13 January, 2017
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) was passed by the Parliament and received Presidential assent in May 2016. Our May 2016 Special Edition on the IBC provides a brief overview of the insolvency, liquidation and bankruptcy process proposed under the IBC, which would overhaul the existing regulatory framework, and our November 2016 Client Alert provides a snapshot of the regulatory infrastructure created to support the IBC. In this Special Edittion, we propose to highlight and discuss in greater detail: (i) the sections of the IBC that have been notified from time to time, till date; (ii) the sections of the IBC that have not yet been notified; and (iii) the interplay between IBC and other laws.
Commencing from August 2016, the Ministry of Corporate Affairs (‘MCA’) has, on a regular basis, been selectively notifying portions of the IBC upon supporting infrastructure having been created. Till date, the sections of the IBC pertaining to the following matters have been notified:
- Setting up of the Insolvency and Bankruptcy Board of India (‘IBBI’), who will act as the insolvency regulator, and powers and functions of the IBBI (including powers to issue regulations);
- Appointment of Insolvency Professionals (‘IPs’) and establishment of Insolvency Professional Agencies (‘IPAs’) to supervise and monitor the IPs;
- Corporate Insolvency Resolution Process (‘CIRP’) and Liquidation; and
- amendments to other laws, such as the Companies Act, 2013, Income Tax Act, 1961, Customs Act, 1962, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Payment and Settlement of Systems Act,
- 2007 etc.
The IBC has established IBBI as the insolvency regulator. Dr. M.S. Sahoo has been appointed as the first chairperson of IBBI. IBBI is located in New Delhi and comprises nine members out of which four have been appointed (ex-officio appointments). The primary function of IBBI is supervision and regulation of IPs, IPAs and information utilities.
IPs and IPAs
The IBC has introduced the concept of eligible intermediaries, i.e. ‘insolvency professionals’, to ensure smooth facilitation of the resolution process in a time-bound manner. In November 2016, the IBBI notified the following three sets of regulations for establishment of the machinery relating to IPs and IPAs:
i. IBBI (Insolvency Professionals) Regulations, 2016 (‘IP Regulations’), which came into effect from November 29, 2016, provide for registration, regulation and oversight of IPs under the IBC. The IP Regulations set out the following categories of persons who are eligible to become IPs:
(a) advocates, chartered accountants, company secretaries and cost accountants (‘Regulated Professionals’) who have held a certificate of practice for more than 15 years will be automatically grandfathered to qualify as IPs on registering with an IPA.
However, their registration will be provisional and be valid for only six months, after which they will have to clear the ‘Limited Insolvency Exam’ to be held by the IBBI;
(b) Regulated Professionals who have held a certificate of practice for more than 10 years must first clear the Limited Insolvency Exam before registering with an IPA;
(c) Graduates, other than Regulated Professionals, with more than 15 years of experience in management must first clear the Limited Insolvency Exam before registering with an IPA; and
(d) any other person who is an Indian resident and is ‘fit and proper’ must first clear the ‘National Insolvency Exam’, which is intended to be more rigorous than the Limited Insolvency Exam.
A limited liability partnership (‘LLP’), a registered partnership firm and a company may also be recognised as an insolvency professional entity if, a majority of the partners of the LLP or the registered partnership firm or a majority of the whole-time directors of the company are registered as insolvency professionals under the IBC.
IBBI (Insolvency Professional Agencies) Regulations, 2016 (‘IPA Regulations’), which came into effect from November 21, 2016, provide for, inter-alia, the eligibility norms for being registered as an IPA and a framework for regulation of IPAs. IPAs operate as self-regulatory organisations whose objective is the enrollment and regulation of IPs and the enforcement of a code of conduct for their member IPs. The salient provisions of the IPA Regulations are as follows:
(a) Only companies registered under Section 8 of the Companies Act, 2013 (‘CA 2013’) may be registered as IPAs;
(b) IPAs must have a minimum net worth of Rs 100,000,000 (approximately US$1,460,000) and a paid-up share capital of Rs 50,000,000 (approximately US$730,000);
(c) At least 51% of the share capital of the IPA must be held, directly or indirectly, by persons resident in India;
(d) More than half of the directors on the board of the registered IPA must be independent directors and not more than one fourth of the directors must be insolvency professionals.
Please note that the Institute of Chartered Accountants of India, Institute of Company Secretaries of India and Institute of Cost Accountants of India have already obtained registration from the IBBI to function as IPAs.
IBBI (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 (‘Model Bye-Law Regulations’) came into effect from Novem- ber 21, 2016. These regulations mandate that the bye-laws of IPAs must be in conformity with the Model Bye-Law Regulations. The Model Bye-Law Regulations provide for the internal governance of the IPA, registration mechanism of member IPs, institution of a disciplinary procedure and grievance redressal mechanism in respect of member IPs.
CIRP and Liquidation
Sections 6 to 32 of the IBC, which deal with the operation of the CIRP, were notified by the MCA and have come into effect on December 1, 2016. These sections entail a single track-entry for foreign and domestic creditors (both financial and operational) as well as corporate debtors, by entitling them to initiate a CIRP on the occurrence of a payment default of more than Rs 100,000 (approximately US$1,500).
Notably, these sections deal with the triggering of CIRP, taking over of the man- agement by the IP, creation of the committee of creditors and the submission and consideration of resolution plans for revival of the corporate debtor as a going concern. The IBBI has also notified IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’), with effect from December 1, 2016. The CIRP Regulations elaborate in greater detail how an IP is appointed, fixing the remuneration of IPs and how the CIRP is conducted. Please refer to our May 2015 Special Edition on the IBC, which provides a comprehensive overview of the CIRP process.
Sections 33 to 54 of the IBC, which deal with the conduct of the liquidation process, were notified by the MCA and came into effect on December 15, 2016. The liquida- tion process specified under these sections gets triggered upon (a) expiry of CIRP period or the maximum period prescribed for completion of the CIRP as permit- ted under the IBC; (b) the fast-track CIRP does not receive a resolution plan; or (c) the adjudicating authority rejects the resolution plan on account of non-com- pliance. In connection with the liquidation process, the IBBI has also notified the IBBI (Liquidation of Insolvent Corporate Persons) Regulations, 2016, with effect from December 15, 2016, which contain specific details on the appointment and remuneration of liquidators and the conduct of liquidation proceedings.
Notable parts not notified
Part III of the IBC dealing with the bankruptcy process for individuals and partnership firms has not yet been notified.
Chapter V, Part II of the IBC, dealing with voluntary liquidation of corporate persons covers instances where the corporate debtor intends to initiate a liquidation proceeding without the occurrence of a payment default. This portion is intended to be notified by April 1, 2017.
Interaction with other laws
Sick Industrial Companies (Special Provisions) Act: The Department of Fi- nancial Services, Ministry of Finance, by way of notification nos. S.O. 3568(E) and 3569(E), notified December 1, 2016 as the date on which the provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (‘Repeal Act’) will come into effect. The Repeal Act provides for repeal of the Sick Industrial Compa- nies (Special Provisions) Act, 1985 (‘SICA’) and related matters. Consequently, with the repeal of SICA, the Board of Industrial and Financial Reconstruction (‘BIFR’) and the Appellate Authority for Industrial and Financial Reconstruction (‘AAIFR’) stand dissolved with effect from December 1, 2016.
Additionally, Section 252 of the IBC was notified on November 1, 2016, which amended Section 4(b) the Repeal Act. Section 4(b) of the Repeal Act originally provided that any reference made to the BIFR or any appeal preferred to the AAIFR will stand abated and such matters must be filed under Part VIA (revival and reha- bilitation of sick industrial companies) of the Companies Act, 1956 (‘CA 1956’). The amended Section 4(b) of the Repeal Act now provides that the new forum for such matters would be National Company Law Tribunal (‘NCLT’) under the IBC, and not the High Court under the CA 1956.
The Repeal Act (including the amendments thereto) sets out the following pro- cess for transferring matters under the IBC:
(a) Any reference made or inquiry pending to or before the BIFR or any proceed- ings pending before the AAIFR will stand abated and the relevant company may make a reference to the NCLT under the IBC. However, if such application is made within 180 days of commencement of the IBC (i.e., up to May 30, 2017), the payment of application fees has been waived;
(b) All matters wherein a scheme has been sanctioned and is in the phase of im- plementation will continue to be implemented in its normal course. Please note that under the SICA, the BIFR was to be a monitoring body for all schemes under implementation.
However, if such scheme is violated, there is no other authority which will play such role.
CA 1956 and CA 2013: On November 15, 2016, the MCA notified Section 255 of the IBC which amends certain provisions of CA 2013 (‘CA Amendment Notification’). One of the main amendments to Section 271 of the CA 2013 is deletion of ‘the in- ability to pay debts’ as a ground for winding up from CA 2013. The intention was that creditor rights for all cases of non-payment of debt come under the ambit of the IBC and all other ‘non-payment’ related grounds for winding up continue to remain under the CA 2013. The winding up provisions of CA 2013 (including Sec- tion 271) have come into force with effect from December 15, 2016.
The MCA has also notified the Companies (Transfer of Pending Proceedings) Rules, 2016 (‘Transfer Rules’) with effect from December 15, 2016. The Transfer Rules, inter alia, deal with the transfer of several proceedings from CA 1956 to CA 2013 and the IBC. In particular, the Transfer Rules provide for the following in rela- tion to winding up cases filed under CA 1956:
(a) All applications and petitions relating to voluntary winding up of companies pending before a High Court on December 15, 2016, will continue with and dealt with by the High Court;
(b) Winding up petitions filed with the High Court where petition has not been served on the respondent – such petitions will get transferred to the NCLT under the IBC on meeting the necessary requirements for initiation of CIRP;
(c) Winding up petition filed with the High Court where petition has been served on the respondent – such petitions will continue to be heard by the High Court.
(d) All cases where opinion has been forwarded by the BIFR for winding up of a company to a High Court and where no appeal is pending, the proceedings for winding up pursuant to Section 20 of SICA will continue to be dealt with by such High Court.
iii. Voluntary liquidation: Pursuant to the CA Amendment Notification, Sections 304 to 323 of the CA 2013 which dealt with ‘voluntary winding up’ have been omitted. Since ‘voluntary winding up’ process under CA 2013 had not been notified by the MCA till date, the process under CA 1956 is presently in operation and will continue till such time that ‘voluntary liquidation’ under IBC is notified.
With the introduction of the IBC and other proposed changes as discussed above, the Government intends to bring the Indian regulations in line with international best practices with a special focus on widening and deepening access to credit.
For further information, please contact:
Zia Mody, Partner, AZB & Partners