Insolvency & Bankruptcy Practice

Why is the code imperative today?

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Lender inertia during the CIRP would mean liquidation – invariably an economically inferior outcome as compared to resolution2. Clarity on the insolvency framework will attract investors to invest into stressed/distressed situations3. Moratorium clause to ensure smooth insolvency-resolution process4. An “open floor” for submission of resolution plans should facilitate the approval of the best plan5. The framework defines the role of the judiciary and leaves limited scope for a legal delay/deferral of the problem

1. Reduce the time taken to resolve insolvency2. Develop investor confidence3. Eliminate confusion caused by a complex judicial framework4. Address the NPA situation decisively5. Develop the credit and bond market

1. Any creditor can file an insolvency petition a default of INR 1 Lakh or more2. Insolvency professional to takeover the management and operations of the borrower during the corporate insolvency resolution process3. Borrowers to focus on liquidity – ensure tight cash flow and monitoring to stay current on payments4. Need to be proactive in identifying issues, communicating with lenders and developing/implementing a turnaround plan5. In case of fraudulent diversion of assets, personal contribution can be sought; imprisonment possible

1. Create a single insolvency and bankruptcy framework - Set up a clear and unambiguous process to be followed by all stakeholders in a time-bound manner2. Provide a commercial solution to a commercial issue3. Allow genuine business failures a second chance4. Clear and unambiguous process to be followed by all stakeholders in a time-bound manner5. Provide confidence to lenders of their rights & enforcement

1. Right to control the borrower upon default and maximize recovery2. Option to initiate the process even if the default is in respect of the debt of another lender3. Need for more robust monitoring systems to enable judicious exercise of powers4. Lack of lender consensus on resolution plan can push the borrower into liquidation5. Clear priority of distribution (waterfall) upon liquidation; government dues subservient to those of secured creditors and unsecured financial creditors

Why was the code needed?

What does the code intend to change?

What does it change for the lenders?

What does it change for the Borrowers?

How can the code help?

Ecosystem

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Insolvency Professional Agencies (IPA’s)

Insolvency Professionals (IP)

Insolvent Entity

Insolvency And Bankruptcy Board (IBBI) IBBI– apex body for promoting transparency &

governance in the administration of the IBC; will be involved in setting up the infrastructure and accrediting IPs & IUs.

IUs - Centralised repository of financial and credit information of borrowers; would validate the information and claims of creditors vis-à-vis borrowers, as needed.

IPAs- professional bodies registered by the Board to promote and regulate the insolvency profession; these bodies will enrol IPs

IPs- Licensed private professionals regulated by the Board; will conduct resolution process; to act as Liquidator/bankruptcy trustee; appointed by creditors and override the powers of board of directors.

Adjudicating Authority (AA) - would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/ reject resolution plans, decide in respect of claims or matters of law/ facts thereof.

COC- consists of financial creditors to who will appoint and approve actions of IPs

Information Utilities (IUS)

Committee of Creditors (COC)

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Emergence of Insolvency Code – Globally

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Text 9.4

Results

USA: Recovery Rate

Text 3.7

Text 4.4

Text 4.4

Text 4.4

United States of America

1978

Canada

1985

Bankruptcy and Insolvency Act

Recovery rate (cents on the dollar): 87.4

• Time taken (years): 0.8

United States Bankruptcy Code

Recovery rate (cents on the dollar): 78.6

• Time taken (years): 1.5

United Kingdom

1986

Singapore

1995

India

2016

United kingdomInsolvency Act

Recovery rate (cents on the dollar): 88.6

• Time taken (years): 1

Singapore Bankruptcy Act

Recovery rate (cents on the dollar): 88.7

• Time taken (years): 0.8

Insolvency & Bankruptcy Code

Recovery rate (cents on the dollar): 26

• Time taken (years): 4.3

Current Status

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Ease of doing business ranking 130 out of 189 countries

72,841 cases pending in 33 debt recovery tribunals

The stressed assets peaked at 10 lakh crore, 15% of gross advances in 2015.

Cost of insolvency procedures amount to a 9 percent of the value of the estate.

Average recovery rate of debtors is close to 26 cents per dollar.

Average time taken for liquidation in India is 4.3 years

Driving factors

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Shift of control from the defaulting debtor’s management

to its creditors

Time bound resolution process to preserve the economic value –

entire process should be completed in 180 days (270 days in case of

extension)

If negotiations fail to establish viability, the

outcome of bankruptcy becomes binding

No injunction can be granted by any court, tribunal or authority

in respect to action taken by adjudicating authority

Lender can initiate the process even if the default is in respect of

the debt of another lender

Creditor approved resolution professional is

appointed ensuring unbiased decision making

Clear and fair distribution of funds in case of liquidation, government dues not to get

priority

Protection of assets of secured borrowers with maximisation of

realisation

Positive support from government for realisation

and resolution of NPAs

Recent govt. ordinance authorises RBI to force banks to

use IBC

Brings financial lenders to a platform – enabling quick decision making and arriving at consensus

quickly

Resolution Process

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Application to Adjudication

Authority

Appointment of Interim Resolution

ProfessionalMoratorium Period

Formulation of Credit Committee

Formulation of Information

Memorandum and Resolution Plan

Resolution plan proposed by creditors

NO Liquidate the company

YESImplement the

Plan

Resolution plan proposed by

creditors

75% approve the proposed plan

Resolution Process – Highlights

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Interim Resolution

Plan

Resolution Plan

Fast Track

Insolvency

Moratorium

COCVoting Power

Interim Resolution Plan

• Financial creditor applicant shall propose the name of an IRP in the application.

• It is optional for the operational creditor to propose the name of an interim IP

Moratorium

COC

Resolution Plan

Fast Track Insolvency

Voting Power

Interim Resolution

Plan

• NCLT to declare moratorium from the insolvency commencement date until the completion of insolvency.

• Moratorium shall prohibit:1. Institution of suits2. Transfer of shares3. Recovery of assets

• Consists of financial creditors only, excluding related parties.

• Will confirm or replace IRP as RP• To approve several actions of RP.• COC can replace IP during CIRP by 75%

approval.

• Payment of insolvency resolution process costs.• Pay liquidation value to operational creditor in 30 days and

to dissenting financial creditor before other financial creditors.

• Management of affairs of the borrower after the plan is approved.

• Implementation and supervision of the approved plan.

For debtors with:• Assets and income below a level• Such class of creditors• Other categories

As may be notified by the central government (completed in 90 days)

• Only financial creditors have voting rights in the committee in the ratio of the debt owed.

• All decision of the committee shall be approved by 75% of financial creditors.

• If all members are not present at a meeting, a vote shall not be taken at the meeting and the RP can seek vote by an electronic voting system.

• Directors of the suspended board and operational creditors can attend the meeting but would not have any voting rights

Liquidation process

Priority of Claims

Liquidation ProcessAppointment of

LiquidatorFormation of Liquidation

EstateConsolidation and

Verification of claimsDistribution of Assets

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• Costs and Expenses of Insolvency

521 43

• Workmen’s dues for the period of twenty-four months & dues of Secured Creditors

• Wages any unpaid to the employees

• Dues to central government and state government

• Unsecured Financial Creditors

Role of Insolvency Professional

Duties of resolution professional as per Section 25 :-

• Takes custody and control of all assets of the corporate debtor -including the business records of the corporate debtor

• Raise interim finances subject to the approval of the committee of creditors

• Appoint accountants, legal or other professionals in the manner as specified by Insolvency Board

• Invite prospective lenders, investors and any other persons to put forward resolution plans

• Present all resolution plans at the meetings of the committee of creditors

• Continuation of business as a going concern on behalf of the corporate debtor.

• Acts as a liquidator unless replaced by the Adjudication Authority and performs the following functions:

o Verification and settlement of claims of creditors

o Evaluation of assets and property

o Measures to protect and preserve the assets and properties

o Sale of immovable property and actionable claims

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Legal Framework

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Adjudicating Authority • The code has established two separate

tribunals to adjudicate grievances related to insolvency, bankruptcy and liquidation of different entities under the law:

i) NCLT will have jurisdiction overcompanies and LLPs

ii) the Debt recovery Tribunal willhave jurisdiction over individualsand partnership firms.

Board• Insolvency and Bankruptcy Board of

India(IBB) is an apex body governing Insolvency and Bankruptcy Code

• The major function of the board is to exercise regulatory measures on insolvency professionals, insolvency professional agencies and information utilities.

Agency• Insolvency Professional Agencies (IPAs)

would admit insolvency professionals as members.

o Currently there are three IPAs

– Indian Institute of Insolvency Professionals of ICAI

– ICSI Insolvency Professional Agency

– Insolvency Professional Agency of Institute of Cost Accountants of India

Information UtilitiesThe information utilities shall act as a regulated information agency which shall electronically record, maintain and provide access of financial information to the persons as may be specified e.g. creditors

Insolvency ProfessionalsInsolvency professionals play a vital role in the insolvency and bankruptcy resolution process as envisaged by the Committee Insolvency professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process.

Topic Current Regime The Code

What constitutes insolvency Inability to pay debt/erosion of net worth

Default of amount higher than INR 1 lakh

Class of creditors Secured and unsecured-separate classesrecognised

Financial and operational – no subclasses.Committee of creditors consists of financial creditors only

Management during CIRP Liquidator RP under supervision COC

Preferential payments Certain government dues had priority oversecured debt

Government dues rank after financial unsecured debt. Trade creditors rank below financial creditors

Exclusions from liquidation estate

N/A Netting and set off recognised on financial control

Institutional Framework Fragmented. Spread across various authorities & forums

Amends and consolidates laws relating to insolvency and reorganization of companies, partnerships and individuals. NCLT is the AA for CIRP. Also envisages establishment of information utilities.

Key Legal Differentiators

About KG Somani & Co.

• K G Somani& Co (KGS) is a 3rd generation Chartered Accountants firm, practicing in India for over 5 decades. TheManaging Partner, Mr. KG Somani is the past president of Institute of Chartered Accountants of India and has representedIndia on the council of International Federation of Accountants. KGS has an international presence in about thirtycountries being a member of TGS Global Network and it also has networking of firms under the regulation of the Instituteof Chartered Accountants of India through its affiliates & offices at five major cities in India. KGS has association withFinancial Institutions, Banks, Power Companies and Corporations, Manufacturing and Transport(including Railways & Aviation) Industry etc. in and outside India.

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KGS Network in India

Argentina, Brazil, Uruguay and Venezuela

Mexico and USA

China, Indonesia, Singapore,

Thailand, Turkey, United Arab

Emirates, Australia

Austria, Belgium, Cyprus, Czech Republic, France,

Germany, Hungary, Italy, Malta, Netherlands, Portugal,

Spain, United Kingdom

Angola & Kenya

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Empanelments• RBI panel for statutory audits of public sector banks• Comptroller Auditor General of India• Chief Commissioner of Income Tax New Delhi• Nationalized Banks, Govt. of India • Public Company Accounting Oversight Board • World Bank/ United Nations• Serious fraud Investigation Office

KGS Advantage

Sectors• Banking• NBFC• Industrial Products• Automobiles• Textile• FMCG

Services

• Auditing

• Taxation

• Financial Services

• Advisory & Liasoning

Network & Experience

KGS has an extensive network of Banks, NBFCs, VC/PEs and other financial institutions. It has presence in the accounting field for more than 5 decades and by leveraging on this experience, it is able to offer quality services to its clients

KGS Team

Our team of dedicated professionals have committed their experience and skills to provide high quality professional services to the clients with the commitment to the highest standards of ethics and integrity.

Presence• Domestic network: AVS & Affiliates AVS has a pan

India presence with around 50 partners and around 280 staff member

• International Network: TGS Global a global accountancy network specializing in accounting, audit, tax, & commercial legal services.

• Power Generation• Print Media• Hospitality• Dairy• Engineering and

Construction• Others

Introducing KGS in insolvency practice

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• Besides providing services in various financial and taxation matters along with consultancy in managerial field, our firm has well experienced Insolvency Professionals

KGS Services as Insolvency Professionals:

1. A fresh start order process

2. Individual insolvency resolution process

3. Corporate insolvency resolution process- Insolvency Professional (IP) to take over the management and operations of the borrower during the CIRP

4. Individual bankruptcy process and

5. Liquidation of a corporate debtor firm.

Cash flow forecasting & monitoring

Rapid diagnostic for red flags

Develop a turnaround plan (resolution plan)

Manage stakeholders

Sell non-core assets/ part of operations

Execute the turnaround plan

KGS Infrastructure

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TEAM COMPOSITION Strength

Advisors* 10

Partner 13

Chartered Accountants (other than partners)

15

Company Secretary/Cost Accountants 5

Law Graduates 2

MBA 5

Post Graduates 5

Semi - Qualified 50

Associates/ Consultants 10

Others 10

*These comprise of retired senior bankers and senior professionals from the large public and private sector undertakings and public sector banks/ financial institutions.**Our Qualified Insolvency Professionals are empanelled with top banks and financial institutions of India like State Bank of India, Punjab National Bank & Bank Of Baroda to name a few.

Key Personnel/Advisors

Mr. K G Somani was the president of the Institute of Chartered Accountants of India in 1988-89. He is a Fellow Member of ICAI and also a member of Institute of Company Secretaries of India & Institution of Valuers. He was also elected as a member of the Central Council of The ICAI in the year 1979, and was a council member during 1979-1992 (12 years). He has strong knowledge of finance, companies act, tax laws and has handled a large number of audits and cases related to sick units before BIFR and its appellate authority. He is Qualified Insolvency Professional and is registered with Insolvency & Bankruptcy Board of India . He is currently acting as resolution professional for Ferro Alloys Corporation Limited (Listed Company )

Mr. Dharmendra Dhelariya, a Chartered Accountant has more than 15 years of experience in Audit and Assurance, AccountingOutsourcing Solutions, Income Tax Services, Company Law Matters, Management Consultancy and Service Tax. His area ofspecialisation includes Information System Audit, Forensic Accounting and Fraud Detection and Insolvency and Bankruptcy. He isQualified Insolvency Professional and is registered with Insolvency & Bankruptcy Board of India

Mr. Vinod Somani is a chartered accountant and has over 30 years of experience in business. His focus areas are audit, income tax,company law matters, project finances and specializes in BIFR matters. Vinod is also serving as director of various public and privatecompanies. He has been serving on behalf of Department of Pubic Enterprises as an expert in the MOU task force committee acrossvarious sectors such as Oil & Gas, Chemical & Fertilizer, Tourism & Transport etc.

Mr. Pradeep Kabra is a Chartered Accountant and has a masters degree in law . He has over 30 years of experience in all facets of theupstream oil and gas industry . He is currently a partner with Faber Capital Limited and was the President and CEO of ShaMaranPetroleum Corp., a publicly listed company in Canada and NASDAQ First North, Stockholm. He is based in Geneva, Switzerland.

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Key Personnel/Advisors

Mr. Girish Gupta is a global financial executive with 31 years of full spectrum of financial experience in multinational companies. Wellrounded educational background with a chartered accountant degree from the Institute of Chartered Accountants Of India and Bachelors ofCommerce from Shri Ram College of Commerce, Delhi. Strong leadership and executive skills developed by working internationally withMNC’s, multicultural operations, cross border multicultural environment and energy sector focus orientation.

Mr. Sushil Behl is a Government Nominee on Central Council of the Institute of Cost Accountants of India and an Independent Director with SMC Power Generation Limited. He retired from the Board level position of Director (Finance) of Western Coalfields Limited (Coal India), in August 2013. An alumni of FMS, Delhi, his prime area of specialization is Financial Management with specialized skills in Corporate Governance, Corporate Finance, Budgetary Control, Corporate Law & Taxation, Capital restructuring, Coal Pricing, Contract Management, Dispute Resolution Mechanisms, Overseas Mergers & Acquisitions/ Trading, Infrastructure etc. He is Qualified Insolvency Professional and is registered with Insolvency & Bankruptcy Board of India.

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Mr. S. Vishvanathan joined State Bank of India as a probationary officer and served as the Managing Director at State Bank of India sinceOctober 9, 2012 until April 30, 2014. He has also served as the Chief Executive Officer and Managing Director of SBI Capital Markets Limitedfrom June 22, 2009 to August 2012. He has been closely involved in the debt restructuring plans of many companies. He is a hands-on manwith experience in all aspects of banking from wholesale to retail, treasury operations and international banking.

Mr. Achal Kumar Gupta holds a Master’s Degree in Arts and a certified associate of the Indian Institute of Bankers. Mr. Gupta was the Deputy Managing Director of IFCI Ltd for a period of 3 years from 12.12.2013 to 11.12.2016. He started his career at Syndicate Bank and thereafter joined State Bank of India in September, 1977 and retired as Managing Director of State Bank of Patiala on 30/11/2013. Mr. Gupta is having over 40 years of varied experience in the areas of Banking and Finance such as credit appraisal and administration, retail banking,treasury management, branch banking, agriculture banking, NRI services and risk management.

Key Personnel/Advisors

Ms. Neeru Abrol, ex- CMD, National Fertilizers Limited (NFL), is a Chartered Accountant by profession and has over three decades of richexperience in manufacturing industry, which also includes SAIL. She embodies an extensive experience in the field of financialmanagement. Under her stewardship, NFL has come into profits after a gap of two years with the successful commissioning of revamp projectscosting Approx. Rs. 4,700 Crores.

Mr. Vishwa Ranjan Gupta is ex- Director (Finance) of Central Warehousing Corporation since May, 2012. Shri Gupta, a B.Com graduate, is aFellow member of the Institute of Chartered Accountants of India and M.B.A. from U.K. He has over 32 years working experience in variousorganizations. He was also posted as Director Finance in Indian Railway Catering and Tourism Corporation Limited (IRCTC). He was aNominee Director on the Board of Andhra Pradesh State Warehousing Corporation, Maharasthra State Warehousing Corporation, MadhyaPradesh Warehousing and logistics Corporation, Telangana State Warehousing Corporation and Haryana State Warehousing Corporation

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Key Personnel/Advisors

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Mr. K K Kuba, a chartered accountant, is an alumni of Shri Ram College of Commerce & has an exposure of over four and half decades inindustry with a sound knowledge of finance, companies act, tax laws, Cost Accounts/Credit Control in listed and public limited Companies andreached to the level of DGM System and has handled a large number of audits.

Mr. Rajendra Prasad Tak, a chartered accountant , is a retired CMD of Cement Corporation of India. He played pivotal role in turnaround of the Company. His area of specialization includes Finance, Management, Sales, Marketing, Administration and Corporate Governance having in-depth knowledge and understanding of total business environment, function related knowledge, making business decisions, far sight vision, building team player. He is nominated as member of the Board of Governors of National Council for Cement and Building Materials by Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, on 26th February, 2014. He is also an elected member of executive board of SCOPE. He is Qualified Insolvency Professional and is registered with Insolvency & Bankruptcy Board of India

Mr. Bhuvnesh Maheshwari, a chartered accountant, has wide & rich experience of over 27 years in the field of auditing, accountancy, finance,banking & taxation including critical financial scrutiny & compilation of financial data, consultation on improving internal control systems. Heis experienced in Internal and Statutory Audits of large Public and Private Sector Undertakings, Banks, Financial Institutions, InsuranceCompanies, Mutual Funds, Venture capital, Co-operative Societies, System Audits, Investigation of frauds, audits in an EDP environment andspecial audit u/s 142 (2A) of the Income Tax Act. He also expertises in implementation of Internal Financial Controls & convergence of accountsin IndAS from IGAAP. He is Qualified Insolvency Professional and is registered with Insolvency & Bankruptcy Board of India .

Mr. Ashish Batta , a chartered accountant, has vast experience of 19 years in the field of Statutory Audits, Tax Audits, Management Audits, internal audits & due diligence audits etc. He has conducted numerous audits of large public and private sector companies, banking institutions and organizations in various sectors of industry and trade. He is Qualified Insolvency Professional and is registered with Insolvency & Bankruptcy Board of India .

Thanking You

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NAME EMAIL CONTACT NO

Vinod Somani vinodsomani@kgsomani.com +91 9811199708

Kavita Agarwal Kavitagarwal@kgsomani.com +91 9711037681

4/1 Asaf Ali Road, 3rd Floor, Delhi

Website: www.kgsomani.com