Category Archives: Insolvency and Bankruptcy Code 2016

Provision under the (Indian) Insolvency and Bankruptcy Code 2016

DISCUSSION (PAPER) ON THE LIQUIDATION PROCESS

Posted on June 25, 2022 | Leave a comment

The Discussion Paper on Streamlining the Liquidation Process, dated 14 June 2022, issued by the Insolvency and Bankruptcy Board of India, is a well-intended step with some corrective measures.

Stakeholders’ Consultation Committee

Section 53 of the Insolvency and Bankruptcy Code, 2016, empowers the Liquidator to consult any stakeholder entitled to a distribution of proceeds. The Liquidation Regulations have already converted the Liquidator’s power to consult any stakeholders into a duty. Increasingly such consultation is binding on the Liquidator unless a contrary decision is well explained and reported. I welcome a consultation committee meeting to increase transparency and democratic decision-making.

The present discussion paper intends to facilitate the consultation at an early stage and remove discrepancies.

Proposal 1: In this regard, it is proposed that the CoC as constituted during CIRP on the basis of admitted claims shall function as SCC during liquidation process with the voting share of members of SCC being same as that in the CoC. The stakeholders who are part of CoC without voting rights will be part of SCC without voting rights. The Liquidator shall convene first meeting of SCC within seven days of liquidation commencement date.

Draft Regulation: “(1A) The committee of creditors under section 21 shall function as the consultation committee with same voting rights till its constitution under sub-regulation (1).

Provided the directors, partners and one representative of operational creditors, as referred in sub-section (3) of section 24, may attend the meetings, but shall not have any right to vote in such meetings”

“(2) The voting share of members of the consultation committee under sub-regulation (1) shall be proportionate to the share of payments they will receive in terms of Section 53 against their admitted claim during liquidation if the liquidation value is taken as the proceeds for sale.

Provided a secured creditor who has not relinquished their security interests under section 52 shall not be part of the consultation committee under regulation (1) or (1A), as the case may be.

Provided further, the representatives of stakeholders not having voting share in the consultation committee may attend the meetings, but shall not have any right to vote in such meetings”

I have one suggestion: the composition of this “Interim Stakeholders’ Consultation Committee” should be constituted by adjusting the composition per entitlement to a distribution of proceeds under Section 53. In addition, the voting powers of the Interim Stakeholders’ Consultation Committee and regular Stakeholders’ Consultation Committee should be aligned.

I suggest amendments in draft sub-regulations (1A) and (2) as under:

“(1A) The committee of creditors under section 21 shall function as the consultation committee with same voting rights till its constitution under sub-regulation (1).

“(2) The voting share of members of the consultation committee under sub-regulation (1) or (1A) shall be proportionate to the share of payments they will receive in terms of Section 53 against their admitted claim during liquidation if the liquidation value is taken as the proceeds for sale.

Proposal 2: The Liquidator shall record the reason of his decision contrary to the advice of the Stakeholders’ Consultation Committee in writing and forward the same to the Adjudicating Authority and the Board within five days.

This will increase the cost in the form of one more application before the Adjudicating Authority takes such a report on record. Further, it will reduce decisions based on the Liquidator’s commercial wisdom.

Proposal 3: A secured creditors shall intimate its decision regarding realisation or relinquishment of its security interest under section 52 of the Code, in the first meeting of the SCC (practically Interim SCC).

Draft Regulation: “(1) A secured creditor shall inform the Liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest within seven days from the liquidation commencement date or in the first meeting of the consultation committee, whichever is later:

Provided that, where a secured creditor does not intimate its decision within seven days from the liquidation commencement date or in the first meeting of the consultation committee, whichever is later, the assets covered under the security interest shall be presumed to be part of the liquidation estate.”

This is a welcome step assuming the secured creditors have filed a claim in the CIRP and part of the Interim SCC). Such secured creditors have enough time to decide after the liquidation resolution and before the Liquidation order. I suggest the status quo in case of secured creditors who, for any reason, have not filed a claim in CIRP.

A second proviso may be added:

Provided also that a secured creditor, who have not filed its claim in the CIRP, shall inform the Liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form C or Form D of Schedule II.”

Proposal 4: The Stakeholders’ Consultation Committee shall now empower to propose replacement of the Liquidator.

This will not be an appropriate step; First it is not in line with the Code; Second the SCC is only a consultative body and thirdly the SCC may replace a hard-working liquidator facilitating the incumbent Liquidator to have the fruit of the Liquidation.

The Code may be amended for the replacement of the Liquidator by the Adjudicating Authority when the Stakeholders’ Consultation Committee applies for such replacement with specific and justified reasons. The Liquidator should have a right to be heard before the SCC and the AA.

Proposal 5: SCC will fix/review the fee of the Liquidator in its first meeting.

I do not see a good reason for this proposal as present regulations adequately cover the fee aspect. In addition, this proposal will open endless negotiations between Liquidator and the stakeholders.

Compromise or Arrangement

Proposal 6: reduction of time period for the Compromise and Arrangement from 90 days to 30 days.

The discussion paper mentions that as of 31 May 2022, only eight liquidation processes have been closed by way of compromise or arrangement under section 230 of the Act, which took an average of 466 days for completion, and the Liquidator has realised only 87% of the liquidation value in these eight cases.

These eight cases are enough to say the reduction of this period may not change the situation as compromise and arrangement is otherwise a time-consuming process. Therefore, such a decrease in time shall promote the auction of the company as a going concern.

Valuation

Proposal 7: Where the Liquidator is of the opinion that fresh valuation is required, he shall seek advice of SCC for the same and such valuation may be considered for subsequent auctions.

This amendment is a welcome step.

Submission of Progress Reports and SCC Minutes

Proposal 8: The Liquidation Regulations may be amended to provide that the Liquidator shall submit the copy of progress reports, along with the minutes of the SCC, with the Board as and when the same is filed with AA. Further, the format of the Progress report, along with its contents, may be provided in detail by way of a Circular.

This proposal is just a procedural addition and may become an example of over governance.

Events-based timelines of Auction

Proposal 9 and 10: Frist auction notice within 45 days of the Liquidation Commencement Date, Auction on 35th day from the public notice and successive auction notice within 15 days of the failed auction.

These proposals may bring procedural uniformity and predictability to the process. However, the gap between successive auction notice and the auction may be reduced to 15-20 days from the proposed 35 days each time. Most of the participants in successive auctions usually working on their proposal/bids from the first or earlier auctions.

Same time, IBBI may also give more power to SCC to consider proposals for private sales provided such private sales should not hamper transparency in the process. Many potential buyers prefer private sale over auction purchases.

Designating Auction Portal

Proposal 11: The Liquidation Regulations may provide that the auction platforms of PDAs as empanelled from time to time may be exclusively designated for offering auction services.

I restrain myself from making any comment on this proposal.

Preparation of Asset Memorandum

Proposal 12: The Liquidator shall use the information provided in IM and valuation conducted during CIRP for preparation of Asset Memorandum and submit the same to AA within 30 days. Further, the Liquidator shall share the asset memorandum with the SCC after receiving confidentiality undertaking from the members of the SCC.

This proposal is good for transparency and proper advisory by the Stakeholders’ Consultation Committee.

Interim Finance availed during CIRP

Proposal 13: The liquidation cost shall include the interest on interim finance till the same is repaid.

This proposal is welcome.

Treatment of Avoidance Applications

Proposal 14: Before filing of an application of dissolution or closure of the process by Liquidator, SCC shall decide the manner in which proceedings in respect of avoidance transactions or fraudulent or wrongful trading, if any, will be pursued after closure of liquidation proceedings and the manner in which the proceeds, if any, from such proceedings shall be distributed. This decision shall be part of the final report filed before the AA.

I am not sure about the effectiveness of the proposal, but hopeful.

Claims

Proposal 15: The Liquidator shall consider the claims collated during the CIRP in respect of claimant who have not submitted their claim during liquidation.

This proposal is a welcome step, but it is always advisable for claimants to file fresh claims.

Disclaimer: The writer is an Insolvency Professional, and his interest may impact the outcome of this discussion.

I am publishing this on the blog for discussion purposes. I will submit my final thought with IBBI one or two days before the last date.  

Aishwarya Mohan Gahrana, Company Secretary and Insolvency Professional

To Join my telegram Channel: https://t.me/AishMGhrana
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Entities as Insolvency Professional!!

Posted on June 20, 2022 | Leave a comment

Can a hospital be registered as a doctor? Can a court be called a judge?

We respect collective and coordinated efforts. However, no Human Collective can replace the prime and primary element – Human.

The Insolvency Resolution Process is a collective effort under the leadership of the Insolvency Professional. He led his team from a tight rope wearing a crown of thorns.

There is no doubt. Insolvency Professionals need services and help. After getting a declaration of independence, he hires independent professionals like advocates, chartered accountants, company secretaries, and valuers. These professionals, as per Regulations, should not be related to significant stakeholders, including the Resolution Professional. While managing a stressed company as going concern, he hires CFO, CEO and other professionals and try not to continue with the old team which led that company into stress.

The Insolvency Professional also hire his own team like any other professional like doctors, Advocate or company Secretaries hire their qualified, semi-qualified, skilled and unskilled staff. Similar to any other professional, all payments to his team and staff members are made from the professional fee of Insolvency Professional.

My emphasis is the Insolvency Professional need a good team in which he has long-term faith and confidence. No doubt, the Insolvency Professional is as independent as his team is. But every Insolvency Professional, at least in his initial years, do not have the resources to build his team.

Presently, an Insolvency Professional (IP) may have services of the Insolvency Professional Entities (IPE) in which he holds a leading position. Still, these services should be on an arm’s length basis. This is on an Insolvency Professional whether he wants to join an Insolvency Professional Entities or not. Despite the growth, the concept of Insolvency Professional Entities is not much popular among Insolvency Professionals. Out of 140 Insolvency Professional Entities total of 44 have shut their shop. Their closure does not impact the insolvency resolution but the finance of the Regulators – 3 IPAs, the front-line regulator, and the IBBI, the principal regulator.

Unfortunately, most of the failed Insolvency Professional Entities failed as the team usually reports to the protagonist promotor of the Insolvency Professional Entities and fails to get the confidence of the other Insolvency Professionals in the entity.

With this background discussion, now I come to the Discussion Paper on enabling entities to become insolvency professionals dated 14 June 2022, issued by the Insolvency and Bankruptcy Board of India.

The Statement of Problem in this discussion paper has two noteworthy observations:

  1. Ensuring continued business operations of a stressed company is an onerous job, and it may not be possible for a single professional to take on the multi-task activities of the board of directors, along with other important insolvency resolution process functions, that too in a time-bound manner;
  2. To fulfil their duties under section 25 of the Code, the resolution professional tends to outsource his functions to other persons such as Insolvency Professional Entities, Process advisors etc. The supporting entities are often not under any strong regulatory framework. Accordingly, it is not possible to fix accountability on unregulated entities.

There is no possibility of disputing the first observation. Ensuring continued business operations of a stressed company and conducting insolvency resolution of a stressed company without any business operation is not possible for a single professional. They need a team.

Regarding second observation hereinabove mentioned, I have the following questions:

  1. Will the whole board of directors of the Insolvency Professional Entity replace the board of the stressed company?
  2. Will every person employed by the Insolvency Professional Entity comes under a strong regulatory framework?

My general reply is negative. However, if it is affirmative, it is affirmative also for the team of all persons hired or employed by any individual Insolvency Professional.

Permitting a company, limited liability partnership or registered partnership firm (hereinafter called Entities) as an Insolvency Professional does not facilitate the Insolvency Process beyond the existing possibilities. We assume economy of scale and joint efforts in the case of Entities as Insolvency professionals. Any legal entity is as good as the individuals behind it. These entities will manage by their promoter or Principal officers.

So, why not an Individual Insolvency Professional can have a proper setup? There should be no reason except for a lack of initial capital and regulatory support. Therefore, whatever facility regulators are willing to provide to these Entities should also be provided to Individual Insolvency Professionals. Further, Regulators should also facilitate the One Person Companies (OPC) of Insolvency Professionals.

I am publishing this on the blog for discussion purposes. I will submit my final thought with IBBI one or two days before the last date.  

Disclaimer: The writer is an Insolvency Professional, and his interest may impact the outcome of this discussion.

Aishwarya Mohan Gahrana, Company Secretary and Insolvency Professional

To Join my telegram Channel: https://t.me/AishMGhrana
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Proposed Fee and Expenses Mechanism for Resolution Professionals

Posted on June 18, 2022 | Leave a comment

The Discussion Paper on Remuneration of an Insolvency Professional, dated 9 June 2022, issued by the Insolvency and Bankruptcy Board of India, is a welcome step.

Remuneration and expenditure consume a significant chunk of time during meetings of the Committee of Creditors. After that, Resolution Professionals need to follow up for payment and reimbursement. Every Resolution Professional spent a good portion out of his pocket without a chance for interest payment. Higher the number of members in the Committee of Creditors, there are lesser chances of timely payment or reimbursement. The Discussion Paper rightly mentions litigations for professional fee payment and recovery of expense amount.

Since the first direction issued by the Hon’ble Adjudicating Authority in March 2018 for framing necessary regulations or guidelines regarding fixation of fees and resolution cost, the IBBI waited long for market maturity to settle this issue. Sadly, we lost the well-intentioned time due to the immaturity of the market.

The most unfortunate situation for Resolution Professional is a frequent request for postponement of the resolution for Professional fee at every meeting until the Resolution Professional exhausts most of his available (ideally less than 2500) working hours in the resolution process and loses negotiation power.

Now, we will discuss the proposed amendment.

[Proposed Regulation 34A(1)]: “The applicant, the Adjudicating Authority and the committee shall fix the fee to be paid to interim resolution professional or the resolution professional, as the case may be, under regulation 33 and 34, respectively, in accordance with the Schedule II.”

The reference of the Committee of Creditors is not required here. The Committee shall ratify and/or fix the remuneration under Proposed Regulation 34A(2).

I propose:

“The the applicant or the Adjudicating Authority shall fix or where the applicant or the Adjudicating Authority did not fix a fee, the minimum fee to be paid to the interim resolution professional or the resolution professional, as the case may be, under regulation 33, shall be in accordance with the Schedule II.”

[Proposed Regulation 34A(2)]: “The committee may ratify an amount higher than the amount fixed under clause (1) of Schedule II, as may be necessary.”

The Committee has two options. It may either ratify the fee fixed by the applicant or the Adjudicating Authority or itself fix the professional fee. The term “ratify” in the proposed draft does not convey the meaning “to fix a fee”. Here, the Committee should have the power to ratify or fix a fee.

I propose:

“The committee may ratify the fee fixed under sub-regulation (1) or may fix a fee to be paid to the interim resolution professional or the resolution professional, as the case may be, under regulation 34, , in accordance with the Schedule II.”

[Proposed Regulation 34A(3)]: An insolvency professional shall submit a statement towards estimate of his fee and fee of the resolution professional in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting and thereafter till the appointment of the resolution professional; or
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional.”

I understand this regulation firstly with plain reading and secondly reading with the discussion paper.

How can an Interim Resolution Professional submit a statement towards an estimate of the fee of yet to be appointed the Resolution Professional? At most, he can submit a statement of assuming his own appointment. The reasoning for this proposal is not clear. Usually, Insolvency Professionals give a well-drafted proposal estimating fee and other major expenses with their consent to act IRP or RP. There is no point in having it a recurring exercise.

If I understand it correctly, I propose:

“An insolvency professional shall submit a statement towards estimate of his fee in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting after his appointment as an interim resolution professional; or
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional.”

If I refer to the discussion paper again on this point, it talks about an estimate of fees and expenditure on the hiring of other professional and support providers. In such a case, I propose:

“An insolvency professional shall submit a statement towards an estimate of expenditure including his fee in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting after his appointment as an interim resolution professional;
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional; and
(d) to the Committee in the next meeting, where there is an upward change in the estimate of expenditure.”

Schedule II

The Discussion Paper proposed a three-tier structure:

  1. The fee of IP in CIRP –Fixed Fee (Minimum) Per Month;
  2. Performance Linked fee structure for timely completion of CIRP; and
  3. Performance-linked fee structure relating to Value Maximization

I have no view on the Minimum fee structure and welcome it as a good start.

The discussion paper suggests performance-linked fee structure for timely completion is a mandatory feature. However, Clause (2) of the Draft Schedule II makes this incentive optional by using the term “may”. I suggest the replacement term “may” with “shall”. This incentive is quite hard to earn but a good morale booster.

The discussion paper suggests an optional performance-linked fee structure relating to Value Maximization. I fear Insolvency Professionals will look for big value corporate debtors with good realization chances. However, best efforts should be incentivized and welcomed. I understand the Committee of Creditors may be the best judge on this.

The amount payable under clauses (2) and (3) is proposed to be capped at ₹ 5 Crore. I could not visualize much difference with or without this cap except for a few high-stake cases.  

Proposed Regulation 34B(1): An insolvency professional shall create an escrow account in the name of corporate debtor, in respect of his fee, and fee for the resolution professional, immediately on his appointment as an interim resolution professional.

I welcome the intention. However, there is a practical difficulty in complying with the Draft Regulation. If the Insolvency Professional opens an escrow account in the name of the Corporate Debtor, Banks asks PAN, Address Proof and Incorporation Documents of the Corporate Debtor. Most of the time, one or more of these documents are not readily available due to non-cooperation. IBBI and RBI should discuss waiver of these documentary requirements, and the order of initiation of corporate insolvency may suffice to open this account. Alternatively, the escrow account may be in the name of Interim Resolution Professional. On the appointment of any other person as Resolution Professional, the balance amount should be transferred to the escrow account of the Resolution Professional so appointed.

Secondly, the escrow account is not only for a fee but for expenses also.  

I am not suggesting any change in the draft regarding the name of the account due to a lack of my knowledge and will leave it for future developments. Except for this, I propose the following changes:

An insolvency professional shall create an escrow account, in respect of the estimate of expenditure, including Interim Resolution Professional and Resolution Professional, immediately on his appointment as an interim resolution professional.

Proposed Regulation 34B(2): The applicant or the Committee, as the case may be, shall deposit in the escrow account, or in alternate arrange for interim finance for depositing in the escrow account, the amount fixed under regulation 34A within 72 hours of submission of the statement by the insolvency professional.

I have nothing to discuss or suggest on this point.

Proposed Regulation 34B(3): The interim resolution professional or the resolution professional shall be eligible to withdraw the amount deposited in the escrow account towards his fee and shall provide the details of withdrawals to the Committee in the statement prepared under regulation 34A.

I again submit the escrow account is not only for a fee but for expenses also.

I propose:

The interim resolution professional or the resolution professional shall be eligible to withdraw the amount deposited in the escrow account towards his monthly fee approved by the Committee of Creditors and payment of other expenditures may be made as and when ratified by the Committee of Creditors.

Proposed Regulation 34B(4): The remaining amount, if any, in the escrow account shall be released upon approval of resolution plan under section 31 or passing of an order for liquidation of corporate debtor under section 33.”

I have nothing to discuss or suggest on this point.

I am publishing this on the blog for discussion purposes. I will submit my final thought with IBBI one or two days before the last date.  

Disclaimer: The writer is an Insolvency Professional, and his interest may impact the outcome of this discussion.

Aishwarya Mohan Gahrana, Company Secretary and Insolvency Professional

To Join my telegram Channel: https://t.me/AishMGhrana
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CBIC IBC Instruction needs to supplement

Posted on May 29, 2022 | Leave a comment

The Instruction No. 1083/04/2022-CX9 dated 23.05.2022 is a welcome step to the extent it came at least though it came late. This instruction and annexed Standard Operating Procedures (SOP) for the NCLT cases regarding filing claims by authorities under CBIC required to be filed under the Insolvency and Bankruptcy Code (IBC) took almost six years.

The Insolvency and Bankruptcy jurisprudence and environment are still in a nascent stage. This instruction is a minor step to remove one of the main hurdles. Insolvency Professionals feel duty-bound to inform the Government Authorities about the Tribunal order for insolvency resolution and their appointment, moratorium, invitation of claims and public announcement. The information of insolvency was usually taken as lightly as a waste paper by authorities armed with the power to attach any property and assets of assesses and accused.

These Government Authorities faced several legal and ego issues:

  1. How could Government Authorities, a legal and sovereign superpower, fall in the category of operational creditors? NOIDA is still facing the same dilemma and running post to pillar to satisfy its legal soul and ego. After losing on judicial fronts, they are pleading to Parliament for an amendment to the Code.
  2. How could a private person, the Insolvency Professional, ask a government authority to file the claim before himself? How could such a person claim the status of a court officer or legal jurisdiction over government authority?
  3. How could a government authority with the power to issue notice, summon someone, and assess tax liabilities suddenly run to the office of a private person, the Insolvency Professional, for approval of their claims? It hurts when an Insolvency Professional declines to receive claim paper (post ninety days), accepts claims, seeks bulky clarification or counters the claim based on his own wisdom.

This particular instruction dated 23.05.2022 is not without discrepancies and practical difficulties. The instruction correctly claims:

“3. One of the reasons for such delay in filing the claims is that concerned zonal offices have not received information regarding initiation of the process in a timely manner. Accordingly, it has not been proposed that IBBI would share the details of the public announcement on a regular basis to an identified office/office or a centralised system and hence it has been requested that such office/officer/system I CBIC need to be identified and intimated to the IBBI for implementing the system for sharing of information.”

This assertion indicates a pathetic situation.

Government Authorities and other persons may receive first-hand information on the insolvency or liquidation or bankruptcy orders directly from National Company Law Tribunal. Theses Instructions rely upon communication from the IBBI. The IBBI itself got this information with a 3-5 days delay.

There is a little time gap in IBBI Communication, which is required to be plugged.

In a practical scenario, within three days of appointment as an Interim Resolution Professional or Liquidator, the Insolvency Professionals issue public notices in newspapers and then send a copy to upload on the IBBI website. In addition, all insolvency professionals send information about the commencement of the insolvency resolution process by email and, if possible, by speed post to all potential claimants, including government authorities, tax authorities, suppliers, and bankers, subject to information received from the corporate debtor or gathered from secondary sources.

There may be a centralised nodal email address of authorities under CBIC. Insolvency Professionals could send an email about the commencement of the insolvency resolution process. Such email may have a standard subject line like <CIRP/Liquidation> <Company Name> <Company CIN> <Company PAN> <State> <Last date of filing Claim> for easy understanding and communication.

These Instructions issued by CBIC do not facilitate Insolvency professionals to communicate with powerful tax authorities directly. If CBIC does not enable Insolvency Professionals, it does not help CBIC authorities to file claims timely.

IBBI has a proper mechanism of email communication of daily development on the public announcement, invitation of claims, invitation of resolution plans and auction notices. Anyone can subscribe to the same. Point No. iv of SOPs annexed with this instruction must have mentioned it more clearly.

However, there is a little time gap in such IBBI Communication, which is required to be plugged. The copy of the public notice does not upload automatically on the IBBI website without their internal approval. Therefore, public notices may display on the IBBI website and communicate with a delay. IBBI may permit such public notices to be uploaded automatically with a copy of the NCLT order as soon as the concerned IRP/Liquidator drafts and upload the same on the IBBI website. This way, it may appear on the website and in newspapers on the same day.

Concerned officials of Government authority and Insolvency Professionals lack clarity on the filing of government claims. Such as; which officer has the authority to sign the claims, make declarations and affidavits, what supporting documents are required in claims by tax authorities and correspondence addresses like email and postal address, the release of properties and assets attached by tax authorities, and vacation of lien on bank accounts and other assets. All these issues and challenges lead to delays in the claim verification and the insolvency resolution process. Therefore, I suggest the next set of instructions and Standard Operating Procedures should have appropriate advisories on these matters. This will certainly assist in reducing litigation.

I have an additional suggestion for CBIC, which affects the microeconomic environment and MSMEs in particular. Unless the management of the corporate debtor under insolvency resolution is cooperating, Insolvency Professionals have no mechanism to have details of suppliers and service providers. All these suppliers and service providers are fellow operational creditors of these tax authorities under Insolvency and Bankruptcy Jurisprudence. CBIC has nation wise data of these suppliers and service providers, including their official email and postal addresses. In case of authorities under CBIC may, please provide such data of the last three years concerning the corporate debtor to concern insolvency professional; it may help better invitation of claims and verification thereof. Authorities under CBIC may also flash a message of public notice to these fellow operational creditors in an automated system.

Aishwarya Mohan Gahrana

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STAKEHOLDERS’ CONSULTATION COMMITTEE IN LIQUIDATION

Posted on October 23, 2021 | Leave a comment

Stakeholders’ Consultation Committee in liquidation do not have any parliamentary backing but a product of subordinate legislation. This is a committee constituted under Regulation 31A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. To understand the scope of stakeholders’ consultation committee we may refer to Section 35(2) and executive overreach in a legislative mandate.

Power to Consult

Section 35(2) empower the liquidator to power to consult any of the stakeholders entitled to a distribution of proceeds under section 53. This is not a duty of the liquidator but power meaning thereby this consultation is completely optional on part of the liquidator. Under law, any such consultation is not be binding on the liquidator.     However, the law mandate record of such consultation, if it takes place. The records of any such consultation shall be made available to all other stakeholders not so consulted, in a manner specified by the Board. [Section 35(2)]

This is the duty of stakeholders consulted to extend all assistance and cooperation to the liquidator to complete the liquidation of the corporate debtor. [Regulation 8(1)]

For the purpose of Second proviso, the liquidator shall maintain the particulars of any consultation with the stakeholders made under this Regulation, as specified in Form A of Schedule II. [Regulation 8(2)]

Consultation Committee

The above law is the major position under the Insolvency and Bankruptcy Code, 2016 and the Liquidation Regulations.

However, the Insolvency and Bankruptcy Board of India (IBBI) to streamline this consultation process, prescribes the Stakeholders’ Consultation. With the recent amendment, the stakeholder’s consultation committee becomes a significant affair. Still, any stakeholder should not consider it as Committee of Creditors which is powerful to decide the faith the resolution process.

The liquidator shall constitute a Stakeholders’ Consultation Committee within sixty days from the liquidation commencement date (the date of liquidation order). The committee shall be constitute based on the List of stakeholders prepared on the basis of claims received and verified. [Regulation 31A(1)]

Duty of Consultation Committee

Regulation 31A cast a duty on the Stakeholders Consultation Committee to advise the liquidator on matters related to –

  • Appointment of Professionals and their remuneration (power given with effect from 30 September 2021);
  • Sale under Regulation 32, including manner of sale, pre-bid qualifications, reserve price, amount of earnest money deposit, and marketing strategy.

The decision(s) taken by the liquidator prior to the constitution of consultation committee shall be placed before the consultation committee for information in its first meeting. [Proviso to Regulation 31A(1)] The Committee has no power to advise on such decision taken place before the constitution of the Stakeholders’ consultation committee.

The Regulations do not limit the power of the liquidator to consult any of the stakeholder under Section 35(2) in any additional matter.

Constitution

The consultation committee shall have following members [Regulation 31A (2)]:

Secured Financial Creditors: 2 – 4 depends upon percentage of claims to the Liquidation Value;

Unsecured Financial Creditors: 1-2 upon percentage of claims to the Liquidation Value;

Workmen and Employees: 1

Government: 1

Operational Creditors: 1-2 upon percentage of claims to the Liquidation Value;

Shareholder or Partners: 1

No Remuneration

This may be noted that these representatives shall not be entitle to any remuneration or allowance under the Code and these regulations. However, the code do not bar creditors representative by the representative to reimburse the cost but in any case, any cost incurred by these representative shall not form part of the liquidation process cost.

The liquidator may facilitate the stakeholders of each class to nominate their representatives for inclusion in the consultation committee. If the stakeholders of any class fail to nominate their representatives, such representatives shall be selected by a majority of voting share of the class, present and voting. [Regulation 31A (3) and (4)].

Record and Information

Representatives in the consultation committee shall have access to all relevant records and information as may be required to provide advice to the liquidator under sub-regulation (1). It means where the liquidator seeks advise on additional matter, the liquidator may at his option provide the information. [Regulation 31A (5)] This record and information may be provided subject to restriction under the Code and Regulations. The Regulations do not provide any restriction; however, the Liquidator may take hint from the CIRP Regulations and should request a non-disclosure undertaking from these Representatives.

Meeting

The liquidator shall convene a meeting of the consultation committee when he considers it necessary and shall convene a meeting of the consultation committee when a request is received from at least fifty-one percent of representatives in the consultation committee. [Regulation 31A(6)] However, it is not clear on what matter the Stakeholders’ consultation Committee shall “forced advise” where the liquidator has not called the meeting.

The liquidator should call meeting at reasonable intervals and keep the committee informed of developments.

The liquidator shall chair the meetings of consultation committee and record deliberations of the meeting. [Regulation 31A(7)]

The consultation committee shall advise the liquidator, by a vote of not less than sixty-six percent of the representatives of the consultation committee, present and voting. The advice of the consultation committee shall not be binding on the liquidator. Where the liquidator takes a decision different from the advice given by the consultation committee, he shall record the reasons for the same in writing and mention it in the next progress report. [Regulation 31A (9) and (10)]

Sale as Going Concern

The liquidator shall place the recommendation of committee of creditors made under sub-regulation (1) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, before the consultation committee for its information. [Regulation 31A(8)]

Under Regulation 39C of those regulations, the committee (of creditors) may recommend that the liquidator (to be appointed) may first explore sale of the corporate debtor as a going concern under clause (e) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 or sale of the business of the corporate debtor as a going concern under clause (f) thereof, if an order for liquidation is passed under section 33.

Where the committee of creditors has not identified the assets and liabilities under sub-regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee. [Regulation 32(3)]

Assignment of not readily realisable assets

A liquidator may assign or transfer a not readily realisable asset through a transparent process, in consultation with the stakeholders’ consultation committee in accordance with regulation 31A, for a consideration to any person, who is eligible to submit a resolution plan for insolvency resolution of the corporate debtor. [Regulation 37A(1)]

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Filing of Claims during Liquidation

Posted on September 4, 2021 | 1 comment

In an earlier post here, we have discussed filing of claims during corporate insolvency resolution process. In this post, we will discuss filing of claims during liquidation process of corporate persons. During liquidation process for a corporate debtor following forms of the IBBI (Liquidation Process) Regulations 2016 are prescribed to file claims by creditors:

  • Operational Creditors –Form C
  • Financial Creditors – Form D
  • Workmen and Employees (individually) – Form E
  • Workmen and Employees (for All) – Form F
  • Claims by other stakeholders – Form G

Most fields of these forms are identical. In case your claim is complicated or have a good amount of money involved, it is advisable to seek help of a good professional. 

The liquidation process starts after failure of the resolution process of corporate person. In the liquidation process, a creditor is required to file claims within 30 days from the date of the liquidation order. Practically, a creditor may have not more than 14-21 days from the receipt of information of the initiation of liquidation process.

Liquidation Order: Day 0

Receipt of the copy of order by Liquidator – Day 3-5

Public Announcement of Liquidation and Invitation of Claims – Day 5-10

Last Day of filing Claims – Day 30

The liquidator has no power to accept claims after 30 days. All creditors failed to file claims within these 30 days must apply the Adjudicating Authority (National Company Law Tribunal) to condone delay.

All these claim amount shall be calculated as on Liquidation Commencement Date.

The affidavit with the claim form shall be attested by Notary Public.

Common points in these Forms

Common FieldsSource of Information
Name and address of LiquidatorForm Public Announcement
Name and Address of ClaimantYour identity proofs/ loan agreements/Invoices

Certificate of Incorporation/GST details
Identification Number of ClaimantPAN/ GSTN / CoI / UID (Aadhar)
Address of ClaimantLatest Bank Statement/ Telephone or Mobile Bill/ UID (Aadhar)
Email of ClaimantIf you are not a frequent user of email, please provide your most used email address as you need to check this email address almost daily to stay updated.
  
Details of documentsList of all relevant documents
Details of any dispute as well as the record of pendency or order of suit or arbitration proceedings—
Details of how and when debt incurredPlease write one paragraph summery of the default
FC – why loan taken, securities, loan disbursal,  loan period interest and due dates OC – what goods or services provided and for which period, details of period of default with first and last invoice
real estate buyers – Allotment letter, agreement to sale, details of payment made
Details of any mutual credit, mutual debts, or other mutual dealings between the corporate debtor and the creditor which may be set-off against the claimDetails if any
Details of the bank account to which the amount of the claim or any part thereof can be transferred pursuant to a resolution planPlease check your cheque book: account number, type of account, Bank name and branch address, IFSC Code, Swift Code etc
List of documents attached to this proof of claim in order to prove the existence and non-payment of claim due to the operational creditorThis will be good if proper file is prepared with proper index and page numbering.
Signature of creditor or person authorised to act on his behalfPlease attach proper authorisation.
Address of person signingAddress Proof – UID/Bank statement/ mobile or telephone bill/ Electricity bill
Liquidation commence datePublic Announcement

In the case of company or limited liability partnership, the declaration and verification shall be made by the director/manager/secretary and in the case of other entities, an officer authorised for the purpose by the entity].

Amount of Claim

In case of operational Creditor: please check and attach invoices, ledger, commercial agreement, Memorandum of understanding, contracts etc. Copy of proper ledger is strongly advisable. Where any interest is claim document like MSME registration or agreement should be attached. Interest for MSME operational Creditors 18% after first 45 days.

In case of a claim by financial creditors: Please check and attach sanction letters, loan agreement, inter-corporate loan agreement, RBI – FEMA Documentation in case of loan from foreign country, mortgage agreement, hypothecation agreement, guarantee agreements, property papers, vehicle registration details, information utility documents, ledger or bank statement or loan statement, securitization documents, DRT orders etc, name of guarantors or principal borrowers;

In case of real estate buyers: application, allotment letter, agreement to sale, sale deed, loan documentation, payment details, ledger copy or bank statement or loan agreement, RERA order, calculation sheet for interest calculation. Interest for class of creditors shall be 8% per year.

In case of Employee and workmen: appointment letter/ promotion letters/ increment letter/ latest salary slips/ TDS statement

Action Post filing claims

After filing claims, claimants should wait response from the Liquidator. The Liquidator shall respond upon your claims on or before 67th day of the Liquidation Commencement Date. In case the claimant find a requirement to modify or amend the claim, the claimant can do it within 14 days of filing of the claim.

Please follow instructions of the liquidator seeking additional information or document unless you are going to appeal against instruction. Please submit all information required. The liquidator may reject your claim if he is not satisfied with your claim. In case of rejection of claim you are required to file an appeal within 14 days of receipt of such decision. You cannot file an amendment of claim in such appeal.

Submission of false or misleading proof of claims shall attract penalties.

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Filing of Claims during Insolvency Resolution

Posted on August 28, 2021 | Leave a comment

In an earlier post here, I have discussed the mode for submission of claims by various classes of creditors. During insolvency resolution process for a corporate debtor following forms are prescribed to file claims by creditors:

  • Operational Creditors –Form B
  • Financial Creditors – Form C
  • Class of Creditors (at least 10 FC in the class) – Form CA
  • Workmen and Employees (individually) – Form D
  • Workmen and Employees (for All) – Form E
  • Creditors other than those covered – Form F

Most fields of these forms are identical. In case your claim is complicated or have a good amount of money involved, it is advisable to seek help of a good professional. 

Look after your money

When you have to recover any money, we should follow up and send frequent reminders. If our amount involve is less than threshold limit to file a case of insolvency against the company or to bear the cost of recovery in normal legal process, we should wait but be vigilant. If we think company is unable to pay and not solvent, we should be careful enough to check if there is a case of insolvency against the company. These insolvency matters may be searched from website of National Company Law Tribunal. I frequently check for insolvency status of my client companies and for companies where we have invested any money.

Always look for public announcement section in the IBBI website. This is important as it is prudent to file our claim in case of insolvency within 90 days (actual time permitted is 14 days). If a creditor could not file a case within 90 days, he has to seek condonation of delay form relevant bench of the adjudicating authority.

Common points in these Forms

Common FieldsSource of Information
Name and address of Resolution ProfessionalForm Public Announcement
Name and Address of ClaimantYour identity proofs/ loan agreements/Invoices

Certificate of Incorporation/GST details
Identification Number of ClaimantPAN/ GSTN / CoI / UID (Aadhar)
Address of ClaimantLatest Bank Statement/ Telephone or Mobile Bill/ UID (Aadhar)
Email of ClaimantIf you are not a frequent user of email, please provide your most used email address as you need to check this email address almost daily to stay updated.
  
Details of documentsList of all relevant documents
Details of any dispute as well as the record of pendency or order of suit or arbitration proceedings—
Details of how and when debt incurredPlease write one paragraph summery of the default
FC – why loan taken, securities, loan disbursal,  loan period interest and due dates OC – what goods or services provided and for which period, details of period of default with first and last invoice
real estate buyers – Allotment letter, agreement to sale, details of payment made
Details of any mutual credit, mutual debts, or other mutual dealings between the corporate debtor and the creditor which may be set-off against the claimDetails if any
Details of the bank account to which the amount of the claim or any part thereof can be transferred pursuant to a resolution planPlease check your cheque book: account number, type of account, Bank name and branch address, IFSC Code, Swift Code etc
List of documents attached to this proof of claim in order to prove the existence and non-payment of claim due to the operational creditorThis will be good if proper file is prepared with proper index and page numbering.
Signature of creditor or person authorised to act on his behalfPlease attach proper authorisation.
Address of person signingAddress Proof – UID/Bank statement/ mobile or telephone bill/ Electricity bill
Insolvency commence datePublic Announcement

This is advisable to send declaration as proper notary affidavit though term used is declaration not affidavit.

In the case of company or limited liability partnership, the declaration and verification shall be made by the director/manager/secretary and in the case of other entities, an officer authorised for the purpose by the entity].

Amount of Claim

In case of operational Creditor: please check and attach invoices, ledger, commercial agreement, Memorandum of understanding, contracts etc. Copy of proper ledger is strongly advisable. Where any interest is claim document like MSME registration or agreement should be attached. Interest for MSME operational Creditors 18% after first 45 days.

In case of a claim by financial creditors: Please check and attach sanction letters, loan agreement, inter-corporate loan agreement, RBI – FEMA Documentation in case of loan from foreign country, mortgage agreement, hypothecation agreement, guarantee agreements, property papers, vehicle registration details, information utility documents, ledger or bank statement or loan statement, securitization documents, DRT orders etc, name of guarantors or principal borrowers;

In case of real estate buyers: application, allotment letter, agreement to sale, sale deed, loan documentation, payment details, ledger copy or bank statement or loan agreement, RERA order, calculation sheet for interest calculation. Interest for class of creditors shall be 8% per year.

In case of Employee and workmen: appointment letter/ promotion letters/ increment letter/ latest salary slips/ TDS statement

Action Post filing claims

After filing claims, claimants should wait response from the Resolution Professional. Please follow instructions of the resolution professional unless you are going to appeal against instruction. Please submit all information required. The resolution professional may hold your claim till all required documents or information is received.

Please note, all resolution professional collect and collate claims on provisional basis only.  The resolution professional may revise accepted claim amount any time if there is any additional information is made available either by claimant or corporate debtor.

 It is advisable to sent reminder if there is no response in seven to ten days of filing claims. Sometime, the resolution professional may advise you to file an application against him for admission of your claim. This may be for various reason.

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CLASS OF CREDITORS – AUTHORISED REPRESENTATIVE

Posted on August 21, 2021 | Leave a comment

The concept of the class of creditors took shape when thousands of home – buyers fought together up to the highest available courts (judicial and political) in India. 

The class of creditors does not means but includes home-buyers or real estate buyers. Class of creditors is a group of 10 or more financial creditors other than banks and financial institutions or trustees in financial securities or deposits. In practice, we often meet home-buyers or real-estate-buyers as the class of creditors. 

In case of CIRP – corporate insolvency resolution process, appointed interim resolution professional immediately after appointment by the Adjudicating Authority (National Company Law Tribunal), ascertain the existence of a class of creditors if any. If it seems that there is a class of creditors, the interim resolution professional identifies three insolvency professionals willing to act as an authorised representative of creditors in the class. 

Under the law, the authorised representative can receive up to Rs 25,000/- per meeting of the committee of creditors. Representing a class in a daylong meeting at such remuneration may seem a lucrative job, but a good authorised representative do much work for the class of creditors without remuneration – like queries received from any member of the class he is representing. These queries generate from a lack of financial knowledge, lack of understanding of the insolvency resolution process, market rumours on social media and speculative news published in responsible media. 

Once the interim resolution professional identifies three insolvency professionals as a candidate for the job of an authorised representative, he publishes by way of advertisement a public announcement inviting claims from creditors.

When the interims resolution professional received sufficient claims from creditors in the class, he will file an application for the appointment of the authorised representative. This application shall be filed within two days of verification of claim received within 14 days from the CIRP commencement date.

Please note, there is another provision that allows creditors to file claims till 90 days from the insolvency resolution commencement date, but claims filed after 14 days shall not be considered for the purpose of appointment of the authorised representative. 

Practically, it may not be possible to have an appointed authorised representative in the first meeting of the committee of creditors. Any delay in the appointment of the authorised representative for any class of creditors shall not affect the validity of any decision taken by the committee.

Once the authorised representative is appointed, the resolution professional shall provide a list of creditors in the class to the respective authorised representative appointed by the Adjudicating Authority.

The authorised representative shall use an electronic means of communication between the authorised representatives and the creditors in the class. In practice, the email address of the authorised representative may serve the purpose.

The authorised representative under law shall attend the meetings of the committee of creditors and vote on behalf of each financial creditor to the extent of his voting share. For the purpose of voting, the authorised representative shall rely on pre-instruction voting.

When the authorised representative receives a notice and agenda for the meeting from the resolution professional, he shall circulate the agenda to creditors in a class. He may seek their preliminary views on any item in the agenda to enable him to participate in the committee meeting effectively. Any creditor in the class may submit his preliminary views to the authorised representative within twenty-four hours. These preliminary views are not their voting instructions.

The authorised representative for a class of creditors shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty per cent of the voting share of the financial creditors he represents, who have cast their vote. In a simple language, each class of creditors shall vote as its majority. This is a general majority rule for voting on behalf of a class of creditors. There is an exception to his majority rule.

For a vote to be cast in respect of an application under section 12A, the authorised representative shall cast his vote individually as per each instruction.

The Timelines:

Receipt of appointment order by interim resolution professional – Day zero;

Identifying three potential candidates for the job of an authorised representative – Day 1;

Draft public announcement and got it translated in other languages – Day 2;

Publication of the public announcement – Day 3;

First cut-off day to receive claims – Day 14;

Verification of claims received before first cut-off date – Day 21;

 Application for appointment of an authorised representative – Day 22

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MODE FOR SUBMISSION OF CLAIMS

Posted on August 7, 2021 | Leave a comment

Insolvency and Bankruptcy law is affecting ordinary people outside business houses, including real estate buyers. Mode for submission of claims before the Resolution Professional or liquidators has one of the technical questions.

Under the insolvency and bankruptcy law, claimants before Resolution Professional or liquidator may either be of the following categories:

– Financial Creditors;

– Class of (financial) Creditors (There must be at least 10 Financial Creditors to form a class of creditors);

– Operational Creditors;

– Workmen and Employees (individually);

– Workmen and Employees (for All); or

– other than those covered.

All these categories for creditors should file their claims before the resolution professional or liquidators.

Under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 prescribed mode to submit a claim is hereunder:

• In Electronic Form

– Financial Creditors – Form C

– Class of Creditors (at least 10 FC) – Form CA 

• By post or by electronic means 

– Operational Creditors –Form B

– Workmen and Employees (individually) – Form D

– Workmen and Employees (for All) – Form E

• In person, by post or by electronic means

– other than those covered – Form F

Please note, this is my presumption that common claims for numerous workers or employees be filed either through post or electronic mode. Unfortunately, the relevant sub-regulation is silent on this aspect.

There are a similar provision under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

What will happen if a person does not file a claim in the legally mandated mode to submit their claim. Will the resolution professional or liquidator deny accepting these claims? Will it be proper compliance of law on the part of the insolvency professional to accept all claims in person? 

I have no answer. 

To avoid, I prefer submission of claim in electronic mode with a copy of these claims in physical format. Physical format, particularly in case of big bank loan, become bulky, but it helps cross-reference while verifying these claims. Further, it is not easy to notice alterations in soft copies.

I also advise claimants should not send original documents except claim forms and verification undertaking or affidavit.

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NEW NORMAL AT NCLT– ONLINE HEARING

Posted on November 27, 2020 | Leave a comment

The year 2020 is an unprecedented year of unusual era. Technology is helping us to survive. In an earlier post Virtual Reception, Lobby and Meeting Rooms, we discussed the process of online hearing in NCLT and NCLAT. Both Tribunals were till recently hearing urgent matters only. Now, Tribunals are switching to regular cause lists. With new normal, tribunals will hear matters in video conferencing mode.

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Promoters in doubt to file settlement proposal during Liquidation Process

Posted on March 31, 2020 | Leave a comment

Guest Post: Adv. Nitin Kumar Kaushik (Insolvency Professional) advnitinkaushik@gmail.com Mob: 70422-58781

Issue: whether the withdrawal of application filed by the Applicant under section 7, 9 and 10 of IB Code can be permitted by the NCLT post liquidation order passed under section 33 of IB Code. OR, can promoter be entitled to propose a scheme of the arrangement after passing Liquidation Order under Section 33 of IB Code?

Earlier, as per Rule 8 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“CIRP Rules”), the National Company Law Tribunal may permit withdrawal of Section 7, 9 and 10 of Insolvency and Bankruptcy Code, 2016 (“IB Code”), on a request by the applicant before its admission. However, at that time, there was no provision in the IB Code to permit withdrawal of the CIRP process after the admission of CIRP.

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Recapitulation Cross-Border Insolvency

Posted on November 8, 2019 | Leave a comment

Guest Post Author: Riya Gulati

Prologue

Cross-border insolvency modulates the treatment of financially distressed borrowers where such borrowers have creditors or assets in more than one nation. International insolvency chiefly accentuates on three modules: choice of law, jurisdiction and enforcement of dictum rules. Indeed, cross-border insolvency fetches with it a host of legal and ethical convolutions and ramifications. Nonetheless, in the matters pertaining to the international insolvency cases, the prime focus inclines on the recognition of foreign functionaries and their powers. The UNCITRAL Model Law on Cross-Border Insolvency and the EC Regulation on Insolvency Proceedings 2000 are the two fundamental contemporaneous regimes for the cross-border insolvencies that have been executed on something outspread than a territorial basis.

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Provident Fund/ Pension/ Gratuity is not part of Liquidation Estate

Posted on July 30, 2019 | Leave a comment

Guest Post: Adv. Nitin Kumar Kaushik (Kaushik Insolvency Professionals)

Numbers of Insolvency Professionals or Liquidators are facing the problem with respect to whether the Provident Fund/Pension Fund/Gratuity Fund is part of liquidation estate or not under Section 36 of the Insolvency and Bankruptcy Code, 2016 “IBC”. Generally, what happens, the Company had deducted the amount, in the form of provident fund or pension fund or gratuity amount, from the salary of the employee/workmen and then did not deposited or failed to deposit in the account of Employees Provident Fund Organisation “EPFO” or Pension Fund Organisation “PFO”. Thereafter, the government department i.e., EPFO or PFO attached the property of the Corporate Debtor in respect of dues of provident fund or pension fund or gratuity amount on the Corporate Debtor, even the attached property already mortgaged with any of the financial institutions or not.

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Case Note: Standard Chartered Bank Vs S K Gupta, NCLAT

Posted on July 19, 2019 | Leave a comment

Dhiraj Yadav, 4th Year Law Student, Dr. Ram Manohar Lohiya National Law University, Lucknow; and
Urvashi Gattani, 3rd year Law Student, ILS, Pune

Insolvency and Bankruptcy Code, 2016 has been severely tested since its enactment. However, constructive interpretation by the judiciary coupled with effective amendments to the Code has flooded the gates with teething issues.

In the instant case, Corporate Insolvency Resolution Process was initiated against ‘Essar Steel India Limited (“Corporate Debtor”), and pursuant to which the Committee of Creditors (“CoC”) approved the Resolution Plan submitted by ArcelorMittal India Pvt. Ltd.(‘Successful Resolution Applicant’) which was adjudged by NCLT, Ahmedabad Bench with certain modifications by the impugned order dated 8th March 2019. The successful resolution applicant in its resolution plan made the following categorisation:

Financial Creditors

(i) Secured Financial Creditors (having a charge on project assets of the ‘Corporate Debtor’);

(ii) Secured Financial Creditors (having no charge on project assets of the ‘Corporate Debtor’);

(iii) Unsecured Financial Creditors (with admitted claims less than Rs.10, 00,000);

(iv) Unsecured Financial Creditors (with admitted claims equal to or above Rs. 10, 00,000).

Operational Creditors

(i) Operational Creditors (workmen and employees);

(ii)The Operational Creditors (other than workmen and employees), but admitted claim amount is less than Rs. 1 Crore and

(iii) The Operational Creditors (whose admitted claim is equal to or more than Rs. 1 Crore).

According to the resolution plan, the first two categories of the operational creditors were proposed to be paid 100% of their dues, but the rest of the Operational Creditors whose claim admitted is Rs. 1 Crore or more, have been proposed with NIL amount i.e. 0% (zero per cent).

However, pursuant to this bifurcation numbers of appeals were preferred by the Operational Creditors and the Financial Creditors, on similar ground. These appeals were clubbed together to answer the question of law involved. The grievances of the Operational Creditors have been that in the resolution plan 0% of their debt has been proposed to be paid and claims of some of the Operational Creditors have been notionally assessed at Re. 1/- (average) by the ‘Resolution Professional’ without any basis.

Standard Chartered Bank (SCB) being one of the Financial Creditors, alleged that they were not equated with other Financial Creditors. All the Financial Creditors have been allowed 91.99% of their claim amount, whereas the claim of SCB has been categorised as-

  • ‘Secured Financial Creditors’ (having a charge on project assets of the Corporate Debtor) ─ in respect of claim amount of Rs. 3,487.10 Crores and SCB has been shown as Secured Financial Creditors but it has not been allowed 91.99% of the claim amount as allowed in favour of other Financial Creditors. SCB has been provided with 1.74% of the claim amount on the ground that it has no charge on project assets of the Corporate Debtor.
  • Unsecured Financial Creditors in respect of claim amount of Rs. 70.34 Crore has been allowed 4.08% of the claim amount.

The following Questions of Law  arising from this appeal and the earlier preferred appeals have been answered by the Hon’ble NCLAT in this pertinent case:

  1. Whether the distribution as shown in the ‘Resolution Plan is discriminatory and can the Financial Creditors be classified on the ground of a Secured Financial Creditor having charge on project assets of the Corporate Debtor and Secured Financial Creditor having no charge on the project asset of the Corporate Debtor or on the ground that the Financial Creditor is an Unsecured Financial Creditor?

Financial Creditors being Claimants at par with other Claimants like other Financial Creditors and the Operational Creditors having conflict of interest cannot distribute the amount amongst themselves that too keeping the maximum amount in favour of one or other Financial Creditors and minimum or ‘NIL’ amount in favour of some other Financial Creditors or the Operational Creditors. This violates Section 30 (2) and Regulation 38 (1A).

There is also discrimination made by CoC in the distribution of the proposed amount to Operational Creditors qua the Financial Creditors. The distribution is discriminatory and arbitrary. Classification of Financial Creditors is also discriminatory.

Therefore, Appellate Tribunal observed that as per the definition of the creditor in the Code, it includes a ‘Financial Creditor’, an ‘Operational Creditor’, a ‘Secured Creditor’, an ‘Unsecured Creditor’ and a decree-holder. Also as per the definition of Financial Creditor and Financial Debt (Section 5 (7)& (8), there is no distinction made between one or other ‘Financial Creditor’. All of such person form one class i.e. ‘Financial Creditor’ they cannot be sub-classified as ‘Secured’ or ‘Unsecured Financial Creditor’ for the purpose of preparation of the ‘Resolution Plan’.

  1. Whether the Operational Creditors can be validly classified on the ground of:
  2. employees of the Corporate Debtor
  3. those who have ‘supplied goods’ and ‘rendered services’ to the ‘Corporate Debtor’ and
  4. the debt payable under the existing law (statutory dues) to the Central Government or the State Government or the Local Authorities?

The Hon’ble  Appellate Tribunal held that the Operational Creditors can be classified for determining the manner in which the amount is to be distributed to them, they are to be given the same treatment if similarly situated.

Thus the classification of Operational Creditors in the Resolution Plan is upheld and not discriminatory as the Operational Creditors whose claim is more than Rs. 1 Crore or the ‘Central Government’ or the ‘State Government’ or the ‘Local Authority’, who raise their claim on the basis of the statutory dues, cannot ask for same treatment as allowed in favour of the Operational Creditors like employees or those who have ‘supplied goods’ and ‘rendered services’ having claim less than Rs.1 Crore, are provided with 100% dues of their claim amount.

  1. Whether the ‘Committee of Creditors’ can delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiation with the ‘Resolution Applicant’ for revision of plan and is it empowered to distribute the amount amongst the ‘Financial Creditors’ and the ‘Operational Creditors’ and other Creditors?

A ‘Sub-Committee or ‘Core Committee’ is unknown and against the provisions of the IBC. There is no provision under IBC which permits constitution of a ‘Core Committee’ or ‘Sub-Committee’ nor the IBC or Regulations empowers the ‘Committee of Creditors’ to delegate the duties of the ‘Committee of Creditors’ to such ‘Core Committee’/ ‘Sub-Committee’.

Therefore, the Committee of Creditors’ cannot delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiating with the ‘Resolution Applicant(s)’. The manner of distribution of amount among various stakeholders is the exclusive domain of the Resolution Applicant.

The said provision makes it clear that the ‘Resolution Applicant’ in its ‘Resolution Plan’ must provide the amount it proposes to pay one or other Creditors, including the ‘Operational Creditors’ and the ‘Financial Creditors’ that means if the ‘Resolution Plan’ does not show the distribution amongst the ‘Financial Creditors’ and the ‘Operational Creditors’, it cannot be placed before the ‘Committee of Creditors’.

Conclusion

The Insolvency and Bankruptcy Code,2016 is experiencing a seesaw of judgments where time and again rights of Financial and Operational Creditors rights have been determined. As per this judgment following the precedents set up in the case of Binani Judgments and in Swiss Ribbons Financial and Operational Creditors have been treated at par. Amount earned during the process by the company, where the Resolution Applicant is not paying full, the profits have been given to the creditors – financial and operational. It has also serious relevance where the resolution plan has been approved and accepted by the lender whether the said lender has any rights left against the principal borrower under the guarantee or otherwise This judgment will have a far-reaching impact in the future when the law of precedent will be referred to.

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PROCEDURE UNDER THE SARFAESI ACT, 2002

Posted on January 23, 2019 | 3 comments

Shreesh Chadha
4th Year BALLB Student,
Jindal Global Law School
Sonipat

In the Statement of Object and Reasons of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002(hereinafter SARFAESI,2002 or Act,2002), it is stated that the recovery of loans was a slow process which consequently resulted in the “mounting levels of Non-Performing Assets”. This act provides for the realization of any security interest in the favour of any secured creditor “without the intervention of the court or tribunal”[1]. This has resulted in a speedy recovery of Non- Performing Assets.

Under this act secured creditors (banks or financial institutions) have many rights for enforcement of security interest under S. 13 of SARFAESI Act, 2002. If the borrower of financial assistance makes any default in repayment of the loan or any instalment and his account is classified as Non-Performing Asset by a secured creditor, then secured creditor may require before the expiry of the period of limitation[2]by written notice. The Impugned Act, does not cover a certain class of assets, for example, any asset other than a non-performing asset, or unsecured loans, loans below ₹100,000 or where remaining debt is below 20% of the original principals stated in S. 31 of the SARFAESI Act,2002.

WHAT IS THE PROCEDURE FOR SALE/AUCTION THAT THE SECURED CREDITOR NEEDS TO FOLLOW?

The procedures laid down in the SARFAESI Act,2002, as well as the Security Enforcement (Rules), 2002, are mandatory, and no divulgence from the same is permitted, as held by the Hon’ble Supreme Court of India.[3] The procedures to be followed under the Act,2002 are stated hereinbelow.

Procedure of Physical Possession of the secured asset:

  • If the borrower defaults in repayment, under S. 13(2) a demand notice is to be sent by Secured Creditor to the borrower to discharge his liabilities. Such notice persists for 60 days. The demand notice shall contain details and amounts of the amount payable by the borrower.[4] This demand notice can also be objected to by the borrower, which should be replied by the secured creditor within 15 days, and the reply should enumerate the reasons for non-acceptance of such objection. This position was clarified by the Hon’ble Supreme Court of India[5]and later amended into the SARFAESI Act, as S. 13 (3A).
  • When the 60 day period concludes, without any discharge by the Borrower, actions can be taken by the Secured Creditor as enumerated under S. 13 (4)- wherein they can take possession of the secured assets, take over the management of the asset, appoint any person to manage the secured asset, require any person who has acquired any of the assets from the borrower to pay the secured creditor.
  • The actions under S. 13 (4) are appealable as enumerated in S. 17- 18. Therefore, the borrower can appeal the actions of the secured creditor in Debt Recovery Tribunal, DRAT, writ in High Court and SLP in Supreme Court.

Procedure of Sale and Auction under the SARFAESI Act,2002:

  • A Sale Notice is required in the case of auctioning off of the secured asset if inviting tenders from the public, or by way of public auction. This sale notice shall be published in 2 leading newspapers, on the website of the secured creditor, and as per the Directions of the Ministry of Finance directions, upload the tender notice on tender.gov.in.
  • The sale notice or possession notice should be effectively served, I.e. in 2 newspapers in circulation in the area as provided for in the SECURITY INTEREST (ENFORCEMENT) RULES,2002.
  • More particularly, the procedure for an auction of immovable assets is given in Rule 8, Security Interest (Enforcement) Rules,2002. the methods of sale of the immovable secured assets include:

(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets; or

(b) by inviting tenders from the public;

(c) by holding public auction; or

(d) by private treaty.[6] (after the possession of the asset by a Bank or Financial Institution, they might be willing to sell it to an appropriate buyer through a private deal with a third party)

Procedure regarding payment by purchaser:

The first step is determining the Reserve Price which is the minimum fair market value of the immovable asset as stipulated by the authorized officer, followed by the relevant notice according to the obligations enumerated in Rule 8 (6). The bidding process for public auction shall be done in accordance with Rule 9, Security Interest Rules, 2002 wherein the bidder shall deposit:

(1) Earnest money deposit (at the time of bidding)

(2) 25 per cent of the accepted sales price (including EMD) after successful bidding

(3) 75 per cent of the balance amount within 15 days of the auction.

Upon completion of the above, the sale certificate shall be issued to him. Otherwise, any sale by any other method other than public auction shall be on terms and conditions as decided by the parties.[7]It is also mandated under the Security Interest Rules,2002 that the amount of sale shall not be less than the reserved price.

 àWHAT ARE THE OTHER REMEDIES AVAILABLE TO SECURED CREDITORS?

Section 14 of the Act, 2002 provides a provision for the assistance of the Chief Metropolitan Magistrate andDistrict Magistrate in taking possession of the property. According to the Hon’ble High Court of Madras has held that this provision should be given a purposive interpretation in consonance with the Statement of Objects and Reasons of the SARFAESI Act,2002. It was held that the purpose of this provision is to aid the secured creditor of obtaining possession of the asset as soon as possible, and convert a Non-Performing Asset into a source of recovery for the amount due, and transfer the secured asset to a willing third party.[8]

However, it is pertinent to mention that all the rights and interests of symbolic and/or physical possession guaranteed to the secured creditor under the Act,2002 extinguish after the sale to the third party is complete. From the date of the registration of the sale deed, the secured creditor does not have any remedy or course of action under S. 13 or S. 14 of the SARFAESI Act,2002.

In instances where the secured creditor is unable to claim possession over the secured asset after the expiry of the period of the demand notice under S. 13(2) of the Act,2002 specifically due to tenancy rights that might exist over the said asset, the rent or any other amount which might become due on the said secured asset from the lessee to the borrower (if any) becomes due to the secured creditor. This position was enumerated in S. 13 (4) of the Act,2002, and was solidified by the Hon’ble Supreme Court [9].

Therefore, within the 4 walls of the Act,2002 the secured creditor is well protected if the correct procedure is followed. The SARFAESI Act,2002 is one such legislation that genuinely removes unnecessary and frivolous litigation from the courts, and provides safeguard against the initiation of such litigation at the option of both, the defaulting borrower as well as the secured creditor.

(Views express in this post are of the author, this blog do not take any responsibility.)

E-mail of auther- shreeshchadha @ gmail.com

[1] S. 13 (1), SARFAESI Act, 2002.

[2] S. 36,SARFAESI Act,2002.

[3]ITC Limited v. Blue Coast Hotels Ltd. &OrsCIVIL APPEAL Nos. 2928-2930 OF 2018.

[4] S 13 (3), SARFAESI Act,2002.

[5]Mardia Chemicals Ltd. v. Union of IndiaTransfer Case (civil)  92-95 of 2002.

[6] Rule 8 (6), Security Interest Rules,2002.

[7] Rule 8(8), Security Interest Rules,2002.

[8]Kathikkal Tea Plantations v. State Bank of IndiaMANU/TN/1926/2009.

[9]Harshad Govardhan Sondgar v. International Asset Reconstruction((2014) 6 SCC 1).

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Posted in Governance and Responsibility, Insolvency and Bankruptcy Code 2016

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Ease of Doing Business Report 2019 – Corporate Law Perspective

Posted on November 2, 2018 | Leave a comment

Once upon a time falling in the line of World Bank was not fine for at least half of the world. The scenario is changing. There is a rumour that economies not only reforms but also window dress it.

India placed this year at the 77th place with 67.23 EODB scores. Unlike a layman, this EODB score concerns the exports. When we talk about this ranking is a rating of Delhi and Mumbai, not any other place. It might possible other states/cities doing better and not reflected in the report.

“India also focused on streamlining business processes. Under its National Trade Facilitation Action Plan 2017-2020, India implemented several initiatives that improved the efficiency of cross-border trade, reducing border and documentary compliance time for both exports and imports (figure 1.9). Enhanced risk-based management now allows exporters to seal their containers electronically at their own facilities; as little as 5% of shipments must undergo physical inspections. India also invested in port equipment, strengthened management and improved electronic document flow. By implementing the Single Window Clearance System in Delhi and the Online Building Permit Approval System in Mumbai during the second half of 2017, India also continued to streamline and centralize its construction permitting process. Regarding getting electricity, newly-adopted regulations from the Delhi Electricity Regulatory Commission require that electrical connections be completed within 15 days of the application’s acceptance. To comply with this regulation, Tata Power Delhi Distribution deployed more personnel as well as tracking tools and key performance indicators to monitor each commercial connection.” {Page 12}

A print version of the report may be downloaded from here.

SPICe added to the report

The report mentioned that India is among nation who improved by making it easier to start a business. India made starting a business easier by fully integrating multiple application forms into a general incorporation form.

Starting a Business

The starting a business ranking is fairly poor despite mentioning of SPICe in the report. The starting a Business rank among 190 economies is 137. On the scale of 100, the score for incorporation is 80.96. Starting a business in India involves 10 procedures involving 16.5 days. It cost 14.4% of per capita income of Indians. It means it is still not easy to start a formal business for an average Indian. This fact cause concern as there is no legal requirement of minimum capital for a business.

Minority Protection

This is good news. Our ranking is fairly good at 7th place with a score of 80. It can be understood that most economies are not doing fair on minority protection. So, it may not be our best efforts but the poor performance of most economies.

The extent of disclosure index (0–10) 8

The extent of director liability index (0–10) 7

Ease of shareholder suits index (0–10) 7

The extent of shareholder rights index (0–10) 10

The extent of ownership and control index (0–10) 8

The extent of corporate transparency index (0–10) 8

Resolving Insolvency

Insolvency is a very interesting phenomenon presently in India. Our improved rank is 108, a number which Indians love. Insolvency Resolution Score is 81.85. An average time for insolvency resolution is one year presently. This is quite embracing as against the promised 180 days. However, we are facing many practical issues and teething troubles.

Cost of Insolvency resolution is 3.5% of the estate evolved. Recovery rate is 85.3 cent in the Dollar.

In India the establishment of debt recovery tribunals reduced nonperforming loans by 28% and lowered interest rates on larger loans, suggesting that faster processing of debt recovery cases cut the cost of credit.

A recent study using Doing Business data showed that insolvency resolution is one of the main drivers behind “missing” corporate bond markets in many economies. More borrowers gain access to credit in economies with a robust legal system that supports the use of movable assets as collateral and a well-developed credit information sharing system.

Other major reform related to business

India (Delhi) issued a regulation prescribing new electricity charges.

India introduced the Maharashtra Goods and Services Tax Act 2017 and the Delhi Goods and Services Tax Act 2017, which unified all sales taxes into one new tax called the Goods and Services Tax (GST).

Performance on corporate law front

Overall performance on corporate law front is not satisfactory. We can notice that last year insolvency related score and rating were improved due to the introduction of the law. Practical implementation of the same was not so satisfactory. Same is also true for incorporation of a company or starting a business.

Targeted reforms

This is unfortunate that government across economies trying to improve their ease of doing business ranking and not taking a holistic approach on reforms. Various segments which might need attention but not directly related to the ranking are not taken care of.

Anyway it is good to see reforms.

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Posted in Companies Act 2013, Governance and Responsibility, Insolvency and Bankruptcy Code 2016, Truth of Our Time

Managing a Going Concern

Posted on September 22, 2017 | Leave a comment

[A version of this article was published in July – August 2017 issue of Newsletter of The ICSI – WIRC Pune Chapter.]

These days, media hype talk about a new magical law to reduce nonperforming assets from the books of lender banks and financial institutions. There is no such new law. There is a law for insolvency resolution. This law also deals with the possibility of liquidation which may trigger after the failure of resolution of insolvency.

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Amendment in Corporate Insolvency Regulations

Posted on August 18, 2017 | Leave a comment

Recent case of Jaypee Infratech, question arises where should home-buyers be classified? Are home-buyers financial creditors or operational creditors? In case, home-buyers they classify themselves as operational creditors, will they forego their claim on interest or assured return on their advances? In case, home-buyers they classify themselves as financial creditors, will they forego their claim over homes? This was a game of dice, will company be able to resolve insolvency or face liquidation?

These amendments try to solve these issues.

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Managing Corporate Debtor under Resolution

Posted on July 14, 2017 | Leave a comment

My well criticized last post “Insolvency Professional ‘Non’ Entities” mentioned, “The Term “Insolvency Professional Entity” has no mention in the Insolvency and Bankruptcy Code, 2016. This is sole creation of anxieties of newly enrolled registered Insolvency Professionals reflected in Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.” Most insolvency professionals, except few like me, are anxious about managing corporate debtor as a going concern. Every worry has its solution.

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Insolvency Professional “Non” Entity

Posted on July 7, 2017 | 1 comment

The Term “Insolvency Professional Entity” has no mention in the Insolvency and Bankruptcy Code, 2016. This is sole creation of anxieties of newly enrolled registered Insolvency Professionals reflected in Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. This magic creation has no purpose except one apart from its legal existence.

[This post already published in NIRC – NIRC Newsletter June 2017] Continue reading →

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