insolvency and Bankruptcy Code, 2016 (Code), the Adjudicating Authority (“AA”) is required to perform its job within the set timelines.

The main issue to be decided by the Hon’ble Appellate Tribunal was whether the time limit prescribed in the Code for admitting or rejecting a petition or initiation of insolvency resolution process is mandatory or not. The Appellate Tribunal observed that Section 12 of the Code prescribes a time limit for completion of insolvency resolution process which is to be completed within 180 days from the date of admission of the application, extension of 90 days can be granted once by the AA. It may be noted that in case the resolution process is not completed within the prescribed time limits, it will result in initiation of liquidation proceedings which may affect the corporate debtor and which could have been avoided otherwise

The Code broadly specifies: (a) 14 days for the AA to admit or reject an application for initiation of Corporate Insolvency Resolution Process (CIRP); (b) seven days for an applicant to rectify defects in the application for CIRP; (c) 10 days for the IBBI to recommend, wherever required, an IRP to the AA, (d) 30 days for the IRP to discharge his duties; and (e) 180 days for creditors to complete a CIRP. Therefore, the NCLAT directed the AA to reject and close the petition preferred by the Respondents and also declared the orders passed by the AA, except for the dismissal orders, illegal if passed after the date of this Order.

10. NCLAT- In the matter of Starlog Enterprises – May 24, 2017

NCLAT reversed the ex-parte order passed by the NCLT (dated 17.02.2017) under section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) in the matters of Starlog Enterprises Ltd. v. ICICI Bank Ltd. The Appellant challenged the NCLT (“Adjudicating Authority”) order on the grounds that proper notice was not served and no opportunity of hearing was given to contest the claims. The NCLAT concluded that before admitting an application under Section 9 of the Code it is mandatory duty of the ‘adjudicating authority’ to issue notice

Further, it was contended by the Appellant that the Respondent in this case (the Financial Creditor) had misled the Adjudicating Authority by computing an incorrect amount. It was also contented by the Appellant that the Respondent acted in contradiction to the guidelines issued by RBI. With respect to this contention, the Appellant submitted that they have formed the Joint Lenders Forum (“JLF”) and have been organizing timely meetings to adopt the rectification as the Corrective Action Plan (“CAP”). It was further submitted by the Appellant that in one of these meetings, the Lead Lender decided to continue with the rectification as the CAP and not to proceed with any individual asset level action. The Appellant contended that the filing of the application under section 7 of the Code disregarding the other members of JLF was a mischief on the part of the Respondent. It was also contended that the Interim Insolvency Resolution Professional (“IRP”), appointed by the Adjudicating Authority, issued a public notice calling upon the creditors of the Appellant company to submit their claims and because of such actions of IRP, the Appellant company failed to comply with the contractual obligations resulting in financial loss as well as loss of goodwill.

NCLAT, by taking the facts and circumstances into consideration, the NCLAT allowed the appeal and imposed a fine of Rs. 50,000 on the Respondent Financial Creditor. NCLAT went on to observe that the Financial Creditor obtained the ex-parte order from the Adjudicating Authority on the basis of an incorrect claim and directed the Adjudicating Authority to maintain a cautious approach in admitting insolvency applications and to ensure adherence to the principles of natural justice.

11. RBI empowered to initiate insolvency proceedings under IBC

RBI vide its press release dated 13.6.2017 had decided to initiate insolvency proceedings against the companies which have outstanding debt with more than 60% Non-Performing Assets (“NPAs”) for more than a year beyond Rs. 5,000 Crores including Essar. This decision of RBI was challenged before the Gujarat High Court by Essar.

The Hon’ble Gujarat High Court in its order dated July 17, 017, rejected Essar’s primary contention that the criteria chosen by RBI to refer the case of Essar to the NCLT under the Insolvency and Bankruptcy Code 2016 (“IB Code”) is unfair and unjust. It ruled that there is no classification but only the time schedule given by RBI for initiation of insolvency petitions. For companies whose debt is more than Rs. 5,000 Crores insolvency proceedings need to be initiated at the earliest and for rest of the companies, if resolution plan could not be finalised within six months, then, insolvency proceedings should be initiated. It was also held that under Section 35AA of the Banking Regulation Act, RBI is empowered to issue directions to the banks in order to tackle the growing problems of NPAs in the country. Furthermore, it was held that the insolvency proceedings can be initiated by the banks irrespective of the directions of RBI as it is solely upon the lenders to choose the method by which they wish to proceed against the loan defaulters.

Besides, the court did not go into the merits of the other contentions of Essar including the appointment of Insolvency Resolution Professional and the issue of its ongoing debt restructuring plan which is still in process and which was not taken into consideration before the initiation of the insolvency proceedings against Essar. The Court noted that the substantial issues related to the insolvency proceedings should be decided by the appropriate forum under the IB Code, i.e. the NCLT.

Regstreet Law Advisors

Regulatory Law Firm of India

Published by
Regstreet Law Advisors

Recent Posts

Bar and Bench

SEBI and Mutual Funds Sumit AgrawalPublished on : 09 May, 2021 , 11:20 am Skin…

5 months ago

Et harum quidem rerum facilis est et expedita distinctio

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore…

1 year ago

At vero eos et accusamus et iusto odio dignissimos ducimus

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore…

1 year ago

Quis autem vel eum iure reprehenderit qui in ea voluptate

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore…

1 year ago

Nemo enim ipsam voluptatem quia voluptas sit aspernatur aut

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore…

1 year ago

Sed ut perspiciatis unde omnis iste natus error sit voluptatem

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore…

1 year ago
%d bloggers like this: