The document summarizes the key features of the Insolvency and Bankruptcy Code of India. It discusses how the Code establishes standardized processes for insolvency resolution and liquidation of corporate entities and individuals. The Code sets strict timelines for insolvency resolution proceedings, provides for replacement of existing management with resolution professionals, and establishes penalties for asset stripping by promoters prior to liquidation. It aims to create a consolidated framework for resolving insolvency issues in a time-bound and predictable manner.

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The Insolvency and Bankruptcy Code, 2015
ICSI Study Circle Meeting – April 2, 2016
Presented By: Sandeep Jhunjhunwala, FCA

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Presentation Overview
Summary
Why is it needed?
Belling the Bankruptcy Cat!
Why India's bankruptcy laws are such a mess?
Can the new bankruptcy law prevent more Vijay
Mallyas?
The Build up to the Code
Key Features
Insolvency resolution process for corporate debtors
Liquidation process
Insolvency resolution process for non-corporate debtors
International Experience
Challenges and Opportunities
ICSI Study Circle Meeting
April 2, 2016
Sandeep Jhunjhunwala

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Old disease, New Prescription
Content
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Why is it needed? Indian banks, neck-deep in bad debts
Content
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April 2, 2016
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Banks have become increasingly vulnerable to poor recovery on loans made to corporates
Gross NPAs of the banking system have risen from 2.4 percent (on a base of INR 23.3 trillion of
advances) in 2008 to 4.8 percent (on a base of INR 59.8 trillion of advances) in 2015
Restructured advances (ie loans whose terms have been revised and which have a higher
probability of becoming NPA in future) have increased from 1.2 percent in 2008 to 6.8 percent in
2015

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Belling the Bankruptcy Cat!
Content
ICSI Study Circle Meeting
April 2, 2016
Sandeep Jhunjhunwala
India is a capital starved country and therefore it is essential that capital isn’t frittered away on weak
and unviable businesses. Quick resolution of bankruptcy can ensure this.
Raghuram Rajan's statement on 'bankrupt defaulters' hits the nail on the coffin
‘19th Century’ approach to doing business will only create ‘third-class’ companies - Niti Aayog CEO
Current laws governing insolvency are fragmented, multi-layered and the adjudication of insolvency
matters take place in multiple fora, resulting in the development of an unpredictable regime
Entire process of winding up is very long-winded, with Courts, Debt Recovery Tribunals and the
Board for Industrial and Financial Reconstruction all having a say in the process
Current system does not address the interests of unsecured creditors (such as bond holders), foreign
creditors or institutions other than Banks (such as for NBFCs)
Creditors will not be stymied by red-tape and promoters will directly become accountable for any
financial lapses
The Code, by forcing failed firms to shut shop, can lead to a survival of the fittest in the job market
too
US has a Bankruptcy Code that provides for fairly quick liquidation or reorganisation of business. It's
time for India to follow suit if it needs to prevent the economy from tumbling southwards

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Why India's bankruptcy laws are such a mess?
Content World Bank reckons that it takes more than 4 years to wind up an ailing company here, almost twice
as long as it does in China, 1.5 years in high-income member countries of the Organisation for
Economic Co-operation and Development (OECD) – Dismal Statistic!
Recovery of debts, too, is stuck at just 25.7 cents on the dollar, among the worst in emerging
economies (80.4 cents in the US, 88.6 cents in the UK)
Kingfisher, once India's second-biggest airline, provides an illuminating example. The Company was
grounded in 2012 with debts of over USD 1.5 billion. But it was not until February of this year that its
long-suffering creditor banks got their hands on its former headquarters in Mumbai.
Nearly 60,000 bankruptcy cases languish in India's overburdened courts
Painfully slow pace as courts try to interpret a variety of conflicting laws that cover insolvency:
– Ailing companies have to wait until their net worth is reduced by half before they qualify as “sick”
– Regulations on land and labour which prevents selling of property/ laying off
– Some laws forbid creditors from taking any legal action against the defaulter until a restructuring
plan is in place which can take several years
ICSI Study Circle Meeting
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With respect to insolvency resolution, India's rank is as low as 136 (out of 189) compared to Singapore's
27, Australia's 14, UK's 13, and USA's 5

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Can the new bankruptcy law prevent more Vijay Mallyas?
Content
ICSI Study Circle Meeting
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Can the new bankruptcy law prevent more Vijay Mallyas?
Content Defaulting promoters, wilful or otherwise, are known to hide behind the shield that the law provides,
treating a company as a separate legal entity, distinct from its promoters, other shareholders, and
directors
Ruse of many defaulters - Following the doctrine of limited liability, the law recognises that the
liability of the shareholders of a company is limited to the extent of their contribution
When lenders turn on the heat, defaulters take a ride on the creaky over-burdened Bankruptcy
and insolvency system
Piercing the corporate veil for default may have a chilling effect on entrepreneurial activity, the
Courts appear to be conscious of this
New Code proposes to bring recalcitrant defaulters to book by empowering creditors to initiate the
process at an early stage to replace the management, and bring in new owners to a business facing
financial distress
Provides for takeover of management by insolvency professionals nominated by the creditors.
Professionals to have the flexibility to bring in turnaround specialists and consultants to achieve the
desired business results
Provides for liquidation of a company at the earliest opportunity to minimise losses for debtors and
shareholders. To deal with instances of asset stripping, the proposed Code provides for avoidance
actions to set aside fraudulent transactions intended to siphon of assets
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Dead Horses
Content Troubled companies in India, or their creditors, largely turn to the Official Liquidator, a government-
appointed officer attached to the Country's High Courts, who administers assets and oversees
liquidation
Official Liquidator system is a complete disaster
Banks can also turn to separate Debts Recovery Tribunals (DRT), partly staffed by officials on
assignment from the banks themselves and overseen by the Ministry of Finance
DRT - officials have little power to draw a line under languishing cases
Both are overstretched - always outnumbered by teetering pillars of files
Presence of multiple adjudication fora creates opportunities for debtor firms to exploit arbitrage to
frustrate the recovery efforts of creditors and to adversely impact timeliness of resolution process
Reform process has so far taken the approach of "interim fixes designed to solve the problem at
hand"
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Background
Content
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The Build up to the Code
Content
1 The Tiwari Committee (1985), which introduced the Sick Industrial Companies Act, Narasimhan Committee I and II (1991 and
1998), which introduced the Recovery of Debts Due to Banks and Financial Institutions Act and the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, Justice Eradi Committee (1999), which introduced
changes to the Companies Act and proposed the repeal of the Sick Industrial Companies Act, LN Mitra Committee (2001) which
proposed a comprehensive bankruptcy code
No single umbrella legislation governs insolvency and bankruptcy proceedings in India
Instead, there is a slew of legislation governing the legal framework, including:
– Companies Act 2013
– Sick Industrial Companies (Special Provisions) Act 1985
– Recovery of Debts Due to Banks and Financial Institutions Act 1993
– Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
2002
– Presidency Towns Insolvency Act, 1909
– Provincial Insolvency Act, 1920
– Forums such as the Debts Recovery Tribunals, Company courts and the National Company
Law Tribunal (proposed by the Companies Act and not yet in force)
Single piece of legislation to connect the various insolvency laws has been on the cards for some
time (nothing moves quickly here!)
Various committees1 have explored the idea of consolidating India's insolvency and bankruptcy
laws
Century Old, Archaic
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The Build up to the Code
Content However, it was not until November 4, 2015 that the Bankruptcy Law Reforms Committee (chaired
by former Secretary General, Lok Sabha and former Union Law Secretary - TK Viswanathan)
submitted its final report which recommended the passage of the Insolvency and Bankruptcy Code,
2015
On December 21, 2015, the Finance Minister tabled the Code before the lower house of the Indian
Parliament (Lok Sabha), currently with a standing committee, which is to give its report by April 29,
2016
A giant leap forward in terms of streamlining India's somewhat scattered insolvency laws into a
single piece of legislation which governs bankruptcy and insolvency for all debtors, including
companies, unlimited liability partnerships, limited liability partnerships, individuals and other
entities (as and when notified by the Central Government)
Code also seeks to repeal the two Insolvency Acts of 1909 and 1920 and amend many of the
existing statutes that govern insolvency proceedings
Code is aligned with the Government's initiative to make doing business in India easier
Divided into various chapters, the Code aims to address the different aspects of insolvency and
bankruptcy proceedings and the varying processes used by different types of debtors
Aimed at creating an overarching framework to make it easier for sick companies to either wind up
their business or engineer a turnaround, and for investors to exit
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Preamble and Structure
A Code to:
Code has 252 sections divided into
5 Parts as below:
Part 1
Preliminary
1 Chapter
Section 1 - 3
Long Title Structure
Part 2
Insolvency
Resolution and
Liquidation for
Corporate Persons
7 Chapters
Section 4 - 77
Part 3
Insolvency
Resolution and
Bankruptcy for
individuals and
Partnership Firms
7 Chapters
Section 78 - 187
 Of corporate persons, partnership firms
and individuals in a time bound manner
 For maximization of value of assets of such
persons, to promote entrepreneurship,
availability of credit and
 Balance the interests of all stakeholders
including alteration in the order of priority of
payment of Government dues and
 Consolidate and amend the laws relating to
reorganisation and insolvency resolution
Content
 To establish an Insolvency and Bankruptcy
Fund, and for matters connected therewith or
incidental thereto
Part 4
Regulation of
Insolvency
Professionals,
Agencies and
Information Utilities
7 Chapters
Section 188 - 223
Part 5
Miscellaneous
Section 224 - 252
Others - Schedules
(11), Statement of
Objects and
Reasons, Financial
Memorandum,
Memorandum
regarding delegated
legislation
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Key Features
Content
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Key Features
Content Applicable to both corporate and non - corporate persons
Facilitates early detection by permitting all creditors (whether secured, unsecured, domestic,
international, financial or operational) to trigger resolution processes
Establishes the Insolvency and Bankruptcy Board of India as the regulator, the National Company
Law Tribunal as an adjudicating authority for corporate entities, and the Debt Recovery Tribunals as
adjudicating authorities for non-corporate persons
Establishes a 180+90 day moratorium (quiet/ silent period) on acceleration and enforcement of
debts against the company
Provides for the replacement of existing management with resolution professionals during insolvency
proceedings to prevent asset-stripping
Provides for predictable and time-bound viability assessment mechanisms, liquidation processes
and distribution waterfalls
Provides for penalties on promoters for asset diversion leading up to liquidation
NCLT is the proposed forum for corporate bankruptcy and DRT is for individual bankruptcy
ICSI Study Circle Meeting
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Insolvency – A situation when an individual/ firm is unable to meet the financial obligations due to its
creditors
Bankruptcy – A legally declared status that an individual/ firm cannot repay debts

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Insolvency Resolution Process
Content Occurrence of Default
Application for initiation of a Restructuring process before the
Authority
Authority admits application - Restructuring process commences
Appointment of Restructuring Professional
Restructuring plan conforming to the Code approved by 75 percent of
financial creditors
Authority approves
plan: Plan becomes
binding
Authority issues a
Liquidation order
Yes No
180 Days (extendable by 90 days)
2 Days
2 Days
Imposition of
Moratorium
Period
Vesting of
Management
Powers
– Financial
Creditors
(Banks/ Bond
holders)
– Operational
Creditors
(Trade
Creditors)
– Debtors
Extendable once, under exceptional circumstances
ICSI Study Circle Meeting
April 2, 2016
Sandeep Jhunjhunwala
Weekends/ National Holidays notwithstanding!

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Key Points on Insolvency Resolution Process
Content Financial Creditor - Can file proceedings with the NCLT along with proof of default. Shall also
suggest an interim resolution professional to manage the defaulter
Operational Creditor - Needs to give a 10-day notice to the debtor for repayment before taking action
Corporate Creditor - Defaulting company can start proceedings by making a reference to the
Adjudicating Authority
NCLT to determine the default within 14 days
Financial creditors to take all key decisions in relation to company’s debt restructuring
Threat of automatic liquidation can create strange results
BoD or partners eligible to attend meetings of Committee of creditors, but not eligible to vote
The above point also holds true for the resolution applicant too
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Liquidation Process
Content
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Trigger event –
Non-receipt/ Rejection of
Resolution Plan, Intimation
about the decision of
Committee of creditors by
RP
RP to be appointed as
liquidator, unless replaced
by Committee of creditors.
Powers of BoD/ Partners to
vest with the Liquidator
Liquidator to identify the
assets of the corporate
debtor and form
liquidation estate and hold
such estate as fiduciary for
the Creditors
Liquidator to collect claims
from creditors within 30
days from commencement
of liquidation
Liquidator to verify such
claims within such time as
may be specified by the
Board
Liquidator to either admit
or reject claims and
communicate within 3
days of such admission or
rejection
Secured creditors to
identify assets offered to
them as security against
the sums owed to them
Liquidator to verify claims
of secured creditors and
discharge the secured
payments
Excess money realized by
secured creditors from the
liquidation of secured
assets to be accounted
and remitted to Liquidator
Any short recovery of
secured debts by a
secured creditor to be
treated as unsecured debt
and repaid in the specified
order of priority
After paying off secured
creditors, the unsecured
debts are to be paid off in
specified order of priority
If all the assets of the
corporate debtor are
completely liquidated, the
liquidator shall apply for
dissolution of corporate
debtor before NCLT
NCLT to pass an order
dissolving the corporate
debtor from the date of
such order
Copy of such order to be
forwarded to the RoC
within 7 days from the date
of such order

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Liquidation Estate – Inclusions and Exclusions
Content
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Inclusions Exclusions
Any assets over which the corporate debtor has
ownership rights
Assets that may/ may not be in possession of the
corporate debtor, including encumbered assets
Tangible assets (movable/ immovable)
Intangible assets (such as IPs, securities, financial
instruments, insurance policies etc)
Assets subject to determination of ownership by Courts
Assets recovered through proceedings for avoidance
of transactions
Asset in respect of which secured creditor has
relinquished security interest
Any other property vested in the corporate debtor on
the insolvency commencement date
All realization proceeds of liquidation
Assets in the possession of corporate
debtor but owned by third parties
Assets in security collateral held by
financial service providers
Personal assets of shareholder or partner
of corporate debtor
Assets of subsidiaries (Indian/ foreign) of
the corporate debtor
Any other assets as may be specified by
the Insolvency and Bankruptcy Board of
India
Compared with existing
law, the ambit of
excluded assets under
the Code has been
expanded

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Fast Track Corporate Insolvency Resolution
Content Application for fast track insolvency resolution may be made in respect of corporate debtor:
– With income or assets below specified threshold; or
– Having notified class of creditors or amount of debt; or
– Falling under the category notified by the Central Government
Fast Track Insolvency process to be completed within 90 days from commencement date
Provision for 1 extension only for a period of 45 days
Process may be initiated by a creditor or corporate debtor by furnishing proof of default or any other
specified details
Process largely the same as that for regular insolvency resolution
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Voluntary Liquidation
Content May be initiated by the corporate debtor even without existence of default
Declarations from majority of directors needed, to be verified by an affidavit of solvency
Special resolution of members needs to be passed within 4 weeks of declaration by directors
Resolution to be approved by creditors representing 2/3rd value of debt within 7 days of the
members resolution
RoC and the Board to be notified of the decision to voluntarily liquidate within 2 days of passing
resolution and subsequent approval by the creditors
The liquidation process shall commence from date of passing resolution.
Liquidator to make application to NCLT on winding up of affairs
NCLT to pass an order dissolving the corporate debtor from the date of such order
Copy of such order to be forwarded to the RoC within 14 days from the date of order
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Distribution of Assets/ Waterfall
Content
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Insolvency
Resolution and
Liquidation Cost
Secured Creditor
+ Workmen’s
dues
Wages and
unpaid dues to
employees
Unsecured
Creditors
Central and State
Government
Dues
Any remaining
debts or dues
Preference
Shareholders
Equity
Shareholders

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Adjudication, Offences and Penalties
Content NCLT – Adjudicating authority in relation to insolvency resolution/ liquidation for corporate persons/
corporate debtors including personal guarantors thereof
Appeal against the order approving resolution plan could be filed on the grounds of contravention of
laws, material irregularity, non-compliance with the statute etc
Appeal lies before the NCLAT followed by the Supreme Court for orders issued by NCLT
Penalties prescribed for:
– Concealment of property
– Undertaking transactions defrauding creditors
– Misconduct in course of corporate resolution insolvency process
– Falsification of Books of corporate debtor
– False representation to creditors
– Contravention of moratorium or resolution plan
– Non-disclosure of dispute or repayment of debt by operational creditor
Imprisonment for a term of 1-5 years + Monetary penalty in the range of INR 100,000 - 10,000,000
Insolvency Professional contravening the provisions of this Code liable for imprisonment
upto 6 months and monetary penalty in the range of INR 100,000 – 500,000ICSI Study Circle Meeting
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Dealing with Personal
Insolvency
Content
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Fresh Start – Eligibility and Process
Content Target group – For indigent, Bottom-of-the-pyramid
individuals with little or no money and assets
– Gross income< INR 60,000
– Assets < 20,000
– Qualifying Debt <35,000
– No dwelling unit/ home ownership
Akin to one time waiver of debt, based on
adjudication
Not automatic - Adjudicating Authority exercises
discretion - admission, discharge order at the end of
moratorium period
Creditors can challenge
Discharge from only ‘qualifying debts’ - unsecured,
upto INR 35,000
Time period – 6 months
Decision of the Resolution professional appealable
before the Adjudicating Authority
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Fresh Start – Pluses and Inadequacies
Content Good to abolish politically motivated loan-waivers which destroys the credit culture
Smooth process of dealing with insolvent poor people could potentially de-politicise the problem
Paltry limits of income, assets and debt fixed by the Code
Government could notify/ modify the limits, Code should not fix such limits
Thresholds designed using the Deprivation Index and Key indicators of debt and investment in India
for 2013 and need revision/ rethinking
Seems impractical that an individual seeking relief in respect of debt upto INR 35,000 could afford
the fee and expenses of resolution process/ insolvency professional
Section 85 – Debtor to make overseas travel during moratorium period after getting permission. Can
such segment afford overseas travel !
Idea behind this scheme may be financial inclusion, but whether the population segment covered will
at all be able to reach out to institutional framework is doubtful
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Insolvency Resolution and Bankruptcy
Content Insolvency Resolution Process
– Negotiated repayment plan for restructuring debts/ affairs
– Resolution Professional to supervise the implementation of repayment plan
– Trigger of Bankruptcy - Not automatic
– Only failure to comply can lead to Bankruptcy
– Maximum time period - 6 months
Bankruptcy Process
– Last resort
– Liquidation of estate of the Bankrupt
– Public notice inviting claims from creditors
– Discharge in a year
– Priority of payment of debts
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Insolvency Resolution and Bankruptcy
Content Linear Process
– Moratorium on fresh legal proceedings
– Trigger event - default in payment of debt
– Waterfall similar to corporate insolvency
– Provision for debt waiver
– Provisions on arrest of debtor
– Penalties prescribed for the Bankrupt and Bankruptcy trustee
Differences from the corporate process
– Distinction between financial and operational creditors absent
– Liquidation is not automatically triggered
– Secured creditors can stay out of Insolvency Resolution Process by enforcing security interest
– Interim moratorium starting from date of application to prevent coercive debt recovery action
– Fresh start
– NCLT – DRT
– Fast track Scheme
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New Opportunities/ Scope
Annexures
ICSI Study Circle Meeting
November 19, 2015

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New Opportunities/ Scope
Content
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Insolvency Professionals
– Induction of new “insolvency professionals” and “insolvency professional agencies” to run the
resolution process
– Under Regulator’s oversight, these agencies will develop professional standards, codes of
ethics and exercise a disciplinary role over errant members leading to the development of a
competitive industry for insolvency professionals
Insolvency Information Utilities
– The Code proposes for information utilities which would collect, collate, authenticate and
disseminate financial information from listed companies and financial and operational creditors
of companies
– An individual insolvency database is also proposed to be set up with the goal of providing
information on insolvency status of individuals

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Content
International Experience
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Chapter 11 – United States Bankruptcy Code
Content
Aspects
Insolvency A business is allowed time to restructure its
debt, while still in operation, in a pre-
insolvency stage
Quick identification of financial distress and a
180-270 day plan to revive a company
Fresh Start Gives the debtor a fresh start, subject to
which the debtor’s fulfilment of its obligations
under its plan of reorganisation
Fresh start provisions apply only to individuals
below the specified income/ asset/ debt
threshold
Management
Control
Company management continues to control
the company under court oversight (“Debtor-
in-possession model”) to steer the company
out of troubled waters
Management control passes over to resolution
professional with substantial power once an
insolvency resolution is underway
Reasons for
filing
Impending insolvency, massive liabilities,
adverse outcome in litigation, anticipated
liquidity issue
Business failure, inability to pay debts,
economic downturn
Secured vs
Unsecured
Creditors
Categorises creditors into classes treating
“like creditors like”
No differentiation - Appears to club secured
creditors with unsecured creditors
Another liquidation code under Chapter 7 provides for the appointment of trustee by the Court to oversee the liquidation of a
company. Under Chapter 7, the business is closed down before sale and the assets auctioned.
Chapter 11 provides to permit the firm to remain in operation while a plan of reorganisation is worked out with the creditors.
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What does the Code mean
for International creditors?
Content
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What does the Code mean for International Creditors?
Beneficial for
international funds/
financial institutions
looking to invest in new
money financings or
distressed debt
situations in India
All financial creditors, in
general, entitled to
participate in
restructuring process
irrespective of debt size
Level Field
Doesn’t override
exchange control
regulations
Adequate
safeguards
Content
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For loans advanced by
offshore lenders to
Indian borrowers under
the ECB route,
prepayment would still
require RBI approval
Ability to raise interim
financing from
international sources
could be limited due to
restrictions on end-use
and investor classes for
foreign currency
borrowings etc
Protection from
“Gaming” - Debtors who
have violated the terms
of a Restructuring Plan
in the past or undergone
a Restructuring Process
in the last 12 months,
precluded from initiating
a Restructuring Process
again

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Challenges
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Challenges
Content Are 180/ 270 days enough?
– Unlike the US Chapter 11 process, where the resolution plan is initially proposed by the
company itself, in the India Code, any creditor can propose a resolution plan. It is, therefore,
likely to be flooded with a mass of resolution plans
– Insolvency professional would need some time to understand the company, its cash flows,
essential operational creditors, etc, before it can prepare an Information Memorandum (IM),
needed to prepare a resolution plan
– Depends on whether a lively and robust insolvency professionals’ market develops in India
– Failure to adhere to 180/ 270 timeline results in commencement of liquidation process
Financial Creditors vis-à-vis Operational Creditors Bargain:
– Operational creditors denied a seat at the Creditors committee table
– NCLT, when reviewing the resolution plan, needs to ensure that operational creditors are
treated fairly
– Overtly benefiting operational creditors may unduly tip the delicate inter-creditor balanceICSI Study Circle Meeting
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Challenges
Content Secured creditors vis-à-vis Unsecured creditors Bargain:
– No demarcation for secured and unsecured creditors
– Creditors Committee comprises of all financial creditors and resolution plan is to be approved
by 75 percent (in value) of all financial creditors (regardless of whether secured or unsecured)
– If secured creditors constitute less than 25 percent of the financial debt, unsecured
creditors would be able to “cram down” a resolution plan on such creditors
– While the Code does protect the rights of secured creditors in a liquidation, at that stage the
value of the secured creditor’s collateral would have further eroded and the costs of the
insolvency process would also rank ahead of the secured creditors
– Statute should respect the seniority of secured creditors as a class; Re-look at the treatment of
secured creditors is merited
ICSI Study Circle Meeting
April 2, 2016
Sandeep Jhunjhunwala

38. Contents
Summary
Content
Annexures
Page 38
OPEN HOUSE & DISCUSSIONS
THANK YOU
Sandeep Jhunjhunwala
Associate Director | BMR & Associates LLP
E: Jhunjhunwala.sandeepr@gmail.com
M: +91 97401 55469
D: +91 80 4032 0011
Views expressed in the presentation are personal