STEP BY STEP PROCEDURE FOR VOLUNTARY LIQUIDATIONS UNDER INSOLVENCY & BANKRUPTCY CODE, 2016

STEP BY STEP PROCEDURE FOR VOLUNTARY LIQUIDATIONS UNDER INSOLVENCY & BANKRUPTCY CODE, 2016

Voluntary Liquidations IBBI notified on 31st March, 2017 the IBBI (Voluntary Liquidation Process) Regulations, 2017 to enable a corporate to liquidate itself voluntarily if it has no debt or if it will be able to pay its debts in full from the proceeds of the assets to be sold under the liquidation.

 In pursuance to these Regulations, ten corporates had initiated voluntary liquidation proceedings by 30th June, 2017. During this quarter July- September 2017, 32 corporates initiated such proceedings.

It is the easy way of closure of company under IBBI regulations. The following conditions have to be satisfied.

1.    There should be no debts

2.     Or It will be able to pay its debts in full from the proceeds of the assets to be sold under the liquidation.

1	CONVENEING OF BOARD MEETING FOR VOLUNTARY WINDING-UP a)     To convene a board meeting to approve the voluntary liquidation. b)    To call for a general meeting to get the approval of members for the voluntary winding up. c)     In the same meeting, pass a board resolution for the appointment of liquidator and fix his remuneration. d)     Pass a resolution to empower the liquidator to operate the bank account.
2	DECLARATION OF SOLVENCY AND VALUATION CERTIFICATE At the Board Meeting, Declaration of solvency duly verified by an affidavit is to be given by the majority of directors/ designated partners, as the case may be. * Audited financial statements and record of business operations of the /corporate for the last two years or for the period since its incorporation, whichever is later; * a report of the valuation of the assets of the corporate, if any, duly certified by a registered valuer;
3	FILING WITH THE ROC To file the declaration of solvency along with audited accounts, report of the auditors with the Registrar of Companies within one month immediately preceding the date of passing Special Resolution in the general meeting.
4.	NO OBJECTION CERTIFICATE FROM CREDITORS If  the Corporate  owes any debt to any one: To obtain No Objection Certificate ( NOC) from the creditors signifying 66% of the value of debt of the Corporate  or pass special resolution at a duly convened creditors meeting, within 7 days from the date of passing of Special Resolution at the general meeting.
5	PUBLIC ANNOUNCEMENT IN FORM A –SCHEDULE 1 A public announcement is to be made by liquidator in Form A of Schedule I within five days of his appointment inviting stakeholders to submit their claims due to the Corporate within one month from the date of application.
6	INTIMATION TO ROC & IBBI To intimate the special resolution passed by the Corporate to the Registrar and to the IBBI within one week of passing of Special Resolution.
7	A SEPARATE BANK ACCOUNT FOR VOLUNTARY LIQUIDATION A separate bank account to be opened by the Liquidator in the name of the corporate with the word “in voluntary liquidation” in a scheduled bank, for receiving all moneys due to the corporate person and to meet all the liquidation cost.
8	TO FIX DEADLINE FOR RECEIVING STATEMENT OF CLAIM Form B -Operational Creditors to submit their claim Form C- Financial Creditors to submit their claims Form D- Workmen and Employees to submit their claim Form E –where there are large number of  employees claims to be submitted Form F- For All Other Stakeholders or Claimants
9	PRELIMINARY REPORT BY LIQUIDATOR The Preliminary report which is to be  prepared by Liquidator should have the following a) The Capital arrangement of the Corporate; b) the evaluations of its assets and liabilities as on liquidation start date based on the books of the Corporate. C) whether the liquidator wants to inquire into any further inquiry into any matter relating to the  Corporate  or to the conduct of the business thereof; d) projected plan of action for carrying out by the liquidation (including the timeline within which he recommends to complete the procedure and the projected liquidation cost.
10	LIST OF CLAIMS Liquidator shall draw a list of claimants on the footing of the evidence of claims submitted and accepted with the following columns as may be applicable: i) Extent of claim acknowledged; ii) the amount of dues to which the debts dues are secured or unsecured; iii) the particulars of claimants; iv) evidence acknowledged or disallowed in part or proof rejected fully within one-and-half month  from the last date of receipt of claim
11	DISBURSEMENT OF REALISED VALUE Liquidator has to realise all the assets of the corporate and shall subtract the cost of liquidation from the amount so realised and after subtracting the liquidation cost, shall allocate the realised amount among the claimants, within 180 days of receipt of the receipt of claim from the stakeholders
12	DEADLINE FOR COMPLETION OF VOLUNTARY LIQUIDATION Liquidator to complete the liquidation process within one year from the date of start of liquidation process.
	ANNUAL STATUS REPORT In case the liquidation process prolongs s for more than 12 months : the liquidator shall a. should call a meeting of the contributories of the corporate person within 15 days from the close of the year in which he is nominated, and at the end of each succeeding year; and b. present an Annual Status Report(s) indicating progress in liquidation including- (i) A list of settlement of claimants, (ii) particulars of any assets that leftovers to be sold and realized, (iii) financial settlement made to the stakeholders, and (iv) The details of distribution of unrealised assets made to the claimants; (v) Is there  any material litigation, by or against the corporate ; and (vi) Filing of, and developments in applications for avoidance of transactions in accordance with Chapter III of Part II of the Code. Annual Status Report shall enclose the audited accounts of the liquidation
13	FINAL LIQUIDATION REPORT TO REGISTRAR AND IBBI Liquidator to submit final report to the IBBI and to the Registrar
14	APPLICATION TO NCLT FOR WINDING-UP Liquidator shall make application to the NCLT for dissolution of Corporate.
15	DISSOLUTION ORDER BY NCLT On receipt of the application, NCLT shall pass an order that the corporate shall be dissolved from the date of NCLT order.
16	FILING WITH THE REGISTRAR OF COMPANIES Within 2 weeks  of the NCLT dissolution order, copy of order shall be forwarded to concerned Registrar of Companies

THE ROLE OF COMMITTEE OF CREDITORS (COC) IN (CIRP) CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

THE ROLE OF COMMITTEE OF CREDITORS (COC) IN (CIRP) CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

COMMITTEE OF CREDITORS (COC)

The Insolvency and Bankruptcy Code, 2016 (Code), however, envisages that if they fail to service the debt, the corporate in default undergoes corporate insolvency resolution process (CIRP). An Insolvency Professional (IP) carries on the business operations of the corporate as a going concern until the Committee of Creditors (CoC) draws up a resolution plan that would keep the business of the corporate going on for ever.

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

The Code, as stated in the long title, requires a CIRP to (a) maximise value of assets of the corporate, and (b) while doing so, balance the interests of all the stakeholders, and assigns this responsibility primarily to the IP, and the CoC comprising non-related financial creditors. The Code maximizes the value by striking a balance between resolution and liquidation. It encourages and facilitates resolution in most cases where creditors would receive at least as much as they would in liquidation. This would happen where enterprise value is ‘sufficiently’ higher than the liquidation value. In such cases, resolution preserves and maximizes the enterprise value as a going concern. In the remaining cases, the Code facilitates liquidation as that maximizes the value for stakeholders.

RESOLUTION VS LIQUIDATION

The Code enables initiation of CIRP at the earliest, even at the very first default, when enterprise value is usually higher than the liquidation value and hence the CoC has the motivation to resolve insolvency of the corporate rather than liquidate it. It mandates resolution in a time bound manner to prevent decline in enterprise value with time, reducing motivation of the CoC to opt for liquidation. It facilitates resolution; makes a cadre of professionals available to run the corporate as a going concern; prohibits suspension or termination of supply of essential services; enables raising interim finances required for running the corporate; etc.

In contrast, the Code prohibits any action to foreclose, recover or enforce any security interest during CIRP and thereby prevents a creditor(s) from maximising his interests. It expects the creditors to recover their default amounts collectively from future earnings of the corporate rather than from sale of its assets.

PROWESS INTERNATIONAL PVT. LTD. VS. PARKER HANNIFIN INDIA PVT. LTD

In the matter of Prowess International Pvt. Ltd. Vs. Parker Hannifin India Pvt. Ltd., the NCLAT reiterated: “It is made clear that Insolvency Resolution Process is not a recovery proceeding to recover the dues of the creditors.” Further, the Code enables a financial creditor to trigger CIRP even when the corporate has defaulted to another creditor and thereby prevents any preferential treatment to a creditor over others.

PARKER HANNIFIN INDIA PVT. LTD. VS. PROWESS INTERNATIONAL PVT. LTD

In the matter of Parker Hannifin India Pvt. Ltd. Vs. Prowess International Pvt. Ltd., the NCLT observed: “The nature of insolvency petition changes to representative suit and the list does not remain only between a creditor and the corporate debtor.” Resolution maximizes the value of assets of the corporate and enables every stakeholder to continue with the corporate to share its fate. All of them stand to gain or lose from resolution, while stakeholders in a category receive similar treatment. In contrast, liquidation allows satisfaction of their claims one after another. If there is any surplus after satisfying the claims of one set of stakeholders fully, the claim of the next set of stakeholders is considered.

THE ROLE OF CIRP

On both counts, maximization of value of assets and balancing the interests, resolution triumphs over recovery as well as liquidation in most cases. Balancing interests under CIRP assumes significance as every corporate may not have enough resources at the commencement of CIRP to satisfy the claims of all stakeholders fully, while resolution provides an opportunity to the CoC to consider and balance their interests. In fact, the Code prescribes several balances in resolution process: repayment of at least liquidation value to operational creditors; repayment of interim finance in priority; approval of resolution plan by 75% voting power; etc.

The CIRP regulations also provide for several balances. They allow a dissenting financial creditor to exit at the liquidation value and thereby protect its interests. Many creditors, however, may not like to exit at the liquidation value. And those who exit, leave the enterprise value behind. This balances the interests of financial creditors’ inter-se while tilting the balance in favour of resolution.

A STATEMENT TO TAKE CARE OF THE INTERESTS OF ALL STAKEHOLDERS

The regulations also require a resolution plan to include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor. The judicial pronouncements require consideration of the interests of all stakeholders in a resolution.

PROWESS INTERNATIONAL PVT. LTD. VS. PARKER HANNIFIN INDIA PVT. LTD.,

In the matter of Prowess International Pvt. Ltd. vs. Parker Hannifin India Pvt. Ltd., the NCLAT held: “In the circumstances, instead of interfering with the impugned order, we remit the case to the Adjudicating Authority for its satisfaction whether the interest of all stakeholders have been satisfied ...”

PRABODH KUMAR GUPTA VS. JAYPEE INFRATECH LIMITED AND OTHERS

In the matter of Prabodh Kumar Gupta vs. Jaypee Infratech Limited and others, the NCLT observed: “..the position of present petitioner is undisputedly of stakeholders. Therefore, the IRP appointed by this Court in respect of the corporate debtor company is equally expected to consider and take care of the interests of the petitioner….”

Courtesy : IBBI Upadates July-September 2017

The Role of Moratorium in Insolvency & Bankruptcy Code 2016 Proceedings

The Role of Moratorium in Insolvency & Bankruptcy Code 2016 Proceedings

What is Moratorium?

If NCLT find that the corporate debtor is saddled with over debts and failed to meet its debt obligations, it will issue a moratorium order under section 14 of the IBC Code.

The specialty of the moratorium order is that the Insolvency Professional is authorised to initiate judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts to meet the creditor’s financial obligations.

The tone of Section 14 is unambiguous and the moratorium in favour of the Corporate Debtor is also outright.

M/s Schewitzer Systemtek India Private Ltd. V. Phoenix ARC Pvt. Ltd., T.C.P. No. 1059/ I&BP/NCLT/MB/MAH/2017.

In the above case, NCLT Mumbai observed that moratorium will not be available to the Guarantors and Section 14 is clear that the moratorium will only cover the properties of Corporate Debtor as the Guarantors are not covered in terms of Section 14 of IBC.

NCLAT also upheld the views held by NCLT in the Schewitzer Systemtek India case in the case held by it in Phoenix ARC Pvt. Ltd V. M/s Schewitzer Systemtek India Private Ltd, Company Appeal (AT) (Insolvency) No. 129 of 2017.

NCLT, Chennai’s Different Stand on Guarantors

However, in  Veesons Energy Systems Pvt. Ltd, wherein the NCLT, Chennai has passed an order restraining the Financial Creditor from proceeding against the Guarantor of the Corporate Debtor during the moratorium period. 

Shark Differences between Schewitzer Systemtek case and Veesons Energy Systems case as regards to Guarantor’s Rights

Schewitzer Systemtek	The properties held by the Guarantors of the Corporate Debtor were also being attached pursuant to the admission of an Insolvency Petition against the Corporate Debtor. Therefore, the NCLT, Mumbai concluded that in terms of moratorium, the properties held by the Guarantor of the Corporate Debtor is not liable to be attached
Veesons Energy Systems	NCLT, Chennai in an application filed by the Guarantor of the Corporate Debtor had restrained the Financial Creditor in proceeding against such Guarantor during the moratorium on the reason that it will result in creating a charge on the assets of the Corporate Debtor which shall amount to encumbering the properties of the Corporate Debtor and in violation of Section 14(1) (b) of the IBC.

CORPORATE INSOLVENCY RESOLUTION PLAN (CIRP) UNDER SECTION 31(1) OF IBC 2016

Further, a resolution plan is sanctioned, approved by Committee of Creditors and affirmed by NCLT, then as per Section 31(1) of the IBC, the Resolution Plan is binding on the Corporate Debtor and its Employees, Members, Creditors, Guarantors and other Stakeholders involved in the resolution plan.

The Corporate Insolvency Resolution Process is time bound and the relief of moratorium is available to the Corporate Debtor only during the Corporate Insolvency Resolution Process period i.e. for a period of 180 days which can further be extended to 90 days.

RESCUE OF GUARANTOR’S RIGHTS BY ALLAHABAD HIGH COURT UNDER SECTION 31 OR 33 OF THE IBC 2016 CODE

 Allahabad High Court also in the matter Sanjeev Shriya V. State Bank of India & Ors. stayed the proceedings against the Guarantors till the finalization of Corporate Insolvency Resolution Process or till the NCLT approves the resolution plan under sub section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33, as the case may be. 

THE TERM MORATORIUM IS TO BE EXPLAINED IN THE IBC 2016 TO REMOVE AMBIGUITY

IBC is silent on the aspect of the definition of moratorium and what proceedings will fall under the ambit of Section 14 of the IBC would still require judicial assessment. Nonetheless, the language of Section 14 of IBC is wide and the intention of the legislature is also to provide complete calm period. 

However, the Appellate Authority has carved out an exception to the moratorium in the matter of Deccan Chronicle case  and has held that the moratorium even in favour of the Corporate Debtor is also not absolute and it will not affect the proceedings before the Hon’ble High Court and Hon’ble Supreme Court under Article 32, 136 and 226/227 of the Constitution of India. 

Courtesy: Mr.  Kunal Godhwani

Debts which were otherwise not recoverable due to being time barred nature now can be basis for initiating insolvency proceedings, says NCLAT.

Debts which were otherwise not recoverable due to being time barred nature now can be basis for initiating insolvency proceedings, says NCLAT.

Neelkanth Township & Construction Pvt. Ltd.

Vs

Urban Infrastructure Trustees Ltd.

FACTS

Neelkanth Township & Construction Pvt. Ltd, the corporate debtor appealed against the order of the National Company Law Tribunal (“NCLT”) allowing commencement of insolvency proceedings on the action of the financial creditor (Urban Infrastructure Trustees Ltd.).

The financial creditor had subscribed to optionally convertible debentures (“OCDs”) issued by the corporate debtor. OCDs carried nil or 1% p.a. interest rate and matured in years 2011, 2012 and 2013.

Neelkanth Township & Construction Pvt. Ltd, the corporate debtor argued that given that the debentures matured in years 2011, 2012 and 2013, the petition for initiation of corporate insolvency resolution process filed in year 2017 is time barred.

·       The application of the financial creditor before NCLT was not complete as it did not contain document prescribed under Section 7(3)(a) of the IBC;

·       Section 7(3)(a) provides:

·       “(3) The financial creditor shall, along with the application furnish—(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;”

·       The financial creditor is actually an investor and not a ‘Financial Creditor’ as defined under the IBC.

VERDICT

APPLICABILITY OF LIMITATION ACT, 1963

NCLAT viewed that that in the absence of any provision in IBC, the Limitation Act, 1963 would not be applicable to initiation of Corporate Insolvency Resolution Process. 

It viewed further that

 “If there is a debt which includes interest and there is default of debt and having continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted.”

PROCEDURAL REQUIREMENT COULD NOT FRUSTRATE

The Insolvency & Bankruptcy Board of India (“Board”) has not specified any other record or evidence of default which may be furnished. Further, as there was no record of default recorded with the information utility, it was contended that the application filed was incomplete. However, the NCLAT rejected the argument, holding that a procedural requirement could not frustrate the substantive provision of law.

INSOLVENCY & BANKRUPTCY (APPLICATION TO ADJUDICATING AUTHORITY) RULES, 2016

The NCLAT also referred to the Rule 41 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 whereby a financial creditor is required to make an application in accordance with prescribed form – 1.

FORM 1 WILL BE SUFFICIENT EVIDENCE OF DEBT UNDER SECTION 7 OF THE IBC.

Part V of the said form prescribes the particulars that need to be provided as part of the application. The NCLAT ruled that in absence any regulation framed by the Board, the evidence of default, records and documents prescribed under Part V of the Form – 1 will be sufficient to determine default of debt under Section 7 of the IBC.

REGULATION 8 OF INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSOLVENCY RESOLUTION PROCESS FOR CORPORATE PERSONS) REGULATIONS, 2016

Regulation 8 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 was also relied upon to substantiate the documents and records the financial creditor could rely upon to prove a claim.

MEANING OF FINANCIAL CREDITOR:

As a financial creditor is one to whom a financial debt is owed, issue arose regarding meaning of financial debt. Financial debt is defined under Section 5(8) of IBC as:

“(8) “Financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—

SECTION 5(8) (C) OF IBC CODE 2016

NCLAT held that section 5 (8) (c) makes it clear that a debenture comes within the meaning of financial debt. Thus, in the present case, the amounts owed on maturity of debentures would be a financial debt.

NO SHAREHOLDER’S APPROVAL IS NECESSARY FOR A RESOLUTION PLAN UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC), SAYS MCA.

NO SHAREHOLDER’S APPROVAL IS NECESSARY FOR A RESOLUTION PLAN UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC), SAYS MCA.

MCA CLARIFICATION

The Ministry of Corporate Affairs (MCA) yesterday issued a clarification stating that no resolution or approval of the shareholders of a debtor company will be required in order to give effect to a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC).

SECTION 30(2)(E) OF THE IBC 

It appears that stakeholders sought the MCA clarification on account of section 30(2)(e) of the IBC, which requires the resolution professional to confirm that the resolution plan “does not contravene any of the provisions of the law for the time being in force”.

 Here, the MCA clarified that the intention was to ensure that the plan is compliant with applicable laws and regulations so that it can be implemented. The MCA provided examples such as compliance with foreign investment regulation, including sectoral caps.

SECTION 31(1) OF THE IBC

As far as shareholders are concerned, the MCA also pointed to section 31(1) of the IBC, which expressly states that an approved resolution plan shall be binding on several persons, including the shareholders of the company. Hence, even though the Companies Act, 2013 may require shareholders’ approval for various actions by the company (such as sale of significant undertakings or issue of shares), such approval is “deemed to have been given on its approval by the Adjudicating Authority”.

Effectively, the MCA clarification points to the fact that once the company is in within the corporate insolvency resolution process, matters go beyond the hands of the shareholders, and that all crucial decisions are taken by the creditors through the mechanisms stipulated in the IBC.

CREDITOR-FRIENDLY NATURE OF THE IBC

This is a reaffirmation of the creditor-friendly nature of the IBC, as separately enunciated by the Supreme Court as well. This is justifiable from a conceptual standpoint in that once the company in the process of insolvency, the interests of the shareholders will have to make way for that of the creditors.