Practically all significant capital markets have understood the requirement for a different trade for SME IPO listings. These business sectors have attempted to make an SME neighbourly market design bolstered by viable organizations and fashioning connects to approaches that encourage another class of investable equities. The system for setting up of SME trades was first proliferated by SEBI in 2008.

In any case, a significant advance toward this path was the report by the Prime Minister’s Task Force in January 2010 on Micro, Small and Medium Enterprises, which prescribed setting up of SME trades to advance inflow of value capital in this segment. In this manner, in 2012, the BSE SME and NSE Emerge stages were built up.

An SME IPO new listing is a committed trade or an exchanging stage for Small and Medium Enterprises. In India, an SME trade works inside a perceived stock trade or the primary trade, for example, the BSE Limited and the National Stock Exchange of India.

“SME stocks are recorded on BSE SME and NSE Emerge. The stages are controlled by BSE and NSE and administered according to SEBI guidelines.”

  – Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

A two-year-old test by BSE and National Stock Exchange (NSE) to enable small organizations to raise capital on isolated stages has met with some achievement, as opposed to the worldwide experience where progress with such activities has been constrained.

All around, the SME IPO showcase has been sizzling with another type of web-based business, internet-based life and portable innovation firms making an introduction. Not in India, however. New companies here, including Snapdeal, Flipkart, Paytm and InMobi have been thumping on the entryways of private value financial specialists and studiously maintaining a strategic distance from open markets. In spite of the fact that these organizations sell in India, they list abroad. Koovs is recorded on AIM, a sub-market of the London Stock Exchange, the primary Indian online business organization to list abroad. MakeMyTrip is recorded on US Nasdaq. Flipkart is registered in Singapore and now a piece of Walmart. JustDial is the main web-based organization recorded in India.

SEBI stressed that fascinating organizations would totally sidestep Indian financial specialists, set up a stage for new businesses – the Institutional Trading Platform (ITP). The ITP was to be another window on stock trades where online business, information investigation, bio-innovation and different new companies can rundown and exchange on their offers, without experiencing the rigours of an IPO procedure. Notwithstanding, this stage didn’t get extravagant of the new companies and it is yet to perceive any startup posting. ITP RIP.

Developing SME Capital Markets has loaned a great deal of certainty in developing business people. With organizations recorded on SME stage getting increasingly settled, the financial specialist base is being expanded. In addition, to an expanding number of SME stocks and more noteworthy returns subsequently, an ever-increasing number of financial specialists are pulled in to SME contributing.

With adequate help from exchange boards and a continuation of financial specialist certainty, 2019 seems to be another great year for SME IPOs.

In March 2012, both BSE and NSE propelled stages for the same focused on substances hoping to raise value capital through reserves, private value and well off people.

While NSE has just five SMEs recorded on its foundation called Emerge, BSE has hustled ahead with 65 organizations, with some observing their valuation increment complex since posting.

“The SME (small and medium venture) stage tends to the real requirement for capital raising for a little organization,” says Ashishkumar Chauhan, CEO of BSE. “There are organizations from different divisions like exchanging, fabricating, steel, material, and money spread over the topography of India. We furnish a wise venture condition with a guaranteed passage and leave alternatives.”

The 65 organizations on BSE’s SME stage, which raised around ₹ 550 crores through starting open contributions (IPOs), presently have a total market capitalization of ₹ 7,890 crores.

The flood returns on the humble gainfulness. Most organizations have detailed a net benefit of only a couple of lakhs, with just a bunch revealing benefits over ₹ 1 crore.

The all-out market capitalization of the five organizations recorded on NSE’s SME stage is almost ₹ 307 crore.

Considering the way that these organizations could be high-chance wagers, showcase controller Securities and Exchange Board of India (Sebi) has kept speculators out of this fragment by setting a base exchange estimation of ₹ 1 lakh.

Endorsing alludes to investors purchasing unsold offers while it is required for brokers to offer purchase and offer statements to any element looking to either put resources into or exit from the organization.

Dealers and brokers state the SME portion gives a great chance to little organizations to raise capital and get familiar with posting prerequisites identified with corporate administration and revelations before graduating to the principle section.

For further details from the SME IPO listing, consultants log on to https://www.muds.co.in 

“The withdrawal of Jaiprakash Power Ventures insolvency application is a positive outcome which should be applauded as standing up to the established purpose of IBC. Even more, it shall be beneficial for all stakeholders in the long run.”

-Shweta Gupta, Founder and CEO, MUDS

The post Whether SME stock gets also listed on BSE/NSE? appeared first on MUDS.

Small and Medium Enterprises in India has always been a pillar of economic growth. Keeping the beneficiary role of SMEs in mind the government and the authorities time and again work towards factors that will strengthen them and broaden their base.

In one such move in 1989 Over-The-Counter Exchange of India (OTCEI), the first exchange exclusively for small companies was formed. The concept of floorless exchange, which came to be known as an electronic exchange, did not pick up the pace and witnessed a premature death.

The main reason for its failure could be that it was a technological concept that was innovative but was introduced far ahead of time. It was also not able to garner the support and infrastructure for a smooth going.

After almost a decade, in January 2010 the Prime Minister’s Task Force recommended setting up of an exclusively dedicated exchange to cater to the SMEs. SEBI framed the rules and regulations for the smooth governance of these exchanges.

Gauging the prospects of an SME exchange, Bombay Stock Exchange (BSE) was the first one to respond and hence, BSE SME Exchange was born in 2012. National Stock Exchange (NSE) was not to be left behind and soon established NSE Emerge.

“SME Exchanges have given a marvelous platform to SMEs to not only dream big but also to achieve and attain their full potential.”

– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

Now ‘Small’ can Dream ‘Big’

The biggest advantage of SME IPO new listing at these exchanges was that the companies could dare to think ‘Big’. Before these exchanges came into being, the biggest hurdle in the growth of SMEs was lack of finance as even institutions were skeptical in offering them big loans.

By SME IPO Listing and going public, these small companies and even startups can:

1. Raise funds from Capital Market
2. Enhance visibility as well as credibility
3. Unlock the fair market value
4. Grow and expand
5. Acquire other businesses
6. Improve governance, bring transparency
7. Can migrate to main exchange with time

“Small businesses can avail big benefits by going public; it opens the doors for expansion and acquisition.”

– Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Exponential Growth of SMEs

SMEs had witnessed a gradual yet slow growth in the last 5 decades in India but this trend reversed after the SME Exchanges were set up and as a result, in the last 5 years SMEs have grown in leaps and bounds.

Today, with almost 50 million Small and Medium Enterprises in India, there is no denying of the important role that they play in the economic growth of the country.

 The SMEs have benefitted India by:

1. Providing huge employment opportunities
2. Ushering in healthy competition and growth
3. Promoting innovation and new ideas
4. Extending support to large companies
5. Helps in the development of rural and backward areas

“Today the SME sector is the most dynamic and vibrant sector in India, contributing greatly towards the economic progress of the country.”

-Shweta Gupta, Founder and CEO, MUDS

SME IPO India: Things to Know

There are certain norms laid down by the Exchanges and SEBU that needs to be taken care of and fulfilled while applying for SME IPO new listing.

5 Main Eligibility Criteria

1. The issuer company should be incorporated under the Companies Act, 1956/2013 in India.
2.   It should have a corporate website.
3. Its net worth must be positive.
4. The track record of at least 3 years should be available along with a positive net worth.

Apart from these, there are other conditions that should be met by the issuer company when going for SME IPO new listing.

1. a) There should not be any reference to the company before BIFR (Board for Industrial and Financial Reconstruction).

b)There should not be any winding up petition against the company that has been accepted by any court.

1. c) There should not be any change in the promoters of the company in the preceding one year from the date of filing the application for SME IPO listing.

“There are so many dos and don’ts to be taken care of when you are going for SME IPO listing; the best step would be to take the assistance of a reputed SME IPO listing consultant.”

– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

The procedure of SME IPO Listing

Step #1. Appointment of Merchant Banker

Step #2. Due Diligence and Document Verification

Step #3. Submission of Draft Red Herring Prospectus

Step #4. Verification & Site Visit

Step #5. In-Principle Approval

Step #6. Filings of RHP/Prospectus

Step #7. Opening & Closure of Issue

Step #8. Listing and Trading of Securities

“From pre-listing to post-listing there is numerous documentation required; seeking guidance from SME IPO consultants will help in ensuring successful listing of your company.”

– Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

SME IPO: Best Bet for Small Businesses

After the initial hiccups and teething problems, the SME IPO has now gathered momentum. The latest statistics are very encouraging and more and more companies and startups are gearing up for it.

“Spurred by investor interest, 145 small and medium enterprises (SMEs) raised a record Rs 2,455 crore through initial public offerings (IPOs) in 2018, a surge of 37 per cent from the funds raised in the preceding year.” Economic Times, 2 Jan 2019.

Mahavir Lunawat, group managing director, Pantomath Advisory Services Group throws more light on this, “A total of 145 SMEs got listed with IPOs worth Rs 2,455 crore last year as compared with 133 firms garnering Rs 1,785 crore in 2017 through the route, according to data compiled by Pantomath Research.

“Overall, a total of 474 firms have garnered Rs 5,825 crore since 2012, when leading stock exchanges- the BSE and the National Stock Exchange (NSE)- launched the SME platforms.”

Conclusion

SME IPO India is giving wings to the dreams of capital-starved SMEs, helping them grow and expand by getting access to capital through equity infusion. Enhanced credibility, improved liquidity, better governance and complete transparency: all these work towards benefitting all stakeholders.

“In the long run, SME IPO listing is a win-win situation for all involved, be it employer, employee or investor, and most importantly, the country!”

-Shweta Gupta, Founder and CEO, MUDS

The post SME Platform or SME IPO in India- Explained appeared first on MUDS.

IBC 2016: An Effective Tool for Insolvency

Insolvency and Bankruptcy Code, 2016 (IBC) has been hailed as the biggest and most ambitious piece of economic legislation of the NDA government which is undoubtedly a well-intentioned step towards economic reforms. Understandably, IBC has been welcomed by all stakeholders and as a consequence, it has witnessed great popularity in its short journey of 3 years.

Framed with an intention to provide an effective, time-bound solution to financially stressed corporates, IBC basically lays stress on working on an effective resolution plan but if it does not turn out to be feasible, then the insolvent company goes for liquidation.

270 days is the maximum time period mandated by the IBC to resolve the insolvent entity’s assets but in case, a buyer is not found within the stipulated period or the committee of creditors is unhappy with the resolution bids, then the assets of the insolvent company shall be liquidated under the guidance of the resolution professional.

Gaps in the IBC Ecosystem

IBC, which is still in its infancy, has been facing roadblocks as the ambiguities and vagueness in the Code are being exploited by unscrupulous elements. The gaps, loopholes, and discrepancies have led to litigations leading to delays, thus, eroding the very essence of the law.

One such flaw was related to the resolution applicant. A resolution applicant was originally defined under the Code as any person who submits a resolution plan to the resolution professional and hence, had a very wide category.

As there was no specific criteria or qualification defined under the Code as to who would be eligible to submit a resolution plan, a resolution applicant, thus, could be any person like a creditor, promoter, prospective investor etc.

This loophole in the law provided an opportunity to defaulting promoters to submit a resolution plan which would give them an opportunity to make a backdoor entry helping them to acquire assets of the corporate debtor at a discounted price.

“This lacuna or loophole has worked against the very essence of the IBC and defeated its purpose.”
— Anuskha (Company Secretary, MUDS Management Pvt. Ltd.)

Insolvency and Bankruptcy Code (Amendment) Bill 2017

The Insolvency and Bankruptcy Board of India (IBBI) became aware of this major gap in the procedure of resolution and liquidation and put in sincere efforts to plug in the loophole and provide complete clarity. Thus, Insolvency and Bankruptcy Code (Amendment) Bill 2017, was introduced and section 29A was included in the code.

29A mandates that any person/s who have contributed to the defaults of the corporate debtor or are undesirable due to incapacities as specified in the section or even are a ’related party’ to another defaulting party, will be ineligible to submit a resolution plan under the Code.

Thus, putting such a provision meant that all such people, who took control of the distressed company in a clandestine manner, are prevented from gaining control of the corporate debtor.

Although the amendment was well-intentioned and it did actually cover a few gaps yet, it did not bring in the desired effect as clarity was lacking at various levels. The ambit of ineligibility and disqualification was very wide and naturally caused more hurdles than relief.

Thus, the need for IBBI to rework on it arose leading to another amendment.

“Changes and amendments are inevitable to keep the Code most relevant tool of insolvency and bankruptcy.”
— Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Insolvency and Bankruptcy Code (Second Amendment) Bill 2018

An official release published recently said that the Insolvency and Bankruptcy Board of India (IBBI) has notified changes to liquidation process regulations in the Insolvency and Bankruptcy Code. These regulations have come to effect from January 6, 2020.

IBC provides time-bound and market-linked resolution process for stressed corporate but in case a resolution process does not seem feasible, then the entity goes for liquidation.

From time to time, IBC has been amended in order to smoothen the process and making the Code an effective tool for insolvency and liquidation.

This latest amendment also provides a process for a stakeholder to seek withdrawal from the corporate liquidation account.

In addition, the amendment also clarifies that a secured creditor is required to pay the excess of realised value of the asset over the amount of its claims admitted, within 180 days of the start of liquidation.

Elaborating on the specific provisions of the amendments, Mehul Bheda, partner, Dhruva Advisors LLP, says, “The amendments are introduced to bring liquidation on par with the resolution process. The restrictions placed on the promoters under Section 29A of the code are now equally applicable to liquidation. This means that no promoter, who is barred from the resolution process, can make a backdoor entry by buying the assets of the company under liquidation or even participating in a scheme of arrangement under Section 230.”

“The amendment clarifies that a person, who is not eligible under the code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to a compromise or arrangement of the corporate debtor under section 230 of the Companies Act, 2013.”

L. Viswanathan, partner Cyril Amarchand Mangaldas, explains the provision of the latest amendment as such, “The amendment to apply Section 29A to a scheme in liquidation is in line with the objective of the IBC to disallow persons who are disqualified from submitting a resolution plan from reacquiring the company through the mechanism of a scheme or in enforcement of security interests by secured creditors.”

Ineligible Creditors  Restrained

The biggest outcome of the amended regulations is that it has provided more teeth to IBC and strengthened the Code, bringing more clarity and transparency. This move shall stop the backdoor entry of those creditors who are barred from submitting an insolvency resolution plan and will restrict them from regaining control of their insolvent firms during liquidation proceedings.

This amendment lays down that a secured creditor has to contribute its share of the insolvency resolution process cost, liquidation process cost, and workmen’s dues, within 90 days of the liquidation commencement date.

  (Source: Economic Times)

In addition, the secured creditor within 180 days of the liquidation commencement date has to pay excess of realised value of the asset, which is subject to security interest, over the amount of its claims admitted.

The release further states that the assets should become part of the Liquidation Estate in case the secured creditor is unable to pay the amount to the liquidator within 90 days or 180 days,

Among other things, the amendment mandates that before an application for dissolution is submitted, the liquidator is required to deposit the amount of unclaimed dividends and undistributed proceeds in a liquidation process and also any income earned into the corporate liquidation account.

“By debarring those individuals who have defaulted on debt obligations, Section 29A of the IBC has ushered in transparency and morality in the entire insolvency process!”
— Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Conclusion

As with everything else, this amendment also has its pros and cons.

The intention of the frame workers is undoubtedly sincere and righteous as they want IBC to be true to its spirit and be hailed as an outstanding piece of legislation for insolvency and bankruptcy of corporate entities.

Talking about these amendments, the Supreme Court has described insertion of section 29A as “a ‘plugging loophole’ and has ruled that strict adherence to Section 29A is mandatory and that willful defaulters shall not be permitted to participate in the corporate insolvency resolution process.”

But on the other hand, the experts point out that although the move is aimed at weeding out defaulting promoters from regaining control of their companies at the liquidation stage, it may adversely impact the recovery chances.

The multiple layered, comprehensive standard of disqualification will surely mar the chances of some genuine resolution applicants as it covers a wide range.

Stressing that this move may lead to lower recoveries for creditors, Manoj Kumar, partner at law firm Corporate Professionals, says, “In many cases promoters have tried to get their companies back by proposing scheme of arrangements in the liquidation stage under Section 230 of the Companies Act,”

While weighing both sides, one can definitely point out that the pros outweigh the cons but the need of the hour is that decision should be taken by the courts on a case to case basis as the ultimate need is maximizing the objectives of the IBC and safeguarding the rights of all the stakeholders.

“By framing these amendments, IBBI has sought to root out this particular fallacy in the Code; hopefully this will help to expedite the process of insolvency resolution and liquidation.” 
-Shweta Gupta, Founder and CEO, MUDS

The post Insolvency Liquidation Process: Secured Creditors cannot sell assets to entities ineligible for Insolvency Plan. appeared first on MUDS.

In recent years the government of India has been putting in lots of efforts to improve the economic scenario and the ‘ease of doing business’ here and in this process has brought numerous new acts and laws or amended them accordingly.

One remarkable step into this direction is the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) which is an outstanding tool to tackle the growing number of corporate debts.

Its most significant feature is that it sets out a time-bound resolution process dealing with debts, defaults and financial failures of Corporates. Designed to provide a robust mechanism for insolvency and liquidation, it was hailed as a perfect tool by all stakeholders.

Periodical Amendments: Strengthening & Smoothening of the Code!

IBC has taken off as a great hit since its enactment but like everything that is new and untested, it is facing some teething problems. As the various provisions of the Code are put to practical use, the gaps and inconsistencies have come to the fore, which need more clarity or changes. There have been various outstanding verdicts that have triggered the need to streamline the mechanism even further.

“Thus, in its three years of the journey, there have been several instances of path-breaking changes being made through amendments in the Insolvency and Bankruptcy Code, 2016.”

— Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

New Payments Formula on the Anvil

The government has been facing lots of criticism and dissatisfaction regarding the provisions of IBC in the distribution of insolvency funds.

The unsecured lenders and operational creditors have been crying foul and to add to it, in recent months there have been some judicial verdicts that are not in line with the Code’s desired distribution priority.

Thus, to overcome the lapse and create a balance, the government is contemplating a new formula for payments to creditors of distressed companies resolved through the IBC, 2016.

Drawbacks of the Present Provision

As more and more cases of insolvency and liquidation under the Insolvency and Bankruptcy Code 2016 goes ahead, distribution of the resolution proceeds amongst all stakeholders, financial creditors, operational creditors, and unsecured lenders, has become the bone of contention.

Currently, the distribution of proceeds is decided by the Committee of Creditors (CoC) consisting of financial creditors and this has led to dissatisfaction among other creditors, lenders.

The disputes related to the distribution of funds amongst all the creditors and lenders have become the key factor for extended litigation, instead of a satisfactory closure.

As a result, some of the biggest insolvency cases have got bogged down in litigation, slowing down the insolvency process instead of speeding up as was desired after the implementation of the Code.

Reworking & Amending the Formula

Insolvency and Bankruptcy Code, 2016 is one of the signal reforms by the Modi government which has been brought about in its endeavour to hasten the insolvency resolution and clean up banks’ book.

Looking at the delays and discontent, the government is acutely aware of the serious gaps in the law and hence, it is seriously mulling tweaking the formula of the distribution of proceeds.

A senior government official, who has the knowledge of the ongoing consultations, confirms that the government intention to change the rules had come from the “highest levels of the government.”

The Corporate Affair Secretary, Injeti Srinivas, also confirmed this news while briefing reporters following a meeting between Finance Minister Nirmala Sitharaman with Bankers on IBC issues. Giving more information on the subject, he stated, “The possibility of formula-based distribution (of assets) which is fairly elaborate which can give best option and reduce litigation and reduce time for litigation with (section) 29A getting settled beyond doubt, the only litigation area essentially is who gets how much, if that can be resolved in an effective manner that could be the real thing.”

Case Study: Essar Steel

There are a few major cases that have drawn the attention of the government and the frameworks towards the lacuna or gaps in the current provisions of IBC.

One such high profile case is the ongoing Essar Steel case which at the moment is in the Supreme Court which will finally decide on the distribution of the proceeds.

Essar Steel case had been admitted in the National Company Law Tribunal (NCLT) in August 2017 and has been embroiled in legal battles till this date.

Billionaire L.N. Mittal-owned ArcelorMittal made Rs 42,000-crore bid for the debt-ridden steel manufacturer Essar, and the same was approved by the Adjudicating Authority, i.e. NCLT, in March 2019. But Arcelor Mittal’s eligibility was challenged by the original promoters, the Ruias, and they opposed approval of the plan.

The Operational creditors also gave a thumbs down to the plan owing to the discriminatory treatment meted out to them. Financial creditor Standard Chartered Bank also opposed the resolution plan on the same grounds and dragged them to the Court.

After the National Company Law Appellate Tribunal (NCLAT) ordered proportional recovery for both financial and operational creditors, the financial creditors got miffed and moved to the Supreme Court. And hence, the squabble continues, eroding the very essence of IBC, which was to usher in a time-bound and fast solution.

Government’s Concerns

Corporate Affair Secretary Injeti Srinivas, expressing the concern areas of IBC 2016 from the government’s point of view, says, “Right now, there are both financial and non-financial considerations. The non-financial considerations determine the eligibility and the financial considerations determine the outcome of the bids. So, there is a feeling that the non-financial considerations can be used for shortlisting and then for the bidding we can have auction mode.”

He also ascertained that the government is exploring different options through which to make the IBC process more unambiguous that will help minimize litigation. Elaborating on this he said, “There could be possibilities that we would examine to make it more transparent and less litigation prone, whether we can have a hybrid system where we can have the rigorous examination of resolution applicants’ eligibility in one stage and after we shortlist all eligibles, can there be an auction platform where they actually bid…that can increase confidence in the system.”

“This goes to prove that the government is exceedingly aware that IBC 2016, a law which was enacted to fast track insolvency and liquidation cases, has major discrepancies in specific areas that need to be ironed.”

-Shweta Gupta, Founder, and CEO, MUDS

New Payments Formula on the Anvil

Major Kumar, partner at law firm Corporate Professionals, points out the core concern area in providing a better deal to unsecured lenders and operational creditors, “It is important to protect the interest of operational creditors because they are very vulnerable, smaller in size and not as capable of protecting their interests but the hurdle is that because the decision making remains with secured lenders, they may try to explore other options for resolution or push the company towards liquidation.”

The government’s effort is to bring about a balance and speed up the process and for this it is in serious consultations with all stakeholders, trying to decode the gaps and work on solutions that will be effective.

As the government has been deliberating on the issue of equitable distribution of the proceeds among the creditors for quite some time, and some of the details of what changes can be made has emerged now.

Details of the Plan under Consideration

One of the proposals is that the resolution amount shall be split into two parts:

• Liquidation amount set by the valuers before the resolution is started, and
• Everything in excess of this amount.

As per this plan, it is suggested that the liquidation amount be distributed to the company’s creditors with the “waterfall” mechanism which will be in accordance with Section 53 of Insolvency and Bankruptcy Code.

This mechanism will ensure that all claims of secured financial creditors be fully paid before payments are made to unsecured financial creditors, who must, in turn, be fully paid before

Source: The Economic Times

operational creditors. The amount which will come in excess of the liquidation value shall be divided among all creditors: secured, unsecured and operational on a pro-rata basis.

A government official, who is associated with this plan, says, “One formula is that everyone has contributed to enterprise value, so up to liquidation value, secured creditors will have the first claim. Till liquidation value, Section 53 (waterfall mechanism) will apply. On the balance, everyone has a claim.”

The second formula, which is being contemplated by the government, is to set aside a fixed proportion of 5% or 10% of sale proceeds for operational creditors.

Before taking the final call, the government is awaiting judgement in the IL&FS case where the National Company Law Appellate Tribunal (NCLAT) is yet to take a decision on the proceeds from the sale of the group’s entities.

“Domain Experts are of the opinion that the formula being planned will surely help in protecting the interest of operational creditors but at the same time, it may deter the financial creditors who may explore other options for recovery.”

– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

The post IBC to bring new payments formula for Creditors appeared first on MUDS.

“Dreaming to own a home, people invested in real estate but many of the builders never delivered; promises were broken, dreams shattered!”- Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

Uneasy Relationship!

The last two decades have witnessed a tug of war between the homebuyers and the builders. The homebuyers, as allottees, relentlessly struggled against fraudulent, rogue developers, as they faced endless delays of their projects; causing financial burden and mental stress to them. 

Some of the builders duped the homebuyers’ big time and never completed the projects, thus, leaving them in a lurch. As the number of aggrieved homebuyers multiplied over the years, the number of people seeking effective relief also increased manifold.

Homebuyers get the Status of Financial Creditors!

The distressed home buyers had very few legal options as they were stuck with one-sided agreements, although some did approach Consumer Courts or regular Courts but these were a time taking procedures.

But a big win came up for them when the Supreme Court of India bestowed on them the status of Financial Creditor under the Insolvency and Bankruptcy Code, on August 9, 2019. This decision was hailed as a landmark judgment and many homebuyers took this route to seek relief.

Anurag Singh Thakur, minister of state for Corporate Affairs stated in the Parliament, “A total 1,821 cases have been filed by homebuyers against builders under the Code.”

Short-Lived Happiness!

Within a few months, news started to trickle in that the real estate developers were very upset with this development and they alleged that the homebuyers were misusing the law. Citing that these tactics were leading to a delay in project completion, the developers started to demand an amendment so that single homebuyers are blocked from approaching NCLT.

Thus, the happiness of homebuyers was very short-lived and even before they were able to get positive results by applying for insolvency of the developer, the IBC 2016 has been amended.

The Insolvency and Bankruptcy Amendment Bill (IBC), 2019, threw a spanner in the homebuyers march towards long-awaited justice as Section 3 of the said amendment has added new provisions to Section 7 of the IBC.

It states, “Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent. of the total number of such allottees under the same real estate project, whichever is less.”

“This amendment has undoubtedly turned the wheels in favor of the Real Estate Developers!” — Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Reaction to the Latest Amendment!

As was expected, the homebuyers were highly disappointed by such an amendment which states that a minimum threshold of 100 or 10 percent home buyers, whichever is lower, is required to take a defaulting developer to the NCLT for starting the liquidation process.

On the other hand, the real estate developers and builders who were asking for such an amendment, have obviously welcomed the move.

Echoing the sentiments of homebuyers’ anguish against such a discriminatory law, Piyush Singh, Partner, PSP Legal, a Delhi-based law firm, states, “Bringing a threshold just for homebuyers is arbitrary while there is no threshold for any other financial or operational creditors. Even a single financial or operational creditor (other than homebuyer) can file an application against the company with NCLT for starting of the liquidation process.”

Plea in Apex Court!

As a last resort, homebuyers moved Supreme Court and several writ petitions have been filed on behalf of homebuyers.

There are several points that have been brought out in these writ petitions against the discriminatory nature of this amendment. One of the petitions states“…Real Estate Allottees who are Financial Creditors under Section 5(8) of the IBC have been rendered remediless and have been subjected to absolute discrimination by putting a precondition/threshold in the form of the minimum number of Allottees of a particular project required for filing an application for triggering the code under Section 7 of the IBC, which is not applicable to other financial creditors under IBC.”

Furthering its stand to reveal and expose the bias that this amendment creates, the same writ petition states, “Because the Ordinance runs in complete contradiction to IBC and imposing such a precondition on the filing of the application under Section 7 of the IBC is completely against the objective of the IBC, as the pre-condition for any financial creditor to approach the adjudicating authority is quantum of the debt and not the number of financial creditors.”

Aditya  Parolia of PSP Legal, who has filed a writ petition on behalf of 11 buyers from across projects, is perplexed and astounded by the complexity of this law and feels it would erode the right of the homebuyers. He says, “The condition imposed on the buyers to file a petition under IBC is highly arbitrary. How can homebuyers be expected to put together this number and then approach the court? There are thousands of cases pending against the builders in NCLTs across the country which in the light of this Ordinance will be automatically dismissed.”

Points of Dissent!

The multiple writ petitions have objected to the Amendment and its specifications on many fronts. Some of the major grievances against it are:

1. The Ordinance is ultra vires to the Constitution of India and in violation of Articles 14 and 21 as it denies them accessing their Fundamental Rights.  
2. It amounts to the creation of a “class within a class” which is “unconstitutional and manifestly arbitrary”.
3. The Ordinance will adversely affect allottees as it has been given retrospective effect. 
4. Allottees will not only lose their money but home and the right to move NCLT too.
5. In addition to these, there are practical issues that will come in the way of homebuyers who wish to pursue insolvency against their real estate developers.

Piyush Singh, Partner, PSP Legal, a Delhi based law firm, argues against the amendment’s impracticability and points out, “Most of the applications filed with NCLT are filed in cases of under-construction projects and there is no mechanism through which a homebuyer who is willing to file an application under Section 7, to get the insolvency proceedings started against the defaulting developer, can contact other homebuyers.”

A Temporary Relief!

A Supreme Court bench comprising Justices R F Nariman and Ravindra Bhat issued notice to the government of India on petitions filed by homebuyers against the latest amendment of the Insolvency and Bankruptcy Code 2016 (IBC). This amendment has introduced a minimum threshold for filing an application with the National Company Law Tribunal (NCLT) against a defaulting developer. 

Further, taking cognizance of the homebuyers’ petitions pending in NCLTs, the Bench has ordered status quo on the matter.

Talking about the partial relief granted by the Apex Court Aditya Parolia of PSP Legal, Advocates & Solicitors, one of the representatives of petitioners, analyses this and says, “This basically means that the NCLT will have to maintain status quo with respect to the applications already filed by homebuyers and investors against defaulting developers.”

This is an interim relief and the Supreme Court will be scrutinizing the legality and constitutional validity of this amendment based on the facts presented by both: the government and the homebuyers!

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Optimistic Expectations!

The words of Abhay Upadhyay, president, Forum for People’s Collective Efforts, a Kolkata-based consumer body, very aptly sums up the expectations of all the aggrieved Homebuyers.

Abhay says, “The amendment that has been brought by the central government despite our objections is definitely unfair for the homebuyers. Now that the matter has moved to the Supreme Court, we hope that the Supreme Court will take cognizance of this issue and will give appropriate directions to the central government,”

Read More: Loan Recovery Agents in India

Way Forward!

As the matter is now in the Apex Court, the homebuyers are hopeful of a favorable judgment as they feel they have a strong case against this amendment.

For the time being the status quo by the Supreme Court is being looked upon as a relief for those homebuyers who have their insolvency applications pending in the NCLT.

Which way things will go will depend on the facts and arguments presented by both sides and also how the Bench perceives it.

If the Court is convinced of the fundamental flaws, as being pointed out by the homebuyers’ multiple petitions, then obviously the order will come in favor of the aggrieved homebuyers.

The point of concern still is in favor of the homebuyers, who have lost money, mental peace, and facing the extra burden of home loan repayments.

What is needed in this hour of crisis is that the real estate developers understand their responsibility and deliver as they have promised.

A fair deal is what the homebuyers are demanding, and if that is delivered, then there is no need for them to approach NCLT or any other legal recourse!

“In this ‘wait and watch’ situation all reasonable stakeholders are hopeful that the Supreme Court will take note of the blatant discrimination against the homebuyers and rectify it!”
-Shweta Gupta, Founder and CEO, MUDS

The post Homebuyers file plea in Supreme Court challenging IBC’s latest Amendment appeared first on MUDS.

In its objective to usher ineffective economic reforms, the government passed the Insolvency and Bankruptcy Code, 2016 (IBC). This was hailed as a positive step by all stakeholders as it shifted the focus from ‘debtor in possession’ to the much needed ‘creditor in control’ when dealing with debts, defaults and financial failures of Corporates.

IBC 2016 is a comprehensive Act that has helped in doing away with all overlapping regulations that were put to practice previously, like Sick Industrial Companies, 1985 and the Companies Act, 2013, etc. The implementation of the IBC Code has established a robust market mechanism leading to timely and time-bound resolution of corporates in distress.

In its short journey of 3 years, IBC 2016 has turned out to be on the right track as it has churned out the recovery of Rs 70,000 crore in the current fiscal year, thus, leaving a remarkable impact on the corporate ecosystem.

Dire need for Group Insolvency regulations!

There is no doubt that IBC 2016 has provided a well founded platform that has smoothened corporate insolvency but in recent years a dire need has arisen to create a holistic group insolvency framework.

Market data by Credit Suisse brings to light that a considerable percentage of Indian businesses are designed as closely connected group organizations, but operate as a single economic unit. While these companies mostly function as a legal independent entity yet their interdependence exists in matters like common proprietors, common directors, common controls and shared assets, inter-corporate loans etc.

“The interlinkages of these individual units largely work well for the group as a whole but the real problem arises when some of them become insolvent.” Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)

Right now IBC 2016 lacks a consolidated mechanism to deal with insolvency of associate or subsidiary companies of a group as one. There have been many instances where many companies of the same group have committed a default and eventually, had to be consolidated into one proceeding by the Courts and Adjudicating authorities.

The trigger points!

These are some companies which have given ample reason for the need of a holistic regulation as regards to insolvency of groups.

1. SBI v. Videocon: Recently, the adjudicating authority under the IBC, Hon’ble National Company Law Tribunal (NCLT) Mumbai Bench pronounced order of consolidation of the liabilities and assets of 13 group entities of Videocon.

2. Edelweiss ARC v. Sachet Infrastructure: In this instance, the adjudicating authority has mandated that all the 5 companies, which were working as a consortium and promised to develop a residential plotted colony, shall be treated as one. The court has appointed a single Resolution Professional who will work on a common resolution plan for all the individual entities of this group.

3. Corporation Bank v. Amtek Auto Limited: In a similar instance, independent companies of Amtek group like Metalyst Forgings Limited, Castex Technologies Limited, ARGL Limited, all were clubbed together by the adjudicating authority.

Apart from these there are hundreds of groups of companies like Lanco, Amrapali, Jaypee, Infrastructure Leasing & Financial Services Limited, etc. which are facing group insolvency.

Framing of Working Group on Group Insolvency

In order to overcome these flaws which caused immense practical problems, the Insolvency and Bankruptcy Board of India decided to take some concrete steps to streamline coordinated and synchronized group insolvency.

The first step in this direction by the Bankruptcy Board of India was to constitute a Working Group on Group Insolvency vide office order No. IBBI/CIRP/GI/2018-19/001 dated 17th January 2019.

This Working Group comprising of 11 eminent members working under the able guidance of the Chairmanship of former SEBI chief UK Sinha, submitted ‘Report of the Working Group on Group Insolvency’ on September 23, 2019. 

“The Working Group has presented a blue-print of the group insolvency framework that has been based on extensive consultations with all stakeholders and domain experts.”- Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Salient Points of Working Group on Group Insolvency

In the letter presented along with the submission of the Report presented by the Working Group, UK Sinha, the Chairman of the group stated, “The thrust of the framework is ‘facilitation’, ‘flexibility’ and ‘choice’. It envisages an enabling group insolvency framework, to be implemented in a phased manner. The first phase may facilitate procedural coordination of only companies in domestic groups. Cross-border group insolvency and substantive consolidation could be considered at a later stage, depending on the experience of implementing the earlier phases of the framework, and the felt need at the relevant time.”

The key recommendation of the Working Group touches on all important aspects of insolvency and liquidation of a corporate group.

1)  Identifying the Group: The Working Group has proposed identification of ‘Group’ based on three factors:

1. Firstly, it is important to establish the mutual relationship shared by the companies; identifying them as per the Companies Act, 2013 whether the company is a holding, subsidiary or associate company of a group.
2. Secondly, the company should fall under the category of fulfillment of commencement standard, i.e., it must have committed a ‘default’ as defined under section 3(12) of the IBC Code, 2016. This is a mandatory clause as the Working Group has recommended only insolvent companies to be taken into consideration for the purpose of group insolvency 
3. Thirdly, it is essential to establish that the company in question is a domestic company as groups having overseas ventures are not included in the first phase of the recommendations of the Working Group.

Thus, the Working Group’s recommendation lays stress on two basic ingredients:

• Ownership
• Control

2) Scope of Grouping: WG has set down three rules that will guide the group insolvency mechanism.

(i) Procedural Coordination Mechanisms (PCM):  A set of rules that will work towards coordinating the ‘procedures’ of insolvency but at the same time keeping the assets of each group company separate.

(ii) Substantive Consolidation Mechanism (SCM):  This refers to consolidation of assets and liabilities of different group companies for the purpose of reorganization or distribution in liquidation, in case of being treated as a part of a single insolvency estate.

(iii) Rules dealing with perverse behavior of Companies: This lays down rules for corporate groups, enabling the creation of mechanisms to recapture assets subject to prejudicial transactions between group members, additionally impose liability on group companies for each other’s debts, etc.

The Working Group has recommended the implementation of PCM in the first phase.

3) Mechanism involving Grouping: Elaborating on the procedural coordination mechanisms, WG recommends that there should be flexibility in applying these mechanisms and should not be initiated in those cases where they don’t help maximise value of assets or lower costs of proceedings.

Further, it recommends that in the cases where it is implemented the Insolvency Professionals, CoCs and Adjudicating Authorities should cooperate, communicate and share information with each other, ensuring benefits like:

• Reducing the time taken in proceedings,
• Lowering costs by not duplicating efforts to collect information, and
• Promoting information symmetry.

Thus, these steps need to be followed for Group insolvency:

1. Joint Application: By making a joint application, the applicants shall be saving on the expenses of multiple applications.
2. Common Adjudicating Authority (AA): Continuing with its efforts to save time, money and efforts, the Working Group recommends one Adjudicating Authority. This can be taken up by the AA who has admitted the first application to commence the CIRP of any company in a group.
3. Common Insolvency Professional: Going ahead in the same direction, the Working Group recommends that the adjudicating authority should appoint a single insolvency professional for group insolvency.
4. Group Committee of Creditors: Working Group states that formation of group creditors’ committee will undoubtedly result in a coordinated negotiation yet, the decision must be left at the discretion of Committee of Creditors of each company.

4) Framework Agreement: The Working Group recommends a Framework Agreement for the group coordination proceedings and it shall have approval of the CoC of each participating company.

The Framework Agreement should include:

• Group Coordinator
• Opt-Out Option
• Common Resolution Plan
• Adjudicating Authority
• In case of liquidation

5) Timeframe: The Working Group has recommended that the entire resolution process shall not exceed 420 days; this is inclusive of additional extension of period up to 90 days.

Conclusion

This move, undoubtedly, will channelize the intricacies of Group Insolvency and assist the Bankruptcy Board to tackle Group Insolvency effectively and efficiently. When the recommendations of the report submitted shall be adopted and implemented, it will ensure immense benefits for all stakeholders: saving time, money and efforts.

The Working Group has recommended the implementation of group insolvency in a phased manner; this will help in understanding and decoding the various aspects better. With time the gaps or flaws will be evident and then they can be worked upon to streamline the entire process. A cautious yet progressive approach, as suggested by the Working Group, will help the Bankruptcy Board in framing an effective regulation for Group Insolvency.

“The necessity of a synchronized and coordinated regulation for Group Insolvency has been felt essential at numerous times by different agencies, and thus, framing concrete rules for a smooth resolution is a very welcome move.”
-Shweta Gupta, Founder and CEO, MUDS

The post Bankruptcy Board Set to Tackle Group Insolvency appeared first on MUDS.

Bankruptcy as the term implies refers to the legal status of a person or entity wherein it is unable to repay the debts of its creditors. In other words, bankruptcy is a legal process for liquidating the business when the existing debts cannot be paid out of the available current assets. Bankruptcy is not the only legal status that an insolvent may seek.

In common parlance often the terms bankruptcy and insolvency are used interchangeably. Though we use these terms interchangeably these terms have their distinct meanings and thus these terms cannot be used as synonyms for one another.

Insolvency refers to the stage wherein a person is unable to repay the money borrowed from a person or company within the due time on account of the unavailability of sufficient assets that can be liquidated to repay the debt burden. Going by the interpretation of the term insolvency, it is only a stage of inability to honor the debts due and not an ultimate status of being bankrupt. When the stage of being insolvent is not monitored strictly then such untapped stage of insolvency ultimately leads to the attainment of the status of being bankrupt. Bankruptcy is the end result of the continued flow of insolvency.

“The principal focus of insolvency & bankruptcy legislations is not to eliminate the insolvent or bankrupt entities instead its main focal zone is to remodel the financial and organizational structure of debtors who are at the moment battling with financial hardship thereby permitting rehabilitation and continuation of their businesses.”

The provisions relating to the insolvency and bankruptcy of individuals and partnerships are enshrined in part III of the Code. On reading part III of the Code we shall witness the provisions targeting bankruptcy order for individual and partnership firms outlined in Chapter IV.

On this note, an application for bankruptcy of the debtor may be made by the creditor(s) or by the debtor himself to the adjudicating authority in the prescribed circumstances. Once the application is filed an interim moratorium shall commence on the date of making the aforesaid application and thereafter come to an end on the bankruptcy commencement date. During the course of the interim moratorium, there shall be a stay on all the pending legal actions or legal proceedings in respect of the debts of the debtor. An insolvency professional as proposed by the debtor or creditor shall be appointed as bankruptcy trustee by the adjudicating authority on the recommendation of the board. After the appointment of the bankruptcy trustee, the adjudicating authority shall make a public notice for inviting claims from creditors.

Once claims are received from the creditors the bankruptcy trustee shall register the received claims and thereafter prepare a list of creditors. After the list of creditors is compiled by the bankruptcy trustee he shall make endeavors to summon and convenve meeting of the committee of creditors. The bankruptcy trustee shall conduct the administration and distribution of the estate of the bankrupt and on the completion of the same, the bankruptcy trustee shall apply to the adjudicating authority for the discharge order. The discharge order shall release the bankrupt from all the bankruptcy debts.

On the interpretation of chapter IV of Part III of the Code, we are of the view that “all creditors taking part in the bankruptcy process would have to donate the respective security interest that is in possession of each of them towards the bankruptcy estate that is created for all the creditors. Once a bankruptcy order is passed, the created bankruptcy estate shall be divided in the prescribed order as mentioned in the relevant Section.” By this action, the process tends to cover more creditors in an effective and synchronized manner.

The Code seems to continue to follow in the footsteps in the same direction thereby protecting creditors by granting creditors enhanced powers along with ensured speedy resolution as highlighted in the preamble of the Code.

Abhishek Jain at MUDS is of the opinion that “Bankruptcy is a serious decision people have to make. Bankruptcy is the legal proceeding in which the debtor puts all his money in his pants pocket and thereafter handovers the coat to the creditors. The status of being bankrupt is temporary because it’s a wise way to regroup and bounce back again with clean hands to continue the business.”

After interpreting the term bankruptcy and thereafter having to gain the insight into the bankruptcy process for individuals and partnership firms in brief it’s time to head toward understanding the entire bankruptcy process for individuals and partnership firms in detail and at length.

Application for Bankruptcy

The application for bankruptcy can be made only in the below-mentioned scenarios:

• On rejection of application for initiating the insolvency resolution process.
• Where the proposed repayment plan is rejected by the adjudicating authority.
• In the scenario where the repayment plan as approved could not be implemented in its entirety due to which it ended prematurely.

The application for bankruptcy is required to be filled within a time span of three months from the date of receipt of the order in any of the aforesaid scenarios. On this note, the application for initiating the bankruptcy process may be filed by the creditor either solely or in consortium with other creditors or by the concerned debtor himself to the respective adjudicating authority.

Application by Debtor

The debtor may on a voluntary basis approach the concerned adjudicating authority for seeking a bankruptcy order if it meets any of the aforesaid scenarios. In the case where the debtor is a firm then in such a state, the application for bankruptcy may be filed by either of the partners of such firm. The application as filed by the debtor shall be in the form as prescribed in the Code thereby incorporating within itself the prescribed annexures as are highlighted in the Code. During the course of making an application for obtaining a bankruptcy order, the debtor may also propose the name of an insolvency professional who shall on the admission of application for bankruptcy act as bankruptcy trustee. It is crucial to note that once an application is filed for obtaining a bankruptcy order then it cannot be withdrawn without the express permission of the concerned adjudicating authority.

Application by Creditor

Creditors may make an application on suo motto basis for seeking a bankruptcy order against the debtor. The application by the creditor shall be in the prescribed format as prescribed in the Code supported by the required annexures as listed in the section. The application for bankruptcy if made by a secured creditor shall be accompanied by a few additional annexures. The creditor shall at the time of making the application for initiating bankruptcy process thereby propose the name of an insolvency professional who shall act as bankruptcy trustee to convene the entire process of bankruptcy. In the scenario where a debtor is a deceased person then an application for bankruptcy may be made against the legal representative of the debtor.

Interim Moratorium

Once an application for bankruptcy is filed by the debtor or creditor, an interim moratorium shall come into effect from the very date on which the application is made and shall cease to be in effect on the bankruptcy commencement date. During the course of the interim moratorium all pending legal actions, as well as legal proceedings, shall remain inoperative. The creditors shall also have no power to initiate any fresh legal proceedings or legal actions against any property of the debtor in relation to their pending debts. In the scenario where the debtor is a firm then in such a situation, the interim moratorium shall be applicable on all the partners of the firm who are its partners as on the date on which application is made against the firm.

Appointment of Bankruptcy Trustee

The bankruptcy trustee is the sole driver of the entire bankruptcy process. The entire series of proceedings for seeking bankruptcy orders are monitored by the bankruptcy trustee. On this note a bankruptcy trustee is appointed whose primary task is to monitor and carry forward the bankruptcy process in a smooth and efficient manner. The bankruptcy trustee is no other but an insolvency professional who is registered with the Board and insolvency agency to act as insolvency professionals. The insolvency professional to act as bankruptcy trustee can be appointed in either of the below-mentioned manners:

Pre Proposed

Where the insolvency professional is already proposed by the creditor or debtor at the time of making an application for bankruptcy then in such a scenario the adjudicating authority shall direct the board to verify that there prevail no pending disciplinary proceedings against the proposed insolvency professional. The above verification shall be directed by the adjudicating authority to the board within a span of seven days to be counted from the date on which it receives the application for bankruptcy. On receipt of the aforesaid direction, the board shall with a period of ten days communicate its findings in writing thereby confirming or rejecting the appointment of the proposed insolvency professional as bankruptcy trustee. If the board rejects the appointment of the proposed insolvency professional then it shall nominate another insolvency professional who shall act as bankruptcy trustee.

By Adjudicating Authority

If the name of insolvency professional is not proposed by the debtor or creditor in the application for bankruptcy then in such a case the adjudicating authority shall instruct the board to nominate an insolvency professional to act as bankruptcy trustee. The above instruction shall be made within a period of seven days from the date of receipt of an application for bankruptcy. The board shall on receipt of the above instruction nominate an insolvency professional to act as a bankruptcy trustee within a period of ten days of receipt of instruction form the adjudicating authority.

The bankruptcy trustee as pre-proposed or nominated by the adjudicated authority shall be duly appointed by the adjudicating authority as a bankruptcy trustee to head forward the bankruptcy process in a time-bound manner.

Bankruptcy Order

Once confirmation or nomination of the bankruptcy trustee is received by the adjudicating authority it shall thereafter within a period of fourteen days pass bankruptcy order. On passing the bankruptcy order the adjudicating authority shall forward the copy of the application for bankruptcy along with a copy of the bankruptcy order to the bankrupt, creditor, and the bankruptcy trustee.
The bankruptcy order as passed by the adjudicating authority shall remain in force till the debtor is ultimately discharged of his debts via discharge order. The bankruptcy order if passed against the firm shall have an effect on all individuals of the firm who are its partners as of the date of passing of the order.

On the passing of the bankruptcy order the estate of the bankrupt shall stand transferred to the appointed bankruptcy trustee and later the formed estate shall be distributed among the creditors. The creditors shall not initiate any fresh legal action or proceedings against the debtor or against his property without the prior approval of the adjudicating authority.

Statement of Financial Position

In the scenario where an application for bankruptcy is filed by the creditor and thereafter on the passing of bankruptcy order by the adjudicating authority, the concerned bankrupt debtor shall furnish a statement of his financial position within a span of seven days from the bankruptcy commencement date. The statement shall be in accordance with the prescribed format as prescribed in the Code. Where the bankrupt is a firm then a joint statement of financial position shall be submitted by the firm along with individual statements from each of the partners.

Invitation of Claims from Creditors

Within ten days from the bankruptcy commencement date, the adjudicating authority shall issue a public notice thereby inviting claims from creditors as are highlighted in the statement of financial position as furnished by the bankrupt or in the application for bankruptcy as filed by the bankrupt. The public notice shall specify the last date by which the claims may be submitted by the creditors. The public notice inviting the claims from creditors shall be published in one English and one vernacular language newspaper; affixed in the premises of the adjudicating authority and also uploaded on the website of the adjudicating authority.

Registration of Claims

The creditors shall get their claims registered with the bankruptcy trustee within a period of seven days of the publication of the notice for submitting claims. The creditors shall submit their claims to the bankruptcy trustee in the format as prescribed in the Code along with the required annexure that shall form part of the application for claim registration.

Preparation of List of Creditors

The bankruptcy trustee shall come into the active role by compiling a list of creditors within a period of fourteen days to be counted from the start of the bankruptcy commencement date. The list of creditors shall be compiled keeping into account the information disclosed by the bankrupt in the bankruptcy application as submitted or in the statement of financial position as furnished later on and from the claims received from the creditors.

Convening Meeting of Creditors

Within a period of twenty days from the bankruptcy commencement date, the bankruptcy trustee shall therein issue a notice calling meeting of creditors. The notice of the meeting shall be sent to all the creditors whose name is covered in the list of creditors as prepared by the bankruptcy trustee. The notice shall highlight the date of meeting of the creditors which shall not be later twenty-one days from the bankruptcy commencement date. Once summoned the meeting of creditors shall be conducted by the bankruptcy trustee. The quorum for the aforesaid meeting shall be decided by the bankruptcy trustee and the summoned meeting shall be convened only in the presence of the required quorum. The minutes of the said meeting shall be prepared and recorded by the bankruptcy trustee. The voting share shall be determined by the resolution professional in the prescribed manner as mentioned in the Code.

Administration and Distribution of Estate of  Bankrupt

From the very date of appointment of the insolvency professional as a bankruptcy trustee, the estate of the bankrupt shall vest or rather be monitored by the appointed bankruptcy trustee. The bankruptcy trustee shall take under his hands the possession and overall control of the property and all other documents of the bankrupt that have a linking with the estate of the bankrupt. The bankruptcy trustee is empowered to claim any after-acquired property by serving a notice to the bankrupt which shall thereafter form part of the bankruptcy estate.

In the scenario where the bankrupt is a deceased person then the bankruptcy trustee shall ensure that claims made by the legal representative for funeral and testamentary expenses for the deceased are honored. The above claim shall rank parallel to that of the secured creditors in the distribution hierarchy. If after administration of the deceased bankrupt’s estate any surplus remains in the possession of the bankruptcy trustee then that available surplus shall be paid to the legal representative of the deceased bankrupt.

After compiling the list of the creditors the bankruptcy trustee shall via notice invite proof of debts from the creditors covered under the compiled list of creditors within a span of fourteen days. The proof debts as submitted by the concerned creditor shall be in the prescribed format and supported by the required annexures.

There may be a situation in which the bankruptcy trustee may have sufficient liquid funds in his hands than in such a state he may declare and distribute the available surplus as interim dividend among the creditors in proportion to the proved bankruptcy debts. At the time of declaring the aforesaid dividend, the bankruptcy trustee shall provide the notice for the same in the prescribed format to all the creditors to whom such the dividend shall be distributed.

In the scenario where the bankruptcy trustee has realized the entire estate of the bankrupt then in such a state, he shall give notice of his intention to declare a final dividend or that no dividend or further dividend shall be declared. If the bankruptcy trustee is of the opinion of declaring a final dividend then he shall declare and distribute the dividend among the creditors who have proved their debts. After the distribution of dividend and making the payment along with interest to all creditors there remains a surplus then the bankrupt shall be entitled to such surplus.

During the course of the administration and distribution of the estates of the bankrupt if there come up any creditors who have not proved their debts prior to the declaration of dividend then these creditors shall not be eligible for hindering the ongoing bankruptcy process. If the concerned creditor is able to prove his claim then in such case he shall become eligible to receive the dividend. Where the bankruptcy trustee fails or denies to pay dividends to the creditor then the concerned creditor may approach the adjudicating authority for seeking action against the bankruptcy trustee. On approaching the adjudicating authority, the adjudicating authority shall pass an order directing the bankruptcy trustee to pay the dividend or make payment of interest along with the cost incurred by the concerned creditor to obtain an order out of his own pocket.

At the time of distribution of final debts, there are various debts that shall rank on priority as against the other debts. On this note the hierarchy or priority order highlighted in the Code is as follows:

Firstly the costs and expenses as are incurred by the bankruptcy trustee during the course of the bankruptcy process shall be paid off in full.

Secondly the workmen’s dues for the preceding twenty-four months to be accounted for from the bankruptcy commencement date and the debts owed to secured creditors on a pari passu basis.

Thirdly the wages and pending dues of the employees other than workmen during the course of the preceding twelve months to be calculated from the bankruptcy commencement date.

Fourthly pending dues if any of the central or state government during a period of two years from the bankruptcy commencement date.

Lastly all other dues and debts owed by the bankrupt as well as unsecured debts.

The glimpses of the priority order in which the payments and distribution of the estate of the bankrupt shall me made as described aforesaid are highlighted below.

Completion of Administration

On completion of the administration and distribution of the estate of the bankrupt, the bankruptcy trustee shall convene a meeting of the committee of the creditors. The bankruptcy trustee shall furnish forth the committee of the creditors’ report of the administration and distribution of the estate of the bankrupt. The committee of creditors shall within a period of seven days of the receipt of the report approve the report as submitted by the bankruptcy trustee.

Discharge Order

After the competition of the administration, the bankruptcy trustee shall approach the adjudicating authority for seeking a discharge order. The bankruptcy trustee shall on the expiry of one year from the bankruptcy commencement date or within seven days of approval of the committee of creditors on completion of administration file an application for the discharge order. On receipt of the application, the adjudicating authority shall pass a discharge order. On obtaining the discharge order the bankrupt shall be discharged from all his pending bankruptcy debts.

Modification/ Recall of bankruptcy order

At any time after passing of the bankruptcy order the adjudicating authority may either on receipt of an application or on suo motto basis modify or recall the passed bankruptcy order irrespective of the fact as to whether the bankrupt is discharged or not. The modification or calling back of order can only be made in selective scenarios. On this note the scenarios in which the passed order can be modified or recalled are as under:

1. In cases where an error is clearly evident by viewing the order.
2. Where bankruptcy debts as well as the expenses in relation to bankruptcy have either been paid off or are secured as per the satisfaction of the adjudicating authority.

In the scenario where the bankruptcy order as passed is modified or recalled by the adjudicating authority then any sale or alienation of property or payments made by the bankruptcy trustee shall be valid. It is important to note that the property as disposed of post-discharge order shall remain in possession of the person whom adjudicating authority shall appoint and in case of non-appointment of any person it shall vest back to the bankrupt on such terms as the adjudicating authority deems fit.

The modified order as passed after the passing of the original discharge order shall be applicable to all the creditors whose debts remain due thereby forming a part of the bankruptcy process.

By having a glance at the above described brief process it is evident that bankruptcy gives a possible way to the bankrupt to cope and renovate himself. It depends on the decision of the bankrupt as to what he decides in such a situation. Bankruptcy is a situation that can be resolved by being calm and controlling the finances which will thereby act as the greatest stress reliever. It is a one-time situation that can be tapped if detected within due time.

People wait until the last minute to approach the bankruptcy lawyer’s office because they don’t want to be in the bankruptcy lawyer’s office. We at MUDS hope that people recognize that bankruptcy is still an option for them and that the only requirement is that the bankrupt needs to be proactive and vigilant in resolving the bankruptcy as early it can be done.

Hope this blog was informative in providing a deep insight into the bankruptcy process for individuals and partnership firms. Stay connected with MUDS for more updates.

The post Bankruptcy for Individuals & Partnership Firms appeared first on MUDS.

The Insolvency and Bankruptcy code is a landmark piece of legislation providing a facelift to the existing regime in the areas of restructuring and the insolvency and bankruptcy in India. The code provided the biggest missing piece in the existing jigsaw of laws by establishing a framework for time-bound resolution for defaulting debts. Today after the implementation of the code, India now has an insolvency and bankruptcy framework which is comparable with international standards. The journey of the code is long-lasting as the code will go a long way in bringing an element of certainty and predictability to commercial transactions in the country thereby providing Ease of Doing Business.

Part III of the code deals with the insolvency resolution and bankruptcy for individuals and partnership firms, where the amount of default is not less than Rs.1, 000. The adjudicating authority of insolvency resolution for the individual and partnership firms would be the Debt Recovery Tribunal (DRT).

The fresh start process is enshrined under Chapter II of Part III of the code. The fresh start process an opportunity for a debtor who is unable to pay his debts to clear off his debts in a time-bound manner on fulfilling the prescribed condition for the fresh start of his qualifying debts. Since the essence of the code is to have a time-bound process and so on this note the time lag for completion of entire process of fresh start is 180 days, to be counted from the date of admission of application for the fresh start process.

“The intent of fresh start process to provide debtors with comparatively small debts a chance to discharge off their debts and restart afresh without any liability. The fresh start process is an alternative to the insolvency and bankruptcy processes. To prevent and curb the abuse of this debtor centric process, the code has aligned certain restrictions on the applicability and validity of fresh start process.”

For availing and undergoing the fresh start process, the first step is to satisfy the essential prerequisites related to fresh start process. Once all the prerequisites are met, an application may be submitted either by the debtor himself or by the resolution professional on behalf of the debtor. Pursuant to this, the code provides for an evaluation of the application by resolution professional, followed by a decision on its acceptance or rejection by the Debt Recovery Tribunal within 14 days of receiving the resolution professional’s recommendations on the application.

Where the application is accepted by the DRT, the code provides for legal protection from both current as well as future legal proceedings against the applicant/debtor for a period of 180 days from the date of admission of application. However, importantly the code provides the creditors in such a situation that bestows on them a right to object any of the facts/grounds listed in an accepted application for fresh start.

Such objections shall be submitted by the creditors to the resolution professional who shall then evaluate the accuracy and the importance of such objections. During the process, the resolution professional shall act as the main point of communication between the parties involved (Debtor/Creditor) and DRT. In the event of any change in financial circumstances which could make DRT change its decision on whether to accept or reject the initial application, then it shall be the duty of resolution professional to ensure that DRT is informed of the relevant change.

Finally after resolution professional has reviewed all the qualifying debts and compiled a final list of these qualifying debts then the DRT shall pass on order to discharge the debtors from all of the obligations with respect to these debts. Once the order is passed, then the fresh start process shall ultimately come to end thereby providing much-needed relief to the small-time debtors.

Having gained an insight into the Fresh Start Process now, let’s move on to the detailed aspects of the Fresh start Process.

Who can make an application for Fresh Start Process?

An application for a fresh start process may be made by a debtor either personally by him or through a Resolution Professional on the grounds of being unable to pay his debts. The application for the Fresh Start Process can only be made after satisfying the prerequisites as mentioned in the chapter for initiating the fresh start process.

Prerequisites for filing Fresh Start Process

For initiating an application for Fresh Start Process the concerned debtor is required to satisfy the below-mentioned prerequisites prior to filing an application for initiating Fresh Start Process. The prerequisites to be kept in mind and complied prior to filing an application for Fresh Start Process are as follows:

• The gross annual income of the debtor should not exceed sixty thousand rupees ;
• The aggregate value of the assets of the debtor should not exceed twenty thousand rupees ;
• The aggregate value of the qualifying debts should not exceed thirty-five thousand rupees ;
• The debtor should not be an undischarged insolvent ;
• The debtor should not own a dwelling unit ;
• No fresh start process, insolvency resolution process or bankruptcy process should be effective against the concerned director; and
• No fresh start order under the provisions of this chapter should have been made in relation to the debtor at any time during the previous twelve months to be counted from the date of making an application for the fresh start process.

Filing of application for Fresh start Process

The debtor on satisfying the above-mentioned prerequisites may make an application for fresh start process. The application for the fresh start process shall be in the prescribed form and supported by fees as prescribed in the appended regulations to the Code. The application for fresh start process shall contain the following annexures duly supported by affidavit:

• Statement of debt owed by the debtor containing the name of the creditor to whom such debt is owed along with the amount of such debt and interest.
• Amount of interest to be paid along with the rate of interest thereon.
• The statement containing details of securities that are held in respect of the debt.
• Financial details of the concerned debtor as well as of his family for two preceding years to be counted from the date of application for a fresh start.
• Personal details of debtors as may be required
• Detailed explanation for making an application for a fresh start
• Details of legal proceedings, if any that have been commenced against the concerned debtor
• Confirmation that no prior fresh start application had been made in relation to the debts of the concerned debtor at any time during the previous twelve months to be counted from the date of this application.

Interim Moratorium

On the filing of an application for Fresh start process, an interim moratorium period commences from the date of filing such application and comes to an end on the date of admission/rejection of the said application.

It is important to note that during the course of the interim moratorium, no legal proceedings or suits in respect to any debt shall be in execution or in words there shall be a stay on all such operations. Also, no creditor shall have authority to initiate any legal proceedings in respect of any pending debts during the interim moratorium period.

Appointment of Resolution Professional

Resolution Professional is a key person under the Insolvency and Bankruptcy process. He is the sole person who drives the various processes as enshrined under the Code. On this note the appointment of Resolution Professional is as follows:

Application filed by debtor through Resolution Professional

On an application being filed by the debtor via the resolution professional, the Adjudicating Authority shall direct the board to conduct a background check of the resolution professional through whom the application was filed on behalf of the debtor. The Adjudicating Authority shall make the aforesaid direction within seven days to be counted from the date on which it receives application for fresh start as filed by debtor via resolution professional. The board after conducting the background check shall communicate its findings in writing to the adjudicating authority stating whether to confirm the appointment of the resolution professional or reject the resolution professional via whom application was filed and thereby nominating another resolution professional.

Application filed by debtor himself

Debtors can also voluntarily initiate a fresh start process by filing an application themselves without the assistance of resolution professional. In such a situation the Adjudicating Authority shall within a period of seven days direct the board to nominate a resolution professional, to continue the fresh start process. On receiving the aforesaid directions from the Adjudicating Authority, the board shall after verifying nominate appropriate resolution professional with a span of ten days.

In either of the above-mentioned ways of appointment of resolution professional, the adjudicating authority shall vide its order appoint the concerned resolution professional who was recommended or nominated by the board.
Once a resolution professional is appointed to continue the fresh start process, he shall be provided a copy of the application for a fresh start as was filed prior to his appointment.

The actual process of fresh start commences after the appointment of Resolution professional as he is the concerned person to drive forward the process flow in an efficient and time-bound manner.

Examination of application by Resolution Professional

On receipt of application as filed by the debtor, the resolution professional shall commence a detailed examination of the application within a time period of ten days to be counted from the date of his appointment. The resolution professional shall after examining the filed application compile a report of his findings which shall be submitted by him to the Adjudicating Authority thereby recommending the acceptance or rejection of the filed application.

The report as compiled by the resolution professional shall incorporate the details of the amount as were mentioned in the application which in the opinion of the resolution professional both qualifying debts and liabilities which are eligible for discharge.

For compiling the report, the resolution professional is free to demand any additional information or explanation from the concerned debtor or any other person that is useful or required for drafting of the report. On receipt of request from resolution professional, the requisitionists shall provide the demanded information or explanation within seven days.

The resolution professional shall after examining the filed application and thereafter compiling his report arrive at a decision highlighting whether to accept or reject the application as filed and quote the same in his report to be served to the Adjudicating authority.

The Decision of the Adjudicating Authority

Once the report as compiled by the resolution professional is received by the Adjudicating Authority, it shall pass an order either admitting or rejecting the application. The order shall be passed within fourteen days from the receipt of the report as compiled by the resolution professional.

The order passed which admits the application filed shall clearly mention the amount which is accepted as qualifying debt based on the report drafted by resolution professional along with the amounts which are eligible for discharge via fresh start process.

The copy of the order as passed by the adjudicating authority shall be provided to the creditors highlighted in the application within a period of two days to be counted from the date on which order is passed along with a copy of the application as filed by the debtor.

Moratorium

Once the application for fresh start as filed is admitted by the adjudicating authority then the moratorium period shall commence from the very date on which the application was admitted and shall remain effective till a period of one hundred and eighty days.

During the course of the moratorium period, there shall be a stay on all the pending litigations in respect of debts. The creditors shall also remain powerless to initiate any proceedings in respect of any debts.

Objection by Creditors

Creditors have been kept in a favorable state in the Code. Creditors have been granted the power to raise objections against the order of adjudicating authority in relation to admission or rejection of application for fresh start process. In this regard the creditors as are mentioned in the order admitting or rejecting the application may if they feel necessary raise objection only on the prescribed grounds within a span of ten days which shall be counted from the day on which creditors receive the order passed by adjudicating authority.

The creditors shall file their objection via an application to resolution professional. Once objections are filed by the creditors, the resolution professional shall thereafter examine the objections raised and thereby decide whether to accept or reject the objections raised. The decision shall be made by resolution professional within a period of ten days to be counted from the data on which the application was received by him. Once objections are examined the resolution professional shall prepare an amended list of qualifying debts for seeking a discharge order.

Application against decisions of Resolution Professional

The aggrieved debtor or creditor may file an application with the adjudicating authority against the decision of the resolution professional within duration of ten days from the date on decision as taken by adjudicating authority. On an application being filed, the adjudicating authority shall decide its opinion within a period of fourteen days and thereby make order as it deems apt.

Replacement of Resolution Professional

Where the debtor or creditor is of the view that the resolution professional appointed to drive the fresh start process is required to be replaced then in such a situation the concerned debtor or the creditor may approach the adjudicating authority for replacement of appointed resolution professional.

On receipt of application for replacement of resolution professional the adjudicating authority shall within seven days make seek reference from board for replacement of resolution professional. Once the board receives the reference as made by the adjudicating authority it shall within ten days recommended to the adjudicating authority name of insolvency professional whom it proposes to be appointed as resolution professional. On being satisfied by the recommendation of the board the adjudicating authority shall appoint the suggested insolvency professional as resolution professional to continue forward the fresh start process.

Revocation of the order by Resolution professional

The Resolution Professional has been granted autonomy to seek revocation of his own order as passed for accepting or rejecting the application filed for fresh start. For seeking revocation of order the resolution professional shall have to make an application for the same to the adjudicating authority. The revocation of order shall only be applied on the fulfillment of the prescribed grounds.

Once the application is filed then adjudicating authority shall vide its order either accept or reject the application so filed within a period of fourteen days to be counted from the date on which the adjudicating authority received the application. If the adjudicating authority admits the application for revocation of order then in this scenario the moratorium as initially commenced shall come to an end and the fresh start process shall become ineffective.

Discharge Order

For obtaining the discharge order the resolution professional shall compile a final list of qualifying debts and thereafter submit the same to adjudicating authority atleast seven days prior to end of moratorium period. On receipt of the aforesaid list the adjudicating authority shall pass discharge order thereby discharging the debtor from the qualifying debts as finally compiled by the resolution professional. It is important to note that via discharge order the debtor shall be discharged from specific set of liabilities and not from his pending debts.

The fresh start process as devised for individuals is coined on the same footing as that of the fast track insolvency resolution for the corporate person. Individuals can use the umbrella of fresh start process to relieve themselves from pending debts and thereafter continue operations afresh as a clean entity.

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The Insolvency and Bankruptcy Code in its early stage repealed the already existing legislations which had become outdated with the passage of time. The Code is not an easy legislation as the drafters of the legislation burned the mid night oil to create a masterpiece legislation that would cater to the solve the issues of the society. The Code is detailed and elongated covering numerous time bound processes designed for the persons covered under the applicability of the code.

On this note the Section 3 and Section 5 of the Code defines numerous terms which are of high importance and relevant for interpretation of the code. Without having a glance at the section 3& 5 of the code it would be cumbersome to analyse and interpret the provisions of the code. Under the section 3 &5 of the code numerous terms have been crisply defined with reference and inline to the Insolvency and Bankruptcy Code.

As per the Code the term debt means an obligation or a liability in relation to a claim which is due from any person. A special contribution and value addition made by the Code is that under the code for the first time the bifurcation of the term debt has been made very priestly. 

On this note under the Code the debt has been bifurcated into financial debt and operational debt.     

The term financial debt as enshrined in the code meant a debt along with interest (if any) which is to be disbursed against the consideration for the time value of money. The definition of financial debt included within its ambit an inclusive list of items which fell within the purview of financial debt. In line to this definition the financial creditor meant to be a person to whom a financial debt as above defined was owed and also included a person to whom such debt had been legally transferred or assigned.

Operational debt means a claim in relation to provision or supply of goods or services thereby covering within its scope employment dues and statutory dues that are payable to the Central or State Government or any local authority under any law for the time being in force. Thereafter keeping the definition of operational debt into purview the operation creditors were defined to be persons to whom financial debt was owed and also included within its ambit persons to whom such debt had been legally assigned or transferred.

A remarkable fact to highlight is that the Insolvency and Bankruptcy Code in a very lucrative and lucid manner bifurcated the term debt into financial and operational debt. Another outstanding and praiseworthy fact incorporated under the Code was that the code introduced a new class of creditors by classifying the creditors on the basis of debt into financial and operational creditors. This was the first time that the creditors had officially been classified on the basis of debt apart from the classification on the basis of security into secured and unsecured creditors.

In this article we will mainly direct our focus towards recovery of bad debts by financial creditors.

Financial creditors as already discussed are persons to whom a financial debt is owed. Also the term financial creditor covers within its purview persons to whom such debt has been legally transferred or aligned. Therefore all lenders who have extended any kind of loans, guarantees or financial credits are covered within the scope and ambit of financial creditors. 

On 6th June 2018 a major amendment came in the favor of the financial creditors in the form of Insolvency and Bankruptcy Code (Amendment) Ordinance 2018. Through the amendment the home buyers and allottees under the Real estate (Regulation and Development) Act 2016 got the status of financial creditors under the Insolvency and Bankruptcy Code. The positive effect of the amendment was that the home buyers and other allottees were able to invoke section 7 against the defaulting promoters. Prior to the amendment the home buyers were treated as unsecured creditors. The amendment is a big relief for the homebuyers. 

After having discussed and interpreted as to who financial creditors are, we will now head toward discussing the recovery modes and mechanism available with these financial creditors. 

The financial creditors occupy the supreme position and ranking under the code. They have priority and say on all matters that are covered and elaborated under the code. They have been bestowed with voting rights and majority stake during the course of constitution of the committee of creditors. Also the financial creditors enjoy privilege of being repaid on priority basis once the proceeds are realized after the insolvency order is passed by NCLT. The biggest power that financial creditors hold with them is that in the scenario of default they can directly approach the NCLT for seeking the insolvency of the debtor concerned.

The data as Published by the IBBI states that out of 1858 cases that have been filed till date around 738 cases have been filed by the financial creditors. Out of the 738 cases filed 172 were filed during quarter ended 31 March 2019. The names of a few cases that were filed by the financial creditors are as follows: 

1. Venky Hi-Tech Ispat Ltd.,
2. BSR Diagnostics Ltd.
3. Sunil Ispat & Power Limited
4. Alok Industries
5. Essar Steel India Ltd. 
6. Dhanalaxmi Paper Mills Pvt. Ltd. 
7. Jyoti Structures Limited

Prerequisites for Debt Recovery via IBC 

1. The minimum amount of default to be recovered should be atleast one lakh rupees. 
2. The debt to be recovered should a debt that was due for recovery after December 2016.
3. There should be evidences of written communications made in relation to the debt due to be recovered.
4. There should be proper copy of agreements and deeds that were entered as evidence in support to highlight the pending debt.

In light of the above the financial creditors may inorder to recover their debts initiate the below mentioned process via which they can recover their pending debts. The processes with the aid of which the financial creditors can recover their debts are as follows:

1. By initiating the Corporate Insolvency Irresolution Process (CIRP)
2. By taking shelter of Liquidation Process
3. By taking recourse of Fast Track Corporate Insolvency resolution Process (FTCIRP)

Corporate Insolvency Resolution Process (CIRP)

On the occurrence or commitment of default by the corporate debtor, the financial creditors can either individually or jointly with other financial creditors file an application to commence the insolvency proceedings against the defaulting corporate debtor.

The financial creditors have the sole privilege of directly approaching the NCLT for filing the application in relation to initiation of corporate insolvency resolution process. They are not required to prove their debts forth the NCLT prior to submission of application for insolvency resolution process. They are granted the express authority to directly knock the doors of the NCLT for recovery of their debts from the defaulting corporate debtors.

On this note the financial creditors are required to make an application in Form 1 along with a fee of Rs. 25,000. The financial creditors while filling the application for initiating the corporate insolvency resolution process as per section 7 of the code shall annex the following documents along the application that is to be submitted: 

1. The evidences of default as highlighted from the records as maintained by the information utility.
2. The proposed name of the insolvency professional who would act as the interim resolution professional.
3. Any other documents or evidences as highlighted by the IBBI.

Once the application is submitted by the financial creditors the same is reviewed by NCLT. The NCLT during the course of reviewing the submitted application ascertains on its own level the existence and nature of default that is highlighted by the financial creditor in the submitted application. It is significant to highlight that the NCLT reviews the submitted application within a time span of fourteen days from the receipt of application. After reviewing the received application the NCLT has the option of accepting or rejecting the received application. In the scenario where the NCLT opts to reject the received application then in such a situation it shall issue a notice to the financial creditor thereby giving opportunity to rectify the highlighted defects.

Once the application is admitted by the NCLT then the corporate insolvency resolution process is deemed to have commenced from the very date on which the application for corporate insolvency resolution process was accepted by the NCLT.

After having arrived at the decision of accepting or rejecting the received application the NCLT shall convey its decision via an order to the financial creditor and corporate debtor if it accepts the received application and to the financial creditor only if it rejects the submitted application.

A crucial fact to be kept in purview is that the Code has prescribed the time line of one hundred and eighty days within which the entire process of corporate insolvency resolution process needs to be completed. The appointed resolution professional shall make his best endeavors to complete the entire process within the prescribed time line of one hundred and eighty days. Even after making the best efforts to complete the process within due time if the process remains uncompleted the in such state the resolution professional may approach the NCLT for seeking extension in time frame to complete the ongoing process. The maximum extension that may be granted by the NCLT for completing the ongoing process is ninety days. It is important to note that the extension in time frame shall be granted only once by the NCLT.

Thus the first step in the direction of debt recovery by the financial creditors is to initiate the corporate insolvency resolution process against the defaulting corporate debtor. If due to any reasons the process of corporate insolvency resolution process does not yield the desired results then the financial creditors may take the next recourse of initiating the liquidation process against the defaulting corporate debtor.

Liquidation Process

In the scenarios where the NCLT does not receive a proper resolution plan or it rejects the received resolution plan on account of non-compliance with the specified requirements then in such cases the NCLT concerned may pass orders for liquidation of the concerned corporate debtor along with issuing a public announcement for the same and forwarding the copy of aforesaid order to the concerned ROC with which the corporate debtor is registered.

The resolution professional as appointed during the course of the corporate insolvency resolution process may with the approval of the committee of creditors request the NCLT to liquidate the defaulting corporate debtor. On receipt of the aforesaid request from the resolution professional the NCLT shall after requisite review pass the order for liquidation of the defaulting corporate debtor.

It is important to note that once liquidation order has been passed by the NCLT then in such a scenario no fresh suit or legal proceeding shall be initiated or filed by or against the concerned defaulting corporate debtor. If required the appointed resolution professional may initiate any suit or legal proceeding with the express approval of the NCLT.

Once the liquidation order is passed by the NCLT against the defaulting corporate debtor the order passed will act as a discharge notice after which the officers, employees and workmen of the corporate debtor will have to relinquish their job. The officers, employees and workmen of the corporate debtor shall continue to work in the scenario where the business of the defaulting corporate debtor is kept running and in operation by the liquidator during the course of the ongoing liquidation process.

It is evident to note that the resolution professional as initially appointed at the time of the corporate insolvency resolution process shall act as liquidator to carry forward the liquidation process. After the appointment of liquidator the board of directors, key managerial persons and partners of the defaulting corporate debtor shall have no role in the business and their respective powers shall move towards the liquidator. Therefore the liquidator will be the main controller of the business of the defaulting corporate debtor   during the course of the liquidation process.

The liquidator apart from managing and looking after the business of the defaulting corporate debtor shall form a liquidation estate comprising of the assets of the corporate debtor. The liquidator during the course of forming the liquidation estate shall stand in the position of fiduciary in relation to the liquidation estate thereby keeping the interest of the creditors in safe and secure.

Fast Track Corporate Insolvency Resolution Process

An application for initiating the fast track corporate insolvency resolution process may be made by the financial creditors against the defaulting corporate debtor. The application for fast track corporate insolvency resolution process may be made by the financial creditors against the following: 

1. Small company- As defined under the Companies Act 2013
2. Startups – As defined in the Government of India notification dated 23rd May 2017 as issued by the Ministry of Commerce & Industry.
3. Unlisted Company – Companies having total assets not exceeding one crore as reported in the financial statements of the immediately preceding financial year.

The Code has prescribed a time span of ninety days within which the entire process of fast track corporate insolvency resolution process needs be completed .Even if after the best endeavors the process of fast track corporate insolvency resolution process remains incomplete then in such a scenario the appointed resolution professional may file an application to NCLT for extension of timeline to complete the ongoing process. On receiving the application for extension of time line for completing the ongoing fast track corporate insolvency resolution process if the NCLT is satisfied that the ongoing fast track corporate insolvency resolution process is such that it cannot be completed in the prescribed time line then in such case the NCLT may extend the prescribed time line by a further duration not exceeding forty five days. E aforesaid extension in time frame shall be granted only once by the NCLT.

The financial creditors for initiating the fast track corporate insolvency resolution process shall file an application to the NCLT thereby attaching the requisite documents along with the application. The set of documents that need to be attached with the application are as follows: 

1. Records as maintained by the information utility highlighting the default committed by the corporate debtor 
2. Any other document as required by the IBBI to suffice that the defaulting corporate debtor against whom application is filed is eligible for fast track corporate insolvency resolution process.

The fast track corporate insolvency resolution process is a shorter version of the corporate insolvency resolution process. The process flow is same but the difference is in the timelines as in case of fast track corporate insolvency the prescribed timeline is just half as compared to the corporate insolvency resolution process.

Therefore the debt recovery under the Insolvency and Bankruptcy may be time consuming but the processes are result oriented in terms of providing the desired outcome. The financial creditors need to be patient and trust the process flow via which they would be successful in recovering their debts. The code is on the track of getting the pending debts recovered, it’s just that right recourse needs to be adopted to do the needful. The banks and financial institutors have successfully recovered their NPAs and stressful assets via the processes as enshrined in the Code.

Hope this article was informative in providing the debt recovery alternatives available with the financial creditors.

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The post Recovery of Debts by Financial Creditors appeared first on MUDS.

The Insolvency and Bankruptcy Code in its early stage repealed the already existing legislation which had become outdated with the passage of time. The Code is not easy legislation as the drafters of the legislation burned the midnight oil to create masterpiece legislation that would cater to the solve the issues of the society. The Code is detailed and elongated covering numerous time-bound processes designed for the persons covered under the applicability of the code.

A remarkable fact to highlight is that the Insolvency and Bankruptcy Code in a very lucrative and lucid manner bifurcated the term debt into financial and operational debt. Another outstanding and praiseworthy fact incorporated under the Code was that the code introduced a new class of creditors by classifying the creditors on the basis of debt into financial and operational creditors. This was the first time that the creditors had officially been classified on the basis of debt apart from the classification on the basis of security into secured and unsecured creditors.

Operational debt means a claim in relation to provision or supply of goods or services thereby covering within its scope employment dues and statutory dues that are payable to the Central or State Government or any local authority under any law for the time being in force. Thereafter keeping the definition of operational debt into purview the operation creditors were defined to be persons to whom financial debt was owed and also included within its ambit persons to whom such debt had been legally assigned or transferred.

In this article, we will mainly direct our focus towards the recovery of debts by operational creditors.

Operational creditors as already discussed are persons to whom an operational debt is owed. Also the term operational creditor covers within its purview persons to whom such debt has been legally transferred or aligned. Therefore all persons who have provided any kind of goods or services are covered within the scope and ambit of operational creditors. 

After having discussed and interpreted who operational creditors are, we will now head toward discussing the recovery modes and mechanism available with these operational creditors. 

The operational creditors occupy a significant position and ranking under the code. They have a say on major matters that are covered and elaborated under the code. They have been bestowed with voting rights and equivalent stakes during the course of the constitution of the committee of creditors. Also, the operational creditors enjoy the privilege of being repaid on a priority basis once the proceeds are realized after the insolvency order is passed by NCLT.  

The data as Published by the IBBI states that out of 1858 cases that have been filed to date around 920 cases have been filed by the operational creditors. Out of the 920 cases filed 168 were filed during the quarter ended 31 march 2019. The names of a few cases that were filed by the operational creditors are as follows:

1. Merchem  Ltd.,
2. Naachair Paper Boards Pvt. Ltd.
3. Swadisht Oil Pvt.  Pvt. Ltd.
4. Bafna Pharmaceuticals Pvt. Ltd.
5. Darjeeling Rolling Mills Pvt. Ltd. 
6. Subburaj Spinning Mills Pvt. Ltd. 

Prerequisites for debt recovery via IBC 

1. The minimum amount of default to be recovered should be at least one lakh rupees. 
2. The debt to be recovered should a debt that was due for recovery after December 2016.
3. There should be evidence of written communications made in relation to the debt due to be recovered.
4. There should be a proper copy of agreements and deeds that were entered as evidence in support to highlight the pending debt.
5. There must be proper invoices for the goods supplied.

The operation cannot directly file an application for initiating the corporate insolvency resolution process. Firstly in order to recover the pending debt the operational creditors need to serve demand notice to the defaulting corporate debtor highlighting the amount to be recovered from him. If after serving the demand notice the operational creditor does not receive his pending dues nor do the operational creditors receive any favorable reply from the defaulting corporate debtor then in such a scenario the operational creditors may go ahead with initiating the corporate insolvency resolution process. at the time of filing an application for initiating the corporate insolvency resolution process, the operation creditor is required to furnish forth the copy of the demand notice as initially served to the defaulting corporate debtor.

A remarkable fact in relation to debt recovery by operational creditors is that in the majority of the cases the debts get recovered once demand notice is served and there arises no requirement for initiating the corporate insolvency resolution process. The demand notice as crafted under the Code is a powerful tool in the hands of the operational creditors for recovering their debts. To prevent the running business and unnecessary hindrances the defaulting corporate debtors often pay off their debts after receipt of a demand notice from operational creditors. 

In light of the above, the operational creditors may in order to recover their debts initiate the below-mentioned process via which they can recover their pending debts. The processes with the aid of which the operational creditors can recover their debts are as follows: 

1. By serving demand notice to the defaulting corporate debtor
2. By initiating the Corporate Insolvency Irresolution Process (CIRP)
3. By taking shelter of Liquidation Process
4. By taking recourse of Fast Track Corporate Insolvency Resolution Process (FTCIRP)

Demand Notice 

The first step in the direction of debt recovery by the operation creditors is to serve the demand notice to the concerned defaulting corporate debtor. In light of this on the occurrence of default by the corporate debtor, the operational creditor shall serve a demand notice/copy of the invoice thereby demanding the unpaid dues for the supplied goods or services to the corporate debtor. The demand notice to be served to the defaulting corporate debtor shall be in the format as prescribed in the code in Form 3. While serving demand notice to the corporate debtor in Form 3 it is important to attach the relevant invoices that highlight the balance payment due from the corporate debtors end.

After serving the demand notice a time of ten days shall be granted to the corporate debtor to highlight:

1. any ongoing dispute in relation to the aforesaid supplied goods or services ;
2. details of payment made (if any) after receipt of demand notice 

If after the end of ten days the operational creditor still does not receive the pending payment or any notice highlighting the existence of dispute then in such a scenario the operational creditor can without any further delay file an application for initiating the corporate insolvency resolution process.

Corporate Insolvency Resolution Process (CIRP)

Even after serving the demand notice if there are no favorable outcomes then the operational creditors can either individually or jointly with other operational creditors file an application to commence the insolvency proceedings against the defaulting corporate debtor.  

The operational creditors have the privilege of approaching the NCLT for filing the application in relation to the initiation of the corporate insolvency resolution process. They are required to prove their debts forth the NCLT prior to submission of application for the insolvency resolution process. They are granted the authority to knock on the doors of the NCLT for recovery of their debts from the defaulting corporate debtors.

On this note, the operational creditors are required to make an application in Form 5 along with a fee of Rs. 2,000. The operational creditors while filling the application for initiating the corporate insolvency resolution process as per section 9 of the code shall annex the following documents along the application that is to be submitted: 

1. The copy of demand notice as originally served to the defaulting corporate debtor;
2. The evidence of default as highlighted from the records is maintained by the information utility.
3. The proposed name of the insolvency professional would act as the interim resolution professional.
4. Any other documents or evidence as highlighted by the IBBI.

Once the application is submitted by the operational creditors the same is reviewed by NCLT. The NCLT during the course of reviewing the submitted application ascertains on its own level the existence and nature of default that is highlighted by the operational creditor in the submitted application. It is significant to highlight that the NCLT reviews the submitted application within a time span of fourteen days from the receipt of the application. After reviewing the received application the NCLT has the option of accepting or rejecting the received application. In the scenario where the NCLT opts to reject the received application then in such a situation, it shall issue a notice to the operational creditor thereby giving an opportunity to rectify the highlighted defects.

Once the application is admitted by the NCLT then the corporate insolvency resolution process is deemed to have commenced from the very date on which the application for corporate insolvency resolution process was accepted by the NCLT.

After having arrived at the decision of accepting or rejecting the received application the NCLT shall convey its decision via an order to the operational creditor and corporate debtor if it accepts the received application and to the operational creditor only if it rejects the submitted application.

A crucial fact to be kept in purview is that the Code has prescribed the timeline of one hundred and eighty days within which the entire process of corporate insolvency resolution process needs to be completed. The appointed resolution professional shall make his best endeavors to complete the entire process within the prescribed timeline of one hundred and eighty days. Even after making the best efforts to complete the process within due time if the process remains uncompleted in such a state the resolution professional may approach the NCLT for seeking an extension in a time frame to complete the ongoing process. The maximum extension that may be granted by the NCLT for completing the ongoing process is ninety days. It is important to note that the extension in the time frame shall be granted only once by the NCLT.

Thus the major step in the direction of debt recovery by the operational creditors is to initiate the corporate insolvency resolution process against the defaulting corporate debtor. If due to any reasons the process of corporate insolvency resolution process does not yield the desired results then the operational creditors may take the next recourse of initiating the liquidation process against the defaulting corporate debtor.

Liquidation Process

In the scenarios where the NCLT does not receive a proper resolution plan or it rejects the received resolution plan on account of non-compliance with the specified requirements then in such cases, the NCLT concerned may pass orders for liquidation of the concerned corporate debtor along with issuing a public announcement for the same and forwarding the copy of aforesaid order to the concerned ROC with which the corporate debtor is registered.

The resolution professional as appointed during the course of the corporate insolvency resolution process may with the approval of the committee of creditors request the NCLT to liquidate the defaulting corporate debtor. On receipt of the aforesaid request from the resolution professional, the NCLT shall after requisite review passes the order for liquidation of the defaulting corporate debtor.

It is important to note that once the liquidation order has been passed by the NCLT then in such a scenario no fresh suit or legal proceeding shall be initiated or filed by or against the concerned defaulting corporate debtor. If required the appointed resolution professional may initiate any suit or legal proceeding with the express approval of the NCLT.

Once the liquidation order is passed by the NCLT against the defaulting corporate debtor the order passed will act as a discharge notice after which the officers, employees, and workmen of the corporate debtor will have to relinquish their job. The officers, employees, and workmen of the corporate debtor shall continue to work in the scenario where the business of the defaulting corporate debtor is kept running and in operation by the liquidator during the course of the ongoing liquidation process.

It is evident to note that the resolution professional as initially appointed at the time of the corporate insolvency resolution process shall act as liquidator to carry forward the liquidation process. After the appointment of the liquidator the board of directors, key managerial persons, and partners of the defaulting corporate debtor shall have no role in the business and their respective powers shall move towards the liquidator. Therefore the liquidator will be the main controller of the business of the defaulting corporate debtor during the course of the liquidation process.

The liquidator apart from managing and looking after the business of the defaulting corporate debtor shall form a liquidation estate comprising of the assets of the corporate debtor. The liquidator during the course of forming the liquidation estate shall stand in the position of fiduciary in relation to the liquidation estate thereby keeping the interest of the creditors in safe and secure.

Fast Track Corporate Insolvency Resolution Process

An application for initiating the fast track corporate insolvency resolution process may be made by the operational creditors against the defaulting corporate debtor. The application for fast track corporate insolvency resolution process may be made by the operational creditors against the following: 

1. Small company- As defined under the Companies Act 2013
2. Startups – As defined in the Government of India notification dated 23rd May 2017 as issued by the Ministry of Commerce & Industry.
3. Unlisted Company – Companies having total assets not exceeding one crore as reported in the financial statements of the immediately preceding financial year.

The Code has prescribed a time span of ninety days within which the entire process of fast track corporate insolvency resolution process needs to be completed. Even if after the best endeavors the process of fast track corporate insolvency resolution process remains incomplete then in such a scenario the appointed resolution professional may file an application to NCLT for extension of the timeline to complete the ongoing process. On receiving the application for extension of timeline for completing the ongoing fast track corporate insolvency resolution process if the NCLT is satisfied that the ongoing fast track corporate insolvency resolution process is such that it cannot be completed in the prescribed timeline then in such case the NCLT may extend the prescribed timeline by a further duration not exceeding forty-five days. E aforesaid extension in time frame shall be granted only once by the NCLT.

The operational creditors for initiating the fast track corporate insolvency resolution process shall file an application to the NCLT thereby attaching the required documents along with the application. The set of documents that need to be attached with the application are as follows: 

1. Records as maintained by the information utility highlighting the default committed by the corporate debtor 
2. Any other document as required by the IBBI to suffice that the defaulting corporate debtor against whom the application is filed is eligible for a fast track corporate insolvency resolution process.

The fast-track corporate insolvency resolution process is a shorter version of the corporate insolvency resolution process. The process flow is the same but the difference is in the timelines as in the case of fast-track corporate insolvency the prescribed timeline is just half as compared to the corporate insolvency resolution process.

Therefore the debt recovery under the Insolvency and Bankruptcy may be time-consuming but the processes are result oriented in terms of providing the desired outcome. The operational creditors need to be patient and trust the process flow via which they would be successful in recovering their debts. The code is on the track of getting the pending debts recovered, it’s just that the right recourse needs to be adopted to do the needful. The operational creditors have been quite active ever since the inception of the code to recover their debts. The number of cases as filed by the operational creditors itself highlights the sound awareness of the provisions among the operational creditors.

Hope this article was informative in providing the debt recovery alternatives available with the operational creditors.

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