CS Professional

Chapter 3 International Valuation Standards Overview – CS Professional Valuations and Business Modelling Study Material is designed strictly as per the latest syllabus and exam pattern.

International Valuation Standards Overview – CS Professional Valuations and Business Modelling Study Material

Question 1.
State under what conditions/assumptions the following statements are true (state only one important condition/assumption for each):
Gordon’s Dividend Growth Model provides a good estimate of intrinsic value of a share. (June 2019, 5 marks)
Answer:
Gordon’s Dividend Growth Model provides a good estimate of intrinsic value of a share, for a company having constant dividend pay-out ratio, return on the equity remains constant, cost of equity does not change with time and market is efficient.

Question 2.
(i) What should be the contents of Valuation Report as per International Valuation Standards (IVS) and
(ii) What is the difference between ‘Valuation date’ and ‘date of the Valuation Report’. (June 2019, 5 marks)
Answer:
(i) As per International Valuation Standards (IVS) 103, where the report is the result of an assignment involving the valuation of an asset or assets, the report must convey the following, at a minimum:
(a) the scope of the work performed, including the elements mentioned in the para Scope of Work, to the extent that each is applicable to the assignment,
(b) the approach or approaches adopted.
(c) the method or methods applied,
(d) the key inputs used,
(e) the assumptions made,
(f) the conclusion(s) of value and principal reasons for any conclusions reached, and
(g) the date of the report (which may differ from the valuation date).

(ii) Difference between ‘Valuation date’ and ‘date of the Valuation Report’ As per International Valuation Standards, the valuation date must be stated. If the valuation date is different from the date on which the valuation report is issued or the date on which investigations are to be undertaken or completed then where appropriate, these dates should be clearly distinguished. Valuation date means, ‘the date’ or period for which financials or information is considered.

The date of Valuation Report is the date on which the report is signed. Valuation date must precede the date of Valuation Report and vice versa should not be done.

Question 3.
‘Different bases of value may require a particular Premise of Value or allow the consideration of multiple Premises of Value’ – Referring International Valuation Standards discuss briefly on different Premises of Valuation. (Dec 2019, 5 marks)

Question 4.
From the annual report 2009 of Precision Tools Limited, the following information has been collected:
Profit and Loss Account of Precision Tools Ltd. for the year ending on 31st March 2009.

Assume that the company follows a ‘Constant Dividend Payout Policy’ and it is committed to maintain the same. Number of shares outstanding as on 31.03.2009 is 5 crores. Net worth of the company as on 31.03.2009 is ₹ 3,100.58 crores and its cost of equity is 15%. Find the value of the equity shares of Precision Tools Limited. Use Constant Growth Model for valuation. (Dec 2009, 9 marks) [CMA Final]
Answer:
Valuation of Equity shares of Precision Tools Ltd. as at 31.3.2009 using the constant Growth Model for Valuation:
Dividend Per Share = ₹ 30 crores/5 crores = ₹ 6.00
Return on Equity = 443.40/3100.58 = 14.30%
Dividend Payout Ratio = (30.00 + 3.10)/443.40 = 7.47%
Retention Ratio = 100% – 7.47% = 92.53%
Growth Rate = 14.30% × 92.53% = 13.23%
Value of Equity Share = (6 × 1.1323)/(15.00% – 13.23%) = ₹ 384.49
Assumption: The company uses a “Constant Dividend Payout Policy”.

Question 5.
The following information along with other necessary information has been extracted from the Annual Report-2010 of Strongman Limited:
Profit and Loss Account of Strongman Limited for the year ending on March 31, 2010

Other Information:
(i) The company had declared total dividend (interim plus final) of 80% for the year 2009-10 on a share with face value of ₹ 10.
(ii) Net Worth of the company – ₹ 2887-355 million.
(iii) Interest on Risk Free Debt – 7.50%.
(iv) Company’s Beta – 1.15.
(v) Rate of Return on Equity Benchmark Index – 15.50%.
Assuming that the Constant Dividend Growth Model is an appropriate model for determining the value of the company’s share, you are required to use the above information and determine the value of the company’s share.
(Dec 2010, 6 marks) [CMA Final]
Answer:
Strong Man Ltd.

	(₹ millions)
Dividend per share paid during 2009-10 (₹ 10 × 80%)	8.00
Profit After Tax	984.663
Net Worth	2887.355
Return on Equity (ROE)(PAT/Net Worth)	34.10%
Total Dividend Paid including the Corporate Dividend tax	858.115
Payout Ratio (Total Payout/PAT)	87.15%
Retention Ratio (l-Payout Ratio)	12.85%
Growth Rate (g = ROE × Retention Ratio)	4.38%

Calculation of Cost of Equity Using CAPM:

Risk Free Rate	7.50%
The Company’s Beta	1.15
Return on Equity Benchmark	15.50%
Index Using CAPM, the cost of Equity is –	16.70%

using the Constant Growth Dividend Model, the value of the share will be –
= (₹ 8 × 1.0438)/(16.70% – 4.38%) = ₹ 67.78

Question 6.
The following financial statements have been extracted from the Annual Report 2011-12 of Kaka Steel:
Balance Sheet of Kaka Steel Limited as at 31^st March



EXPENSES

(i) Find the EPS for the period ending on March 31, 2011 and March 31, 2012.
(ii) The face value per share is ₹ 10. Determine Return on Equity (ROE) for the year ending on March 31,2011 and March 31, 2012.
(iii) Using the price of ₹ 471.75, determine the ratio between the market price and the book value as on April 1, 2012.
(iv) Calculate the P/E ratio using the price of ₹ 471.75 and the EPS calculated for the year ending on March 31, 2012.
(v) The CFO of Kaka Steels has to make a presentation as a part of due diligence in Merger and Acquisition process. He has requested your help in determining intrinsic value of the shares. Assuming that the intrinsic value of the Kaka Steel Ltd. share can be fairly estimated through the Constant Growth Model, using the information given below, you are required to determine the value of share. Assume the cost of equity as 15%.

(Dec 2012, 4+ 2+ 3 + 1 + 5 = 15 marks) [CMA Final]
Answer:
(i)

	31-Mar-11	31-Mar-12
	6,868.69	6,696.42
PAT	959.41	971.41
No. of shares	95.94	97.14
EPS	71.56	68.94

(ii)

	31-Mar-11	31 Mar-12
Share Capital	959.41	971.41
Reserves & Surplus	45,807.02	51,649.95
Money received against share warrants	178.2
Deferred tax liability	936.8	970.51
	47,881.43	53,591.87
Less: Foreign currency monetary item		407.9
	47,881.43	53,183.97
Return on Equity
Profit After Tax	6,865.69	6,696.42
Return on Equity	14.34%	12.59%

(iii) Net Worth as on 31-03-2012 53,186.97
Share Capital 971.41
No. of Share 97.14
Book Value per share 547.52
Market price on 020412012 471.75
Market price to Book Value Ratio 0.86

(iv) P/E Ratio = EPS/Market Price
= 68.94/471.75
= 6.84

(v)

Proposed dividend on ordinary shares	1,165.46
Tax on dividends	181.57
Total Pay out	1,347.03
Profit After Tax	6,696.42
Dividend Pay Out Ratio	20.12%
Retention Ratio	79.88%
Return on Equity	12.59%
Growth Rate ( ROE* Retention Ratio)	10.06%
Dividend Per Share (Proposed Dividend/ No. of Shares)	12
Cost of Equity	15.00%
Intrinsic Value of Share	267.17%

Question 7.
The following financial statements have been extracted from the Annual Report 2011-12 of Solid Biscuit Ltd. Balance Sheet of Solid Biscuits Ltd. as At 31^st March —


Miscellaneous Information about the Company
1. Face Value of the Share of the Company : ₹ 2 per share
2. Beta of the Company : 0.90
3. Promoters Holding : 62.59%
4. Dividend History of the Company:
Year ending on March 31, : Dividend Rate (%)
2003 : 100
2004 : 110
2005 : 140
2006 : 150
2007 : 150
2008 : 180
2009 : 400
2010 : 250
2011 : 325
2012 : 425
5. Effective Corporate Dividend Tax Rate = 16.22%
Miscellaneous Information about the Industry lo which the company belongs to:
PIE (Price/Earning Ratio) : 31.68
P/B (Price/Book Value Ratio) : 9.42
Market Capitalization/Enterprise Value : 0.97
Enterprise Value/PB DITA : 19.06
Miscellaneous Information about the Stock Market and Interest Rate:
1. The Market Rate of Return : 15.60%.
2. Risk Free Interest Rate : 7.75%
on the basis of the above, you are required to determine the following:
i. Intrinsic Value of the Share using Constant Growth Model. (June 2013, 5 marks)
ii. Determine the relative valuation of the Company’s Share using
I. P/E Multiple (June 2013, 2 marks)
II. P/B Multiple (June 2013, 4 marks) [CMA Final]
III. Market Capitalization/Enterprise Value (June 2013, 4 marks) (CMA Final)
Answer:
Determination of Intrinsic Value of the Share using constant Growth Model: (‘In Crores)

Calculation of Net Worth	31 – Mar -12
Share Capital	₹ 23.89
Reserves and Surplus	₹ 496.15
Deferred tax liabilities (Net)	₹ 8.16
Net Worth	₹ 528.20
Calculation of return on Equity PAT	₹ 186.74
Return on Equity	35.35%

(₹ in crores)

Dividend Particulars	2011 -12
Total share capital	₹ 23.89
No. of shares (No. in crores )	11.945
Dividend per share (‘2* 425%)	₹ 8.50
Total dividend	₹ 101.53
Taxon dividends @ 16.22%	₹ 16.47
Total pay out	₹ 118.00
PAT (Profit after Tax)	₹ 186.74
Dividend pay out ratio	63.19%
Retention Ratio	36.81%
Return on Equity (ROE)	35.35%
Growth Rate (ROEx retention rate)	13.01%
Dividend per share	8.50
Cost of Equity	14.81%
Intrinsic Value of the share	₹ 533.32

Calculation of the cost of Equity using CAPM:

Risk Free Interest rate	7.755
Market rate of return	15.60%
Beta of the Company	0.90%
Cost of Equity	14.81%

I. Answer:
Valuation as per P/E Multiple

Industry P/E Multiple	31.68
PAT	₹ 186.74
No. of Shares	11.945
Earning Per share (EPS)	₹ 15.63
Valuation as per P/E Multiple	₹ 495.26

II. Answer:
Valuation as per P/B Multiple

Industry P/B Multiple	9.42
Net worth	₹ 528.20
No. of Shares	11.945
Book value Per share (B)	₹ 44.22
Valuation as per P/B Multiple	₹ 416.55

III. Answer:
Valuation as per market capitalization/Enterprise value

Industry Market Capitalization/Enterprise value	0.97
Industry enterprises value/PBDITA	19.06
PBITA (profit Before Depreciation Interest tax and amortization) = (Profit Before tax + Finance Cost + depreciation and Amortization)	₹ 337.76
Enterprise value (19.06 * 337.76)	₹ 6,437.71
Market capitalization as per Industry ratio of Market Capitalization/Enterprise Value	₹ 6,244.57
No. of Shares	11.945
Valuation as per Market Capitalization/Enterprise value                                                         (in crores)	₹ 522.78

Question 8.
Consider two companies – Alpha Limited and Beta Limited. Both have announced their annual results for 2014-2015 on May 5, 2015 and as per the reported results both are having identical Profit After Tax (PAT) of ₹ 7,125 lakhs and 120 lakhs equity shares outstanding (face value of each share is ₹ 10). Both the companies having same net worth of ₹ 28,500 lakhs.

Alpha Limited has growth plans in future and accordingly, it has decided to have a low payout of 40% as dividend. It is believed that its earnings will increase by present rate of growth every year in perpetuity. Assume that the company is having the required rate of return on equity of 17% a year.

Beta Limited has growth plans in future, but not very ambitious and due to that, it is going to have a dividend payout of 60%. It is believed that its earnings will increase by the present rate of growth every year in perpetuity. Assume that the company is having the required rate of return on equity of 15% a year. Assume that both the companies are identical in all other aspects. Calculate P/E Ratio assuming that Constant Growth Model works. Also explain why a particular company is having higher P/E Ratio. (Dec 2015, 8 + 2 = 10 marks) [CMA Final]
Answer:

(in Lakhs)

Company	Alpha Ltd.	Beta Ltd.
Profit After Tax	7,125	7,125
No. of shares outstanding	120	120
Net Worth	28,500	28,500
Dividend Payout	40%	60%
Cost of Equity	17%	15%
ROE [(7,125 ÷ 28,500) × 100]	25%	25%
Growth Rate [ROE × (1 – Dividend Payout Ratio]	15%	10%
EPS(PAT ÷ No. of Shares)	₹ 59.38	₹ 59.38
Price per share	₹ 1365.50	₹ 783.80
P/E Ratio	23	13.20

Working Note	Alpha Ltd.	Beta Ltd.
1. Dividend Payout (40% & 60%)	₹ 2,850 lakhs	₹ 4,275 lakhs
2. Dividend per share	₹ 23.75	₹ 35.63
3. Dividend of next period [D0 (1 + g)]	₹ 27.31	₹ 39.19
4. Difference between Ke and g	2%	5%
5. Price of share (3 ÷ 4)	₹ 1365.50	783.80

Alpha Ltd. has high P/E Ratio because has high growth rate and it is holding back more profit through low dividend payout ratio to achieve higher growth rate.

Question 9.
Explain the concept of IVS and which committee constitute these standards?
Answer:
The International Valuation Standards Council (IVSC) is an independent, not-for-profit organization committed to advancing quality in the valuation profession. The primary objective of IVSC is to build confidence and public trust in valuation by producing standards and securing their universal adoption and implementation for the valuation of assets across the world. The International Valuation Standards (IVS) is a fundamental part of the financial system with high level of professionalism.

Valuations are widely used and relied upon in financial and other markets, whether for inclusion in financial statements, for regulatory compliance or to support secured lending and transactional activity. The International Valuation Standards (IVS) are standards for undertaking valuation assignments using generally recognized concepts and principles that promote transparency and consistency in valuation practice. IVSC promotes leading practice approaches for proper execution and effective competency of leading professionals.

The IVSC is the body responsible for setting the International Valuation Standards (IVS). The Board has autonomy in the development of its agenda and approval of its publications. In developing the IVS, the Board:

• Follows established due process in the development of any new standard, including consultation with stakeholders (valuers, users of valuation services, regulators, valuation professional organizations, etc) and public exposure of all new standards or material alterations to existing standards,
• Liaises with other bodies that have a standard-setting function in the financial markets,
• Conducts outreach activities including round-table discussions with invited constituents and targeted discussions with specific users or user groups.

The objective of the IVS is to increase the confidence and trust of users of valuation services by establishing transparent and consistent valuation practices. A standard will do one or more of the following:

• identify or develop globally accepted principles and definitions,
• identify and promulgate considerations for the undertaking of valuation assignments and the reporting of valuations,
• identify specific matters that require consideration and methods commonly used for valuing different types of assets or liabilities.

The IVS consist of mandatory requirements that must be followed in order to state that a valuation was performed in compliance with the IVS. Certain aspects of the standards do not direct or mandate any particular course of action, but provide fundamental principles and concepts that must be considered in undertaking a valuation.

Question 10.
Explain the IVS Framework in detail.
Answer:
The IVS Framework
This serves as a preamble to the IVS. The IVS Framework consists of general principles for valuers following the IVS regarding objectivity, judgment, competence and acceptable departures from the IVS.

Compliance with Standards
When a statement is made that a valuation will be, or has been, undertaken in accordance with the IVS, it is implicit that the valuation has been prepared in compliance with all relevant standards issued by the IVSC.

Assets and Liabilities
The standards can be applied to the valuation of both assets and liabilities. To assist the legibility of these standards, the words asset or assets have been defined to include liability or liabilities and groups of assets, liabilities, or assets and liabilities, except where it is expressly stated otherwise, or is clear from the context that liabilities are excluded.

Valuer
Valuer has been defined as “an individual, group of individuals, or a firm possessing the necessary qualifications, ability and experience to undertake a valuation in an objective, unbiased and competent manner. In some jurisdictions, licensing is required before one can act as a valuer. Because a valuation reviewer must also be a valuer, to assist with the legibility of these standards, the term valuer includes valuation reviewers except where it is expressly stated otherwise, or is clear from the context that valuation reviewers are excluded.
‘Registered Valuer’ means a person registered as a Valuer under Chapter XVII of the Companies Act 2013.

Registration as Valuers.
(1) For the purposes of sub-section (1) of section 247, the Central Government or any authority, institution or agency, as may be notified by the Central Government, shall maintain a register to be called as the Register of Valuers in which there shall be registered the names, address and other details of the persons registered as valuers in pursuance of section 247.

(2) The following persons shall be eligible to apply for being registered as a valuer:

(a) a Chartered Accountant, Company Secretary or Cost Accountant who is in whole-time practice, or retired member of Indian Corporate Law Service or any person holding equivalent Indian or foreign qualification as the Ministry of Corporate Affairs may recognize by an order; provided that such foreign qualification acquired by Indian citizen.

(b) a Merchant Banker registered with the Securities and Exchange Board of India, and who has in his employment person(s) having qualifications prescribed under (a) above to carry out valuation by such qualified persons;

(c) Member of the Institute of Engineers and who is in whole-time practice;

(d) Member of the Institute of Architects and who is in whole-time practice;

(e) A person or entity possessing necessary competence and qualification as may be notified by the Central Government from time to time.

Provided that persons referred to in (a), (c) and (d) and qualified person in (b) above shall have not less than five years continuous experience after acquiring membership of respective institutions.

Objectivity
The process of valuation requires the valuer to make impartial judgments as to the reliability of inputs and assumptions. For a valuation to be credible, it is important that those judgments are made in a way that promotes transparency and minimizes the influence of any subjective factors on the process. Judgment used in a valuation must be applied objectively to avoid biased analyses, opinions and conclusions.

Competence
Valuation must be prepared by an individual or firm having the appropriate technical skills, experience and knowledge of the subject of the valuation, the market(s) in which it trades and the purpose of the valuation. If a valuer does not possess all the necessary technical skills, experience and knowledge to perform all aspects of a valuation, it is acceptable for the valuer to seek assistance from specialists in certain aspects of the overall assignment, providing this is disclosed in the scope of work (see IVS 101 Scope of Work) and the report (see IVS 103 Reporting).

The valuer must have the technical skills, experience and knowledge to understand, interpret and utilize the work of any specialists.

Departures
A “departure” is a circumstance where specific legislative, regulatory or other authoritative requirements must be followed that differs from some of the requirements within IVS. Departures are mandatory in that a valuer must comply with legislative, regulatory and other authoritative requirements appropriate to the purpose and jurisdiction of the valuation to be in compliance with IVS. A valuer may still state that the valuation was performed in accordance with IVS when there are departures in these circumstances.

The requirement to depart from IVS pursuant to legislative, regulatory or other authoritative requirements takes precedence over all other IVS requirements.

Question 11.
Explain in detail the IVS Asset Standard under these categories.
(a) IVS 200 Businesses and Business interests
(b) IVS 210 Intangible Assets
(c) IVS 300 Plant and Equipment
(d) IVS 400 Real Property Interests
(e) IVS 410 Development Property
(f) IVS 500 Financial Instruments Answer:
Answer:
(a) IVS 200 Businesses and Business Interests
The definition of what constitutes a business may differ depending on the purpose of a valuation. However, generally a business conducts a commercial, industrial, service or investment activity. Businesses can take many forms, such as corporations, partnerships, joint ventures and sole proprietorships. The value of a business may differ from the sum’of the values of the individual assets or liabilities that make up that business. When a business value is greater than the sum of the recorded and unrecorded net tangible and identifiable intangible assets of the business, the excess value is often referred to as going concern value or goodwill.

When valuing individual assets or liabilities owned by a business, valuers should follow the applicable standard for that type of asset or liability (IVS 210 Intangible Assets, IVS 400 Real Property Interests, etc). Valuers must establish whether the valuation is of the entire entity, shares or a shareholding in the entity (whether a controlling or non-controlling interest), or a specific business activity of the entity. The type of value being provided must be appropriate to the purpose of the valuation and communicated as part of the scope of the engagement (see IVS 101 Scope of Work). It is especially critical to clearly define the business or business interest being valued as, even when a valuation is performed on an entire entity, there may be different levels at which that value could be expressed. For example:

Enterprise value: Often described as the total value of the equity in a business plus the value of its debt or debt-related liabilities, minus any cash or cash equivalents available to meet those liabilities.
Total invested capital value: The total amount of money currently invested in a business, regardless of the source, often reflected as the value of total assets less current liabilities and cash.
Operating Value: The total value of the operations of the business, excluding the value of any nonoperating assets and liabilities.

Equity value: The value of a business to all of its equity shareholders. Valuations of businesses are required for different purposes including acquisitions, mergers and sales of businesses, taxation, litigation, insolvency proceedings and financial reporting. Business valuations may also be needed as an input or step in other valuations such as the valuation of stock options, particular class(es) of stock, or debt.
Answer:
(b) IVS 210 Intangible Assets
An intangible asset is a non-monetary asset that manifests itself by its economic properties. It does not have physical substance but grants rights and/or economic benefits to its owner.

Specific intangible assets are defined and described by characteristics such as their ownership, function, market position and image. These characteristics differentiate intangible assets from one another.

There are many types of intangible assets, but they are often considered to fall into one or more of the following categories (or goodwill):

Marketing-related: Marketing-related intangible assets are used primarily in the marketing or promotion of products or services. Examples include trademarks, trade names, unique trade design and internet domain names.

Customer-related: Customer-related intangible assets include customer lists, backlog, customer contracts, and contractual and non-contractual customer relationships.

Artistic-related: Artistic-related intangible assets arise from the right to benefits from artistic works such as plays, books, films and music, and from non-contractual copyright protection.

Contract-related: Contract-related intangible assets represent the value of rights that arise from contractual agreements. Examples include licensing and royalty agreements, service or supply contracts, lease agreements, permits, broadcast rights, servicing contracts, employment contracts and non-competition agreements and natural resource rights.

Technology-based: Technology-related intangible assets arise from contractual or non-contractual rights to use patented technology, unpatented technology, databases, formulae, designs, software, processes or recipes.

In valuing an intangible asset, valuers must understand different value from customer contracts (those contracts in place on the specifically what needs to be valued and the purpose of the valuation.

As the amount of goodwill is dependent on which other tangible and intangible assets are recognized, its value can be different when calculated for different purposes. For example, in a business combination accounted for under IFRS or US GAAP, an intangible asset is only recognized to the extent that it:

(a) is separable, i.e., capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so, or

(b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations

While the aspects of goodwill can vary depending on the purpose of the valuation, goodwill frequently includes elements such as:
(a) company-specific synergies arising from a combination of two or more businesses (e.g, reductions in, operating costs, economies of scale or product mix dynamics),
(b) opportunities to expand the business into new and different markets,
(c) the benefit of an assembled workforce (but generally not any intellectual property developed by members of that workforce),
(d) the benefit to be derived from future assets, such as new customers and future technologies, and
(e) assemblage and going concern value.
Intangible asset valuations are performed for a variety of purposes. It is the valuer’s responsibility to understand the purpose of a valuation and whether intangible assets should be valued, whether separately or grouped with other assets, A non-exhaustive list of examples of circumstances that commonly include an intangible asset valuation component is provided below:

(a) For financial reporting purposes, valuations of intangible assets are often required in connection with accounting for business combinations, asset acquisitions and sales, and impairment analysis.
(b) For tax reporting purposes, intangible asset valuations are frequently needed for transfer pricing analyses, estate and gift tax planning and reporting, and ad valorem taxation analyses.
(c) Intangible assets may be the subject of litigation, requiring valuation analysis in circumstances such as shareholder disputes, damage calculations and marital dissolutions (divorce).
(d) Other statutory or legal events may require the valuation of intangible assets such as compulsory purchases/eminent domain proceedings.
(e) Valuers are often asked to value intangible assets as part of general consulting, collateral lending and transactional support engagements.
Answer:
(c) IVS 300 Plant and Equipment
Items of plant and equipment (which may sometimes be categorized as a type of personal property) are tangible assets that are usually held by an entity for use in the manufacturing/production or supply of goods or services, for rental by others or for administrative purposes and that are expected to be used over a period of time.

For Example, For lease of machinery and equipment, the right to use an item of machinery and equipment (such as a right arising from a lease) would also follow the guidance of this standard. It must also be noted that the “right to use” an asset could have a different life span than the service life (that takes into consideration of both preventive and predictive maintenance) of the underlying machinery and equipment itself and, in such circumstances, the service life span must be stated. Assets for which the highest and best use is “in use” as part of a group of assets must be valued using consistent assumptions. Unless the assets belonging to the sub-systems may reasonably be separated independently from its main system, then the sub-systems may be valued separately, having consistent assumptions within the sub-systems. This will also cascade down to sub-sub-systems and so on.

Factors that may need to be considered under each of these headings include the following:

(a) Asset-related:

1. the asset’s technical specification,

2. the remaining useful, economic or effective life, considering both preventive and predictive maintenance,

3. if the asset is not valued in its current location, the costs of

4. the asset’s condition, including maintenance history,

5. any functional, physical and technological obsolescence, decommissioning and removal, and any costs associated with the asset’s existing in-place location, such as installation and re-commissioning of assets to its optimum status,

6. for machinery and equipment that are used for rental purposes, the lease renewal options and other end-of-lease possibilities,

7. any potential loss of a complementary asset, e.g., the operational life of a machine may be curtailed by the length of lease on the building in which it is located,

8. additional costs associated with additional equipment, transport, installation and commissioning, etc, and

9. in cases where the historical costs are not available for the machinery and equipment that may reside within a plant during a construction, the valuer may take references from the Engineering, Procurement, Construction (“EPC”) contract.

(b) Environment-related:

1. the location in relation to the source of raw material and market for the product. The suitability of a location may also have a limited life, eg, where raw materials are finite or where demand is transitory,

2. the impact of any environmental or other legislation that either restricts utilisation or imposes additional operating or decommissioning costs,

3. radioactive substances that may be in certain machinery and equipment have a severe impact if not used or disposed of International Valuation Standards appropriately. This will have a major impact on expense consideration and the environment,

4. toxic wastes which may be chemical in the form of a solid, liquid or gaseous state must be professionally stored or disposed of. This is critical for all industrial manufacturing, and

5. licences to operate certain machines in certain countries may be restricted.

(c) Economic-related:

1. the actual or potential profitability of the asset based on comparison of operating costs with earnings or potential earnings (see IVS 200 Business and Business Interests),

2. the demand for the product manufactured by the plant with regard to both macro and micro economic factors could impact on demand, and

3. the potential for the asset to be put to a more valuable use than the current use (i.e., highest and best use).
Answer:
(d) IVS 400 Real Property Interests

Property interests are normally defined by state or the law of individual jurisdictions and are often regulated by national or local legislation. Before undertaking a valuation of a real property interest, a valuer must understand the relevant legal framework that affects the interest being valued.

A real property interest is a right of ownership, control, use or occupation of land and buildings. There are three main types of interest:

the superior interest in any defined area of land. The owner of this interest has an absolute right of possession and control of the land and any buildings upon it in perpetuity, subject only to any subordinate interests and any statutory or other legally enforceable constraints,

a subordinate interest that normally gives the holder rights of exclusive possession and control of a defined area of land or buildings for a defined period, e.g. under the terms of a lease contract, and/or

a right to use land or buildings but without a right of exclusive possession or control, eg, a right to pass over land or to use it only for a specified activity.

Intangible assets fall outside the classification of real property assets. However, an intangible asset may be associated with, and have a material impact on, the value of real property assets. It is therefore essential to be clear in the scope of work precisely what the valuation assignment is to include or exclude. For example, the valuation of a hotel can be inextricably linked to the hotel brand. In such cases, the valuation process will involve consideration of the inclusion of intangible assets and their impact on the valuation of the real property and plant and equipment assets. When there is an intangible asset component, the valuer should also follow IVS 210 Intangible Assets.

To comply with the requirement to identify the asset to be valued in IVS 101 Scope of Work, the following matters must be included:

(a) a description of the real property interest to be valued, and
(b) identification of any superior or subordinate interests that affect the interest to be valued.
For Examples, Valuations of real property interests for different purposes including secured lending, sales and purchases, taxation, litigation, compensation, insolvency proceedings and financial reporting.
Answer:
(e) IVS 410 Development Property

In the context of this standard, development properties are defined as interests where redevelopment is required to achieve the highest and best use, or where improvements are either being contemplated or are in progress at the valuation date and include:

• the construction of buildings,
• previously undeveloped land which is being provided with infrastructure,
• the redevelopment of previously developed land,
• the improvement or alteration of existing buildings or structures,
• land allocated for development in a statutory plan, and
• land allocated for a higher value uses or higher density in a statutory plan.

Valuations of development property may be required for different purposes. It is the valuer’s responsibility to understand the purpose of a valuation. A non-exhaustive list of examples of circumstances that may require a development valuation is provided below:

(a) when establishing whether proposed projects are financially feasible,
(b) as part of general consulting and transactional support engagements for acquisition and loan security,
(c) for tax reporting purposes, development valuations are frequently needed for ad valorem taxation analyses,
(d) for litigation requiring valuation analysis in circumstances such as shareholder disputes and damage calculations,
(e) for financial reporting purposes, valuation of a development property is often required in connection with accounting for business combinations, asset acquisitions and sales, and impairment analysis, and
(f) for other statutory or legal events that may require the valuation of development property such as compulsory purchases.

When valuing development property, valuers must follow the applicable standard for that type of asset or liability. The residual value or land value of a development property can be very revenue to be derived from the completed project or any of the development costs that will be incurred. This remains the case regardless of the method or methods used or however diligently the various inputs are researched in relation to the valuation date.

This sensitivity also applies to the impact of significant changes in either the costs of the project or the value on completion of the current value. If the valuation is required for a purpose where significant changes in value over the duration of a construction project may be of concern to the user (e.g., where the valuation is for loan security or to establish a project’s viability), the valuer must highlight the potentially disproportionate effect of possible changes in either the construction, costs or end value on the profitability of the project and the value of the partially completed property. A sensitivity analysis may be useful for this purpose provided it is accompanied by a suitable explanation.
Answer:
(f) IVS 500 Financial Instruments
A financial instrument is a contract that creates rights or obligations between specified parties to receive or pay cash or other financial consideration. Such instruments include but are not limited to, derivatives or other contingent instruments, hybrid instruments, fixed income, structured products and equity instruments. A financial instrument can also be created through the combination of other financial instruments in a portfolio to achieve a specific net financial outcome.

Valuations of financial instruments conducted under IVS 500 Financial Instruments can be performed for many different purposes including, but not limited to:
(a) acquisitions, mergers and sales of businesses or parts of businesses,
(b) purchase and sale,
(c) financial reporting,
(d) legal or regulatory requirements (subject to any specific requirements set by the relevant authority),
(e) internal risk and compliance procedures,
(f) tax, and
(g) litigation.

To comply with the requirement to identify the asset or liability to be valued as in IVS 101 Scope of Work, the following matters must be addressed:
(a) the class or classes of instrument to be valued,
(b) whether the valuation is to be of individual instruments or a portfolio, and investigations required to support the valuation must be adequate having
(c) the unit of account.
IVS 102 Investigations and Compliance, provide that the regard to the purpose of the assignment. To support these: investigations, sufficient evidence supplied by the valuer and/or a credible and reliable third party must be assembled. To comply with these requirements, the following are to be considered:
(a) All market data used or considered as an input into the valuation process must be understood and, as necessary, validated.
(b) Any model used to estimate the value of a financial instrument shall be selected to appropriately capture the contractual terms and economics of the financial instrument.
(c) Where observable prices of, or market inputs from, similar financial instruments are available, those imputed inputs from comparable price(s) and/or observable inputs should be adjusted to reflect the contractual and economic terms of the financial instrument being valued.
(d) Where possible, multiple valuation approaches are preferred. If differences in value occur between the valuation approaches, the valuer must explain and document the differences in value.

To comply with the requirement to disclose the valuation approach(es) and reasoning in IVS 103 Reporting, consideration must be given to the appropriate degree of reporting detail. The requirement to disclose this information in the valuation report will differ for different categories of financial instruments. Sufficient information should be provided to allow users to understand the nature of each class of instrument valued and the primary factors influencing the values. Information that adds little to a users’ understanding as to the nature of the asset or liability, or that obscures the primary factors influencing value, must be avoided. In determining the level of disclosure that is appropriate, regard must be had to the following:

(a) Materiality: The value of an instrument or class of instruments in relation to the total value of the holding entity’s assets and liabilities or the portfolio that is valued.
(b) Uncertainty: The value of the instrument may be subject to significant uncertainty on the valuation date due to the nature of the instrument, the model or inputs used or to market abnormalities. Disclosure of the cause and nature of any material uncertainty should be made.
(c) Complexity: The greater the complexity of the instrument, the greater the appropriate level of detail to ensure that the assumptions and inputs affecting value are identified and explained.
(d) Comparability: The instruments that are of particular interest to users may differ with the passage of time. The usefulness of the valuation report, or any other reference to the valuation, is enhanced if it reflects the information demands of users as market conditions change, although, to be meaningful, the information presented, should allow comparison with previous periods.
(e) Underlying instruments: If the cash flows of a financial instrument are generated from or secured by identifiable underlying assets or liabilities, the relevant factors that influence the underlying value must be provided in order to help users understand how the underlying value impacts the estimated value of the financial instrument.

Question 12.
What are the Indian Valuation Standards issued by ICAI.
Answer:
Indian Valuation Standards (IVSs) issued by ICAI
Valuation Standards Board of ICAI has issued ‘Indian Valuation Standards (IVS 101,102,103, 201,202, 301,302, 303)’. These standards sets out the concepts, principles, practices and procedures to ensure uniformity in approach and quality of valuation output.

Valuation field is gaining importance now and is considered as one of the most critical areas in finance and it plays a key role in many areas of finance such as buy/ sell, solvency, merger and acquisition. It also plays an important role in the Insolvency Resolution regime where Liquidation value has to be ascertained by Resolution professional through the Registered Valuers.

Looking at the importance, The Institute of Chartered Accountants of India has constituted Valuation Standards Board in the year 2017-18. The Valuation Standards Board has been constituted to focus on the release of Indian Valuation Standards, providing Interpretations, Guidance and Technical Materials from time to time and implementation of the Standards. With a vision to promote best practices in this niche area of practice, the Standards lay down a framework for the chartered accountants to ensure uniformity in approach and quality of valuation output. The following Valuation Standards have been issued by ICAI:

1. Preface to the Indian Valuation Standards
2. Framework for the Preparation of Valuation Report in accordance with the Indian Valuation Standards
3. Indian Valuation Standard 101-Definitions
4. Indian Valuation Standard 102 – Valuation Bases
5. Indian Valuation Standard 103 – Valuation Approaches and Methods
6. Indian Valuation Standard 201 – Scope of Work, Analyses and Evaluation
7. Indian Valuation Standard 202 – Reporting and Documentation
8. Indian Valuation Standard 301 – Business Valuation
9. Indian Valuation Standard 302 – Intangible Assets
10. Indian Valuation Standard 303 – Financial Instruments

These Indian Valuation Standards will be applicable for all valuation engagements on mandatory basis under the Companies Act 2013. In respect of Valuation engagements under other Statutes like Income Tax, SEBI, FEMA etc, it will be on recommendatory basis for the members of the Institute. These Valuation Standards are effective for the valuation reports issued on or after 1st July, 2018.

Chapter 17 Professional and Ethical Practices for Insolvency Practitioners – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Professional and Ethical Practices for Insolvency Practitioners – CS Professional Insolvency Law and Practice Study Material

Question 1.
‘Integrity, objectivity and Independence are the primary criteria to be appointed as Resolution Professional’s – Elucidate the statement highlighting few important code of conduct for Insolvency professionals under the Insolvency and Bankruptcy Code, 2016. (Dec 2020, 6 marks)
Answer:
Integrity and Objectivity

1. An insolvency professional must maintain integrity by being honest, straightforward, and forthright in all professional relationships.
2. An insolvency professional must not misrepresent any facts or situations and should refrain from being involved in any action that would bring disrepute to the profession.
3. An insolvency professional must act with objectivity in his professional dealings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not.
4. An insolvency professional appointed as an interim resolution professional, resolution professional, liquidator, or bankruptcy trustee should not himself acquire, directly or indirectly, any of the assets of the debtor, nor knowingly permit any relative to do so.

Independence

1. An insolvency professional must maintain complete independence in his professional relationships and should conduct the insolvency resolution, liquidation or bankruptcy process, as the case may be, independent of external influences.
2. In cases where the insolvency professional is dealing with assets of a debtor during liquidation or bankruptcy process, he must ensure that he or his relatives do not knowingly acquire any such assets, whether directly or indirectly unless it is shown that there was no impairment of objectivity, independence or impartiality in the liquidation or bankruptcy process and the approval of the Board has been obtained in the matter.
3. An insolvency professional shall not take up an assignment under the Code, if he, any of his relatives, any of the partners or directors of the insolvency professional entity of which he is a partner or director, or the insolvency professional entity of which he is a partner or director is not independent, in terms of the Regulations related to the processes under the Code, in relation to the corporate person/ debtor and its related parties.
4. An insolvency professional shall disclose the existence of any pecuniary or personal relationship with any of the stakeholders entitled to distribution under sections 53 or 178 of the Code.
5. An insolvency professional shall not influence the decision or the work of the committee of creditors or debtor, or other stakeholders under the Code, so as to make any undue or unlawful gains for himself or his related parties, or cause any undue preference for any other persons for undue or unlawful gains and shall not adopt any illegal or improper means to achieve any mala side objectives

Question 2.
What are the powers of the disciplinary committee of Insolvency and Bankruptcy Board of India (IBBI)? Also elaborate the circumstances when the IBBI can cancel or suspend the registration of an Insolvency Professional Agency (IPA). (Dec 2021, 3 + 3 = 6 marks)
Answer:
Powers of the Disciplinary Committee
Section 220 of the Insolvency and Bankruptcy Code, 2016 deals with the appointment of disciplinary committee. It provides that-

1. The Board shall constitute a disciplinary committee to consider the reports of the investigating authority submitted under section 218(6). Provided that the members of the disciplinary committee shall consist of whole-time members of the Board only.
2. On examination of the report of the Investigating Authority, if the disciplinary committee is satisfied that sufficient cause exists, it may impose penalty as specified in sub-section 3 or suspend or cancel the registration of the Insolvency Professional (IP) or suspend or cancel the registration of Insolvency Professional Agency (IPA) or Information Utility (IU).
3. Where any IPA or IP or an IU has contravened any provisions of this Code or rules or regulations made, thereunder, the disciplinary committee may impose penalty which shall be-
   • Three times the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention; or
   • Three times the amount of the unlawful gain made on account of such contravention, whichever is higher.
     Provided that where such loss or unlawful gain is not quantifiable, the total amount of the penalty imposed shall not exceed more than one crore rupees.
4. Notwithstanding anything contained in sub-section (3), the board may direct any person who has made unlawful gains or averted loss by indulging in any activity in contravention of this Code, or the rules or regulations made thereunder, to disgorge an amount equivalent to such unlawful gain or aversion of loss.
5. The Board may take such action as may be required to provide restitution to the person who suffered loss on account of any contravention from the amount so disgorged, if the person who suffered such loss is identifiable and the loss suffered is directly attributable to such person.
6. The Board may make regulations to specify-
   a. the procedure for claiming restitution under sub-section (5),
   b. the period within which such restitution may be claimed, and
   c. the manner in which restitution of amount may be made.

Cancellation or suspensions of registration of IPA:
Section 201 (5) of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to the cancellation or suspension of registration of IPA. It provides that the Board may, by order, suspend or cancel the certificate of registration granted to an IPA on any of the following grounds namely:
a. that is has obtained registration by making a false statement or misrepresentation or by any other unlawful means;
b. that it has failed to comply with the requirements of the regulations made by the Board or bye-law made by the IPA;
c. that is has contravened any of the provisions of the Act or the rules or the regulations made thereunder;
d. on any other ground as may be specified by regulations.
Provided that no order shall be made under this sub-section unless the IPA concerned has been given a reasonable opportunity of being heard.
Provided further that no such order shall be passed by any member except whole- time members of the Board.

Question 3.
The Insolvency and Bankruptcy Board of India (IBBI) and Insolvency Professional Agencies (IPAs) have come across, some mistakes being committed by some of the Insolvency Professionals (IPs) in conduct of Corporate Insolvency Resolution Process (CIRP). These mistakes costs to the Corporate Debtor (CD) and to the economy, and often amounts to contravention of provisions of the law.
Explain in detail the mistakes committed by the Insolvency Professionals (IPs) with reference to the:
(i) Accepting the assignment without having the Authorisation For Assignment (AFA),
(ii) Fee payable to the IP,
(iii) Appointment of Professionals and
(iv) Appointment of Registered Valuers, by qouting the relevant provisions of the Insolvency and Bankruptcy Code, 2016. (Dec 2021, 3 marks each)
Answer:
Yes, it is true to say that the Insolvency and Bankruptcy Board of India (IBBI) and Insolvency Professional Agencies (IPAs) have come across some mistakes being committed by some of the IPs in conduct of CIRPs. These mistakes are costs to the Corporate Debtor (CD) and the economy, and often amount to contravention of provisions of the law.
The mistakes committed by the IPs and the relevant provisions of the IBC are as under:
(i) Assignment without having Authorisation : Regulation 7A of the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) requires that an IP shall not accept or undertake any assignment, including CIRP, unless he holds an authorisation for assignment (AFA) on the date of such acceptance or commencement of such assignment, as the case may be.
As per Regulation 12A(5) of Insolvency and Bankruptcy Board of India (Model Bye- Laws and Governing Board Of Insolvency Professional Agencies) Regulations, 2016 i.e. (bye-laws of the IPAs) provide that, if the AFA is not issued, renewed or rejected by the IPA within 15 days of the date of receipt of application, the authorisation shall be deemed to have been issued or renewed, as the case may be, by the IPA. The Insolvency and Bankruptcy Board of India (IBBI) has made available an IT facility for the IPs to apply for the issuance or renewal of AFA and the IPAs to issue or renew AFAs, as the case may be, in a time bound manner. There are, however, instances where an IP undertook CIRP without having an AFA and in some cases, without even applying for an AFA, in contravention of the provisions of law.

(ii) Fee payable to IP: The Code of Conduct for Insolvency Professionals (IPs) under the IBBI (Insolvency Professionals) Regulations, 2016 require that an IP must provide services for remuneration which is charged in a transparent manner, and is a reasonable reflection of the work necessarily and properly undertaken.
Regulation 33 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) requires that the applicant shall fix the expenses to be incurred on or by the IRP. Regulation 34 requires that the committee of creditors (CoC) shall fix the expenses to be incurred on or by the RP. Regulation 39D requires the CoC to fix the fee payable to the liquidator, in the event the CD proceeds for liquidation.
It is, however, observed that in a few cases, the fee payable to an IP was not fixed beforehand and the IP drew a fee on his own without approval of such fee from the competent authority, in contravention of the provisions of law.

(iii) Appointment of professionals : It is the duty of the Resolution Professional (RP) to preserve and protect the assets of the Corporate Debtor (CD), including continuing its business operations. Section 25(2) of the Code empowers an RP to appoint accountants, legal or other professionals for this purpose. Clause 23B of the Code of Conduct under the IBBI (Insolvency Professionals) Regulations, 2016 prohibits an IP from engaging or appointing any of his relatives or related parties for or in connection with any work relating to any of his assignment.
An IP is, therefore, required to satisfy himself that there is a need for services of a professional; such services are not available within the CD; the person is qualified to render professional service; the professional to be appointed is suitable for the purpose; the professional is not a relative or related party of the IP; the fee to be paid to the professional is reasonable; etc.
RP needs to apply his mind to these and other related aspects while appointing a professional. RP must not appoint any person who is not a professional, or who is his relative or a related party, or who is choice of a stakeholder. RP must not appoint a professional to provide services to a stakeholder, or a professional because a stakeholder wants that professional to be appointed. There are instances where the RP appointed a professional who is the choice of a stakeholder or a person who is not a professional for professional services. This compromises the independence of the IP as well as that of the professionals and imposes avoidable cost on the CD and other stakeholders.

(iv) Appointment of registered valuers : Regulation 27 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) envisages estimation of fair value and liquidation value of the assets of the Corporate Debtor (CD). These values serve as reference for evaluation of choices, including liquidation, and selection of the choice that decides the fate of the CD, and consequently of the stakeholders. A wrong valuation may liquidate an otherwise viable CD, which may be disastrous for an economy.
Given the importance of valuation in CIRP, the CIRP Regulations require that fair value and liquidation value of the CD shall be determined by two registered valuers (RVs) and it is the duty of the RP to appoint RVs only. There are, however, a few instances where the RP appointed persons other than RVs for conduct of valuations and in some cases, appointed only one RV instead of two. This indicates lack of due diligence and sincerity of the IP and probably demonstrates mala fide intent in some cases to get a valuation done to subserve certain interests. This potentially risks the life of the CD and adversely affects the interests of stakeholders, and drives out qualified and regulated valuation professionals out of practice.

Question 4.
The Insolvency and Bankruptcy Board of India (IBBI) had issued ‘Show Cause Notice’ (SCN) to Suresh Kumar, Insolvency Professional (IP) under Regulation 11 of the IBBI (Insolvency Professionals) Regulations, 2016 for accepting the assignment as Resolution Professional (RP) in the Corporate Insolvency Resolution Process (CIRP) of Crane India Ltd, a Corporate Debtor (CD) after 31st December, 2019, without holding a valid Authorisation for Assignment (AFA) issued to him by his Insolvency Professional Agency (IPA).
In this case Suresh Kumar was ratified to act as RP in the meeting of Committee of Creditors (CoC) held on 19th January, 2020. However, consent for CIRP assignment by RP was given in June, 2018 and CIRP commenced in November, 2019.
The IBBI alleged that, Suresh Kumar had accepted assignment as the RP in CIRP of the CD after 31st December, 2019 without having valid AFA which is in the contravention of Section 208 of IBC.
However, the RP replied to the SCN that the assignment was accepted to act as RP before 31st December, 2019 by him and the same was admitted by Hon’ble National Company Law Tribunal (NCLT). He further stated that he did not have any malafide intention for not obtaining the AFA and apologized for the same.
But it was referred to Disciplinary Committee (DC) by the IBBI for disposal of the SCN in accordance with the Code and Regulations made thereunder.
Whether the RP is liable on the basis of above facts ? (June 2022, 6 marks)

Question 5.
Who is insolvency professional?
Answer:

• Insolvency Professional means a person enrolled with an Insolvency Professional Agency as its member and registered with the IBBI as an Insolvency Professional.
• “Insolvency Professional” means a person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207.
• An Insolvency Professional (IP) plays a very important role under the Insolvency and Bankruptcy Code, 2016.

Question 6.
Explain the following key terms as per the Insolvency and Bankruptcy Code, 2016:
(a) Liquidator
(b) Resolution Professional
(c) Bankruptcy Trustee
(d) Resolution Professional
Answer:
(a) Liquidator: “Liquidator” means an insolvency professional appointed as a liquidator in accordance with the provisions of Chapter III or Chapter V of Part II, as the case may be.
(b) Resolution Professional: “Resolution Professional”, for the purposes of Part II, means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim-resolution professional.
(c) Bankruptcy Trustee: “Bankruptcy Trustee” means the insolvency professional appointed as a trustee for the estate of the bankrupt under
section 125.
(d) Resolution Professional: “Resolution Professional” means an insolvency professional appointed under Part III as a resolution professional for conducting the fresh start process or insolvency resolution process

Question 7.
Explain the provisions related to enrolment and registration of Insolvency Professionals?
Answer:

• Section 206 of the Insolvency and Bankruptcy Code lays down that no person shall render his services as insolvency professional under this Code without being enrolled as a member of an insolvency professional agency and registered with the Board.
• Section 207(1) further lays down that every insolvency professional shall, after obtaining the membership of any insolvency professional agency, register himself with the Board within such time, in such manner and on payment of such fee, as may be specified by regulations.
• Section 207(2) empowers the IBBI to specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field to act as insolvency professionals.
• The Insolvency and Bankruptcy Board of India has made the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 to regulate the working of Insolvency Professionals. These regulations are amended from time to time by the Insolvency and Bankruptcy Board of India

Question 8.
State the functions and obligations of Insolvency Professionals?
Answer:
Functions of insolvency Professionals
Section 208(1) of the Code provides that where any insolvency resolution, fresh start, liquidation or bankruptcy process has been initiated, it shall be the function of an insolvency professional to take such actions as may be necessary, in the following matters, namely:-
(a) a fresh start order process under Chapter II of Part III;
(b) individual insolvency resolution process under Chapter III of Part III;
(c) corporate insolvency resolution process under Chapter II of Part II;
(d) individual bankruptcy process under Chapter IV of Part III; and
(e) liquidation of a corporate debtor firm under Chapter III of Part II. Obligations of Insolvency Professionals
Section 208(2) mandates that every insolvency professional shall abide by the following code of conduct:-
(a) to take reasonable care and diligence while performing his duties;
(b) to comply with all requirements and terms and conditions specified in the bye-laws of the insolvency professional agency of which he is a member;
(c) to allow the insolvency professional agency to inspect his records;
(d) to submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the insolvency professional agency of which he is a member; and
(e) to perform his functions in such manner and subject to such conditions as may be specified.

Question 9.
Explain in detail the “Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016”?
Answer:

• The Insolvency and Bankruptcy Board of India has made the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 in exercise of the powers conferred by sections 196,207 and 208 read with section 240 of the Insolvency and Bankruptcy Code, 2016.
• These regulations came into force with effect from 29th November 2016. The IBBI (Insolvency Professionals) Regulations, 2016 makes provisions for the examination and registration of Insolvency Professionals with the Insolvency and Bankruptcy Board of India.
• These regulations also make provisions for the disciplinary proceedings against the insolvency professional as well as prescribes a code of conduct for insolvency professionals.

According to Regulation 4, no individual shall be eligible to be registered as an insolvency professional if he
(a) is a minor;
(b) is not a person resident in India;
(c) does not have the qualification and experience specified in regulations 5 and 9 of the IBBI (Insolvency Professionals) Regulations, 2016;
(d) has been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of expiry of the sentence. Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be registered;
(e) he is an undischarged insolvent, or has applied to be adjudicated as an insolvent;
(f) he has been declared to be of unsound mind; or
(g) he is not a fit and proper person. First Schedule to the aforesaid regulations prescribes a code of conduct for insolvency professionals.
According to Regulation 7(2)(h), the registration of an insolvency professional shall be subject to the condition that he shall abide by the following Code of Conduct specified in the First Schedule to the Regulations

Question 10.
Write a note on provisions related to Code of Conduct for Insolvency Professionals?
Answer:
Provisions related to Code of Conduct for Insolvency Professionals are as under:
Integrity and objectivity
1. An insolvency professional must maintain integrity by being honest, straightforward, and forthright in all professional relationships.
2. An insolvency professional must not misrepresent any facts or situations and should refrain from being involved in any action that would bring disrepute to the profession.
3. An insolvency professional must act with objectivity in his professional dealings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not.
4. An insolvency professional appointed as an interim resolution professional, resolution professional, liquidator, or bankruptcy trustee should not himself acquire, directly or indirectly, any of the assets of the debtor, nor knowingly permit any relative to do so.
Independence and impartiality
5. An insolvency professional must maintain complete independence in his professional relationships and should conduct the insolvency resolution, liquidation or bankruptcy process, as the case may be, independent of external influences.
6. In cases where the insolvency professional is dealing with assets of a debtor during liquidation or bankruptcy process, he must ensure that he or his relatives do not knowingly acquire any such assets, whether directly or indirectly unless it is shown that there was no impairment of objectivity, independence or impartiality in the liquidation or bankruptcy process and the approval of the Board has been obtained in the matter.
7. An insolvency professional shall not take up an assignment under the Code if he, any of his relatives, any of the partners or directors of the insolvency professional entity of which he is a partner or director, or the insolvency professional entity of which he is a partner or director is not independent, in terms of the Regulations related to the processes under the Code, in relation to the corporate person/ debtor and its related parties.
8. An insolvency professional shall disclose the existence of any pecuniary or personal relationship with any of the stakeholders entitled to distribution under sections 53 or 178 of the Code, and the concerned corporate person/ debtor as soon as he becomes aware of it, by making a declaration of the same to the applicant, committee of creditors, and the person proposing appointment, as applicable.
8A. An insolvency professional shall disclose as to whether he was an employee of or has been in the panel of any financial creditor of the corporate debtor, to the committee of creditors and to the insolvency professional agency of which he is a professional member and the agency shall publish such disclosure on its website.
9. An insolvency professional shall not influence the decision or the work of the committee of creditors or debtor, or other stakeholders under the Code, so as to make any undue or unlawful gains for himself or his related parties, or cause any undue preference for any other persons for undue or unlawful gains and shall not adopt any illegal or improper means to achieve any mala fide objectives.
Professional competence
10. An insolvency professional must maintain and upgrade his professional knowledge and skills to render competent professional service. Representation of correct facts and correcting misapprehensions
11. An insolvency professional must inform such persons under the Code as may be required, of a misapprehension or wrongful consideration of a fact of which he becomes aware, as soon as may be practicable.
12. An insolvency professional must not conceal any material information or knowingly make a misleading statement to the Board, the Adjudicating Authority or any stakeholder, as applicable.

Timeliness
13. An insolvency professional must adhere to the time limits prescribed in the Code and the rules, regulations and guidelines thereunder for insolvency resolution, liquidation or bankruptcy process, as the case may be, and must carefully plan his actions, and promptly communicate with all stakeholders involved for the timely discharge of his duties.
14. An insolvency professional must not act with mala fide or be negligent while performing his functions and duties under the Code.

Information management
15. An insolvency professional must make efforts to ensure that all communication to the stakeholders, whether in the form of notices, reports, updates, directions, or clarifications, is made well in advance and in a manner which is simple, clear, and easily understood by the recipients.
16. An insolvency professional must ensure that he maintains written contemporaneous records for any decision taken, the reasons for taking the decision, and the information and evidence in support of such decision. This shall be maintained so as to sufficiently enable a reasonable person to take a view on the appropriateness of his decisions and actions.
17. An insolvency professional must not make any private communication with any of the stakeholders unless required by the Code, rules, regulations and guidelines thereunder, or orders of the Adjudicating Authority.
18. An insolvency professional must appear, co-operate and be available for inspections and investigations carried out by the Board, any person authorised by the Board or the insolvency professional agency with which he is enrolled.
19. An insolvency professional must provide all information and records as may be required by the Board or the insolvency professional agency with which he is enrolled.
20. An insolvency professional must be available and provide information for any periodic study, research and audit conducted by the Board.

Confidentiality
21. An insolvency professional must ensure that confidentiality of the information relating to the insolvency resolution process, liquidation or bankruptcy process, as the case may be, is maintained at all times. However, this shall not prevent him from disclosing any information with the consent of the relevant parties or required by law.

Occupation, employability and restrictions
22. An insolvency professional must refrain from accepting too many assignments, if he is unlikely to be able to devote adequate time to each of his assignments. In the matter of IDBI Bank Ltd. v. Lanco Infratech Ltd, NCLT Hyderabad Bench held that an Insolvency Professional must refrain from accepting too many assignments, if he is unable to devote adequate time to each of his assignments as per Clause 22, Schedule I of the Code of Conduct for Insolvency Professionals.
23. An insolvency professional must not engage in any employment, except when he has temporarily surrendered his certificate of membership with the insolvency professional agency with which he is registered.
24. An insolvency professional must not conduct business which in the opinion of the Board is inconsistent with the reputation of the profession.

Remuneration and costs
25. An insolvency professional must provide services for remuneration which is charged in a transparent manner, is a reasonable reflection of the work necessarily and properly undertaken, and is not inconsistent with the applicable regulations.
25A. An insolvency professional shall disclose the fee payable to him, the fee payable to the insolvency professional entity, and the fee payable to professionals engaged by him to the insolvency professional agency of which he is a professional member and the agency shall publish such disclosure on its website.
26. An insolvency professional shall not accept any fees or charges other than those which are disclosed to and approved by the persons fixing his remuneration.
27. An insolvency professional shall disclose all costs towards the insolvency resolution process costs, liquidation costs, or costs of the bankruptcy process, as applicable, to all relevant stakeholders, and must endeavour to ensure that such costs are not unreasonable.

Gifts and hospitality
28. An insolvency professional, or his relative must not accept gifts or hospitality which undermines or affects his independence as an insolvency professional.
29. An insolvency professional shall not offer gifts or hospitality or a financial or any other advantage to a public servant or any other person, intending to obtain or retain work for himself, or to obtain or retain an advantage in the conduct of profession for himself. Code

Question 11.
Write a note on provisions related to Code of Conduct for Insolvency Professionals?
Answer:

• The Code is intended to assist insolvency practitioners meet the obligations expected of them by providing professional and ethical guidance.
• The purpose of the Code is to provide a high standard of professional and ethical guidance amongst insolvency professionals.
• The insolvency professionals should be guided not merely by the terms but also by the spirit of the Code. Since it is impossible to define every situation to which the principles set out in the Code will be relevant, there are a few basic principles stated in Schedule I [Under regulation 7(2)(g)] of Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations,2016 which lays down the broad principles under ‘Code of Conduct for Insolvency Professionals’.
• As a professional membership body promoting high standards of practice in relation to work undertaken by its members, we require our members to adhere to certain principles in all aspects of professional work.

Question 12.
Insolvency professional to ensure compliance with provisions of the applicable laws. Comment
Answer:
Insolvency professional to ensure compliance with provisions of the applicable laws.
IBBI in exercise of powers under section 196 read with section 208 of the Insolvency and Bankruptcy Code, 2016 has issued a Circular dated 3rd January, 2019 stating that,

• A corporate person undergoing insolvency resolution process, fast track insolvency resolution process, liquidation process or voluntary liquidation process under the Insolvency and Bankruptcy Code, 2016 (Code) needs to comply with provisions of the applicable laws (Acts, Rules and Regulations, Circulars, Guidelines, Orders, Directions, etc.) during such process. For example, a corporate person undergoing insolvency resolution process, if listed on a stock exchange, needs to comply with every provision of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, unless the provision is specifically exempted by the competent authority or becomes inapplicable by operation of law for the corporate person.
• It is hereby directed that while acting as an Interim Resolution Professional, a Resolution Professional, or a Liquidator for a corporate person under the Code, an insolvency professional shall exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with the applicable laws.
• It is clarified that if a corporate person during any of the aforesaid processes under the Code suffers any loss, including penalty, if any, on account of non-compliance of any provision of the applicable laws, such loss shall not form part of insolvency resolution process cost or liquidation process cost under the Code. It is also clarified that the insolvency professional will be responsible for the non-compliance of the provisions of the applicable laws if it is on account of his conduct.

Question 13.
Insolvency professional not to outsource his responsibilities. Comment.
Answer:
Insolvency professional should not to outsource his responsibilities.
IBBI in exercise of powers under section 196 read with section 208 of the Insolvency and Bankruptcy Code, 2016 has issued a Circular dated 3rd January, 2019 stating that,

• The Insolvency and Bankruptcy Code, 2016 (Code) read with regulations made thereunder cast specific duties and responsibilities on an insolvency professional. An insolvency professional is required to perform certain tasks under the Code while acting as an Interim Resolution Professional, a Resolution Professional, a Liquidator or a Bankruptcy Trustee for various processes. For example, an insolvency professional is required to manage the operations of the corporate debtor as a going concern. He is also required to invite resolution plans, examine them and present to the committee of creditors for its approval such resolution plans which comply with the provisions of the Code. To assist him in carrying out his responsibilities, the Code read with regulations allow an insolvency professional to appoint accountants, legal or other professionals, as may be necessary.
• It has been observed that a few insolvency professionals are advising the prospective resolution applicants to submit a certificate from another person to the effect that they are eligible to be resolution applicants. This requirement amounts to outsourcing responsibilities of an insolvency professional to another person. Further, this adds to cost of the’ resolution applicant and delays submission of resolution plans. The Code read with regulations do not envisage such a certification from a third person.
• It is hereby directed that an insolvency resolution professional shall not outsource any of his duties and responsibilities under the Code. He shall not require any certificate from another person certifying eligibility of a resolution applicant.

Question 14.
What are the Disclosures required to be made by Insolvency Professionals and other Professionals appointed by Insolvency Professionals conducting Resolution Processes?
Answer:
The Board vide its Circular No. IP/005/2018 dated 16th January, 2018 has made it mandatory for the IRP or the RP, as the case may be, to disclose the following to the IPA with which he is enrolled:

• His relationship (if any) with the corporate debtor (after appointment):
• His relationship (if any) with the Committee of creditors, within a period of three days from the constitution of the committee of creditors;
• His relationship with any professional(s) appointed by him within a period of three days from the date of the appointment;
• His relationship with the interim finance provider, within three days of the agreement with the interim finance provider; and-
• His relationship with the prospective resolution applicant (s) within three days of supply of the information memorandum to the prospective resolution applicant.
  In addition to the above, the IRP or the RP, as the case may be, must make:
• Disclosure of the relationship of the other professional(s) engaged by him, with himself, the Corporate Debtor, Financial Creditor(s) within three days of the appointment;
• Disclosure of the relationship of the Interim Finance Provider(s) with himself, the Corporate Debtor, Financial Creditor(s), within three days of the agreement with the Interim Finance Provider;
• Disclosure of the relationship of the Prospective Resolution Applicant(s) with himself, the Corporate Debtor, Financial Creditor(s), within three days of the supply of information memorandum to the Prospective Resolution Applicant.

Question 15.
What are the common mistakes being committed by some of the Insolvency Professional in conduct of corporate insolvency resolution process?
Answer:
Some of the mistakes committed by any Insolvency Professional which may
also lead to initiate any disciplinary action are as under:
(a) Assignment without having Authorisation:
Regulation 7Aof the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) requires that an IP shall not accept or undertake any assignment, including CIRP, unless he holds an authorisation for assignment (AFA) on the date of such acceptance or commencement of such assignment, as the case may be. The bye-laws of the IPAs provide that, if the AFA is not issued, renewed or rejected by the IPA within 15 days of the date of receipt of application, the authorisation shall be deemed to have been issued or renewed, as the case may be, by the IPA. The IBBI has made available an IT facility for the IPs to apply for the issuance or renewal of AFA and the IPAs to issue or renew AFAs, as the case may be, in a time bound manner. There are, however, instances where an IP undertook CIRP without having an AFA and in some cases, without even applying for an AFA, in contravention of the provisions of law.

(b) Fee payable to IP:
The Code of Conduct for IPs under the IP Regulations require that an IP must provide services for remuneration which is charged in a transparent manner, and is a reasonable reflection of the work necessarily and properly undertaken. Regulation 39D requires the Committee of Creditors to fix the fee payable to the liquidator, in the event the Corporate Debtors proceeds for liquidation. It is, however, observed that in a few cases, the fee payable to an IP was not fixed beforehand and the IP drew a fee on his own without approval of such fee from the competent authority, in contravention of the provisions of law.

(c) Application for cooperation:
A CIRP requires cooperation of the CD, and its promoters, suspended directors, and management. However, co-operation may not be forthcoming in all cases. Section 19 of the Code, therefore, enables the IRP/RP to file an application to the Adjudicating Authority (AA) in case of non-co-operation for direction to such persons to comply with the instructions of the IRP/RP and to co-operate with him. Since time is the essence of a CIRP, the IRP /RP must act with promptitude and file the application, wherever required, without any procrastination. There are instances where the IRP / RP failed to file such applications or filed it so late that it lost its purpose and effectiveness. Any delay in filing applications despite continuing non-cooperation may reflect undue influence of promoters on the IP, and endanger the life of the CD.

(d) Public announcement:
Section 15 of the Code read with regulation 6 of the CIRP Regulations requires the IRP to make a public announcement of commencement of CIRP within three days of his appointment. Such announcement is required to be made in one English and one regional language paper with wide circulation at the location of the registered office and principal office of the CD. This enables the creditors to submit claims to the IRP and consideration of such claims by the authorised stakeholders while resolving stress of the CD. There are instances where the IRP did not make public announcement promptly on his appointment, or made it later, or made it in one newspaper, or made it in one English newspaper having circulation at the location of the CD. This not only puts the CIRP at risk, but also deprives the stakeholders of their legitimate rights.

(e) Updating of list of claims:
Section 25(2)(e) read with regulation 13 of the CIRP Regulations mandates that the IRP/RP shall verify every claim as per time line and maintain a list of creditors containing their names along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, update the list and display it on the website, if any, of the CD. There are instances where some IRPs/RPs did not display the list of creditors on the web site of the CD and in some cases, did not update it. This increases queries and complaints about the status of claims, impacts transparency and compromises interests of stakeholders.

(f) Authority of CoC:
The Code read with Regulations has specified responsibilities of an IP and of the CoC in a CIRP. These require decisions on several matters by the CoC with the required majority of voting share. No creditor, whether secured or unsecured, irrespective of its voting power or share, or no pool of creditors such as Joint Lenders’ Forum is a substitute of the CoC. It has been observed in a few cases that an IP took directions of a creditor having significant voting power or a pool of creditors. This compromises the independence of IP and amounts to contravention of the provisions of the Code.

(g) Appointment of professionals:
It is the duty of the RP to preserve and protect the assets of the CD, including continuing its business operations. Section 25(2) of the Code empowers an RP to appoint accountants, legal or other professionals for this purpose. Clause 23B of the Code of Conduct under the IP Regulations prohibits an IP from engaging or appointing any of his relatives or related parties for or in connection with any work relating to any of his assignment. He must not appoint any person who is not a professional, or who is his relative or a related party, or who is choice of a stakeholder. There are instances where the RP appointed a professional who is the choice of a stakeholder or a person who is not a professional for professional services. This compromises the independence of the IP as well as that of the professionals and imposes avoidable cost on the CD and other stakeholders.

(h) Appointment of registered valuers:
Given the importance of valuation in CIRP, the CIRP Regulations require that fair value and liquidation value of the CD shall be determined by two registered valuers (RVs) and it is the duty of the RP to appoint RVs only. There are, however, a few instances where the RP appointed persons other than RVs for conduct of valuations and in some cases, appointed only one RV instead of two. This indicates lack of due diligence and sincerity of the IP and probably demonstrates mala fide intent in some cases to get a valuation done to subserve
certain interests. This potentially risks the life of the CD and adversely affects the interests of stakeholders, and drives out qualified and regulated valuation professionals out of practice.

(i) Payment for professional services:
An IP and every other professional he appoints are independent professionals. They need to be paid reasonable fee commensurate to their services and such fee must be agreed before the appointment. The IP or professional concerned must raise bills / invoices in his name towards such fee, and such fee must be credited to his bank account. Any payment of fee for the services of an IP or any other professional appointed by the IP to any person other than the IP or such other professional, as the case may be, does not form part of the insolvency resolution process cost (IRPC). There are, however, a few instances where fee was paid to a person other than the IP or the professional concerned. This impacts transparency and cleanliness of the process while diluting professional accountability.

(j) Disclosure of fee and relationship:
The CIRP Regulations require the IRP / RP to make relationship and cost disclosures in the manner required by IBBI. It is the duty of an IP to disclose the fee payable to him as well as the fee payable to professionals engaged by him while performing the duties as an IP. It is also his duty to disclose the relationship he has with the professionals engaged by him. This ensures transparency and enables the stakeholders to take informed decisions. Failure to disclose these details creates a suspicion in the mind of stakeholders about impartiality and objectivity of the IP and possibly, conflict of interests, he may have.

(k) Fee for authorised representatives:
Regulation 16A of the CIRP Regulations entitles an authorised representative (AR) of creditors in a class to receive the specified amount of fee for every meeting of the CoC attended by him. It is, however, observed that ARs in a few CIRPs were paid an amount different from what is permissible under the Regulations.

(l) Representation in judicial proceedings:
Section 25(2)(b) of the Code mandates RP to represent and act on behalf of the CD with third parties, and exercise rights for the benefit of the CD in judicial, quasi-judicial or arbitration proceedings. There are instances where the IP failed to represent the CD in judicial proceedings. Failure to do so compromises the duties of the RP to preserve and protect the interests of the CD, in addition to compromising the objective of value maximisation of the Code.

(m) Related party transactions:
Section 28 of the Code requires the RP to take prior approval of the CoC before undertaking any related party transactions during the CIRP. Any such transaction without approval of the CoC is void. There are instances where the IP failed to take approval of the CoC before undertaking such transactions. This puts the transaction at risk and compromises the objective of value maximisation through CIRP and may reflect the intention of the RP to give undue advantage to a related party.

(n) Payment to creditors during CIRP:
The Code requires every creditor to submit claims as on insolvency commencement date (ICD) to the IRP. The IRP / RP cannot clear the dues of any creditor during the CIRP, as this amounts to giving preferential treatment to one creditor over others and thereby alters the priority mandated under the Code. There are instances where the RP allowed payment of dues outstanding as on the ICD to some creditors during CIRP.

(o) Avoidance transactions:
The Code read with the CIRP Regulations casts a duty on the RP to file applications in respect of avoidance transactions (preferential, undervalued, extortionate and fraudulent transactions) for appropriate directions with a view to claw back the value lost in these transactions. He is required to form an opinion on such transactions within 75 days of the ICD and to file applications to the AA within 135 days of the ICD. There are instances where the RP failed to independently apply mind to such transactions and file applications in respect of them. In a few cases, he allowed himself to be directed by the CoC or stakeholders. This may reflect serious dereliction of duty and breach of trust in addition to depriving the stakeholders of their legitimate dues.

(p) Supply of information:
Section 29 of the Code casts a duty on the RP to provide access to all relevant information to prospective RAs in physical and electronic form. Regulation 36 of the CIRP Regulations requires the RP to provide information memorandum in electronic form to each member of the CoC. However, in few instances, it has been observed that RPs did not provide the relevant information to prospective RAs and members of the CoC. This compromises the possibility of revival of the CD in contravention to the provisions of the Code.

(q) Confidentiality undertaking:
The CIRP Regulations require the RP to obtain an undertaking of confidentiality from every prospective RA and every member of the CoC before sharing the information memorandum. There are instances where the RP shared the documents with the members of the CoC and/or prospective RAs without obtaining the required undertaking. This exposes the CD to risks such as insider trading or weakens its competitive position in the market. This may reflect intention of the IP to provide privileged access to some persons at the cost of others and compromise value maximisation.

(r) Disclosure of information:
The Code read with Regulations requires disclosure of certain information such as commencement of CIRP and details list of creditors in public domain. The details of valuation are required to be disclosed to every member of the CoC in electronic form, on receiving a confidentiality undertaking. Thus, information and documents need to be disclosed or supplied to entitled persons, in the specified manner, at the specified time, after meeting the specified requirements. It has been observed that in a few cases, certain information meant for entitled stakeholders were disclosed in public domain, or certain information meant for public were not disclosed in public domain, or certain information were disclosed before or after the time specified in the law.

(s) Window for views:
Regulation 16A (9) of the CIRP Regulations mandates that an AR shall circulate the agenda to creditors in a class, and may seek their preliminary views on any item in the agenda to enable him to effectively participate in the meeting of the CoC. The creditors have a time window of at least 12 hours to submit their preliminary views, and the said window must open at least 24 hours after the AR has sought preliminary views. Further, regulation 25(6) of the CIRP Regulations requires the AR to circulate the minutes of the meeting to creditors in a class and announce the voting window at least 24 hours before the window opens for voting instructions and keep the voting window open for at least 12 hours. It is observed that such timelines were not adhered to in a few cases and voting window remained open for a period shorter than that is provided in the Regulations or for unusually long periods. This may create suspicion about the intention of the IP and may deprive a creditor of its right to vote.

(t) Circulation of minutes:
The CIRP Regulations, therefore, require the RP to circulate the minutes of the meetings by electronic means to members of CoC and ARs, if any, within 48 hours of the conclusion of the meeting. There are instances where the IRP/RP failed to record and circulate minutes promptly or did it late. This may reflect poorly on the competence and integrity of the IP and cause delay in critical decisions.

(u) Inclusion of costs in IRPC:
Section 5(13) of the Code read with regulation 31 of the CIRP Regulations specifies what is included in IRPC. It includes only those costs which are necessary for a CIRP. The law does not allow inclusion of any other cost in IRPC. A member of CoC may incur costs to travel to attend the meetings of the CoC; the CoC may incur costs to obtain a legal advice or in engaging a professional; the CD may have incurred a cost before ICD; the RP may pay a penalty for non-compliance with any law during CIRP; etc. There are instances where such costs were included in the IRPC. This may reflect undue influence of beneficiaries on the IP, in addition to causing diminution of value of the CD.

(v) Compliance with applicable laws:
Section 17(2)(e) of the Code mandates the IRP/RP to comply with the requirements under any law for the time being in force on behalf of the CD. Any non-compliance has a cost to the CD and its stakeholders and attracts penal consequences. For example, a listed company has several continuing obligations under the securities laws. Failure to discharge these obligations compromises the interests of investors in securities. There are, however, instances where an IRP/RP failed to comply with requirements of various laws.

(w) Timeline:
It is the duty of the IRP/RP to ensure that every task in the CIRP is completed in time unless directed otherwise by a competent authority. There are instances where the IP failed to adhere to specified timelines. This endangers the life of the CD, compromises the interests of stakeholders, and frustrates the objectives of the Code.

(x) Compliance with orders:
The AA issues directions from time to time to facilitate smooth conduct of CIRP, generally based on applications by the parties. The proceedings before the AA are judicial proceedings and its directions are orders of the Court. Any non-compliance with any of their orders may amount to contempt of court. There are a few instances where the RP failed to comply with directions of the AA. Such disregard of the order of the AA may jeopardise the CIRP, impact the interests of stakeholders and drain scarce judicial resources.

(y) Maintenance of records:
Regulation 39A of the CIRP Regulations requires an IRP/RP to preserve a physical as well as an electronic copy of the records relating to CIRP of the. It has been observed that in a few cases an IP failed to produce complete records in respect of CIRPs conducted by him. This suggests the possibility of failure to comply with the relevant provisions of law as well as lack of transparency.

(z) Co-operation with the Inspecting Authority:
The Code enables the IBBI and the IPA to monitor conduct and performance of the IPs. The IBBI appoints an Inspecting Authority (IA) to conduct an inspection of an IP. It is the duty of the IP to give all assistance to the IA, produce all records in his custody or control, and furnish all statements and information which the IA may require. There are instances where an IP failed to cooperate with the IA, did not produce documents and records promptly and prolonged inspection on some excuse or the other. This may be construed as a hindrance to the functioning of the IBBI or the IPA, as the case may be, and compromise of interests of stakeholders.

Chapter 16 Fresh Start Process – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Fresh Start Process – CS Professional Insolvency Law and Practice Study Material

Question 1.
On what grounds, an aggrieved debtor or creditor, may make an application to the Adjudicating Authority against the action taken by the Resolution Professional under the Fresh Start Process ? Also elaborate the restrictions imposed on a debtor during moratorium period of Fresh Start Process. (Dec 2021, 3 + 3 = 6 marks)
Answer:
Grounds on which the aggrieved debtor or creditor may make an application to the Adjudicating Authority against the action taken by the Resolution Professional under the Fresh Start Process
Section 87 of the Insolvency and Bankruptcy Code, 2016 provides that debtor or the creditor who is aggrieved by the action taken by the Resolution Professional under Section 86 may within ten days of such decision may make an application to the Adjudicating Authority challenging such action on any of the following grounds, namely:-
(a) that the Resolution Professional has not given an opportunity to the debtor or the creditor to make a representation; or
(b) that the Resolution Professional colluded with the other party in arriving at the decision; or
(c) that the Resolution Professional has not complied with the requirements of Section 86.
The Adjudicating Authority shall decide the application referred within fourteen days of such application and make an order as it deems fit. Where the application has been allowed by the Adjudicating Authority it shall forward its order to the Board and the Board may take such action as may be required against the Resolution Professional.

Restrictions imposed on a debtor during moratorium period of Fresh Start Process
The following restrictions are imposed on debtor during the moratorium period of Fresh Start Process, as provided under section 85(3) of the IBC:
a. shall not act as a director of any company, or directly or indirectly take part in or be concerned in promotion, formation or management of the company.
b. shall not dispose-off or alienate any of the assets.
c. shall inform his business partners that he is undergoing a fresh start process.
d. shall be required to inform prior to entering into any financial or commercial transaction of such value as may be notified by the Central Government, either individual or jointly, that he is undergoing a fresh start process.
e. shall disclose the name under which he enters into business transactions, if it is a different name then the one under the application.
f. shall not travel outside India except with the permission of the Adjudicating Authority.

Question 2.
Explain the concept of ‘fresh start’ under IBC,2016.
Answer:
Fresh Start is a new concept introduced under sections 80 to 93 in Chapter II of Part III of the Insolvency and Bankruptcy Code, 2016. In this process,

• Eligible debtors get discharged from certain debts (not exceeding a specified threshold) by applying to the Adjudicating Authority and can start afresh without any liabilities.
• It is available only to debtors having gross annual income less than sixty thousand rupees; the aggregate value of the assets not exceeding twenty thousand rupees; the aggregate value of the qualifying debts not exceeding thirty-five thousand rupees and do not have a dwelling unit.
• Application can be filed only by the debtor for fresh start for discharge of his debt.
• Application is then examined by a resolution professional (RP) who then submits a report to the DRT, recommending acceptance or rejection of the application.
• DRT passes an order, either admitting or rejecting the application.
• If the application is admitted, the creditors have an opportunity to object to the process on limited grounds.
• On conclusion of the process, the DRT passes an order for the discharge of the debtor or revokes the admission of the application.
• The discharge order writes off the unsecured debts, allowing the debtor to start afresh, subject to an entry in the credit history.

Question 3.
Are there any statutory regulations introduced by IBBI for initiating the fresh start process?
Answer:
No, since the provisions of fresh start process have not been notified under the Code therefore no statutory regulations providing the form and manner for initiating fresh start process have been introduced yet by the Insolvency and Bankruptcy Board of India (“Board”).

Question 4.
Who can apply for fresh start process?
Answer:
Section 80 of the Insolvency and Bankruptcy Code, 2016 provides that a debtor who is unable to pay his debt and fulfils the below mentioned conditions shall be entitled to make an application for a fresh start process for discharge of his qualifying debt.
A debtor may either personally or through a Resolution Professional may apply for fresh start process if he fulfills the following conditions:
(a) The gross annual income of the debtor does not exceed sixty thousand rupees:
(b) The aggregate value of the assets of the debtor does not exceed twenty thousand rupees.
(c) The aggregate value of the qualifying debts does not exceed thirty -five thousand rupees;
(d) He is not an undischarged bankrupt;
(e) He does not own a dwelling unit, irrespective of whether it is encumbered or not;
(f) A fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him; and
(g) No previous fresh start order under these provisions has been made in relation to him in the preceding twelve months of the date of the application for fresh start.

Question 5.
What is included in Qualifying Debt?
Answer:
Qualifying Debt means any amount due, which includes interest or any other sum due in respect of the amounts owed under any contract, by the debtor for a liquidated sum either immediately or at certain future time but does not includes

• an excluded debt;
• a debt to the extent it is secured; and
• any debt which has been incurred three months prior to the date of the application for fresh start process where excluded debt means
• liability to pay fine imposed by a court or tribunal;
• liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;
• liability to pay maintenance to any person under any law for the time being in force;
• liability in relation to a student loan;
• any other debt as may be prescribed.

Question 6.
State the process of filing of applications for fresh start process and its effect.
Answer:
An application for a fresh start process shall be in such form and manner and accompanied by such fee as may be prescribed by the regulations after their enforcement and shall contain the following information supported by an affidavit namely:
(a) List of all debts owed by the debtor till the date of application along with details of amount of each debt and the names of the creditors;
(b) The interest payable on the debts and the rate thereof stipulated in the contract;
(c) A list of security held in respect of any of the debts;
(d) The financial information of the debtor and his immediate family for up to two years prior to the date of the application;
(e) The particulars of the debtor’s personal details;
(f) The reasons for making the application;
(g) The particulars of any legal proceedings which, to the debtor’s knowledge has been commenced against him; and
(h) The confirmation that no previous fresh start order under the provisions of the Code has been made in respect of the qualifying debts of the debtor in the preceding twelve months of the date of the application.
When an application is filed under Section 80 by a debtor, an interim-moratorium shall commence on the date of filing of said application in relation to all the debts and shall cease to have effect on the date of admission or rejection of such application-, as the case may be.
During the interim-moratorium period if any legal action or legal proceeding is pending in respect of any of debts of the debtor then same shall be deemed to have been stayed and no creditor shall initiate any legal action or proceedings in respect of such debt.

Question 7.
What is the process of appointment of Resolution Professional?
Answer:
Section 82 of the IBC, 2016 provides that where an application under Section 80 is filed by the debtor through a Resolution Professional, the Adjudicating Authority shall direct the Board within seven days of the date of receipt of the application to seek confirmation that there are no disciplinary proceedings against the Resolution Professional submitting such application. The Board shall then communicate the confirmation or rejection of the Resolution Professional to the Adjudicating Authority. In case of rejection, the Board shall nominate a Resolution Professional suitable for the fresh start process.
Where the debtor himself has filed an application under section 80, the Adjudicating Authority shall direct the Board to nominate a Resolution Professional for the fresh start process. The Board shall nominate a Resolution Professional within ten days of receiving the direction issued by the Adjudicating Authority. The Adjudicating Authority shall by order appoint the Resolution Professional recommended or nominated by the Board.

Question 8.
What are the contents of the report given by resolution professional?
Answer:
The report by Resolution Professional shall contain the details of the amounts mentioned in the application which in the opinion of the Resolution Professional are (a) qualifying debts; and (b) liabilities eligible for discharge under sub-section (3) of Section 92.

Question 9.
State the grounds on which the Resolution Professional may accept the application.
Answer:
The Resolution Professional shall presume that the debtor is unable to pay his debts at the date of the application if in his opinion:
(a) information supplied in the application indicates that the debtor is unable to pay his debts and he has no reason to believe that the information supplied is incorrect or incomplete; and
(b) there is no change in the financial circumstances of the debtor since the date of the application enabling the debtor to pay his debts.

Question 10.
State the grounds on which the resolution professional may reject the application.
Answer:
The Resolution Professional shall reject the application in the following cases:
(a) The debtor does not satisfy the conditions specified under Section 80; or
(b) The debts disclosed in the application by the debtor are not qualifying debts; or
(c) The debtor has deliberately made a false representation or omission in the application or with respect to the documents or information submitted.
The Resolution Professional shall record the reasons for recommending the acceptance or rejection of the application in the report to the Adjudicating Authority and shall give a copy of the report to the debtor.

Question 11.
Explain the process after the acceptance or rejection of an application.
Answer:
Acceptance of application-

• In case application has been accepted by the Adjudicating Authority then the order shall state the amount which has been accepted as qualifying debts by the Resolution Professional and other amounts eligible for discharge under Section 92 for the purposes of the fresh start order.
• A copy of the order passed by the Adjudicating Authority along with a copy of the application shall be provided to the creditors mentioned in the application within two days of the passing of the order.
• Section 85 of the Insolvency and Bankruptcy Code, 2016 provides that on the date of admission of the application the moratorium period shall commence in respect of all the debts of the debtor.
• During the moratorium period any pending legal action or legal proceeding in respect of any debt shall be deemed to have been stayed and pursuant to the provisions of Section 86 the creditors shall not initiate any legal action or proceedings in respect of any debt.
• The moratorium ceases to have effect at the end of the period of one hundred and eighty days beginning with the date of admission unless the order admitting the application is revoked under sub-section (2) of section 91.
• During the moratorium period, the debtor shall:
• not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company;
• not dispose of or alienate any of his assets;
• inform his business partners that he is undergoing a fresh start process;
• be required to inform prior to entering into any financial or commercial transaction of such value as may be notified by the Central Government, either individually or jointly, that he is undergoing afresh start process;
• disclose the name under which he enters into business transactions, if it is different from the name in the application admitted under Section 84 and
• not travel outsides India except with the permission of the Adjudicating Authority.

Question 12.
Explain Section 86 of Insolvency and Bankruptcy Code, 2016.
Answer:
Section 86 of the Insolvency and Bankruptcy Code, 2016 provides that any creditor mentioned in the order of the Adjudicating Authority under Section 84 to whom a qualifying debt is owed may within a period of ten days from the date of receipt of the order under Section 84, object only on the following grounds, namely:
(a) inclusion of a debt as a qualifying debt; or
(b) incorrectness of the details of the qualifying debt specified in the order under Section 84.

• A creditor may file an objection by way of an application to the Resolution Professional.
• The application shall be supported by such information and documents as may be prescribed.
• The Resolution Professional shall consider every objection made under this Section.
• The Resolution Professional shall examine the objections and either accept or reject the objections within ten days of the date of the application.
• The Resolution Professional may examine on any matter that appears to him to be relevant to the making of a final list of qualifying debts for the purposes of Section 92.

On the basis of the examination the Resolution Professional shall:
(a) prepare an amended list of qualifying debts for the purpose of the discharge order;
(b) make an application to the Adjudicating Authority for directions under section 90; or
(c) take any other steps in relation to the debtor.

Question 13.
State the provisions related to application against decision of Resolution Professional.
Answer:
Section 87 of the Insolvency and Bankruptcy Code, 2016 provides that any debtor or the creditor aggrieved by the action taken by the Resolution Professional under Section 86 may within ten days of such decision apply to the Adjudicating Authority challenging such action on any of the following grounds, namely:
(a) that the Resolution Professional has not given an opportunity to the debtor or the creditor to make a representation;
(b) that the Resolution Professional colluded with the other party in arriving at the decision; or
(c) that the Resolution Professional has not complied with the requirements of Section 86.
The Adjudicating Authority shall decide the application referred within fourteen days of such application and make an order as it deems fit. Where the application has been allowed by the Adjudicating Authority it shall forward its order to the Board and the Board may take such action as may be required against the Resolution Professional.

Question 14.
State the general duties of debtor filing for a fresh start.
Answer:
The duties of the debtor during fresh start process are prescribed under Section 88 as follows:
(a) To make available to the Resolution Professional all information relating to his affairs, attend meetings and comply with the requests of the Resolution Professional in relation to the fresh start process.
(b) To inform the Resolution Professional as soon as reasonably possible of any material error or omission in relation to the information or document supplied to the Resolution Professional or any change in financial circumstances afterthe date of application, where such change has an impact on the fresh start process.

Question 15.
What is the procedure in case of replacement of Resolution Professional?
Answer:
Where the debtor or the creditor is of the opinion that the Resolution Professional appointed under section 82 is required to be replaced, they may apply to the Adjudicating Authority for the replacement of such Resolution Professional.

• The Adjudicating Authority shall apply within seven days of the receipt of the application to the Board for such replacement.
• The Board shall within ten days recommend the name of insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.
• Adjudicating Authority shall appoint another Resolution Professional for the purposes of the fresh start process on the basis of the recommendation by the Board.
• The Adjudicating Authority may give directions to the replaced Resolution Professional to share all information with the new Resolution Professional in respect of the fresh start process; and to co-operate with the new Resolution Professional in such matters as may be required.

Question 16.
How can an order admitting application be revoked ?
Answer:
Resolution Professional may submit an application to the Adjudicating Authority seeking revocation of its order made under Section 84 on the following grounds, namely:
(a) the debtor is ineligible for a fresh start process due to any change in the financial circumstances of the debtor;
(b) non-compliance by the debtor of the restrictions imposed under sub-section (3) of section 85; or
(c) he has acted in a mala fide manner and has wilfully failed to comply with the provisions of this Chapter.
The Adjudicating Authority shall within fourteen days of the receipt of the application may by order admit or reject the application. On passing of the order admitting the application the moratorium and the fresh start process shall cease to have effect.
A copy of the order passed by the Adjudicating Authority under this Section shall be provided to the Board for the purpose of recording an entry in the register referred to in section 196.

Question 17.
Explain the provisions related to the discharge order.
Answer:
Section 92 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall prepare a final list of qualifying debts and submit such list to the Adjudicating Authority at least seven days before the moratorium period comes to an end.
The Adjudicating Authority shall discharge the debtor from the following liabilities namely:
(a) penalties in respect of the qualifying debts from the date of application till the date of the discharge order;
(b) interest including penal interest in respect of the qualifying debts from the date of application till the date of the discharge order; and
(c) any other sums owed under any contract in respect of the qualifying debts from the date of application till the date of the discharge order.
The discharge order shall be forwarded to the Board for the purpose of recording an entry in the register referred to in section 196. A discharge order shall not discharge any other person apart from the debtor from any liability in respect of the qualifying debts.

Chapter 15 Bankruptcy for Individuals and Partnership Firms – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Bankruptcy for Individuals and Partnership Firms – CS Professional Insolvency Law and Practice Study Material

Question 1.
What is required for a sound bankruptcy and insolvency framework as per the Report of the Bankruptcy Law Reforms Committee?
Answer:
A sound bankruptcy and insolvency framework requires the existence of an impartial, efficient and expeditious administration. This is more likely to be possible for individual insolvency when administrative proceedings are placed outside the court of law. As with legal entities, what is visualised for individuals is to enable a negotiated settlement between creditors and debtor without active involvement of the court. The principle is to allow greater flexibility in the repayment plans, and a time to execute the plans, that can be acceptable to both parties. If creditors and debtors can settle on such a plan out of court, what matters for the system is that there is a record of this settlement and that it can affect the premium of future credit transactions.

Question 2.
Name the Acts governing the personal insolvency prior to enactment of Insolvency and Bankruptcy Code, 2016.
Answer:
Personal insolvency is primarily governed under two Acts in India: the Presidency Towns Insolvency Act, 1909 (for the erstwhile Presidency towns, i.e. Kolkata, Mumbai and Chennai) and the Provincial Insolvency Act, 1920 (for the rest of India).

Question 3.
Discuss the main aim of Insolvency and Bankruptcy Code.
Answer:
The law aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, presently contained in a number of legislations, into a single legislation.

Question 4.
Describe the main functions of Bankruptcy Trustee .
Answer:
According to Section 149 of the Insolvency and Bankruptcy Code, 2016, the bankruptcy trustee shall perform the following functions in accordance with the provisions of this Chapter –
(a) investigate the affairs of the bankrupt;
(b) realise the estate of the bankrupt; and
(c) distribute the estate of the bankrupt..
It may be noted that “bankruptcy trustee” means the insolvency professional appointed as a trustee for the estate of the bankrupt under section 125 of the Insolvency and Bankruptcy Code, 2016.

Question 5.
What are the main duties of bankrupt towards Bankruptcy Trustee.
Answer:
Section 150 of the Insolvency and Bankruptcy Code, 2016 provides that the bankrupt shall assist the bankruptcy trustee in carrying out his functions by:
(a) giving to the bankruptcy trustee the information of his affairs;
(b) attending on the bankruptcy trustee at such times as may be required;
(c) giving notice to the bankruptcy trustee of any of the following events which have occurred after the bankruptcy commencement date,
(i) acquisition of any property by the bankrupt;
(ii) devolution of any property upon the bankrupt;
(iii) increase in the income of the bankrupt;
(d) doing all other things as may be prescribed.
The bankrupt shall give notice of the increase in income or acquisition or devolution of property within seven days of such increase, acquisition or devolution.

Question 6.
Discuss the rights of Bankruptcy Trustee as per Section 151 of the Insolvency and Bankruptcy Code, 2016.
Answer:
The bankruptcy trustee may, by his official name-
(a) hold property of every description;
(b) make contracts;
(c) sue and be sued;
(d) enter into engagements in respect of the estate of the bankrupt;
(e) employ persons to assist him;
(f) execute any power of attorney, deed or other instrument; and
(g) do any other act which is necessary or expedient for the purposes of or in connection with the exercise of his rights.

Question 7.
Mention the general powers of Bankruptcy Trustee.
Answer:
As per Section 152 of the Code, the bankruptcy trustee may while discharging his functions under this Chapter,
(a) sell any part of the estate of the bankrupt;
(b) give receipts for any money received by him;
(c) prove, rank, claim and draw a dividend in respect of such debts due to the bankrupt as are comprised in his estate;
(d) where any property comprised in the estate of the bankrupt is held by any person by way of pledge or hypothecation, exercise the right of redemption in respect of any such property subject to the relevant contract by giving notice to the said person;
(e) where any part of the estate of the bankrupt consists of securities in a company or any other property which is transferable in the books of a person, exercise the right to transfer the property to the same extent as the bankrupt might have exercised it if he had not become bankrupt; and
(f) deal with any property comprised in the estate of the bankrupt to which the bankrupt is beneficially entitled in the same manner as he might have dealt with it.

Question 8.
List the acts for which bankruptcy trustee requires the approval of creditors.
Answer:
Section 153 of the Insolvency and Bankruptcy Code, 2016 provides that the bankruptcy trustee for certain acts needs the approval of the committee of creditors:
(a) carry on any business of the bankrupt as far as may be necessary for winding it up beneficially;
(b) bring, institute or defend any legal action or proceedings relating to the property comprised in the estate of the bankrupt;
(c) accept as consideration for the sale of any property a sum of money due at a future time subject to certain stipulations such as security.
(d) mortgage or pledge any property for the purpose of raising money for the payment of the debts of the bankrupt;
(e) where any right, option or other power forms part of the estate of the bankrupt, make payments or incur liabilities with a view to obtaining, for the benefit of the creditors, any property which is the subject of such right, option or power;
(f) refer to arbitration or compromise on such terms as may be agreed, any debts subsisting or supposed to subsist between the bankrupt and any person who may have incurred any liability to the bankrupt;
(g) make compromise or other arrangement as may be considered expedient, with the creditors;
(h) make compromise or other arrangement as he may deem expedient with respect to any claim arising out of or incidental to the bankrupt’s estate;
(i) appoint the bankrupt to:
(a) supervise the management of the estate of the bankrupt or any part of it;
(b) carry on his business for the benefit of his creditors;
(c) assist the bankruptcy trustee in administering the estate of the bankrupt.

Question 9.
What is included in the Estate of Bankrupt?
Answer:
As per Section 155(1) of the Insolvency and Bankruptcy Code, 2016, the estate of the bankrupt includes –
(a) all property belonging to or vested in the bankrupt at the bankruptcy commencement date;
(b) the capacity to exercise and to initiate proceedings for exercising all
such powers in or over or in respect of property as might have been exercised by the bankrupt for his own benefit at the bankruptcy commencement date or before the date of the discharge order passed under section 138; and .
(c) all property which by virtue of any of the provisions of this Chapter is comprised in the estate. Further as per Section 155(1) of the Code the estate of the bankrupt shall not include –
(a) excluded assets;
(b) property held by the bankrupt on trust for any other person;
(c) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund; and
(d) such assets as may be notified by the Central Government in consultation with any financial sector regulator.

Question 10.
Explain the provisions of acquisition of control by Bankruptcy Trustee.
Answer:
According to Section 157 of the Insolvency and Bankruptcy Code, 2016, the bankruptcy trustee shall take possession and control of all property, books, papers and other records relating to the estate of the bankrupt or affairs of the bankrupt which belong to him or are in his possession or under his control. Where any part of the estate of the bankrupt consists of things in actionable claims, they shall be deemed to have been assigned to the bankruptcy trustee without any notice of the assignment.

Question 11.
What are the restrictions on Disposition of Property?
Answer:
Section 158(1) of the Insolvency and Bankruptcy Code, 2016 provides that any disposition of property made by the debtor, during the period between the date of filing of the application for bankruptcy and the bankruptcy commencement date shall be void.
Further, Section 158(2) of the Insolvency and Bankruptcy Code, 2016 provides that Any disposition of property made under sub-section (1) shall not give rise to any right against any person, in respect of such property, even if he has received such property before the bankruptcy commencement date in –
(a) good faith;
(b) for value; and
(c) without notice of the filing of the application for bankruptcy.
It may be noted that the term “property” means all the property of the debtor, whether or not it is comprised in the estate of the bankrupt, but shall not include property held by the debtor in trust for any other person.

Question 12.
Discuss the provisions related to after-acquired property of Bankrupt.
Answer:
As per Section 159

1. The bankruptcy trustee shall be entitled to claim for the estate of the bankrupt, any after-acquired property by giving a notice to the bankrupt.
2. A notice under sub-section (1) shall not be served in respect of (a) excluded assets, or (b) any property which is acquired by or devolves upon the bankrupt after a discharge order is passed under section 138.
3. The notice under sub-section (2) shall be given within fifteen days from the day on which the acquisition or devolution of the after-acquired property comes to the knowledge of the bankruptcy trustee.
4. For the purposes of sub-section (3)
   (a) anything which comes to the knowledge of the bankruptcy trustee shall be deemed to have come to the knowledge of the successor of the bankruptcy trustee at the same time; and
   (b) anything which comes to the knowledge of a person before he is appointed as a bankruptcy trustee shall be deemed to have come to his knowledge on the date of his appointment as bankruptcy trustee.
5. The bankruptcy trustee shall not be entitled, by virtue of this section, to claim from any person who has acquired any right over after-acquired property, in good faith, for value and without notice of the bankruptcy.
6. A notice may be served after the expiry of the period under sub-section (3) only with the approval of the Adjudicating Authority.

Question 13.
What is meant by the Onerous Property of Bankrupt?
Answer:
Section 160(1) of the Insolvency and Bankruptcy Code, 2016 provides that the bankruptcy trustee may, by giving notice to the bankrupt or any person interested in the onerous property, disclaim any onerous property which forms a part of the estate of the bankrupt.
Section 160 (2) of the Insolvency and Bankruptcy Code, 2016 provides that the bankruptcy trustee may give the notice under sub-section (1) notwithstanding that he has taken possession of the onerous property, endeavored to sell it or has exercised rights of ownership in relation to it. Section 160 (2) of the Insolvency and Bankruptcy Code, 2016 provides that a notice of disclaimer under subsection (1) shall
(a) determine, as from the date of such notice, the rights, interests and liabilities of the bankrupt in respect of the onerous property disclaimed;
(b) discharge the bankruptcy trustee from all personal liability in respect of the onerous property as from the date of appointment of the bankruptcy trustee.
As per Section 160(4) of the Insolvency and Bankruptcy Code, 2016 a notice of disclaimer under sub-section (1) shall not be given in respect of the property which has been claimed for the estate of the bankrupt under section 155 without the permission of the committee of creditors.
Section 160(5) of the Insolvency and Bankruptcy Code, 2016 provides that a notice of disclaimer under subsection (1) shall not affect the rights or liabilities of any other person, and any person who sustains a loss or damage in consequence of the operation of a disclaimer under this section shall be deemed to be a creditor of the bankrupt to the extent of the loss or damage. It may be noted that the term “onerous property” means (i) any unprofitable contract; and (ii) any other property comprised in the estate of the bankrupt which is unsaleable or not readily saleable, or is such that it may give rise to a claim.

Question 14.
What are the provisions related to the notice to disclaim onerous property.
Answer:
As per Section 161(1) of the Insolvency and Bankruptcy Code, 2016, no notice of disclaimer under section 160 shall be necessary if:
(a) a person interested in the onerous property has applied in writing to the bankruptcy trustee or his predecessor requiring him to decide whether the onerous property should be disclaimed or not; and
(b) a decision under clause (a) has not been taken by the bankruptcy trustee within seven days of receipt of the notice. As per Section 161 (2) of the Insolvency and Bankruptcy Code, 2016, any onerous property which cannot be disclaimed under sub-section (1) shall be deemed to be part of the estate of the bankrupt. An onerous property is said to be disclaimed where notice in relation to that property has been given by the bankruptcy trustee under section 160.

Question 15.
What are the provisions of disclaimer of leaseholds?
Answer:
According to Section 162 of the Insolvency and Bankruptcy Code, 2016, the bankruptcy trustee shall not be entitled to disclaim any leasehold interest, unless a notice of disclaimer has been served on every interested person and –
(a) no application objecting to the disclaimer by the interested person, has been filed with respect to the leasehold interest, within fourteen days of the date on which notice was served; and
(b) where the application objecting to the disclaimer has been filed by the interested person, the Adjudicating Authority has directed under section 163 that the disclaimer shall take effect. Where the Adjudicating Authority gives a direction above, it may also make order with respect to fixtures, improvements by tenant and other matters arising out of the lease as it may think fit.

Question 16.
Explain the process of filing a challenge against disclaimed property.
Answer:
As per Section 163(1) of the Insolvency and Bankruptcy Code, 2016, an application challenging the disclaimer may be made by the following persons under this section to the Adjudicating Authority
(a) any person who claims an interest in the disclaimed property; or
(b) any person who is under any liability in respect of the disclaimed property; or
(c) where the disclaimed property is a dwelling house, any person who on the date of application for bankruptcy was in occupation of or entitled to occupy that dwelling house.
Section 163(2) of the Insolvency and Bankruptcy Code, 2016 provides that the Adjudicating Authority may on an application under sub-section (1) make an order for the vesting of the disclaimed property in, or for its delivery to any of the persons mentioned in sub-section (1).
As per Section 163(3) of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority shall not make an order in favour of a person who has made an application under clause (b) of sub-section (1) except where it appears to the Adjudicating Authority that it would be just to do so for the purpose of compensating the person.
Section 163(4) of the Insolvency and Bankruptcy Code, 2016, provides that the effect of an order under this section shall be taken into account while assessing loss or damage sustained by any person in consequence of the disclaimer under sub-section (5) of section 160.
Section 163(5) of the Insolvency and Bankruptcy Code, 2016, provides that an order under sub-section (2) vesting property in any person need not be completed by any consequence, assignment or transfer.

Question 17.
What are Undervalued Transactions?
Answer:
As per Section 164(1) of the Insolvency and Bankruptcy Code, 2016, the bankruptcy trustee may apply to the Adjudicating Authority for an order under this section in respect of an undervalued transaction between a bankrupt and any person.
As per Section 164(2) of the Insolvency and Bankruptcy Code, 2016, the undervalued transaction referred above should have –
(a) been entered into during the period of two years ending on the filing of the application for bankruptcy; and
(b) caused bankruptcy process to be triggered.
As per Section 164(3) of the Insolvency and Bankruptcy Code, 2016, a transaction between a bankrupt and his associate entered into during the period of two years preceding the date of making of the application for bankruptcy shall be deemed to be an undervalued transaction under this section.
Section 164(4) of the Insolvency and Bankruptcy Code, 2016 provides that on the application of the bankruptcy trustee, the Adjudicating Authority may (a) pass an order declaring an undervalued transaction void; (b) pass an order requiring any property transferred as a part of an undervalued transaction to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and (c) pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the undervalued transaction.
As per Section 164(5) of the Insolvency and Bankruptcy Code, 2016, the order under Section 164(4)(a) shall not be passed if it is proved by the bankrupt that the transaction was undertaken in the ordinary course of business of the bankrupt: It may be noted that the provisions of this sub-section shall not be applicable to undervalued transaction entered into between a bankrupt and his associate under sub-section (3) of this section. Space to write important points for revision

Question 18.
Which transactions are included in undervalued transaction?
Answer:
A bankrupt is said to have entered into an undervalued transaction with any person if-
(a) he makes a gift to that person;
(b) no consideration has been received by that person from the bankrupt;
(c) it is in consideration of marriage; or
(d) it is for a consideration, the value of which in money or money’s worth is significantly less than the value in money or money’s worth of the consideration provided by the bankrupt.

Question 19.
Explain “Preference Transactions”.
Answer:
As per Section 165

1. The bankruptcy trustee may apply to the Adjudicating Authority for an order if any preference is given to any person.
2. The transaction giving preference to an associate of the bankrupt under sub-section (1) should have been entered into by the bankrupt with the associate during the period of two years ending on the date of the application for bankruptcy.
3. Any transaction giving preference not covered under sub-section (2) should have been entered into by the bankrupt during the period of six months ending on the date of the application for bankruptcy.
4. The transaction should have caused the bankruptcy process to be triggered.
5. On receiving the application, the Adjudicating Authority may –
   (a) pass an order declaring a transaction giving preference void;
   (b) pass an order requiring any property transferred in respect of a transaction giving preference to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and
   (c) pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the transaction giving preference.
6. The Adjudicating Authority shall not pass an order unless proved that the bankrupt was influenced in his decision of giving preference to a person by a desire.
7. For the purpose of sub-section (6), if the person is an associate of the bankrupt, at the time of giving preference, it shall be presumed that the bankrupt was influenced in his decision under that sub- section.
8. A bankrupt shall be deemed to have entered into a preference transaction if –
   (a) the person is the creditor or surety or guarantor for any debt of the bankrupt; and
   (b) the bankrupt does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the debtor becoming a bankrupt, will be better than the position he would have been in, if that thing had not been done.

Question 20.
Discuss the post effects of order.
Answer:
1. As per Section 166 (1) an order passed by the Adjudicating Authority under Section 164 or 165, shall not –
(a) give rise to a right against a person interested in the property acquired under Section 164 or 165, whether or not he is the person with whom the bankrupt entered into such transaction; and
(b) require any person to pay a sum to the bankruptcy trustee in respect of the benefit received from the undervalued transaction or a transaction giving preference, whether or not he is the person with whom the bankrupt entered into such transaction.

2. The provision of sub-section (1) shall apply only if the interest was acquired or the benefit was received-
(a) in good faith;
(b) for value;
(c) without notice that the bankrupt entered into the transaction at an under- value or for giving preference;
(d) without notice that the bankrupt has filed an application for bankruptcy or a bankruptcy order has been passed; and
(e) by any person who at the time of acquiring the interest or receiving the benefit was not an associate of the bankrupt.

3. Any sum required to be paid to the bankruptcy trustee under sub-section (1) shall be included in the estate of the bankrupt.

Question 21.
Describe provisions related to Extortionate credit transactions.
Answer:
As per Section 167:
1. On an application by the bankruptcy trustee, the Adjudicating Authority may make an order under this section in respect of extortionate credit transactions to which the bankrupt is or has been a party.

2. The transactions under sub-section (1) should have been entered into by the bankrupt during the period of two years ending on the bankruptcy commencement date.

3. An order of the Adjudicating Authority may –
(a) set aside the whole or part of any debt created by the transaction;
(b) vary the terms of the transaction or vary the terms on which any security for the purposes of the transaction is held;
(c) require any person who has been paid by the bankrupt under any transaction, to pay a sum to the bankruptcy trustee;
(d) require any person to surrender to the bankruptcy trustee any property of the bankrupt held as security for the purposes of the transaction.

4. Any sum paid or any property surrendered to the bankruptcy trustee shall be included in the estate of the bankrupt.

Question 22.
What do you mean by Extortionate credit transaction?
Answer:
An extortionate credit transaction is a transaction for or involving the provision of credit to the bankrupt by any person

1. on terms requiring the bankrupt to make exorbitant payments in respect of the credit provided; or
2. which is unconscionable under the principles of law relating to contracts.
3. Any debt extended by a person regulated for the provision of financial services in compliance with the law in force in relation to such debt, shall not be considered as an extortionate credit transaction under this section.

Question 23.
Explain the provisions under Section 168.
Answer:
Section 168 is related to obligations under contracts.

• This section shall apply where a contract has been entered into by the bankrupt with a person before the bankruptcy commencement date.
• Any party to a contract, other than the bankrupt under sub-section (1), may apply to the Adjudicating Authority for –
  (a) an order discharging the obligations of the applicant or the bankrupt under the contract;
  (b) payment of damages by the party or the bankrupt, for non-performance of the contract or otherwise.
• Any damages payable by the bankrupt by virtue of an order under clause (b) of sub-section (2) shall be provable as bankruptcy debt.
• When a bankrupt is a party to the contract under this section jointly with another person, that person may sue or be sued in respect of the contract without joinder of the bankrupt.

Question 24.
Discuss the provisions regarding the proceedings in case of death of the bankrupt.
Answer:

• Continuance of proceedings on death of bankrupt shall continue as if he were alive.
• All the provisions related to the administration and distribution of the estate of the bankrupt shall, so far as the same are applicable, apply to the administration of the estate of a deceased bankrupt.
• While administering the estate of a deceased bankrupt, the bankruptcy trustee shall have regard to the claims by the legal representative of the deceased bankrupt to payment of the proper funeral and testamentary expenses incurred by them.
• The claims under sub-section (2) shall rank equally to the secured creditors in the priority provided under section 178.
• If, on the administration of the estate of a deceased bankrupt, any surplus remains in the hands of the bankruptcy trustee afterpayment in full of all the debts due from the deceased bankrupt, together with the costs of the administration and interest as provided under section 178, such surplus shall be paid to the legal representatives of the estate of the deceased bankrupt or dealt with in such manner as may be prescribed.

Question 25.
Explain the rules regarding the proof of debt.
Answer:
As per Section 171 of the Code the bankruptcy trustee shall give notice to
each of the creditors to submit proof of debt within fourteen days of preparing
the list of creditors under section 132.
The proof of debt shall –
(a) require the creditor to give full particulars of debt, including the date on which the debt was contracted and the value at which that person assesses it;
(b) require the creditor to give full particulars of the security, including the date on which the security was given and the value at which that person assesses it;
(c) be in such form and manner as may be prescribed.

Question 26.
What can be the valid proofs of debt against the bankrupt?
Answer:
In case the creditor is a decree holder against the bankrupt, a copy of the decree shall be a valid proof of debt. Where a debt bears interest, that interest shall be provable as part of the debt except in so far as it is owed in respect of any period after the bankruptcy commencement date.
The bankruptcy trustee shall estimate the value of any bankruptcy debt which does not have a specific value.
The value assigned by the bankruptcy trustee shall be the amount provable by the concerned creditor.
A creditor may prove for a debt where payment would have become due at a date later than the bankruptcy commencement date as if it were owed presently and may receive dividends in a manner as may be prescribed. Where the bankruptcy trustee serves a notice and the person on whom the notice is served does not file a proof of security within thirty days after the date of service of the notice, the bankruptcy trustee may, with leave of the Adjudicating Authority, sell or dispose of any property that was subject to the security, free of that security.

Question 27.
Mutual credit and set-off Section 173 states that where before the bankruptcy commencement date, there have been mutual dealings between the bankrupt and any creditor, the bankruptcy trustee shall take an account of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other; and only the balance shall be provable as a bankruptcy debt or as the amount payable to the bankruptcy trustee as part of the estate of the bankrupt. Sums due from the bankrupt to another party shall not be included in the account taken by the bankruptcy trustee above, if that other party had notice at the time they became due that an application for bankruptcy relating to the bankrupt was pending.

Question 28.
Explain the process of distribution of interim dividend.
Answer:
According to Section 174 of the Insolvency and Bankruptcy Code, whenever the bankruptcy trustee has sufficient funds in his hand, he may declare and distribute interim dividend among the creditors in respect of the bankruptcy debts which they have respectively proved.

• Where the bankruptcy trustee has declared any interim dividend, he shall give notice of such dividend and the manner in which it is proposed to be distributed.
• In the calculation and distribution of the interim dividend, the bankruptcy trustee shall make provision for any bankruptcy debts which appear to him to be due to persons who, by reason of the distance of their place of residence, may not have had sufficient time to tender and establish their debts; and any bankruptcy debts which are subject of claims which have not yet been determined; disputed proofs and claims; and expenses necessary for the administration of the estate of the bankrupt.

Question 29.
How is property is distributed in case of bankruptcy of an individual and partnership firm?
Answer:
According to Section 175(1) of the Insolvency and Bankruptcy Code, 2016, the bankruptcy trustee may, with the approval of the committee of creditors, divide in its existing form amongst the creditors, according to its estimated value, any property in its existing form which from its peculiar nature or other special circumstances cannot be readily or advantageously sold.
Section 175(2) provides that an approval under sub-section (1) shall be sought by the bankruptcy trustee for each transaction, and a person dealing with the bankruptcy trustee in good faith and for value shall not be required to enquire whether any approval required under sub-section (1) has been given.
Section 175(3) provides that where the bankruptcy trustee has done anything without the approval of the committee of creditors, the committee may, for the purpose of enabling him to meet his expenses out of the estate of the bankrupt, ratify the act of the bankruptcy trustee.
Section 175(4) states that the committee of the creditors shall not ratify the act of the bankruptcy trustee under Section 175(3) unless it is satisfied that the bankruptcy trustee acted in a case of urgency and has sought its ratification without undue delay.

Question 30.
Explain the regulations related to declaration of the final dividend.
Answer:
As per Section 176:

1. Where the bankruptcy trustee has realised the entire estate of the bankrupt or so much of it as could be realised in the opinion of the bankruptcy trustee, he shall give notice-
   (a) of his intention to declare a final dividend; or
   (b) that no dividend or further dividend shall be declared.
2. The notice under sub-section (1) shall contain such particulars as may be prescribed and shall require all claims against the estate of the bankrupt to be established by a final date specified in the notice.
3. The Adjudicating Authority may, on the application of any person interested in the administration of the estate of the bankrupt, postpone the final date referred to in sub-section (2).
4. After the final date referred to in sub-section (2), the bankruptcy trustee shall –
   (a) defray any outstanding expenses of the bankruptcy out of the estate of the bankrupt;
   (b) if he intends to declare a final dividend, declare and distribute that dividend among the creditors who have proved their debts, without regard to the claims of any other persons.
5. If a surplus remains after payment in full with interest to all the creditors of the bankrupt and the payment of the expenses of the bankruptcy, the bankrupt shall be entitled to the surplus.
6. Where a bankruptcy order has been passed in respect of one partner in a firm, a creditor to whom the bankrupt is indebted jointly with the other partners in the firm or any of them shall not receive any dividend out of the separate property of the bankrupt until all the separate creditors have received the full amount of their respective debts.

Question 31.
Discuss the provisions of claims of creditors.
Answer:
According to Section 177(1)
1. A creditor who has not proved his debt before the declaration of any dividend is not entitled to disturb, by reason that he has not participated in it, the distribution of that dividend or any other dividend declared before his debt was proved, but – (a) when he has proved the debt, he shall be entitled to be paid any dividend or dividends which he has failed to receive, out of any money for the time being available for the payment of any further dividend; and (b) any dividend or dividends payable to him shall be paid before that money is applied to the payment of any such further dividend.

2. No action shall lie against the bankruptcy trustee for a dividend, but if the bankruptcy trustee refuses to pay a dividend payable under sub-section (1), the Adjudicating Authority may order him to – (a) pay the dividend; and (b) pay, out of his own money (i).interest on the dividend; and (ii) the costs of the proceedings in which the order to pay has been made.

Question 32.
Discuss the order of making payment of debts.
Answer:
As per Section 178, the following debts shall be paid in priority to all other debts

1. (a) the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full;
   (b) (i) the workmen’s dues for the period of twenty-four months preceding the bankruptcy commencement date; and (ii) debts owed to secured creditors.
   (c) wages and any unpaid dues owed to employees, other than workmen, of the bankrupt for the period of twelve months preceding the bankruptcy commencement date;
   (d) any amount due to the Central Government and the State Government including the amount to be received on account of Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the bankruptcy commencement date;
   (e) all other debts and dues owed by the bankrupt including unsecured debts.
2. The debts in each class specified in sub-section (1) shall rank in the order mentioned in that sub-section but debts of the same class shall rank equally amongst themselves, and shall be paid in full, unless the estate of the bankrupt is insufficient to meet them, in which case they shall abate in equal proportions between themselves.
3. Where any creditor has given any indemnity or has made any payment of moneys by virtue of which any asset of the bankrupt has been recovered, protected or preserved, the Adjudicating Authority may make such order as it thinks just with respect to the distribution of such asset with a view to giving that creditor an advantage over other creditors in consideration of the risks taken by him in so doing.
4. Unsecured creditors shall rank equally amongst themselves unless contractually agreed to the contrary by such creditors.
5. Any surplus remaining after the payment of the debts under sub-section (1) shall be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the bankruptcy commencement date.
6. Interest payments under sub-section (5) shall rank equally irrespective of the nature of the debt.
7. In the case of partners, the partnership property shall be applicable in the first instance in payment of the partnership debts and the separate property of each partner shall be applicable in the first instance in payment of his separate debts.
8. Where there is a surplus of the separate property of the partners, it shall be dealt with as part of the partnership property; and where there is a surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property.

Question 33.
Who is the Adjudicating Authority in case of bankruptcy of individuals and partnership firms.
Answer:
As per Section 179 of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority, in relation to insolvency matters of individuals and firms shall be the Debt Recovery Tribunal having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain and can entertain an application under this Code regarding such person.
The Debt Recovery Tribunal shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain or dispose of-
(a) any suit or proceeding by or against the individual debtor;
(b) any claim made by or against the individual debtor;
(c) any question of priorities or any other question whether of law or facts, arising out of or in relation to insolvency and bankruptcy of the individual debtor or firm under this Code. Notwithstanding anything contained in the Limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified for any suit or application in the name and on behalf of a debtor for which an order of moratorium has been made under Part III, the period during which such moratorium is in place shall be excluded.

Question 34.
Do Civil court has any jurisdiction to entertain any suit or proceedings?
Answer:

• According to Section 180 of the Insolvency and Bankruptcy Code, 2016, no civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal has jurisdiction under this Code.
• No injunction shall be granted by any court, tribunal or authority in respect of any action taken, or to be taken, in pursuance of any power conferred on the Debt Recovery Tribunal orthe Debt Recovery Appellate Tribunal by or under this Code.

Question 35.
What are the provisions related to appeal against the DRT?
Answer:

• As per Section 181 of the Insolvency and Bankruptcy Code, 2016, an appeal from an order of the Debt Recovery Tribunal under this Code shall be filed within thirty days before the Debt Recovery Appellate Tribunal.
• The Debt Recovery Appellate Tribunal may, if it is satisfied that a person was prevented by sufficient cause from filing an appeal within thirty days, allow the appeal to be filed within a further period not exceeding fifteen days.
• An appeal from an order of the Debt Recovery Appellate Tribunal on a question of law under this Code shall be filed within forty-five days before the Supreme Court. The Supreme Court may, if it is satisfied that a person was prevented by sufficient cause from filing an appeal within forty-five days, allow the appeal to be filed within a further period not exceeding fifteen days.

Chapter 14 Bankruptcy Order for Individuals and Partnership Firms – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Bankruptcy Order for Individuals and Partnership Firms – CS Professional Insolvency Law and Practice Study Material

Question 1.
A Director of a Private Limited Company, which is already in Corporate Insolvency Resolution Process has approached you to file an application for Bankruptcy for himself. Explain him the present status of applicability of the Insolvency and Bankruptcy Code, 2016 (IBC 2016) and also list out the prohibitions for individuals on declaration as Bankrupt under the IBC 2016. (Dec 2020, 6 marks)
Answer:
Presently Insolvency and Bankruptcy Code, 2016 is applicable for Companies incorporated under the Companies Act, 2013 and Limited Liability Partnerships incorporated under LLP Act.
Chapter IV of Part III of the Insolvency and Bankruptcy Code, 2016 (the Code) deals with the provisions of bankruptcy order for individuals and partnershipfirms. The provisions related to insolvency resolution of individual and partnership firm have been notified under the Code.
Section 141 of the Insolvency and Bankruptcy Code, 2016 provides that a bankrupt from the bankruptcy commencement date shall:
(a) not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company:
(b) without the previous sanction of the bankruptcy trustee, be prohibited from creating any charge on his estate or taking any further debt:
(c) be required to inform his business partners that he is undergoing a bankruptcy process;
(d) prior to entering into any financial or commercial transaction of such value as may be prescribed, either individually or jointly, inform all the parties involved in such transaction that he is undergoing a bankruptcy process:
(e) without the previous sanction of the Adjudicating Authority, be incompetent to maintain any legal action or proceedings in relation to the bankruptcy debts, and
(f) not be permitted to travel overseas without the permission of the Adjudicating Authority
Any restriction to which a bankrupt may be subject under this Section shall cease to have effect if the bankruptcy order against him is modified or recalled under Section 142 of the Insolvency and Bankruptcy Code, 2016 or he is discharged under Section 138 of the Insolvency and Bankruptcy Code, 2016.

Question 2.
What is Bankruptcy?
Answer:

• Bankruptcy is a legal procedure to give debt relief for people whose circumstances are unlikely to change and who have no hope of paying off their debts within a reasonable time.
• The term bankruptcy applies only to individuals and not to the companies or other legal entities.
• An individual may be made bankrupt only by court order following the presentation of a bankruptcy petition. An individual may present his own petition on the ground that he is insolvent, i.e. unable to pay his debts.
• Chapter IV of Part III of the Insolvency and Bankruptcy Code, 2016 deals with the provisions of bankruptcy order for individuals and partnership firms that how and under what circumstances debtor or creditor can apply for the bankruptcy order.

Question 3.
State the circumstances under which the application for bankruptcy of any debtor can be made to the Adjudicating Authority.
Answer:
Section 121 of the Insolvency and Bankruptcy Code, 2016 provides that an application for bankruptcy of a debtor may be made by a creditor individually or jointly with other creditors or by a debtor to the Adjudicating Authority in such format and with such fees as may be prescribed in the following circumstances:

• Where an order has been passed by an Adjudicating Authority under Section 100(4), Section 115 (2) and 118(3) of the Insolvency and Bankruptcy Code, 2016.
• An application for bankruptcy shall be filed within a period of three months from the date of the order passed by the Adjudicating Authority.
• Also, where the debtor is a firm, the application may be filed by any of its partners.

Question 4.
What documents are required to be submitted along with the application by a debtor for the bankruptcy of a debtor?
Answer:
Section 122 of the Insolvency and Bankruptcy Code, 2016 provides that an application for bankruptcy of a debtor shall be accompanied by:
(a) the records of insolvency resolution process undertaken under Chapter III of Part III;
(b) the statement of affairs of the debtor in such form and manner as may be prescribed, on the date of the application for bankruptcy; and
(c) a copy of the order passed by the Adjudicating Authority under Chapter III of Part III permitting the debtor to apply for bankruptcy.
The debtor may propose an insolvency professional as the bankruptcy trustee in the application for bankruptcy. An application for bankruptcy by the debtor shall not be withdrawn without the leave of the Adjudicating Authority. Space to write important points for revision

Question 5.
What documents are required to be submitted along with the application by a creditor for the bankruptcy of a debtor in respect of an unsecured debt?
Answer:
Section 123 of the Insolvency and Bankruptcy Code, 2016 provides that an application for bankruptcy by a creditor shall be accompanied by:
(a) the records of insolvency resolution process undertaken under Chapter III of the Insolvency and Bankruptcy Code, 2016;
(b) a copy of the order passed by the Adjudicating Authority under Chapter III of the Insolvency and Bankruptcy Code, 2016 permitting the creditor to apply for bankruptcy;
(c) details of the debts owed by the debtor to the creditor as on the date of the application for bankruptcy; and
(d) such other information as may be prescribed.

Question 6.
What documents are required to be submitted along with the application by a creditor for the bankruptcy of a debtor in respect of an secured debt?
Answer:
An application made in respect of a debt which is secured shall be accompanied with:
(a) a statement by the creditor having the right to enforce the security that creditor shall in the event of a bankruptcy order being made, give up his security for the benefit of all the creditors of the bankrupt; or
(b) a statement by the creditor stating that the application for bankruptcy is only in respect of the unsecured part of the debt and an estimated value of the unsecured part of the debt.
If a secured creditor makes an application for bankruptcy and submits a statement, the secured and unsecured parts of the debt shall be treated as separate debts. The creditor may propose an insolvency professional as the bankruptcy trustee in the application for bankruptcy.
An application for bankruptcy in case of a deceased debtor, may be filed against his legal representatives.

Question 7.
What are the consequences of filing an application of bankruptcy?
Answer:
Section 124 of the Insolvency and Bankruptcy Code, 2016 provides that when an application for bankruptcy is filed under Section 122 or Section 123 of the Insolvency and Bankruptcy Code, 2016 then-
(a) interim-moratorium shall commence on the date of the making of the application on all actions against the properties of the debtor in respect of his debts and such moratorium shall cease to have effect on the bankruptcy commencement date; and
(b) during the interim-moratorium period any pending legal action or legal proceeding against any property of the debtor in respect of any of his debts shall be deemed to have been stayed and the creditors of the debtor shall not be entitled to initiate any legal action or legal proceedings against any property of the debtor in respect of any of his debts.
Where the application has been made in relation to a firm, the interim moratorium shall operate against all the partners of the firm as on the date of the making of the application. The provisions of this Section shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

Question 8.
Who is a bankruptcy trustee and what are the provisions of appointment of Insolvency Professional as Bankruptcy Trustee?
Answer:

• Section 125 of the Insolvency and Bankruptcy Code, 2016 provides that if an insolvency professional is proposed as the bankruptcy trustee in the application for bankruptcy under Section 122 or Section 123 of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority shall direct the Insolvency and Bankruptcy Board of India within seven days of receiving the application for bankruptcy to confirm that there are no disciplinary proceedings against such professional.
• The Insolvency and Bankruptcy Board of India(IBBI) shall within ten days from the date of the receipt of the direction shall in writing either confirm or reject his appointment. In case of rejection, it will nominate another bankruptcy trustee for the bankruptcy process.
• Where a bankruptcy trustee is not proposed by the debtor or creditor, the Adjudicating Authority shall direct the IBBI within seven days of receiving the application to nominate a bankruptcy trustee for the bankruptcy process.
• IBBI then shall nominate a bankruptcy trustee within ten days of receiving the direction from the Adjudicating Authority. The bankruptcy trustee confirmed or nominated under this Section shall be appointed as the bankruptcy trustee by the Adjudicating Authority in the bankruptcy order under Section 126 of the Insolvency and Bankruptcy Code, 2016.

Question 9.
Who shall pass the Bankruptcy Order? When will it be passed? What is the validity of such order?
Answer:
As per Section 126 of the IBC, 2016 the Adjudicating Authority shall pass a bankruptcy order within fourteen days of receiving the confirmation or nomination of the bankruptcy trustee under Section 125 of the Insolvency and Bankruptcy Code, 2016.
The Copy of the same along with the bankruptcy application shall be provided to the bankrupt, creditors and the bankruptcy trustee within seven days of the passing of the bankruptcy order.
As per Section 127 of the IBC 2016 such order passed shall continue to have effect till the debtor is discharged under Section 138 of the Insolvency and Bankruptcy Code, 2016.

Question 10.
Mention the provisions of Section 128 of IBC, 2016.
Answer:
Secion 128 of the Insolvency and Bankruptcy Code, 2016 provides that on passing of the bankruptcy order under Section 126 of the Insolvency and Bankruptcy Code, 2016:
(a) the estate of the bankrupt shall vest in the bankruptcy trustee as provided under Section 154 of the IBC, 2016;
(b) the estate of the bankrupt shall be divided among his creditors;
(c) a creditor of the bankrupt indebted in respect of any debt claimed as a bankruptcy debt shall not:
(i) initiate any action against the property of the bankrupt in respect of such debt; or
(ii) commence any suit or other legal proceedings except with the leave of the Adjudicating Authority and on such terms as the Adjudicating Authority may impose.

Question 11.
Explain the Statement of financial position as per Section 129 of the IBC, 2016.
Answer:

• The Section 129 of IBC, 2016 provides that after passing a bankruptcy order, the bankrupt shall submit his statement of financial position to the bankruptcy trustee within seven days from the bankruptcy commencement date in a prescribed form and manner.
• If the firm is a bankrupt, its partners on the date of the order shall submit a joint statement as well as an individual statement of his financial position.
• The bankruptcy trustee may require the bankrupt or any other person to submit in writing further information explaining or modifying any matter contained in the statement of financial position.

Question 12.
What follows the submission of statement of financial position?
Answer:
Section 130 of the IBC, 2016 provides for Public notice inviting claims from creditors

• Send notices within ten days of the bankruptcy commencement date to the creditors mentioned in the statement of affairs submitted by the bankrupt under Section 129 of the Insolvency and Bankruptcy Code, 2016; or the application for bankruptcy submitted by the bankrupt under Section 122 of the Insolvency and Bankruptcy Code, 2016 .
• The public notice shall include the last date up to which the claims shall be submitted and such others matters and details as may be prescribed and shall be published in leading newspapers, one in English and another in vernacular having sufficient circulation where the bankrupt resides; affixed on the premises of the Adjudicating Authority; and placed on the website of the Adjudicating Authority. The notice to the creditors shall include such matters and details as may be prescribed.

Question 13.
For what purpose the creditors meeting is conducted?
Answer:
The following business shall be conducted in the meeting of the creditors in which regard a resolution may be passed, namely:
(a) the establishment of a committee of creditors;
(b) any other business that the bankruptcy trustee thinks fit to be transacted. The bankruptcy trustee shall cause the minutes of the meeting of the creditors to be recorded, signed and retained as a part of the records of the bankruptcy process. The bankruptcy trustee shall not adjourn the meeting of the creditors for any purpose for more than seven days at a time.

Question 14.
State the voting rights of creditors.
Answer:

• As per Section 135 of the Insolvency and Bankruptcy Code, 2016 every creditor mentioned in the list under Section 132 of the IBC, 2016 or his proxy shall be entitled to vote in respect of the resolutions in the meeting of the creditors in accordance with the voting share assigned to him.
• The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Insolvency and Bankruptcy Board of India.
• A creditor shall not be entitled to vote in respect of a debt for an unliquidated amount.
• The following creditors shall not be entitled to vote under this Section, namely:
  (a) creditors who are not mentioned in the list of creditors under Section 132 of the IBC, 2016 and those who have not been given a notice by the bankruptcy trustee;
  (b) creditors who are associates of the bankrupt.

Question 15.
What is a Discharge Order?
Answer:

• Section 138 of the Insolvency and Bankruptcy Code, 2016 provides that the bankruptcy trustee shall apply to the Adjudicating Authority for a discharge order on the expiry of one year from the bankruptcy commencement date or within seven days of the approval of the committee of creditors of the completion of administration of the estates of the bankrupt under Section 137 of the Insolvency and Bankruptcy Code, 2016.
• The Adjudicating Authority shall pass a discharge order on an application by the bankruptcy trustee.
• A copy of the same shall be provided to the IBBI, for the purpose of recording an entry in the register referred to in Section 196 of the IBC, 2016.

Question 16.
What are the effects of the discharge order?
Answer:
Section 139 of the IBC, 2016 provides that the discharge order made under Section 138 of the IBC, 2016 shall release the bankrupt from all the bankruptcy debts but it will not affect
(a) The functions of the bankruptcy trustee;
(b) The operation of the provisions of Chapter IV and V of Part III of the IBC, 2016.
(c) The release of the bankrupt from any debt incurred by means of fraud or breach of trust to which he was a party; or
(d) Discharge the bankrupt from any excluded debt.

Question 17.
What are the disqualifications of a bankrupt post commencement of bankruptcy?
Answer:
The bankrupt shall from the bankruptcy commencement date, be subject to the disqualifications mentioned in Section 140. In addition to any disqualification under any other law for the time being in force, a he/she shall be disqualified from:
(a) being appointed or acting as a trustee or representative in respect of any trust, estate or settlement;
(b) being appointed or acting as a public servant;
(c) being elected to any public office where the appointment to such office is by election; and
(d) being elected or sitting or voting as a member of any local authority.

Question 18.
What restrictions are put on a bankrupt post-bankruptcy commencement?
Answer:
Section 141 of the Insolvency and Bankruptcy Code, 2016 provides that a bankrupt from the bankruptcy commencement date shall:
(a) not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company;
(b) without the previous sanction of the bankruptcy trustee, be prohibited from creating any charge on his estate or taking any further debt;
(c) be required to inform his business partners that he is undergoing a bankruptcy process;
(d) prior to entering into any financial or commercial transaction of such value as may be prescribed, either individually or jointly, inform all the parties involved in such transaction that he is undergoing a bankruptcy process;
(e) without the previous sanction of the Adjudicating Authority, be incompetent to maintain any legal action or proceedings in relation to the bankruptcy debts; and
(f) not be permitted to travel overseas without the permission of the Adjudicating Authority.

Question 19.
State the provisions of modification or recall of bankruptcy order.
Answer:
Under Section 142 of the Insolvency and Bankruptcy Code, 2016 the Adjudicating Authority may on an application or suo moto, modify or recall a bankruptcy order, if it is satisfied that:
(a) there exists an error apparent on the face of such order; or
(b) both the bankruptcy debts and the expenses of the bankruptcy have, afterthe making of the bankruptcy order, either been paid for or secured to the satisfaction of the Adjudicating Authority.
Any modification or recall of the bankruptcy order shall be valid except that the property of the bankrupt shall vest in such person as the Adjudicating Authority may appoint or, in default of any such appointment, revert to the bankrupt on such terms as the Adjudicating Authority may direct.
A copy of the such order shall be provided to the IBBI, for the purpose of recording an entry in the register referred to in Section 191 of the Insolvency and Bankruptcy Code, 2016.
The modified or recalled order shall be binding on all creditors so far as it relates to any debts due to them which form a part of the bankruptcy.

Question 20.
Is there any provision for the fees of bankruptcy trustee?
Answer:
Section 144 of the IBC, 2016 provides that fees shall be paid to a bankruptcy trustee appointed for conducting the bankruptcy process in proportion to the value of the estate of the bankrupt. The same shall be paid to the bankruptcy trustee from the distribution of the estate of the bankrupt in the manner provided in Section 178 of the IBC, 2016.

Question 21.
Is there any provision of replacing the bankruptcy trustee? If yes, then what is the procedure?
Answer:

• If the Committee of creditors is of the opinion that at any time during the bankruptcy process, a bankruptcy trustee appointed under Section 125 of the Insolvency and Bankruptcy Code, 2016 is required to be replaced, then as per Section 145 it may replace him with another bankruptcy trustee in the manner provided under this Section.
• 75 % of the Committee of creditors must vote to replace the bankruptcy trustee.
• The Adjudicating Authority shall within seven days of the receipt of the application direct the IBBI to recommend for replacement of bankruptcy trustee.
• The IBBI shall within ten days of such order by the Adjudicating Authority recommend a bankruptcy trustee for replacement against whom no disciplinary proceedings are pending.
• After recommendation the new trustee shall be appointed within fourteen days.
• The earlier bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed on the date of his appointment.
• The Adjudicating Authority may give the following directions to the earlier bankruptcy trustee:
  (a) to share all information with the new bankruptcy trustee in respect of the bankruptcy process; and
  (b) to co-operate with the new bankruptcy trustee in such matters as may be required.
• The earlier bankruptcy trustee replaced under this Section shall be released in accordance with the provisions of Section 148 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).
• The bankruptcy trustee appointed under this Section shall give a notice of his appointment to the bankrupt within seven days of his appointment.

Question 22.
If a bankruptcy trustee intends to cease practicing as an insolvency professional, he may do so. Comment.
Answer:
A bankruptcy trustee may resign if he intends to cease practicing as an insolvency professional or there is conflict of interest or change of personal circumstances which preclude the further discharge of his duties as a bankruptcy trustee.
The resignation shall be accepted by the Adjudicating Authority within seven days and direct the Insolvency and Bankruptcy Board of India for his replacement.
The IBBI shall within ten days of the direction of the Adjudicating Authority recommend another bankruptcy trustee ais a replacement.
The Adjudicating Authority shall appoint the bankruptcy trustee recommended by the IBBI within fourteen days of receiving the recommendation.
The replaced bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed on the date of his appointment. He/she shall share all information with the new bankruptcy trustee and co-operate whenever required.
The bankruptcy trustee appointed shall give a notice of his appointment to the committee of creditors and the bankrupt within seven days of his appointment. The bankruptcy trustee replaced under this Section shall be released in accordance with the provisions of Section 148 of the Insolvency and Bankruptcy Code, 2016.

Question 23.
What steps will be taken by the Adjudicating Authority in case of vacancy caused due to resignation or replacement caused in the office of the bankruptcy trustee?
Answer:

• The Adjudicating Authority shall direct the Insolvency and Bankruptcy Board of India for replacement of a bankruptcy trustee.
• The IBBI shall within ten days of the direction of the Adjudicating Authority recommend another bankruptcy trustee as a replacement.
• The Adjudicating Authority shall appoint the bankruptcy trustee recommended by the IBBI within fourteen days of receiving the recommendation.
• The replaced bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed on the date of his appointment. He/she shall share all information with the new bankruptcy trustee and co-operate whenever required.
• The bankruptcy trustee appointed shall give a notice of his appointment to the committee of creditors and the bankrupt within seven days of his appointment. The bankruptcy trustee replaced under this Section shall be released in accordance with the provisions of Section 148 of the Insolvency and Bankruptcy Code, 2016.
• The IBBI shall within ten days of the direction of the Adjudicating Authority recommend a bankruptcy trustee as a replacement.
• The Adjudicating Authority shall appoint the bankruptcy trustee recommended by the Insolvency and Bankruptcy Board within fourteen days of receiving the recommendation.
• The earlier bankruptcy trustee shall deliver possession of the estate of the bankrupt to the bankruptcy trustee appointed, on the date of his appointment.

Question 24.
Under which Chapter of IBC 2016, provisions of bankruptcy order are given?
Answer:
Chapter IV of Part III of the Insolvency and Bankruptcy Code, 2016 deals with the provisions of bankruptcy order for individuals and partnership firms that how and under what circumstances debtor or creditor can apply for the bankruptcy order.

Question 25.
Name the Adjudicating and Appellate Authority under IBC, 2016 in case of individuals and partnership firms.
Answer:
The Adjudicating Authority for dealing with insolvency and bankruptcy of individual and partnership firm is Debt Recovery Tribunal and Appellate Authority for the same is Debt Recovery Appellate Tribunal.

Question 26.
Who prepares the list of creditors in case of bankruptcy?
Answer:
As per Section 132 of the IBC, 2016 the bankruptcy trustee has to prepare within fourteen days from the bankruptcy commencement date, a list of creditors on the basis of the disclosed information.

Chapter 13 Insolvency Resolution of Individual and Partnership Firms – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Insolvency Resolution of Individual and Partnership Firms – CS Professional Insolvency Law and Practice Study Material

Question 1.
Application for initiation of individual insolvency resolution process can be submitted by a debtor only in respect of debts which are not excluded debts. Which debts are to be treated as excluded debts? (June 2019, 6 marks)
Answer:
Section 94 of the Insolvency and Bankruptcy Code, 2016 deals with the application by debtor to initiate insolvency resolution process. A debtor who commits a default may apply, either personally or through a resolution professional, to the adjudicating Authority for initiating the insolvency resolution process, by submitting an application.[Section 94(1)]
An application under sub-section(l) shall be submitted only in respect of debts which are not excluded debts.[Section 94(3)]
Excluded Debts : Section 79(15) of the Code defines excluded debts, which means:
(a) liability to pay fine imposed by a Court or Tribunal;
(b) liability to pay damages for negligence nuisance or breach of a statutory, contractual or other legal obligation;
(c) liability to pay maintenance to any person under any law for the time being in force;
(d) liability in relation to a student loan;
(e) any other debt as may be prescribed.

Question 2.
XYZ Bank has given loan of ₹ 20 crore to AB Ltd. The loan is duly guaranteed by personal guarantee of two relatives of directors. The loan went in to default and the Bank decided to file application against personal guarantors u/s 95 of Insolvency and Bankruptcy Code, 2016 (IBC), to initiate insolvency resolution process.
The Resolution Professional (RP) has filed a report under Section 99 of the IBC recommending approval of application filed u/s 95 of the IBC by the Bank against personal guarantors to the Corporate Debtors (CD).
The CD says that the Debt Recovery Tribunal (DRT) have no right to entertain the present petition as the guarantors are resident, which falls within territorial jurisdiction of other DRT, and also the RP had not complied with the procedure as envisaged in Section 99(2) which mandates the RP to require debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing the proof of the same. Hence the RP has not followed the mandate of Section 99(2) of the IBC.
Based on the above facts answer the following questions :
(a) Whether issue of territorial jurisdiction was appropriate ?
(b) Whether objection about RP, not complying with mandate of Section 99(2) of IBC was sustainable ? (June 2022, 6 marks)

Question 3.
The Insolvency and Bankruptcy Code, 2016 (Code) aims to consolidate laws relating to liquidation and insolvency of corporate persons, partnership firms and individuals in India. Comment.
Answer:

• The Insolvency and Bankruptcy Code, 2016 (Code) aims to consolidate laws relating to liquidation and insolvency of corporate persons, partnership firms and individuals in India
• The provisions of the Code aim to maximize the value of assets of such persons in order to promote entrepreneurship in the country and also increase the availability of capital and credit in the economy.
• Sections 94 to 120 in Chapter III of Part III of the Insolvency and Bankruptcy Code, 2016 deal with insolvency resolution process for Individuals and Partnership Firms.

Question 4.
Explain the process of filing application by debtor to initiate insolvency resolution process.
Answer:

• Section 94 of the Insolvency and Bankruptcy Code, 2016 provides that the debtor who commits a default may apply to the Adjudicating Authority for initiating the insolvency resolution process by submitting an application with such fee and in such form as may be prescribed, either personally or through a Resolution Professional.
• However where the debtor is a partner of a firm, such debtor shall not apply to the Adjudicating Authority for initiating the insolvency resolution process in respect of the firm unless all or a majority of the partners of the firm file the application jointly.
• Application submitted for initiating the insolvency resolution process shall be submitted only in respect of debts which are not excluded debts

Question 5.
Application submitted for initiating the insolvency resolution process shall be submitted only in respect of debts which are not excluded debts. Comment
Answer:
Application submitted for initiating the insolvency resolution process shall be submitted only in respect of debts which are not excluded debts. Excluded Debt means:

• liability to pay fine imposed by a court or tribunal:
• liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;
• liability to pay maintenance to any person under any law for the time being in force;
• liability in relation to a student loan;
• any other debt as may be prescribed

Question 6.
A debtor can make application for initiating the insolvency resolution process subject to certain conditions. State those conditions.
Answer:
A debtor can make application for initiating the insolvency resolution process only if he is not:
(a) an undischarged bankrupt;
(b) undergoing a fresh start process;
(c) undergoing an insolvency resolution process; or
(d) undergoing a bankruptcy process.

A debtor shall not be eligible to apply for insolvency resolution process if an application regarding insolvency resolution process has already been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application under this Section

Question 7.
Explain the process of filing application by creditor to initiate insolvency resolution process.
Answer:

• Section 95 of the Insolvency and Bankruptcy Code, 2016 provides that a creditor may apply to the Adjudicating Authority for initiating the insolvency resolution process by submitting an application with such fee and in such form as may be prescribed, either by himself or jointly with other creditors or through a Resolution Professional.
• However, a creditor may apply under this Section in relation to any partnership debt owed to him for initiating an insolvency resolution process against any one or more partners of the firm or the firm.
• Where an application has been made against one partner in a firm, any other application against another partner in the same firm shall be presented in or transferred to the Adjudicating Authority in which the first mentioned application is pending for adjudication and such Adjudicating Authority may give such directions for consolidating the proceedings under the applications as it thinks just.
• Application under Section 95 shall be accompanied with such details and documents relating to
  (a) the debts owed by the debtor to the creditor or creditors submitting the application for insolvency resolution process as on the date of application;
  (b) the failure by the debtor to pay the debt within a period of fourteen days of the service of the notice of demand; and
  (c) relevant evidence of such default or non-repayment of debt.
• The creditor shall also provide a copy of the application made under this Section to the debtor

Question 8.
Explain the concept of interim Moratorium as per Section 96 of the Insolvency and Bankruptcy Code, 2016.
Answer:

• Section 96 of the Insolvency and Bankruptcy Code, 2016 provides that when an application for initiating the insolvency resolution process is filed under Section 94 or Section 95 of the Insolvency and Bankruptcy Code, 2016 then an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application.
• During the interim-moratorium period any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed and the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.
• Where the application for initiating the insolvency resolution process has been made in relation to a firm, the interim moratorium shall operate against all the partners of the firm as on the date of the application.
• The provisions of this Section shall not apply to such transactions as
  may be notified by the Central Government in consultation with any financial sector regulator. .

Question 9.
Write a note on appointment of Resolution Professional in relation to liquidation and insolvency of partnership firms and individuals as per Insolvency and Bankruptcy Code, 2016.
Answer:

• Section 97 of the Insolvency and Bankruptcy Code, 2016 provides that if an application under Section 94 or 95 is filed through a Resolution Professional, the Adjudicating Authority shall direct the Insolvency and
  Bankruptcy Board of India within seven days of the date of the application to confirm that there are no disciplinary proceedings pending against the Resolution Professional.
• The Insolvency and Bankruptcy Board of India shall within seven days from the date of receipt of directions from Adjudicating Authority; communicate to the Adjudicating Authority in writing either confirming the appointment of the Resolution Professional or rejecting the appointment of the Resolution Professional and nominating another Resolution Professional for the insolvency resolution process.
• Where an application for initiating the insolvency resolution process under Section 94 or 95 of the Insolvency and Bankruptcy Code, 2016 is filed by the debtor or the creditor himself (as the case may be) and not through the Resolution Professional, the Adjudicating Authority shall direct the Insolvency and Bankruptcy Board of India within seven days of the filing of such application, to nominate a Resolution Professional for the insolvency resolution process.
• The Insolvency and Bankruptcy Board of India shall nominate a Resolution Professional within ten days of receiving the direction from the Adjudicating Authority.
• The Adjudicating Authority shall by an order appoint the Resolution Professional recommended or as nominated by the Insolvency and Bankruptcy Board of India.
• The Resolution Professional appointed by the Adjudicating Authority shall be provided a copy of the application for insolvency resolution process.
  Replacement of Resolution Professional
• Section 98 of the Insolvency and Bankruptcy Code, 2016 provides that where the debtor or the creditor is of the opinion that the Resolution Professional appointed under Section 97 of the Insolvency and Bankruptcy Code, 2016 is required to be replaced, the debtor or creditor (as the case may be) may apply to the Adjudicating Authority for the replacement of the such Resolution Professional.
• The Adjudicating Authority shall within seven days from the date of receipt of the application with regard to the replacement of Resolution Professional shall make a reference to the Insolvency and Bankruptcy Board of India for replacement of the Resolution Professional.
• The Insolvency and Bankruptcy Board of India shall within ten days from the date of receipt of the reference from the Adjudicating Authority, shall recommend the name of the Resolution Professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.
• The creditors may apply to the Adjudicating Authority for replacement of the Resolution Professional where it has been decided in the meeting of the creditors to replace the Resolution Professional with a new Resolution Professional for implementation of the repayment plan.

Question 10.
Write a note on submission of report by Resolution Professional in relation to liquidation and insolvency of partnership firms and individuals as per Insolvency and Bankruptcy Code, 2016.
Answer:

• Section 99 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall examine the application under Section 94 or Section 95 (as the case may be) within ten days from the date of the appointment and submit a report to the Adjudicating Authority recommending for approval or rejection of the application with regard to the initiation of insolvency resolution process.
• Where the application has been filed under Section 95, the Resolution Professional may require the debtor to prove repayment of the debt claimed as unpaid by the creditor by furnishing:
  (a) evidence of electronic transfer of the unpaid amount from the bank account of the debtor;
  (b) evidence of encashment of a cheque issued by the debtor; or
  (c) a signed acknowledgment by the creditor accepting receipt of dues
• For the purposes of examining the application with regard to the initiation of insolvency resolution process, the Resolution Professional may seek such further information or explanation in connection with the application as may be required frorti the debtor or the creditor or any other person who in the opinion of the Resolution Professional may provide such information.
• The person from whom such information or explanation is sought shall furnish such information or explanation within seven days from the date of receipt of the request from Resolution Professional.
• After examination of the application, Resolution Professional may recommend the acceptance or rejection of the application in his report.
• Where the Resolution Professional finds that the debtor is eligible for a fresh start Process (Sections 81 to 93 of the Insolvency and Bankruptcy Code, 2016, the Resolution Professional shall submit a report recommending that the application by the debtor under Section 94 of the Insolvency and Bankruptcy Code, 2016 be treated as an application under Section 81 of the Insolvency and Bankruptcy Code, 2016 by the Adjudicating Authority.
• The Resolution Professional shall record the reasons for recommending the acceptance or rejection of the application in the report and shall give a copy of the report to the debtor or the creditor (as the case may be).

Question 11.
Write a note on provisions related to “rights of creditors” and “insolvency procedure” in relation to liquidation and insolvency of partnership firms and individuals as per Insolvency and Bankruptcy Code, 2016.
Answer:
A. Registering of claims by creditors

• Section 103 of the Insolvency and Bankruptcy Code, 2016 provides that the creditors shall register claims with the Resolution Professional by sending details of the claims by way of electronic communications or through courier, speed post or registered letter.
  B. Preparation of list of creditors
• Section 104 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall prepare a list of creditors on the basis of the:
  (a) information disclosed in the application filed by the debtor under Section 94 or 95 of the Insolvency and Bankruptcy Code
  (b) claims received by the Resolution Professional under Section 102 of the Insolvency and Bankruptcy Code, 2016.
• The Resolution Professional shall prepare the list of creditors within thirty days from the date of the issue of the notice by Adjudicating Authority
  C. Repayment Plan :
• Section 105 of the Insolvency and Bankruptcy Code, 2016 provides that the debtor shall in consultation with the Resolution Professional shall prepare a repayment plan containing a proposal to the creditors for restructuring of the debts or affairs of the concerned debtor.
• The repayment plan may authorise or require the Resolution Professional to:
  (a) carry on the debtor’s business or trade on his behalf or in his name; or
  (b) realise the assets of the debtor; or
  (c) administer or dispose of any funds of the debtor.
• The repayment plan shall include the justification for preparation of such repayment plan and reasons on the basis of which the creditors may agree upon the plan; provision for payment of fee to the Resolution Professional and such other matters as may be specified.
• The Resolution Professional shall submit the repayment plan along with the report on such plan to the Adjudicating Authority within a period of twenty-one days from the last date of submission of claims under Section 102 of the Insolvency and Bankruptcy Code, 2016.
• The report of the Resolution Professional on repayment plan shall include that:
  (a) the repayment plan is in compliance with the provisions of any law for the time being in force;
  (b) the repayment plan has a reasonable prospect of being approved and implemented; and
  (c) there is a necessity of summoning a meeting of the creditors, if required, to consider the repayment plan.
  D. Summoning of meeting of creditors:
• Section 107 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall issue a notice calling the meeting of the creditors at least fourteen days before the date fixed for such meeting.
• The Resolution Professional shall send the notice of the meeting to the list of creditors prepared under Section 104 of the Insolvency and Bankruptcy Code, 2016.
• In the meeting of the creditors, the creditors may decide to approve, modify or reject the repayment plan.
• The Resolution Professional shall ensure that if modifications are suggested by the creditors, consent of the debtor shall be obtained for each modification.
  E. Voting rights in meeting of creditors:
• Section 109 of the Insolvency and Bankruptcy Code, 2016 provides that a creditor shall be entitled to vote at every meeting of the creditors in respect of the repayment plan in accordance with voting share assigned to him.
• The Resolution Professional shall determine voting share to be assigned to each creditor in the manners specified by the Insolvency and Bankruptcy Board of India.
• A creditor shall not be entitled to vote in respect of a debt for an unliquidated amount.
• A creditor shall not be entitled to vote in a meeting of the creditors if the name of creditor is not mentioned in the list of creditors prepared under Section 104 of the Insolvency and Bankruptcy Code, 2016 or creditor is an associate of the debtor.
• A secured creditor participating in the meetings of the creditors and voting in relation to the repayment plan shall forfeit his right to enforce the security during the period of the repayment plan in accordance with the terms of the repayment plan.
  F. Approval of repayment plan by creditors:
• Section 111 of the Insolvency and Bankruptcy Code, 2016 provides that the repayment plan or any modification to the repayment plan shall be approved by a majority of more than three-fourth in value of the creditors present in person or by proxy and voting on the resolution in a meeting of the creditors.
• The Resolution Professional shall provide a copy of the report of the meeting of creditors prepared under Section 99 of the Insolvency and Bankruptcy Code, 2016 to the debtor, creditor (including those who were not present at the meeting) and to the Adjudicating Authority.
  G. Order of Adjudicating Authority on repayment plan:
• Section 114 of the Insolvency and Bankruptcy Code, 2016 provides that the Adjudicating Authority shall by an order approve or reject the repayment plan on the basis of the report of the meeting of the creditors submitted by the Resolution Professional under Section 112 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).
• The order of the Adjudicating Authority approving the repayment plan may also provide for directions for implementing the repayment plan
  H. Effect of order of Adjudicating Authority on repayment plan
• Section 115 of the Insolvency and Bankruptcy Code, 2016 provides that where the Adjudicating Authority has approved the repayment plan under Section 114 of the Insolvency and Bankruptcy Code, 2016, the repayment plan shall take effect as if proposed by the debtor in the meeting; and shall be binding on creditors mentioned in the repayment plan and on the debtor.
• Where the Adjudicating Authority rejects the repayment plan under Section 114 of the Insolvency and Bankruptcy Code, 2016, the debtor and the creditors shall be entitled to file an application for bankruptcy under Section 121 to 148 of the of the Insolvency and Bankruptcy Code, 2016.
• A copy of the order passed by the Adjudicating Authority shall be provided to the Insolvency and Bankruptcy Board of India
  I. Implementation and supervision of repayment plan
• Section 116 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional appointed under Section 97 or Section 98 of the Insolvency and Bankruptcy Code, 2016 shall supervise the implementation of the repayment plan.
• The resolution professional may apply to the Adjudicating Authority for directions, if necessary, in relation to any particular matter arising under the repayment plan and the Adjudicating Authority may issue directions as may be necessary in this regard.
  J. Completion of repayment plan
• Section 117 of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Professional shall within fourteen days from the date of the completion of the repayment plan, forward to the persons who are bound by the repayment plan under Section 115 of the Insolvency and Bankruptcy Code, 2016 and the Adjudicating Authority, the following documents:
  (a) a notice that the repayment plan has been fully implemented; and
  (b) a copy of a report by the resolution professional summarising all receipts and payments made in pursuance of the repayment plan and extent of the implementation of such plan as compared with the repayment plan approved by the meeting of the creditors.
  K. Discharge order
• Section 119 of the Insolvency and Bankruptcy Code, 2016 provides that on the basis of the repayment plan, the Resolution Professional shall apply to the Adjudicating Authority for a discharge order in relation to the debts mentioned in the repayment plan and the Adjudicating Authority may pass such discharge order.
• The discharge order shall be forwarded to the Insolvency and Bankruptcy Board of India, for the purpose of recording entries in the register.

Chapter 12 Cross Border Insolvency – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Cross Border Insolvency – CS Professional Insolvency Law and Practice Study Material

Question 1.
‘Insolvency and Bankruptcy Code also regulates cross border transactions’ Elucidate the relevant provisions of Insolvency and Bankruptcy Code, 2016. (June 2019, 6 marks)
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency. Agreements with foreign countries: Section 234 of the Code empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency. Section 234 of the Code provides that the Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [Section 234(1)]
The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)]
Letter of request to a country outside India in certain cases: Section 235 of the Code lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [Section 235(1)]
The Adjudicating Authority on receipt of an application under sub-section(l) and, on being satisfied that evidence or action relating to assets under sub- section(1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to court or an authority of such country competent to deal with such request. [Section 235(2)]
The current cross border insolvency framework in India is dependent on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus, it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 2.
“A domestic business may have foreign branches or subsidiaries, or a foreign business may have domestic branches or subsidiaries. Foreign creditors may have valid claims in domestic bankruptcy cases, and domestic creditors may have valid claims in foreign bankruptcy cases”.
Elucidate with reference to the objectives and scope of Model Law developed in this regard? (Dec 2019, 6 marks)
Answer:
The Preamble to UNCITRAL Model Law on Cross-Border Insolvency provides that:
The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
(a) Co-operation between the courts and other competent authorities of this State and Foreign States involved in cases of Cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of Cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
(d) Protection and maximization of the value of the debtor’s assets; and
(e) Facilitation of the rescue of financially troubled business, thereby protecting investment and preserving employment.

UNCITRAL Model Law on Cross-Border Insolvency applies where:

• Assistance is sought in this State by a foreign court or a foreign representative in connection with foreign proceeding; or
• Assistance is sought in a foreign State in connection with a proceeding under [identify laws of the enacting State relating to insolvency]; or
• A foreign proceeding and a proceeding under (identify laws of the enacting State relating to insolvency) in respect of the same debtor are taking place concurrently; or
• Creditors or other interested persons in a foreign State have an interest in requesting the commencement of or participating in a proceeding under (identify laws of the enacting State relating to insolvency).

UNCITRAL Model Law on Cross-Border Insolvency does not apply to a proceeding concerning (designate any types of entities, such as Banks or Insurance Companies, that are subject to a special Insolvency regime in this State and that this State wishes to exclude from this Law).
The acceptance of the cross border insolvency norms was observed in the CIRP of Jet Airways Limited where the NCLAT has allowed Dutch Administrator to attend the meeting of the Committee of Creditors, however, with limited or no power to participate directly.

Question 3.
The United Nations Commission on International Trade Law’s. Model Law on Cross Border Insolvency do not lead to harmonization of Insolvency Laws enacted by the individual Countries’. Do you agree with this statement? Explain. (Dec 2020, 6 marks)
Answer:
No, we do not agree with the said statement. In fact the UNCITRAL Model Law on Cross Border Insolvency do harmonize the Insolvency Laws enacted by the individual countries.
Globally, cross-border insolvency laws are based on one country providing assistance to the other in taking control of the assets and eventual disposition of such assets of the debtor company. Such aims are achieved by the mutual recognition of each country’s insolvency regime.
Some countries have adopted the UN Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency, adopted in 1997. The model law is designed to provide a harmonized approach to the treatment of cross-border insolvency proceedings, facilitate cooperation between the courts and office holders involved in the insolvency in different jurisdictions, and provide forthe mutual recognition of judgements and direct access of foreign representatives to the courts of the enacting state.
The Legislative Guide on Insolvency Law is intended to be used as a reference by national authorities and legislative bodies when preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.
The UNCITRAL Model Law on Cross-Border Insolvency, is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency. Those instances include cases where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.

Question 4.
Whether a foreign company can merge into an Indian company or vice versa? Discuss the relevant provisions of the Insolvency and Bankruptcy Code, 2016. (Dec 2021, 6 marks)
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency. Agreements with foreign countries : Section 234 empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency. Section 234 of the Code provides that: The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [(Section 234(1)].
The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)].
Letter of request to a country outside India in certain cases : Section 235 of the Insolvency and Bankruptcy Code, 2016 lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [(Section 235(1)]
The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with, such request. [Section 235(2)]
The current cross border insolvency framework in India is dependent on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 5.
UN Commission on International Trade Law on cross-border insolvency, was adopted in 1997. Since then the subject was deliberated in various statutes in India and abroad and finally as per the Banking Law Reforms Committee (BLRC) Report, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted which contains the provisions relating to the question of cross-border insolvency. In this context describe the provisions of cross-border insolvency as contained in the IBC. (June 2022, 6 marks)

Question 6.
What is cross border insolvency?
Answer:

• Cross-border insolvency (sometimes called international insolvency) regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country.
• In recent times, the number of cross-border insolvency cases has increased significantly.

Question 7.
What should be the objective of effective and efficient insolvency law?
Answer:
An effective and efficient insolvency regime should aim to achieve the following key objectives in a balanced manner:

• Maximization of value of assets.
• Ensuring equitable treatment of similarly situated creditors
• Provision for timely, efficient and impartial resolution of insolvency
• Preservation of the insolvency estate to allow equitable distribution to creditors
• Ensuring a transparent and predictable insolvency law that contains incentives for gathering and dispensing information
• Recognition of existing creditor rights and establishment of clear rules for ranking of priority claims
• Establishment of a framework for cross-border insolvency.

Question 8.
What is “The United Nations Commission on International Trade (UNCITRAL)”?
Answer:

• The United Nations Commission on Internationa Trade Law (UNCITRAL) is a subsidiary body of the General Assembly.
• The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966.
• The Commission carries out its work at annual sessions.
• The United Nations Commission on International Trade Law prepares international legislative texts for use by States in modernizing commercial law and non-legislative texts for use by commercial parties in negotiating transactions.

Question 9.
Explain the key provisions of UNCITRAL Legislative guide on Insolvency Laws.
Answer:

• The Legislative Guide on Insolvency Law was prepared by the United Nations Commission on International’Trade Law (UNCITRAL).
• The Legislative Guide is divided into four parts.
• Part one discusses the key objectives of an insolvency law, structural issues such as the relationship between insolvency law and other law, the types of mechanisms available for resolving a debtor’s financial difficulties and the institutional framework required to support an effective insolvency regime.
• Part two deals with core features of an effective insolvency law, various stages of an insolvency proceeding from their commencement to discharge of the debtor and closure of the proceedings.
• Part three addresses the treatment of enterprise groups in insolvency, both nationally and internationally. In terms of the international treatment of groups, part three focuses on cooperation and coordination.
• Part four focuses on the obligations that might be imposed upon those responsible for making decisions with respect to the management of an enterprise when that enterprise faces imminent insolvency or insolvency becomes unavoidable. The aim is to protect the legitimate interests of creditors and other stakeholders.

Question 10.
State the key differences between UNCITRAL Legislative Guide on Insolvency Law vis-a-vis UNCITRAL Model Law on Cross-Border Insolvency.
Answer:

• There are differences between UNCITRAL Legislative Guide on Insolvency Law vis-a-vis UNCITRAL Model Law on Cross-Border Insolvency.
• A model law generally is used differently than a legislative guide.
• Specifically, a model law is a legislative text recommended to States for enactment as part of national law, with or without modification. As such, model laws generally propose a comprehensive set of legislative solutions to address a particular topic and the language employed supports direct incorporation of the provisions of the model law into a national law.
• The focus of a legislative guide, on the other hand, is upon providing guidance to legislators and other users and for that reason guides generally include a substantial commentary discussing and analysing relevant issues. It is not intended that the recommendations of a legislative guide be enacted as part of national law as such. Rather, they outline the core issues that it would be desirable to address in that law, with some recommendations providing specific guidance on how certain legislative provisions might be drafted.

Question 11.
Write a note on UNCITRAL Model Law on Cross-Border Insolvency.
Answer:

• The UNCITRAL Model Law on Cross-Border Insolvency, adopted in 1997, is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency.
• The Model Law is designed to assist States to equip their insolvency laws with a modern legal framework to more effectively address cross-border insolvency proceedings concerning debtors experiencing severe financial distress or insolvency.
• It focuses on authorizing and encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws.
• For the purposes of the Model Law, a cross-border insolvency is one where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.

Question 12.
Explain the key provisions /elements of UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
The Model Law focuses on four elements identified as key to the conduct of cross-border insolvency cases:
1. Access:
These provisions give representatives of foreign insolvency proceedings and creditors a right of access to the courts of an enacting State to seek assistance and authorize representatives of local proceedings being conducted in the enacting State to seek assistance elsewhere.

2. Recognition:

• One of the key objectives of the Model Law is to establish simplified procedures for recognition of qualifying foreign proceedings in order to avoid time-consuming legalization or other processes that often apply and to provide certainty with respect to the decision to recognize.
• These core provisions accord recognition to orders issued by foreign courts commencing qualifying foreign proceedings and appointing the foreign representative of those proceedings.
• Recognition of foreign proceedings under the Model Law has several effects – principal amongst them is the relief accorded to assist the foreign proceeding.

3. Relief

• A basic principle of the Model Law is that the relief considered necessary for the orderly and fair conduct of cross-border insolvencies should be available to assist foreign proceedings.
• Key elements of the relief available include interim relief at the discretion of the court between the making of an application for recognition and the decision on that application, an automatic stay upon recognition of main proceedings and relief at the discretion of the court for both main and non-main proceedings following recognition.

4. Cooperation and coordination

• These provisions address cooperation among the courts of States where the debtor’s assets are located and coordination of concurrent proceedings concerning that debtor.
• The Model Law expressly empowers courts to cooperate in the
  areas governed by the Model Law and to communicate directly with foreign counterparts.
• Cooperation between courts and foreign representatives and between representatives, both foreign and local, is also authorized.
• The provisions addressing coordination of concurrent proceedings aim to foster decisions that would best achieve the objectives of both proceedings, whether local and foreign proceedings or multiple foreign proceedings.

Question 13.
Explain the purpose of UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency are as under:

•  Cooperation between the courts and other competent authorities of this State and foreign States involved in cases of cross-border insolvency;
• Greater legal certainty for trade and investment;
• Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
• Protection and maximization of the value of the debtor’s assets; and
• Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

Question 14.
Explain the cases where UNCITRAL Model Law on Cross-Border Insolvency applies.
Answer:
UNCITRAL Model Law on Cross-Border Insolvency applies where:

• Assistance is sought in this State by a foreign court or a foreign representative in connection with a foreign proceeding; or
• Assistance is sought in a foreign State in connection with a proceeding under laws of the enacting State relating to insolvency; or
• A foreign proceeding and a proceeding under laws of the enacting State relating to insolvency in respect of the same debtor are taking place concurrently; or
• Creditors or other interested persons in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under laws of the enacting State relating to insolvency
  UNCITRAL Model Law on Cross-Border Insolvency does not apply to a proceeding concerning [designate any types of entities, such as banks or insurance companies, that are subject to a special insolvency regime in this State and that this State wishes to exclude from this Law].

Question 15.
Explain the Principle of Supremacy of International Obligations as per UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
Article 3 provides that to the extent the Model Law conflicts with an obligation of the State enacting the Model Law arising out of any treaty or other form of agreement to which it is a party with one or more other States, the requirements of the treaty or agreement prevail.

Question 16.
Explain the following key terms as per UNCITRAL Model Law on Cross-Border Insolvency.
(a) Foreign proceeding
(b) Foreign representative
(c) Foreign court
Answer:
(a) Foreign proceeding: “Foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation;
(b) Foreign representative: “Foreign representative” means a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding
(c) Foreign court: “Foreign court” means a judicial or other authority competent to control or supervise a foreign proceeding.

Question 17.
Explain the legal provisions related to filing of application by foreign representative to commence a proceeding as per Model Law.
Answer:

• According to Article 11, a foreign representative is entitled to apply to commence a proceeding under the laws of the enacting State relating to insolvency, if the conditions for commencing such proceeding otherwise met.
• A foreign representative has this right without prior recognition of the foreign proceeding because the commencement of an insolvency proceeding might be crucial in cases of urgent need for preserving the assets of the debtor.
• The Model Law avoids the need to rely on cumbersome and time-consuming letters rogatory or other forms of diplomatic or consular communications that might otherwise have to be used.
• This facilitates a coordinated, cooperative approach to cross-border insolvency and makes fast action possible.
• The Model Law provides that the foreign representative has procedural standing for commencing an insolvency proceeding in the enacting State (under the conditions applicable in the enacting State) and that the foreign representative may participate in an insolvency proceeding in the enacting State
• Upon recognition of a foreign proceeding, the foreign representative is entitled to participate in a proceeding regarding the debtor under the laws of the enacting State relating to insolvency (Article 12).

Question 18.
Explain the legal provisions related to recognition of foreign proceedings as per Model Law.
Answer:

• Article 15 defines the core procedural requirements for an application by a foreign representative for recognition.
• A foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed.
• An application for recognition shall be accompanied by:
  (a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or
  (b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or
  (c) In the absence of evidence referred to in subparagraphs (a) and (b) above, any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative.
• An application for recognition shall also be accompanied by a statement identifying all foreign proceedings in respect of the debtorthat are known to the foreign representative.
• As per Article 17 of Model Law, a foreign proceeding shall be recognized if:
  (a) The foreign proceeding is a proceeding within the meaning as defined under Article 2;
  (b) The foreign representative applying for recognition is a person or body within the meaning as defined in Model Law
  (c) The application meets the requirements of Article 15; and
  (d) The application has been submitted to the court.
• The foreign proceeding shall be recognized as a foreign main proceeding if it is taking place in the State where the debtor has the centre of its main interests; or as a foreign non-main proceeding if the debtor has an establishment within the meaning of subparagraph (f) of Article 2 in the foreign State.

Question 19.
What are the reliefs that may be granted upon recognition of a foreign proceeding?
Answer:
According to Article 21, upon recognition of a foreign proceeding, whether main or non-main, where it is necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including:
(a) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities, to the extent they have not been stayed under Article 20;
(b) Staying execution against the debtor’s assets to the extent it has not been stayed under Article 20;
(c) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under Article 20;
(d) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities;
(e) Entrusting the administration or realization of all or part of the debtor’s assets located in this State to the foreign representative or another person designated by the court;
(f) Extending relief granted under Article 19; and
(g) Granting any additional relief that may be available to a person or body administering a reorganization or liquidation under the law of the enacting State under the laws of that State.

Question 20.
Cooperation is the key for effective implementation of Model Law on Cross-Border Insolvency. Comment.
Answer:
Cooperation is the key for effective implementation of Model Law on Cross-Border Insolvency.
Cooperation with Foreign Courts and Foreign Representatives:

• Chapter IV (Articles 25-27), on cross-border cooperation, is a core element of the Model Law. Its objective is to enable courts and insolvency administrators from two or more countries to be efficient and achieve optimal results.
• Articles 25 and 26 not only authorize ctoss-border cooperation, they also mandate it by providing that the court and the insolvency administrator “shall cooperate to the maximum extent possible”.
• The Articles are designed to overcome the widespread problem of national laws lacking rules providing a legal basis for cooperation by local courts with foreign courts in dealing with cross-border insolvencies.
• The enactment of Articles 25-27 offers an opportunity for making that principle more concrete and adaptable to the particular circumstances of cross-border insolvencies.
  Cooperation and direct communication between courts or foreign representatives (Article 25):
• The court is entitled to communicate directly with, or to request information or assistance directly from, foreign courts or foreign representatives.
• The ability of courts, with appropriate involvement of the parties, to communicate “directly” and to request information and assistance “directly” from foreign courts or foreign representatives is intended to avoid the use of time-consuming procedures traditionally in use, such as letters rogatory.
  Cooperation and direct communication between a person or body administering a reorganization or liquidation under the law of the enacting State and foreign courts or foreign representatives (Article 26):
• Article 26 on international cooperation between persons who are appointed to administer assets of insolvent debtors reflects the important role that such persons can play in devising and implementing cooperative arrangements, within the parameters of their authority.
• The provision makes it clear that an insolvency administrator acts under the overall supervision of the competent court.
  According to Article 27, Cooperation may be implemented by any appropriate means, including:
• Appointment of a person or body to act at the direction of the court;
• Communication of information by any means considered appropriate by the court;
• Coordination of the administration and supervision of the debtor’s assets and affairs;
• Approval or implementation by courts of agreements concerning the coordination of proceedings
• Coordination of concurrent proceedings regarding the same debtor;
• The enacting State may wish to list additional forms or examples of cooperation.

Question 21.
The World Bank Principles have been designed as a broad-spectrum assessment tool to assist countries in their efforts to evaluate and improve core aspects of their commercial law systems. Comment.
Answer:

• The World Bank Principles have been designed as a broad-spectrum assessment tool to assist countries in their efforts to evaluate and improve core aspects of their commercial law systems that are fundamental to a sound investment climate, and to promote commerce and economic growth.
• Efficient, reliable and transparent creditor rights and insolvency systems are of key importance for reallocation of productive resources in the corporate sector, for investor confidence and forward-looking corporate restructuring.
• The Principles emphasize contextual, integrated solutions and the policy choices involved in developing those solutions.
• The Principles highlight the relationship between the cost and flow of credit (including secured credit) and the laws and institutions that recognize and enforce credit agreements (Part A).
• The Principles also outline key features and policy choices relating to the legal framework for risk management and informal corporate workout systems (Part B), formal commercial insolvency law frameworks (Part C) and the implementation of these systems through sound institutional and regulatory frameworks (Part D).
• The principles have broader application beyond corporate insolvency regimes and creditor rights. The Principles are designed to be flexible in their application, and do not offer detailed prescriptions for national systems.
• The Principles embrace practices that have been widely recognized and accepted as good practices internationally.

Question 22.
Discuss the key elements of the World Bank Principles for effective insolvency and creditor rights system.
Answer:
Key elements of the World Bank Principles for effective insolvency and creditor rights systems is given below:
1. Credit Environment:

• Compatible credit and enforcement systems : A regularized system of credit should be supported by mechanisms that provide efficient, transparent and reliable methods for recovering debt, including seizure and sale of immovable and movable assets and sale or collection of intangible assets, such as debt owed to the debtor by third parties. An efficient system for enforcing debt claims is crucial to a functioning credit system
• Collateral systems : One of the pillars of a modern credit economy is the ability to own and freely transfer ownership interests in property, and to grant a security interest to credit providers with respect to such interests and rights as a means of gaining access to credit at more affordable prices. The legal framework for secured lending addresses the fundamental features and elements for the creation, recognition and enforcement of security interests in all types of assets, movable and immovable, tangible and intangible, including inventories, receivables, proceeds and future property, and on a global basis, including both possessory and non-possessory interests.
• Enforcement systems: A modern, credit-based economy requires predictable, transparent and affordable enforcement of both unsecured and secured credit claims by efficient mechanisms outside of insolvency, as well as a sound insolvency system. These systems must be designed to work in harmony.
• Credit information systems: A modern credit-based economy requires access to complete, accurate and reliable information concerning borrowers’ payment histories. This process should take place in a legal environment that provides the framework for the creation and operation of effective credit information systems. Privacy concerns should also be addressed
• Informal corporate workouts: Corporate workouts should be supported by an environment that encourages participants to restore an enterprise to financial viability. Informal workouts are negotiated in the “shadow of the law.” Accordingly, the enabling environment must include clear laws and procedures that require disclosure of or access to timely and accurate financial information on the distressed enterprise; encourage lending to, investment in or recapitalization of viable distressed enterprises; support a broad range of restructuring activities, such as debt write-offs, restructurings and debt-equity conversions; and provide favourable or neutral tax treatment for restructurings.

2. Insolvency Law Systems:
Effective insolvency systems have a number of aims and objectives.
Systems should aspire to:

• integrate with a country’s broader legal and commercial systems;
• maximize the value of a firm’s assets and recoveries by creditors;
• provide for both efficient liquidation of nonviable businesses and those where liquidation is likely to produce a greater return to creditors and reorganization of viable businesses;
• strike a careful balance between liquidation and reorganization, allowing for easy conversion of proceedings from one proceeding to another;
• provide for equitable treatment of similarly situated creditors, including similarly situated foreign and domestic creditors;
• provide for timely, efficient and impartial resolution of insolvencies;
• prevent the improper use of the insolvency system;
• prevent the premature dismemberment of a debtor’s assets by individual creditors seeking quick judgments;
• provide a transparent procedure that contains, and consistently applies, clear risk allocation rules and incentives for gathering and dispensing information;
• recognize existing creditor rights and respect the priority of claims with a predictable and established process; and
• establish a framework for cross-border insolvencies, with recognition of foreign proceedings.
  Where an enterprise is not viable, the main thrust of the law should be swift and efficient liquidation to maximize recoveries for the benefit of creditors.

3. Implementation: Institutional and Regulatory Frameworks:
Strong institutions and regulations are crucial to an effective insolvency system. The institutional framework has three main elements: the institutions responsible for insolvency proceedings, the operational system through which cases and decisions are processed and the requirements needed to preserve the integrity of those institutions— recognizing that the integrity of the insolvency system is the linchpin for its success.

4. Overarching considerations of sound investment climates:

• Transparency, accountability and corporate governance :
  Minimum standards of transparency and corporate governance should be established to foster communication and cooperation. Disclosure of basic information – including financial statements, operating statistics and detailed cash flows – is recommended for sound risk assessment. Accounting and auditing standards should be compatible with international best practices so that creditors can assess credit risk and monitora debtor’s financial viability. Corporate law and regulation should guide the conduct of the borrower’s shareholders. A corporation’s board of directors should be responsible, accountable and independent of management, subject to best practices on corporate governance.
• Transparency and Corporate Governance: Transparency and good corporate governance are the cornerstones of a strong lending system and corporate sector. Transparency and corporate governance are especially important in emerging markets, which are more sensitive to volatility from external factors. Without transparency, there is a greater likelihood that loan pricing will not reflect underlying risks, leading to higher interest rates and other charges. Transparency and strong corporate governance are needed in both domestic and cross-border transactions and at all phases of investment-at the inception when making a loan, when managing exposure while the loan is outstanding, and especially once a borrower’s financial difficulties become apparent and the lender is seeking to exit the loan. Transparency increases confidence in decision.
• Predictability: Investment in emerging markets is discouraged by the lack of well-defined and predictable risk allocation rules and by the inconsistent application of written laws. Moreover, during systemic crises investors often demand uncertainty risk premiums too onerous to permit markets to clear. Some investors may avoid emerging markets entirely despite expected returns that far outweigh known risks. Rational lenders will demand risk premiums to compensate for systemic uncertainty in making, managing and collecting investments in emerging markets.

Question 23.
Discuss the key provisions of United States Bankruptcy Code.
Answer:
In the United States of America, all bankruptcy cases are handled in federal courts under rules outlined in the “Bankruptcy Code”, a federal law. It is a uniform federal law that governs all bankruptcy cases in America. The Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act, 1978 and is codified as title 11 of the United States Code. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (Bankruptcy Rules).
Six basic types of bankruptcy cases are provided for under the Bankruptcy Code.

1. Chapter 7 titled “Liquidation”. In Chapter 7 Bankruptcy, a court-appointed trustee or administrator takes possession of non-exempt assets, liquidates these assets and then uses the proceeds to pay creditors.
2. Chapter 9 titled “Adjustment of Debts of a Municipality”. Chapter 9 Bankruptcy proceedings provides for reorganization which is available to municipalities. In Chapter 9 Bankruptcy proceedings a municipality (which includes cities, towns, villages, counties, taxing districts, municipal utilities, and school districts) get protection from creditors and a municipality can pay back debt through a confirmed payment plan.
3. Chapter 11 titled “Reorganization”. Unlike Chapter 7 where the business ceases operations and a trustee sells all of its assets, under Chapter 11 the debtor remains in control of its business operations and repay creditors concurrently through a court-approved reorganization plan.
4. Chapter 12 was added to the Bankruptcy Code in 1986. It allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
5. Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts.
6. Chapter 15 was added to the Bankruptcy Code in 2005. It provides mechanism for dealing with insolvency cases involving debtors, claimants and other interested parties involving more than one country. Under Chapter 15 a representative of a corporate bankruptcy proceeding outside the country can get access to the United States courts.

Question 24.
Write a note on the provisions for cross border transactions under Insolvency and Bankruptcy Code, 2016.
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency.
Section 234: Agreements with foreign countries

• Section 234 empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency.
• Section 234 of the Code provides that the Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [Section 234(1)]
• The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)]
  Section 235: Letter of request to a country outside India in certain cases
• Section 235 of the Code lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [Section 235(1)]
• The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with such request. [Section 235(2)]
• The current cross border insolvency framework in India is dependant on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 25.
Write a note on the Insolvency Law Committee (ILC) on Cross Border Insolvency.
Answer:
Insolvency Law Committee (ILC) on Cross Border Insolvency:

• The Ministry of Corporate Affairs has constituted the Insolvency Law Committee (ILC) to recommend amendments to the Insolvency and Bankruptcy Code of India, 2016.
• The Committee has submitted its 2nd Report to the Government on 16 October 2018 recommending amendments in the Insolvency and Bankruptcy Code, 2016 with respect to cross-border insolvency.
• The necessity of having Cross Border Insolvency Framework under the Insolvency and Bankruptcy Code arises from the fact that many Indian companies have a global presence and many foreign companies have presence in India.
• Inclusion of comprehensive legal framework dealing with cross border insolvency will be a major step forward and will bring Indian Insolvency Law on a par with that of matured jurisdictions.
• The Committee proposed a draft ‘Part Z’ in the Insolvency and Bankruptcy Code, 2016, based on an analysis of the UNCITRAL Model Law. The Committee has also recommended a few carve outs to ensure that there is no inconsistency between the domestic insolvency framework and the proposed Cross Border Insolvency Framework.
• The UNCITRAL Model Law has been adopted in as many as 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues.
• The advantages of the Model Law are the precedence given to domestic proceedings and protection of public interest.
• The other advantages include greater confidence generation among foreign investors, adequate flexibility for seamless integration with the domestic Insolvency Law and a robust mechanism for international cooperation.

Question 26.
Write a note on the recommendations of the Insolvency Law Committee (ILC) on Cross Border Insolvency.
Answer:
Key recommendations of the Committee are as under:
1. Applicability: The Committee recommended that at present, draft Part Z should be extended to corporate debtors only.

2. Duplicity of regimes: The Committee noted that currently the Companies Act, 2013 contains provisions to deal with insolvency of foreign companies. It observed that once Part Z is enacted, it will result in a dual regime to handle insolvency of foreign companies. It recommended that the Ministry of Corporate Affairs undertake a study of such provisions in the Companies Act, 2013 to assess whether to retain them.

3. Reciprocity: The Committee recommended that the Model Law may be adopted initially on a reciprocity basis. This may be diluted subsequently upon re-examination. Reciprocity indicates that a domestic court will recognise and enforce a foreign court’s judgment only if the foreign country has adopted similar legislation to the domestic country.

4. Access to Foreign Representatives: The Model Law allows foreign insolvency professionals and foreign creditors access to domestic courts to seek remedies directly. Direct access with regards to foreign creditors is envisaged under the Code even presently. With respect to access by foreign insolvency professionals to Indian courts, the Committee recommended that the Central Government be empowered to devise a mechanism that is practicable in the current Indian legal framework.

5. Centre of Main Interests (COMI): The Model Law allows recognition of foreign proceedings and provides relief based on this recognition. Relief may be provided if the foreign proceeding is a main proceeding or non-main proceeding. If the domestic courts determine that the debtor has its COMI in a foreign country, such foreign proceedings will be recognised as the main proceedings. This recognition will result in certain automatic relief, such as allowing foreign representatives greater powers in handling the debtor’s estate. For non-main proceedings, such relief is at the discretion of the domestic court. The Committee recommended that a list of indicative .factors comprising COMI may be inserted through rule-making powers. Such factors may include location of the debtor’s books and records, and location of financing.

6. Cooperation: The Model Law lays down the basic framework for cooperation between domestic and foreign courts, and domestic and foreign insolvency professionals. Given that the infrastructure of adjudicating authorities under the Code is still evolving, the cooperation between Adjudicating Authorities and foreign courts is proposed to be subject to guidelines to be notified by the Central Government.

7. Concurrent Proceedings: The Model Law provides a framework for commencement of domestic insolvency proceedings, when a foreign insolvency proceeding has already commenced or vice versa. It also provides for coordination of two or more concurrent insolvency proceedings in different countries by encouraging cooperation between courts. The Committee recommended adopting provisions in relation to these in draft Part Z.

8. Public policy considerations: Part Z provides that the Adjudicating Authority may refuse to take action under the Code if it is contrary to public policy. The Committee recommended that in proceedings where the Authority is of the opinion that a violation of public policy may be involved, a notice must be issued to the Central Government. If the Authority does not issue notice, the Central Government may be empowered to apply to it directly.

Chapter 12 Valuation of Business during Distressed Sale – CS Professional Valuations and Business Modelling Study Material is designed strictly as per the latest syllabus and exam pattern.

Valuation of Business during Distressed Sale – CS Professional Valuations and Business Modelling Study Material

Question 1.
Sound Health Systems Ltd. is operating in the health sector and is having about 40 hospitals – general, specialty and super-specialty- across India. The Balance Sheet of the Company, as reported in its Annual Report, 2008 is given below: (Dec 2009)

Balance Sheet of Sound Health Systems Limited as at 31 st March


Sound Health Systems Ltd. has not been performing well in the past and consequently, has suffered losses during the last few years. However, the management of the company strongly feels that the company can be again put on the path to sound financial health by having proper financial restructuring. Therefore, the following scheme of financial reconstruction is being devised:

(a) Equity shares are to be reduced to ₹ 2 from ₹ 10 fully paid up.
(b) The rate on preference share is to be reduced to 10% and the value thereof reduced to ₹ 50 from ₹ 100 fully paid up.
(c) Lenders have agreed to forego interest payable to them as on March 31, 2008.
(d) Creditors have agreed to forgo 25% of their claims and remaining amount will be converted into equity shares at a rate of ₹ 2 fully paid up but they have to be paid 20% of the amount due as on March 31,2008 in cash immediately.
(e) Unsecured loan lenders will take 10% of the amount as on March 31, 2008 and they have agreed to take the remaining amount after 4 years.
(f) To meet the requirement of working capital of the company and to make payment to creditors and others, it is decided to issue 20 lakh shares of ₹ 2 each at a premium of ₹ 3 totalling ₹ 5 per share. The existing shareholders have decided to subscribe for them and the whole amount will be paid along with the application.
(g) A provision of ₹ 80 lakh is to be made for doubtful debts on debtors.

You are required to show the impact of the said financial restructuring on the balance sheet of the company and also, prepare the new balance sheet assuming that the scheme has been successfully implemented. (15 marks) [CMA Final]
Answer:
M/s Sound Health Systems Ltd.
Statement showing the Impact of Proposed Financial Reconstruction

Particulars	ltem(s) on which there will be Impact	Amount of Impact (? in Lakhs)
(i) Equity shares are to be reduced to ₹ 2 from ₹ 10 fully paid up.	Share Capital Reserves and Surplus	-19,061.321 19,061.321
(iii) Lenders have agreed to forego interest payable to them as on March 31, 2008	Interest on Loans Payable Reserves and Surplus	-1000 1000
(iv) Creditors have agreed to forego 25% of their claims and remaining amount will be converted into equity shares at the rate of ₹ 2 fully paid up but they have to be paid 20% of the amount due as on March 31, 2008 in cash immediately.	Creditors (Paid in Cash) Cash in Hand and Bank Creditors (Amount foregone) Reserves & Surplus Creditors (Issued Equity Shares) Equity Share Capital	-727.384 727.384 -909.239 09.23 -2,000.306 2,000.306
(v) Unsecured loan lenders will take 10% of the amount as on March 31,2008 and they have agreed to take the remaining amount after 4 years.	Unsecured Loans Cash in Hand and Bank	-256.239 256.239
(vi) To meet requirement of the working capital of the company and to make payment to creditors and others it is decided to issue 20 lakhs share of ₹ 2 each at a premium of ₹ 3 totaling₹ 5 per share. The existing share- holders have decided to subscribe for them and the whole amount will be paid along with the application	Equity Shares Capital Security Premium (Reserves & Surplus) Cash in Hand and Bank	40.00 60.00 100.00
(vii) A provision of ₹ 80 lakhs is to be made for doubtful debts on debtors.	Provision for doubtful debts Reserves & Surplus	80 -80

Balance Sheet of Sound Health System Ltd. as on 31 st March 2008 (Revised Balance after incorporating necessary impacts of financial restructuring)

Note:

1. Debit Balance of Profit and Loss Account has been written off by deducting the equivalent amount from ‘Reserve and Surplus.
2. Negative Balance in Cash in Hand and at Bank represents the amount of overdraft taken by the company to meet the necessary cash obligations.

Question 2.
Discuss the feature of declining companies.
Answer:
Features of Declining Companies
At this juncture, it is important to understand the features of ‘Declining Companies’. The characteristics of declining companies are as follows-
1. Stagnant or declining revenues: Perhaps the most telling sign of a company in decline is the inability to increase revenues over extended periods, even when times are good. Flat revenues or revenues that grow at less than the inflation rate is an indicator of operating weakness. It is even more telling if these patterns in revenues apply not only to the , company being analyzed but to the overall sector, thus eliminating the explanation that the revenue weakness is due to poor management (and ’ can thus be fixed by bringing in a new management team).

2. Shrinking or negative margins: The stagnant revenues at declining firms are often accompanied by shrinking operating margins, partly because firms are losing pricing power and partly because they are dropping prices to keep revenues from falling further. This combination results in deteriorating or negative operating income at these firms, with occasional spurts in profits generated by asset sales or one time profits.

3. Asset divestitures: If one of the features of a declining firm is that existing assets are sometimes worth more to others, who intend to put them to different and better uses, it stands to reason that asset divestitures will be more frequent at declining firms than at firms earlier in the life cycle. If the declining firm has substantial debt obligations, the need to divest will become stronger, driven by the desire to avoid default or to pay down debt.

4. Big payouts – dividends and stock buybacks: Declining firms have few or any growth investments that generate value, existing assets that may be generating positive cash flows and asset divestitures that result in cash inflows. If the firm does not have enough debt for distress to be a concern, it stands to reason that declining firms not only pay out large dividends, sometimes exceeding their earnings, but also buy back stock.

5. Financial leverage – the downside: If debt is a double-edged sword, declining firms often are exposed to the wrong edge. With stagnant and declining earnings from existing assets and little potential for earnings growth, it is not surprising that many‘declining firms face debt burdens that are overwhelming.

Question 3.
Discuss the valuation Issues of declining companies.
Answer:
Valuation Issues of Declining Companies
The issues that we face in valuing declining companies come from their common characteristics. Most of the valuation techniques we use for businesses, whether intrinsic or relative, are built for healthy firms with positive growth and they sometimes break down when a frm is expected to shrink over time or if distress is imminent.

Intrinsic (DCF) Valuation
The intrinsic value of a company is the present value of the expected cash flows of the company over its lifetime. While that principle does not change with declining firms, there are practical problems that can hamper valuations which are discussed as under:

Existing Assets
When valuing the existing assets of the firm, we estimate the expected cash flows from these assets and discount them back at a risk-adjusted discount rate. While this is standard valuation practice in most valuations, there are two aspects of declining companies that may throw a twist in the process.

(i) Earning less than cost of capital:
In many declining firms, existing assets, even if profitable, earn less than the cost of capital. The natural consequence is that discounting the cash flows back at the cost of capital yields a value that is less than the capital invested in the firm. From a valuation perspective, this is neither surprising nor unexpected: assets that generate sub-par returns can be value destroying.

(ii) Divestiture effects:
If existing assets earn less than the cost of capital, the logical response is to sell or divest these assets and hope that the best buyer will pay a high price for them. From a valuation perspective, divestitures of assets create discontinuities in past data and make forecasts more difficult to make. To see how divestitures can affect past numbers, consider a firm that divested a significant portion of its assets midway through last year.

Growth Assets
Declining firms derive little from growth assets, and the valuation of these assets should therefore not have a significant impact on value. While this is generally true, we have to leave open the possibility that some declining firms are in denial about their status and continue to invest in new assets, as it they had growth potential. If these assets earn less than the cost of capital, the value of adding new assets will be negative and reinvestment will lower the value of the firm.

Discount Rates
If the cost of capital is a weighted average of the costs of debt and equity, what is -it about declining firms that makes it difficult to estimate these numbers? First, the large dividends and buybacks that characterize declining firms can have an effect on the overall value of equity and on the debt ratios that we use in the computation. In particular, returning large amounts of cash to stockholders will reduce the market value of equity, through the market price, with dividends, and the number of shares, with stock buybacks. If debt is not repaid proportionately, the debt ratio will increase, which will then affects of costs of debt, equity and capital.

Terminal Value
To estimate the terminal value, we first estimate a growth rate that a firm can sustain forever, with the caveat that the growth cannot exceed the growth rate of the economy, with the risk free rate acting as a proxy. We follow up by making reasonable assumptions about what a firm can generate as excess returns in perpetuity and use this number to forecast a reinvestment rate for the firm. We complete the process by estimating a discount rate for the terminal value computation, with the qualifier that the risk parameters used should reflect the fact that the company will be a more stable one.

From Operating Assets to Equity Value per Share While the process of getting from operating assets to equity value per share follows the standard script – add cash and other non-operating assets, subtract debt outstanding and the value of any equity options granted by the firm (either in financing or to management) and divide by the number of shares outstanding – there are two problems that we face, especially with the distressed sub-set of declining firms.

Relative Valuation
Analysts who fall back on relative valuation as a solution to the problems of valuing declining or distressed firms, using intrinsic valuation, will find themselves confronting the estimation issues that were listed in the earlier sections either explicitly or implicitly when they use multiples and comparables.

(i) Scaling Variable:
All multiples have to be scaled to common variables, which can be broadly categorized into revenues, earnings, book value or sector specific measures. With distressed companies, earnings and book values can become inoperative very quickly, the former because many firms in decline have negative earnings and the latter because repeated losses can drive the book value of equity down and into negative territory.

(ii) Comparable Firms:
There are two possible scenarios that we can face when valuing declining firms. One is when we are valuing a declining firm in a business where the remaining firms are all healthy and growing. Since markets value declining firms very differently from healthy firms, the challenge in this case is working out how much of a discount the declining firm should trade at, relative to the values being attached to healthy firms.

(iii) Incorporating Distress:
While analysts often come up with creative solutions to the first two problems – using multiples of future earnings and controlling for differences in decline, for instance – the presence of distress puts a wild card in the comparison.

Question 4.
Write note on Distress Assets.
Answer:
Distressed Assets – The Indian Scenario
The Indian banking sector is an exemplar of distressed assets which has been witnessing blow after blow in asset quality management on account of multiple large and small scale projects ran into hurdles along the way, such as, poor evaluation of project, extensive delays in project, poor monitoring and poor accounting leading to cost overruns, which disallowed the borrowers from repayment of their loans. Mostly the public sector banks suffered severe impacts and there was a slowdown in growth of credit.

Therefore, the RBI, following the European Central Bank’s (ECB) tests on supervising the Euro banks after the big financial crisis, came up with certain effective measures to remedy the situation and deal with distressed assets before it’s too late.

Such efficacious methods to lower the stress of distressed assets include lowering the financial stress of the project such as the JLF, the SDR technique (necessitating the banks’ debt-for-equity swap process and change of management in companies), and the 5/25 mechanism (so that loans for long-term projects, such as infrastructure industries and core industrial sectors, are refinanced every 5 years when they have a tenure of 25 years or above).

Further, in order to make an assessment of how effectively the ‘Bad Loan Management Schemes’, drawn up by the bank Boards individually, were working and in order to make sure that the banks were taking proactive measures to clean up balance sheets, the RBI launched an Asset Quality Review (AQR) as a part of the bank’s mandate to improve the banking sector, clean up bad loans and boost the quality of their balance sheets by March 2017.

Chapter 11 Winding-Up by Tribunal – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Winding-Up by Tribunal – CS Professional Insolvency Law and Practice Study Material

Question 1.
Mention the circumstances in which a Company may be wound up by Tribunal. (Dec 2021, 6 marks)
Answer:
Section 271 of the Companies Act provides that a company may, on a petition under section 272, be wound up by the Tribunal-
a. if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
b. if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
c. if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
d. if the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial years; or
e. if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Question 2.
What is the meaning of winding up?
Answer:

• Winding-up is the process whereby assets are realised, liabilities are paid off and the surplus, if any, distributed among its members.
• Winding up is a means by which the dissolution of a company is brought about.
• The main purpose of winding up of a company is to realize the assets and pay the company’s debts expeditiously and fairly in accordance with the law. If any surplus is left, it is distributed among the members in accordance with their rights.

Question 3.
On winding up, the company does not cease to exist as such except when it is dissolved. Comment.
Answer:

• On winding up, the company does not cease to exist as such except when it is dissolved.
• Even after commencement of the winding-up, the property and assets of the company belong to the company until the dissolution takes place.
• On dissolution, the company ceases to exist as a separate entity and becomes incapable of keeping property, suing or being sued.
• Thus in between the winding up and dissolution, the legal status of the company continues and it can be sued in the court of law.

Question 4.
Explain the important changes brought about by the Insolvency and Bankruptcy Code, 2016 to provisions relating to winding up in the Companies Act, 2013.
Answer:
The Insolvency and Bankruptcy Code, 2016 has made significant amendments to provisions relating to winding up in the Companies Act,
2013. The important ones are as under:
A. “Winding up”: The expression “winding up” was not defined in the Companies Act, 2013 .The Eleventh Schedule has added sub-section (94A) to section 2 of the Companies Act, 1956. The definition of “winding up” reads as follows: “Winding up” means winding up under the Companies Act, 2013 or liquidation underthe Insolvency and Bankruptcy Code, 2016, as applicable.”

B. [Section 2(94A)] Voluntary winding up: Provisions relating to voluntary winding up in the Companies Act, 2013 i.e., sections 304 to 323 have been omitted by the Insolvency and Bankruptcy Code, 2016. Voluntary liquidation is now dealt with under section 59 of the Insolvency and Bankruptcy Code, 2016.

C. Inability to pay debts: Insolvency and Bankruptcy Code, 2016 has substituted section 271 of the Companies Act, 2013. Now after its substitution, section 271 provides the following five grounds where a company may be wound up by a Tribunal:
(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
(c) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
(d) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.”
The following two grounds have been deleted from section 271:
(a) if the company is unable to pay its debts;
(b) if the Tribunal has ordered the winding up of the company under Chapter XIX.

Question 5.
Explain the circumstances in which company may be wound up by Tribunal.
Answer:
Section 271 of the Companies Act provides that a company may, on a petition under section 272, be wound up by the Tribunal,
(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
(c) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
(d) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Question 6.
Who may file Petition for Winding up?
Answer:
Section 272 lays down that a petition to the Tribunal for the winding up of a company shall be presented by
(a) the company;
(b) any contributory or contributories;
(c) all or any of the persons specified in clauses (a) and (b);
(d) the Registrar;
(e) any person authorised by the Central Government in that behalf; or
(f) in a case falling under clause (b) of section 271, by the Central Government or a State Government

Question 7.
State the provisions related to filing of statement of affairs of the company in case of winding up.
Answer:

• Section 274 of Companies Act lays down that in case, where the Tribunal is satisfied that on a petition that the winding up of the company is to be made out, he may by an order direct the company to file its objections along with a statement of its affairs within thirty days of the order which can be allowed a further period of thirty days in a situation of contingency or special circumstances.
• In case, where the Company fails to file the statement of affairs, the tribunal shall forfeit the right of the company to oppose the petition and right of such directors and officers of the company as found responsible for such non-compliance.
• Further, the director or the officer of the company who is in default will be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both

Question 8.
Explain the provisions related to appointment of liquidator in case of winding up.
Answer:

• For the purposes of winding up of a company by the Tribunal, the Tribunal at the time of the passing of the order of winding up, shall appoint an Official Liquidator or a liquidator from the panel maintained under sub-section (2) as the Company Liquidator. [Section 275(1)]
• The provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016.] [Section 275(2)]
• Where a provisional liquidator is appointed by the Tribunal, the Tribunal may limit and restrict his powers by the order appointing him or it or by a subsequent order, but otherwise he shall have the same powers as a liquidator. [Section 275(3)]
• The terms and conditions of appointment of a provisional liquidator or Company Liquidator and the fee payable to him or it shall be specified by the Tribunal on the basis of task required to be performed, experience, qualification of such liquidator and size of the company.
  [Section 275(5)]
• On appointment as provisional liquidator or Company Liquidator, as the case may be, such liquidator shall file a declaration within seven days from the date of appointment in the prescribed form disclosing conflict of interest or lack of independence in respect of his appointment, if any, with the Tribunal and such obligation shall continue throughout the term of his appointment. [Section 275(6)]
• While passing a winding up order, the Tribunal may appoint a provisional liquidator, if any, appointed under clause (c) of sub-section (1) of section 273, as the Company Liquidator for the conduct of the proceedings for the winding up of the company. [Section 275(7)]

Question 9.
State the content of report which is submitted by Company Liquidator in case of winding up.
Answer:
According to section 281(1), where the Tribunal has made a winding up order or appointed a Company Liquidator, such liquidator shall, within sixty days from the order, submit to the Tribunal, a report containing the following particulars, namely:
(a) the nature and details of the assets of the company including their location and value, stating separately the cash balance in hand and in the bank, if any, and the negotiable securities, if any, held by the company;
(b) amount of capital issued, subscribed and paid-up;
(c) the existing and contingent liabilities of the company including names, addresses and occupations of its creditors, stating separately the amount of secured and unsecured debts, and in the case of secured debts, particulars of the securities given, whether by the company or an officer thereof, their value and the dates on which they were given;
(d) the debts due to the company and the names, addresses and occupations of the persons from whom they are due and the amount likely to be realised on account thereof;
(e) guarantees, if any, extended by the company;
(f) list of contributories and dues, if any, payable by them and details of any unpaid call;
(g) details of trademarks and intellectual properties, if any, owned by the company;
(h) details of subsisting contracts, joint ventures and collaborations, if any;
(i) details of holding and subsidiary companies, if any;
(j) details of legal cases filed by or against the company; and
(k) any other information which the Tribunal may direct or the Company Liquidator may consider necessary to include.

Question 10.
Explain the powers and duties of Company Liquidator in a winding up of a company.
Answer:
Section 290 of the Companies Act, 2013 lays down that the Company Liquidator, in a winding up of a company by the Tribunal, shall have the following powers

• to carry on the business of the company so far as may be necessary for the beneficial winding up of the company;
• to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose, to use, when necessary, the company’s seal;
• to sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels;
• to sell the whole of the undertaking of the company as a going concern
• to raise any money required on the security of the assets of the company;
• to institute or defend any suit, prosecution or other legal proceeding, civil or criminal, in the name and on behalf of the company;
• to invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds in accordance with priorities established under this Act;
• to inspect the records and returns of the company on the files of the Registrar or any other authority;
• to prove rank and claim in the insolvency of any contributory for any balance against his estate, and to receive dividends in the insolvency,
• to draw, accept, make and endorse any negotiable instruments including cheque, bill of exchange, hundi or promissory note in the name and on behalf of the company
• to take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company
• to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities and for protection of the assets of the company, appoint an agent to do any business which the Company Liquidator is unable to do himself;
• to take all such actions, steps, or to sign, execute and verify any paper, deed, document, application, petition, affidavit, bond or instrument as may be necessary for winding up of the company, for distribution of assets and in discharge of his duties and obligations and functions as Company Liquidator; and
• to apply to the Tribunal for such orders or directions as may be necessary for the winding up of the company.

Question 11.
Write a note on audit of Company Liquidator’s accounts in case of winding up.
Answer:

• The Company Liquidator shall maintain proper and regular books of account including accounts of receipts and payments made by him in such form and manner as may be prescribed.
• The Company Liquidator shall, at such times as may be prescribed but not less than twice in each year during his tenure of office, present to the Tribunal an account of the receipts and payments as such liquidator
• The Tribunal shall cause the accounts to be audited in such manner as it thinks fit, and for the purpose of the audit, the Company Liquidator shall furnish to the Tribunal with such vouchers and information as the Tribunal may require, and the Tribunal may, at any time, require the production of, and inspect, any books of account kept by the Company Liquidator.
• When the accounts of the company have been audited, one copy thereof shall be filed by the Company Liquidator with the Tribunal, and the other copy shall be delivered to the Registrar which shall be open to inspection by any creditor, contributory or person interested.
• The Company Liquidator shall cause the accounts when audited, or a summary thereof, to be printed, and shall send a printed copy of the accounts or summary thereof by post to every creditor and every contributory.

Question 12.
Discuss the provisions related to dissolution of company.
Answer:
Provisions related to dissolution of company are as under:

• When the affairs of a company have been completely wound up, the Company Liquidator shall make an application to the Tribunal for dissolution of such company. [Section 302(1)].
• The Tribunal shall on an application filed by the Company Liquidator under sub-section (1) or when the Tribunal is of the opinion that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company should be made, make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly. [Section 302(2)].
• A copy of the order shall, within thirty days from the date thereof, be forwarded by the Company Liquidator to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company. [Section 302(3)].
• If the Company Liquidator makes a default in forwarding a copy of the order within the period specified in subsection (3), the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.
  [Section 302(4)].

Question 13.
An application under Section 7 of the Code is maintainable when winding-up proceeding against the Corporate Debtor has already been initiated? Comment.
Answer:

• NCLAT relied on the case of Forech India Pvt. Ltd. Vs. Edelweiss Assets Reconstruction Company Ltd. & Anr., wherein the NCLAT observed that if a Corporate Insolvency Resolution has started or on failure, if liquidation proceeding has been initiated against the Corporate Debtor, the question of entertaining another application under Section 7 or Section 9 against the same very Corporate Debtor does not arise, as it is open to the ‘Financial Creditor’ and the ‘Operational Creditor’ to make claim before the Insolvency Resolution Professional/Official Liquidator.
• The NCLAT further opined that once second stage i.e. liquidation (winding-up) proceedings has already been initiated, the question of reverting back to the first stage of Corporate Insolvency Resolution Process or preparation of Resolution Plan does not arise.
• In view of the facts of the present case, the NCLAT concluded that as the High Court had already ordered winding-up of Corporate Debtor and the same has been initiated, therefore, initiation of Corporate Insolvency Resolution Process against Corporate Debtor did not arise.

Question 14.
The applicant filed an application before NCLT Bench under section 10 of the Insolvency and Bankruptcy Code, 2016 suppressing the material facts that liquidation order had been passed in a winding-up petition against the corporate debtor. State the penal provisions in this regard.
Answer:

• The corporate applicant suppressed this material fact, knowing it to be material, and filed the petition under section 10 and in contravention of Rule 10 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The alleged act of the corporate applicant is punishable under section 77(a) of the Insolvency and Bankruptcy Code 2016.
• Accordingly, it directed the Registrar of Companies to lodge prosecution against the applicant under section 77(a) of the Code. It rejected application with costs of ?10 lakh, which shall be paid by the applicant in the account of the Prime Ministers National Relief Fund

Question 15.
Explain the constitution and role of the Advisory Committee in the winding-up process.
Answer:

• The Tribunal may, while passing an order of winding up of a company, direct that there shall be, an advisory committee to advise the Company Liquidator and to report to the Tribunal on such matters as the Tribunal may direct. [Section 287(1)]
• The advisory committee appointed by the Tribunal shall consist of not more than twelve members, being creditors and contributories of the company or such other persons in such proportion as the Tribunal may, keeping in view the circumstances of the company under liquidation, direct. [Section 287(2)]
• The Company Liquidator shall convene a meeting of creditors and contributories, as ascertained from the books and documents, of the company within thirty days from the date of order of winding up for enabling the Tribunal to determine the persons who may be members of the advisory committee. [Section 287(3)]
• The advisory committee shall have the right to inspect the books of account and other documents, assets and properties of the company under liquidation at a reasonable time. [Section 287(4)]
• The provisions relating to the convening of the meetings, the procedure to be followed thereat and other matters relating to conduct of business by the advisory committee shall be such as may be prescribed. [Section 287(5)] The meeting of advisory committee shall be chaired by the Company Liquidator. [Section 287(6)]

Question 16.
Can Company Liquidator take professional assistance in case of winding up of company?
Answer:

• The Company Liquidator may, with the sanction of the Tribunal, appoint one or more chartered accountants or company secretaries or cost accountants or legal practitioners or such other professionals on such terms and conditions, as may be necessary, to assist him in the performance of his duties and functions under this Act. [Section 291(1)]
• Any person appointed under this section shall disclose forthwith to the Tribunal in the prescribed form any conflict of interest or lack of independence in respect of his appointment. [Section 291(2)]

Question 17.
Explain the provisions related to fraudulent preferences.
Answer:

• Section 328 of the Companies Act, 2013 deals with fraudulent preference.
• Sub-section (1) of section 328 provides that where a company has given preference to a person who is one of the creditors of the company or a surety or guarantor for any of the debts or other liabilities of the company, and the company does anything or suffers anything done which has the effect of putting that person into a position which, in the event of the company going into liquidation, will be better than the position he would have been in if that thing had not been done prior to six months of making winding up application, the Tribunal, if satisfied that, such transaction is a fraudulent preference may order as it may think fit for restoring the position to what it would have been if the company had not given that preference.
• According to sub-section (2), if the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done by or against a company within six months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.
• Where a company is being wound up and anything made, taken or done after the commencement of this Act is invalid under section 328 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company’s debt, then, without prejudice to any rights or liabilities arising, apart from this provision, the person preferred shall be subject to the same liabilities, and shall have the same rights, as if he had undertaken to be personally liable as a surety for the debt, to the extent of the mortgage or charge on the property or the value of his interest, whichever is less. [Section 331(1)]

Chapter 10 Debt Recovery and Securitization – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Debt Recovery and Securitization – CS Professional Insolvency Law and Practice Study Material

Question 1.
How an asset reconstruction company may acquire rights or interest in financial assets of any bank or financial institution? (June 2019, 6 marks)
Answer:
Section 5 of the SARFAESI Act, 2002 provides for the acquisition of rights or interest in financial assets of any bank or financial institution.
Section 5 provides as under:
(1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any asset reconstruction company may acquire financial assets of any bank or financial institution-
(a) by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank orfinancial institution, incorporating therein such terms and conditions as may be agreed upon between them; or
(b) by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.
(1A) Any document executed by any bank orfinancial institution under sub-section (1) in favour of the asset reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitisation shall be exempted from stamp duty in accordance with the provisions of Section 8F of the Indian Stamp Act, 1899.
Provided that the provisions of this sub-section shall not apply where the acquisition of the financial assets by the asset reconstruction company is for the purposes other than asset reconstruction or securitisation.

(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section(l) by the asset reconstruction company, such asset reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets.
(2A) If the bank or financial institution is holding any right, title or interest upon any tangible asset or intangible asset to secure payment of any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire the tangible asset or assignment or licence of intangible asset, such right, title or interest shall vest in the asset reconstruction company on acquisition of such assets under sub-section (1).

(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, power-of-attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the asset reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, asset reconstruction company, as the case may be, had been party thereto or as if they had been issued in favour of asset reconstruction company, as the case may be.

(4) If, on the date of acquisition of financial asset under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the asset reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the asset reconstruction company, as the case may be.

(5) On acquisition of financial assets under sub-section (1), the asset reconstruction company, may with the consent of the originator, file an application before the Debts Recovery Tribunal or the Appellate Tribunal or any Court or Other Authority for the purpose of substitution of its name in any pending suit, appeal or other proceedings and on receipt of such application, such Debts Recovery Tribunal or the Appellate Tribunal or Court or Authority shall pass orders for the substitution of the asset reconstruction company in such pending suit, appeal or other proceedings.

Question 2.
What shall be treated as Debt under the Code? (Dec 2019, 2 marks)
Answer:
As per Section 3(11) of the Insolvency and Bankruptcy Code, 2016, ‘debt’ means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Question 3.
Under what circumstances Debtor is not entitled to make an application to the NCLT? (Dec 2019, 3 marks)
Answer:
Section 11 of the Insolvency and Bankruptcy Code, 2016 lists out the persons who are not eligible to make an application to initiate the corporate insolvency resolution process. According to Section 11, the following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under Chapter II of Part II of the Insolvency and Bankruptcy Code, 2016:
(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
(d) a corporate debtor in respect of whom a liquidation order has been made.

Question 4.
What is the meaning of Non-performing Assets?
Answer:

• When a borrower, who is under a liability to pay to secured creditor, makes any default in repayment of secured debt or any instalment thereof, the account of borrower is classified as non-performing asset (NPA).
• N As constitute a real economic cost to the nation because they reflect the application of scarce capital and credit funds to unproductive uses.
• The money locked up in NPAs are not available for productive use and to the extent that banks seek to make provisions for NPAs or write them off, it is a charge on their profits.
• High level of NPAs impact adversely on the financial strength of banks who in the present era of globalization, are required to conform to stringent International Standards.
• The public at large is also adversely affected because bank’s main source of funds are deposits placed by public continued growth in NPA portfolio threatens the repayment capacity of the banks and erode the confidence reposed by them in the banks.

Question 5.
What is the objective of “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”?
Answer:

• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was enacted with a view to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto.
• The Act enables the banks and financial institutions to realise long-term assets, manage problems of liquidity, asset liability mismatch and improve recovery by exercising powers to take possession of securities, sell them and reduce non- performing assets by adopting measures for recovery or reconstruction.
• The main purpose of the SARFAESI Act is to enable and empower the secured creditors to take possession of their securities and to deal with them without the intervention of the court and also alternatively to authorise any securitisation or reconstruction company to acquire financial assets of any bank or financial institution.
• The said Act further provides for setting up of asset reconstruction companies which are empowered to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets and take over the management of the business of the borrower.

Question 6.
Define the following terms:
(a) asset reconstruction
(b) asset reconstruction company
Answer:
(a) Asset reconstruction: “asset reconstruction” means acquisition by any [asset reconstruction company] of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance;
(b) “Asset Reconstruction Company”: “asset reconstruction company” means a company registered with Reserve Bank under section 3 for the purposes of carrying on the business of asset reconstruction or securitisation, or both.

Question 7.
What do you mean by the term “ Financial Asset” as per SARFAESI Act?
Answer:
“Financial asset” means debt or receivables and includes

• a claim to any debt or receivables or part thereof, whether secured or unsecured; or
• any debt or receivables secured by, mortgage of, or charge on, immovable property; or
• a mortgage, charge, hypothecation or pledge of movable property; or
• any right or interest in the security, whetherfull or part underlying such debt or receivables; or
• any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or
• any beneficial right, title or interest in any tangible asset given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire such tangible asset; or
• any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or
• any financial assistance.

Question 8.
What do you mean by the term “Securitisation” as per SARFAESI Act?
Answer:
“Securitisation” as per SARFAESI Act means acquisition of financial assets by any asset reconstruction company from any originator, whether by raising of funds by such asset reconstruction company from qualified buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.

Question 9.
What is the meaning of Asset Reconstruction Companies [ARC] and state its objective?
Answer:

• “Asset Reconstruction Company”, means a company registered with Reserve Bank under section 3 of SARFAESI Act for the purposes of carrying on the business of asset reconstruction or securitisation, or both.
• Focused measures to help the banking systems to realise its NPAs has resulted into creation of specialised bodies called asset management companies which in India have been named asset reconstruction companies (‘ARCs’).
• The buying of impaired assets from banks or financial institutions by ARCs will make their balance sheets cleaner and they will be able to use their time, energy and funds for development of their business.
• The main objective of asset reconstruction company (‘ARC’) is to act as agent for any bank or financial institution for the purpose of recovering their dues from the borrowers on payment of fees or charges, to act as manager of the borrowers’ asset taken over by banks, or financial institution, to act as the receiver of properties of any bank or financial institution and to carry on such ancillary or incidental business with the prior approval of Reserve Bank wherever necessary.
• If an ARC carries on any business other than the business of asset reconstruction or securitisation or the business mentioned above, it shall cease to carry on any such business within one year of doing such other business.

Question 10.
Discuss provisions of registration of Asset Reconstruction Companies.
Answer:
Section 3 of the SARFAESI Act deals with the Registration of Asset Reconstruction Companies:

• No asset reconstruction company shall commence or carry on the business of securitisation or asset reconstruction without
  (a) obtaining a certificate of registration granted under this section; and
  (b) having net owned fund of not less than two crore rupees or such other higher amount as the Reserve Bank, may, by notification, specify:
• Every asset reconstruction company shall make an application for registration to the Reserve Bank in such form and manner as it may specify.
• The Reserve Bank may, after being satisfied that the specified conditions are fulfilled, grant a certificate of registration to the asset reconstruction company to commence or carry on business of securitisation or asset reconstruction, subject to such conditions, which it may consider, fit to impose.
• The Reserve Bank may reject the application if it is satisfied that the conditions specified are not fulfilled.
• Every asset reconstruction company, shall obtain prior approval of the Reserve Bank for any substantial change in its management including appointment of any director on the board of directors of the asset reconstruction company or managing director or chief executive officer thereof or change of location of its registered office or change in its name.

Section 4 of the SARFAESI Act deals with the Cancellation of certificate of registration.
The Reserve Bank may cancel a certificate of registration granted to asset reconstruction company, if such company –
(a) ceases to carry on the business of securitisation or asset reconstruction; or
(b) ceases to receive or hold any investment from a qualified buyer or
(c) has failed to comply with any conditions subject to which the certificate of registration has been granted to it; or
(d) at any time fails to fulfil any of the conditions referred to in clauses
(a) to (g) of sub-section (3) of section 3; or
(e) fails to
(i) comply with any di rection issued by the Reserve Bank under the provisions of this Act; or
(ii) maintain accounts in accordance with the requirements of any law or any direction or order issued by the Reserve Bank under the provisions of this Act; or
(iii) submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank; or
(iv) obtain prior approval of the Reserve Bank required under sub-section (6) of section 3.

• A asset reconstruction company aggrieved by the order of cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which [such order of cancellation] is communicated to it, to the Central Government.
• A asset reconstruction company, which is holding investments of qualified buyers and whose application for grant of certificate of registration has been rejected or certificate of registration has been cancelled shall, notwithstanding such rejection or cancellation be deemed to be a asset reconstruction company until it repays the entire investments held by it (together with interest, if any) within such period as the Reserve Bank may direct.

Question 11.
Discuss the provisions related to acquisition of rights or interest in financial assets by Asset Reconstruction companies.
Answer:
Section 5 of the Act covers the provisions related to Acquisition of rights or interest in financial assets by Asset Reconstruction Companies.
1. Notwithstanding anything contained in any agreement or any other law for the time being in force, any asset reconstruction company may acquire financial assets of any bank or financial institution –
(a) by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or
(b) by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.
(1 A) Any document executed by any bank or financial institution under sub-section (1) in favour of the asset reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitisation shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act.

2. If the bank or financial institution is a lender in relation to any financial assets acquired under subsection (1) by the asset reconstruction company, such asset reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets. (2A) If the bank or financial institution is holding any right, title or interest upon any tangible asset or intangible asset to secure payment of any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire the tangible asset or assignment or licence of intangible asset, such right, title or interest shall vest in the asset reconstruction company on acquisition of such assets under sub-section (1).

3. Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of- attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under subsection (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the asset reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, asset reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of asset reconstruction company, as the case may be.

4. If, on the date of acquisition of financial asset under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the asset reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the asset reconstruction company, as the case may be.

5. On acquisition of financial assets under sub-section (1), the asset reconstruction company, may with the consent of the originator, file an application before the Debts Recovery T ribunal or the Appellate T ribunal or any court or other Authority for the purpose of substitution of its name in any pending suit, appeal or other proceedings and on receipt of such application, such Debts Recovery Tribunal or the Appellate Tribunal or court or Authority shall pass orders for the substitution of the asset reconstruction company in such pending suit, appeal or other proceedings.

Question 12.
Discuss the provisions related to issue of security by raising of receipts or funds by Asset Reconstruction companies.
Answer:
Section 7 of the Act covers the provisions related to Acquisition of rights or
interest in financial assets by Asset Reconstruction Companies.
1. Any asset reconstruction company, may, after acquisition of anyfinancial asset under sub-section (1) of section 5, offer security receipts to qualified buyers or such other category of investors including non- institutional investors as may be specified by the Reserve Bank in consultation with the Board, from time to time, for subscription in accordance with the provisions of those Acts.

2. An asset reconstruction company may raise funds from the qualified buyers by formulating schemes for acquiring financial assets and shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired out of investments made by a qualified buyer and ensure that realisations of such financial asset is held and applied towards redemption of investments and payment of returns assured on such investments under the relevant scheme.
(2A) (a) The scheme for the purpose of offering security receipts under sub-section (1) or raising funds under sub-section (2), may be in the nature of a trust to be managed by the asset reconstruction company, and the asset reconstruction company shall hold the assets so acquired or the funds so raised for acquiring the assets, in trust for the benefit of the qualified buyers holding the security receipts or from whom the funds are raised. (c)The provisions of the Indian Trusts Act, 1882 shall, except in so far as they are inconsistent with the provisions of this Act, apply with respect to the trust referred to in clause (a) above.

3. In the event of non-realisation under sub-section (2) of financial assets, the qualified buyers of asset reconstruction company, holding security receipts of not less than seventy-five per cent of the total value of the security receipts issued under a scheme by such company, shall be entitled to call a meeting of all the qualified buyers and every resolution passed in such meeting shall be binding on the company.

4. The qualified buyers shall, at a meeting called under sub-section (3), follow the same procedure, as nearly as possible as is followed at meetings of the board of directors of the asset reconstruction company, as the case may be.

Question 13.
What are the measures that can be taken by Asset Reconstruction company. Also state the other functions of Asset Reconstruction company as provided in Section 10 of the Act?
Answer:
Section 9 deals with the measures for Asset Reconstruction.
1. Without prejudice to the provisions contained in any other law for the time being in force, an asset reconstruction company may, for the purposes of asset reconstruction, provide for any one or more of the following measures, namely: –
(a) the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower;
(b) the sale or lease of a part or whole of the business of the borrower
(c) rescheduling of payment of debts payable by the borrower;
(d) enforcement of security interest in accordance with the provisions of this Act;
(e) settlement of dues payable by the borrower;
(f) taking possession of secured assets in accordance with the provisions of this Act;
(g) conversion of any portion of debt into shares of a borrower company.

Section 10 deals with the other functions of asset reconstruction company.
1. Any asset reconstruction company registered may
(a) act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fee or charges as may be mutually agreed upon between the parties;
(b) act as a manager referred to in clause (c) of sub-section (4) of section 13 on such fee as may be mutually agreed upon between the parties;
(c) act as receiver if appointed by any court or tribunal.

Question 14.
State the powers of Reserve Bank of India for regulating Asset Reconstruction Company.
Answer:
1. Section 12 deals with the power of Reserve Bank to determine policy and issue directions
If the Reserve Bank is satisfied that in the public interest or to regulate financial system of the country to its advantage or to prevent the affairs of any asset reconstruction company from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such asset reconstruction company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any asset reconstruction company in matters relating to income recognition, accounting standards, making provisions for bad and doubtful debts, capital adequacy, etc.
the Reserve Bank may give directions to any asset reconstruction company:

• the type of financial asset of a bank or financial institution which can be acquired and procedure for acquisition of such assets and valuation thereof .
• the aggregate value of financial assets which may be acquired by any asset reconstruction company
• the fee and other charges which may be charged or incurred for management of financial assets acquired by any asset reconstruction company
• transfer of security receipts issued to qualified buyers

2. Section 12A deals with the power of Reserve Bank to cal I for statements and information relating to the business or affairs of such asset reconstruction company.

3. Section 12B deals with the power of Reserve Bank to carry out audit and inspection. It shall be the duty of every director or other officer or employee of the asset reconstruction company to produce before the person, conducting an audit or inspection under sub-section (1), all such books, accounts and other documents in his custody or control and to provide him such statements and information relating to the affairs of the asset reconstruction company as may be required.

Question 15.
Explain in detail the process of enforcement of Security Interest by creditors as per Section 13 of the Act.
Answer:
Process of enforcement of Security Interest by creditors as per Section 13
of the Act is as under:
1. Any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.

2. Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub- section (4).

3. The notice shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.
(3A): If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within fifteen days of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower:

4. In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

5. Any payment made by any person to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

6. Any transfer of secured asset after taking possession thereof ortakeover of management, by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset

7. Where any action has been taken against a borrower, all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests.

8. Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets,
(i) the secured assets shall not be transferred by way of lease assignment or sale by the secured creditor; and
(ii) in case, any step has been taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.

9. Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than sixty per cent in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors.

10. Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.

11. Without prejudice to the rights conferred on the secured creditor under or by this section, the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act.

12. The rights of a secured creditor under this Act may be exercised by one or more of his officers authorised in this behalf in such manner as may be prescribed.

13. No borrower shall, after receipt of notice from the secured creditor transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor.

Question 16.
Describe in detail about the process of takeover of Management as provided in Section 15 of SARFAESI Act.
Answer:
Process of takeover of Management as provided in Section 15 of SARFAESI Act is as under:
1. When the management of business of a borrower is taken over by asset reconstruction company under clause (a) of section 9 or, as the case may be, by a secured creditor under clause (b) of sub-section (4) of section 13, the secured creditor may, by publishing a notice in a newspaper published in English language and in a newspaper published in an Indian language in circulation in the place where the principal office of the borrower is situated, appoint as many persons as it thinks fit
(a) in a case in which the borrower is a company as defined in the Companies Act, 1956, to be the directors of that borrower in accordance with the provisions of that Act; or
(b) in any other case, to be the administrator of the business of the borrower.

2. On publication of a notice under sub-section (1), –
(a) in any case where the borrower is a company, all persons holding office as directors of the company and in any other case, all persons holding any office having power of superintendence, direction and control of the business of the borrower immediately before the publication of the notice under sub-section (1), shall be deemed to have vacated their offices as such;
(b) any contract of management between the borrower and any di rector or manager thereof holding office as such immediately before publication of the notice under sub-section (1), shall be deemed to be terminated;
(c) the directors or the administrators appointed under this section shall take such steps as may be necessary to take into their custody or under their control all the property, effects and actionable claims to which the business of the borrower is, or appears to be, entitled and all the property and effects of the business of the borrower shall be deemed to be in the custody of the directors or administrators, as the case may be, as from the date of the publication of the notice;
(d) the directors appointed under this section shall, for all purposes, be the directors of the company of the borrower and such directors or as the case may be, the administrators appointed under this section, shall alone be entitled to exercise all the powers of the directors or as the case may be, of the persons exercising powers of superintendence, direction and control, of the business of the borrower whether such powers are derived from the memorandum or articles of association of the company of the borrower or from any other source whatsoever.

3. Where the management of the business of a borrower, being a company as defined in the Companies Act, 1956, is taken over by the secured creditor,
(a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;
(b) no resolution passed at any meeting of the shareholders of such
company shall be given effect to unless approved by the secured creditor;
(c) no proceeding for the winding up of such company or for the appointment of a receiver in respect thereof shall lie in any court, except with the consent of the secured creditor.

4. Where the management of the business of a borrower had been taken over by the secured creditor, the secured creditor shall, on realisation of his debt in full, restore the management of the business of the borrower to him: Provided that if any secured creditor jointly with other secured creditors or any asset reconstruction company or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.

Question 17.
Whether any compensation to directors is to be given for loss of office if management has been taken over as per Section 15 of SARFAESI Act by ARC or secured creditor?
Answer.
No managing director or any other director or a manager or any person in charge of management of the business of the borrower shall be entitled to any compensation for the loss of office or for the premature termination under this Act of any contract of management entered into by him with the borrower

Question 18.
Explain the provisions related to Register of securitisation, reconstruction and security interest transactions.
Answer:
Provisions related to Register of securitisation, reconstruction and security interest transactions are covered in Section 22 of the Act. Section 22 states that:
1. For the purposes of this Act, a record called the Central Register shall be kept at the head office of the Central Registry for entering the particulars of the transactions relating to
(a) securitisation of financial assets;
(b) reconstruction of financial assets; and
(c) creation of security interest.

2. It shall be lawful for the Central Registrar to keep the records wholly or partly in computer, floppies, diskettes or in any other electronic form subject to such safeguards as may be prescribed.

3. The register shall be kept under the control and management of the Central Registrar.

Question 19.
Explain the provisions related to reporting of satisfaction of security interest by Asset Reconstruction Company or secured creditor.
Answer:
Section 25 deals with the Asset Reconstruction Company or secured creditor to report satisfaction of security interest. Section 25 states that:
1. The asset reconstruction company or the secured creditor as the case may be, shall give intimation to the Central Registrar of the payment or satisfaction in full, of any security interest relating to the asset reconstruction company orthe secured creditor and requiring registration under this Chapter, within thirty days from the date of such payment or satisfaction.
(1 A) On receipt of intimation under sub-section (1), the Central Registrar shall order that a memorandum of satisfaction shall be entered in the Central Register.

2. If the concerned borrower gives an intimation to the Central Registrarfor not recording the payment or satisfaction referred to in sub-section (1), the Central Registrar shall on receipt of such intimation, cause a notice to be sent to the asset reconstruction company or the secured creditor calling upon it to show cause within a time not exceeding fourteen days specified in such notice, as to why payment or satisfaction should not be recorded as intimated to the Central Registrar.

3. If no cause is shown, the Central Registrar shall order that a memorandum of satisfaction shall be entered in the Central Register.

4. If cause is shown, the Central Registrar shall record a note to that effect in the Central Register, and shall inform the borrower that he has done so.

Question 20.
Provisions of SARFAESI Act does not apply in certain cases. State those cases.
Answer:
As per Section 31 the provisions of SARFAESI Act shall not apply to
(a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, 1930 or any other law for the time being in force;
(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872;
(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934;
(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the Merchant Shipping Act, 1958;
(e) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930;
(f) any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure, 1908;
(g) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;
(h) any security interest created in agricultural land;
(i) any case in which the amount due is less than twenty per cent of the principal amount and interest thereon.

Question 21.
Whether civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under SARFAESI Act?
Answer:
Section 34 provides that no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under SARFAESI Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Question 22.
What is the need and objective of Recovery of Debts and Bankruptcy Act, 1993?
Answer:

• Recovery of Debts and Bankruptcy Act, 1993 was passed by the Parliament of India, with a view to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions, insolvency resolution and bankruptcy of individuals and partnership firms and for matters connected therewith or incidental thereto.
• The Act provides a procedure that is distinct from the existing Code of Civil Procedure in order to ensure a speedy adjudication. The Act also provides for the setting up of a separate set of tribunals to hear such matters and these tribunals are termed as Debt Recovery Tribunals (DRTs).

Question 23.
Discuss the composition of Debt Recovery Tribunal constituted under Recovery of Debts and Bankruptcy Act, 1993.
Answer:
ATribunal shall consist of one person only (hereinafter referred to as the Presiding Officer) to be appointed, by notification, by the Central Government.
Notwithstanding anything contained in sub-section (1), the Central Government may –
(a) authorise the Presiding Officer of any other Tribunal established under any other law for the time being in force to discharge the function of the Presiding Officer of a Debt Recovery Tribunal under this Act in addition to his being the Presiding Officer of that Tribunal; or
(b) authorise the judicial Member holding post as such in any other Tribunal, established under any other law for the time being in force, to discharge the functions of the Presiding Officer of Debts Recovery Tribunal under this Act, in addition to his being the judicial Member of that Tribunal
Section 5 provides that a person shall not be qualified for appointment as the Presiding Officer of a Tribunal unless he is, or has been, or is qualified to be, a District Judge

Question 24.
Explain the provisions related to establishment of Appellate Tribunal under Recovery of Debts and Bankruptcy Act, 1993.
Answer:

• As per Section 8 (1) of the Act, the Central Government shall, by notification, establish one or more Appellate Tribunals, to be known as the Debts Recovery Appellate Tribunal, to exercise the jurisdiction, powers and authority conferred on such Tribunal by or under Recovery of Debts and Bankruptcy Act, 1993.
• Section 9 of the Act provides that an Appellate Tribunal shall consist of one person only (hereinafter referred to as the Chairperson of the Appellate Tribunal) to be appointed, by notification, by the Central Government.
• Section 10 of the Act deals with the qualifications for appointment of Chairperson of the Appellate Tribunal.
• It provides that a person shall not be qualified for appointment as the Chairperson of an Appellate Tribunal unless he:
  (a) is, or has been, or is qualified to be, a Judge of a High Court; or
  (b) has been a member of the Indian Legal Service and has held a post in Grade I of that service for at least three years; or
  (c) has held office as the Presiding Officer of a Tribunal for at least three years.
• Section 11 provides that the Chairperson of an Appellate Tribunal shall hold office for a term of five years from the date on which he enters upon his office and shall be eligible for reappointment.

Question 25.
Explain in detail the procedure for making application to the Tribunal under section 19 of the Recovery of Debts and Bankruptcy Act, 1993.
Answer:
(a) Where a bank or a financial institution has to recover any debt from any person, it may make an application to the Tribunal.

(b) Where a bank or a financial institution, which has to recover its debt from any person, has filed an application to the Tribunal under sub-section (1) and against the same person another bank or financial institution also has a claim to recover its debt, then, the later bank or financial institution may join the applicant bank or financial institution at any stage of the proceedings, before the final order is passed, by making an application to that Tribunal.

(c) Every application shall be in such form, and shall be accompanied with true copies of all documents relied on in support of the claim along with such fee, as may be prescribed.
Every applicant in the application filed under sub-section (1) or sub-section (2) for recovery of debt, shall
(a) state particulars of the debt secured by security interest over properties or assets belonging to any of the defendants and the estimated value of such securities
(b) if the estimated value of securities is not sufficient to satisfy the debt claimed, state particulars of any other properties or assets owned by any of the defendants, if any; and
(c) if the estimated value of such other assets is not sufficient to recover the debt, seek an order directing the defendant to disclose to the Tribunal particulars of other properties or assets owned by the defendants.

(d) On receipt of application under sub-section (1) or sub-section (2), the Tribunal shall issue summons with following directions to the defendant-

• to show cause within thirty days of the service of summons as to why relief prayed for should not be granted;
• direct the defendant to disclose particulars of properties or assets other than properties and assets specified by the applicant under clauses (a) and (b) of sub-section (3A); and
• to restrain the defendant from dealing with or disposing of such assets and properties disclosed under clause (c) of sub-section (3A) pending the hearing and disposal of the application for attachment of properties.
  The defendant, on service of summons, shall not transfer by way of sale, lease or otherwise except in the ordinary course of his business any of the assets over which security interest is created and other properties and assets specified or disclosed under sub-section (3A), without the prior approval of the Tribunal.

(e) The defendant shall within a period of thirty days from the date of service of summons, present a written statement of his defence including claim for set-off.

(f) Where the defendant claims to set-off against the applicant’s demand any ascertained sum of money legally recoverable by him from such applicant, the defendant may, present a written statement containing the particulars of the debt sought to be set-off along with original documents and other evidence relied on in support of claim of set-off in relation to any ascertained sum of money, against the applicant.

(g) The written statement shall have the same effect as a plaint in a cross-suit so as to enable the Tribunal to pass a final order in respect of both the original claim and of the set-off.

(h) The applicant shall be at liberty to file a written statement in answer to the counter-claim of the defendant within such period as may be prescribed.

(i) Where a defendant sets up a counter-claim in the written statement and in reply to such claim the applicant contends that the claim thereby raised ought not to be disposed of by way of counter-claim but in an independent action, the Tribunal shall decide such issue along with the claim of the applicant for recovery of the debt.

(j) Where, at any stage of the proceedings, the Tribunal is satisfied that the defendant, with intent to obstruct or delay or frustrate the execution of any order for the recovery of debt that may be passed against him,

• is about to dispose of the whole or any part of his property; or
• is about to remove the whole or any part of his property from the local limits of the jurisdiction of the Tribunal; or
• is likely to cause any damage or mischief to the property or affect its value by misuse or creating third party interest, the Tribunal may direct the defendant, within a time to be fixed by it, either to furnish security, in such sum as may be specified in the order.

(k) The Tribunal may also in the order direct the conditional attachment of the whole or any portion of the property.

(l) In the case of disobedience of an order made by the Tribunal or breach of any of the terms on which the order was made, the Tribunal may order the properties of the person guilty of such disobedience or breach to be attached and may also order such person to be detained in the civil prison for a term not exceeding three months, unless in the meantime the Tribunal directs his release.

(m) Where it appears to the Tribunal to be just and convenient, the Tribunal may, by order,
(a) appoint a receiver of any property, whether before or after grant of certificate for recovery of debt;
(b) remove any person from the possession or custody of the property;
(c) commit the same to the possession, custody or management of the receiver;
(d) confer upon the receiver all such powers, as to bringing and defending suits in the courts or filing and defending applications before the Tribunal
(e) appoint a Commissioner for preparation of an inventory of the properties of the defendant or for the sale thereof.

(n) Where a certificate of recovery is issued against a company and such company is under liquidation, the Tribunal may by an order direct that the sale proceeds of secured assets of such company be distributed in the same manner as provided in section 326 of the Companies Act, 2013 or under any other law for the time being in force.

(o) The Tribunal may, after giving the applicant and the defendant, an opportunity of being heard, in respect of all claims, set-off or counter-claim, if any, and interest on such claims, within thirty days from the date of conclusion of the hearings, pass interim or final order as it deems fit which may include order for payment of interest from the date on which payment of the amount is found due up to the date of realisation or actual payment.
Where it is proved to the satisfaction of the Tribunal that the claim of the applicant has been adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the parties or where the defendant has repaid or agreed to repay the claim of the applicant, the Tribunal shall pass orders recording such agreement, compromise or satisfaction of the claim.
While passing the final order, the Tribunal shall clearly specify the assets of the borrower over which security interest is created in favour of any bank or financial institution and direct the Recovery Officers to distribute the sale proceeds of such assets.
Notwithstanding anything to the contrary contained in any law for the time being in force, the proceeds from sale of secured assets shall be distributed in the following orders of priority, namely: – (i) the costs incurred for preservation and protection of secured assets, the costs of valuation, public notice for possession and auction and other expenses for sale of assets shall be paid in full; (ii) debts owed to the bank or financial institution.

(p) The Tribunal shall send a copy of its final order and the recovery certificate, to the applicant and defendant. The applicant and the defendant may obtain copy of any order passed by the Tribunal on payment on such fee as may be prescribed.

(q) The Presiding Officer shall issue a certificate of recovery along with the final order, for payment of debt with interest under his signature to the Recovery Officer for recovery of the amount of debt specified in the certificate.

(r) Any recovery certificate issued by the Presiding Officer shall be deemed to be decree or order of the Court for the purposes of initiation of winding up proceedings against a company registered under the Companies Act, 2013 (18 of 2013) or Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 or insolvency proceedings against any individual or partnership firm under any law for the time being in force, as the case may be.

(s) Where the Tribunal, which has issued a certificate of recovery, is satisfied that the property is situated within the local limits of the jurisdiction of two or more Tribunals, it may send the copies of the certificate of recovery for execution to such other Tribunals where the property is situated.

(t) The application made to the Tribunal shall be dealt with by it as expeditiously as possible and every effort shall be made by it to complete the proceedings in two hearings, and to dispose of the application finally within one hundred and eighty days from the date of receipt of the application.

(u) The Tribunal may make such orders and give such directions as may be necessary or expedient to give effect to its orders or to prevent abuse of its process or to secure the ends of justice.

Question 26.
Explain the process of appeal to Debt Recovery Appellate Tribunal as per Section 20 of the Act.
Answer:

• As per Section 20, any person aggrieved by an order made, or deemed to have been made, by a Tribunal under Recovery of Debts and Bankruptcy Act, 1993, may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter.
• No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of the parties.
• Every appeal shall be filed within a period of thirty day from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him and it shall be in such form and be accompanied by such fee as may be prescribed.
• Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing it within that period.
• On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.
• The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and to the concerned Tribunal.
• The appeal filed before the Appellate Tribunal shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.

Question 27.
Write a note on the power of Debt Recovery Tribunal provided under Recovery of Debts and Bankruptcy Act, 1993.
Answer:
Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:

• summoning and enforcing the attendance of any person and examining him on oath;
• requiring the discovery and production of documents;
• receiving evidence on affidavits;
• issuing commissions for the examination of witnesses or documents;
• reviewing its decisions;
• dismissing an application for default or deciding it ex parte;
• setting aside any order of dismissal of any application for default or any order passed by it ex parte;
• any other matter which may be prescribed.

Question 28.
Explain the modes of recovery of debt determined by Debt Recovery Tribunal.
Answer:
Section 25 states that the Recovery Officer shall, on receipt of the copy of the certificate under sub-section (7) of section 19, proceed to recover the amount of debt specified in the certificate by one or more of the following modes, namely: –
(a) attachment and sale of the movable or immovable property of the defendant;
(b) taking possession of property over which security interest is created or any other property of the defendant and appointing receiver for such property and to sell the same
(c) arrest of the defendant and his detention in prison;
(d) appointing a receiver for the management of the movable or immovable properties of the defendant;
(e) any other mode of recovery as may be prescribed by the Central Government.

Question 29.
Insolvency and Bankruptcy Code, 2016 prevails over SARFAESI Act, 2002.Comment.
Answer:

• In the case of Canara Bank v. Sri Chandramoulishvar Spg. Mills (P) Ltd., the NCLAT while referring to Supreme Court’s verdict in Innoventive case has ruled that when two proceedings are initiated, one under the Insolvency and Bankruptcy Code, 2016 and the other under the SARFAESI Act, 2002, then the proceeding under the l&B code shall prevail.
• The appeal in the case was preferred by the Financial Creditor i.e. Canara Bank against the NCLT’s (National Company law Tribunal) order, whereby the application preferred by Operational Creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (application for initiation of corporate insolvency resolution process by operational creditor) against the Corporate Debtor i.e. M/s. Sri Chandra Moulishvar Spinning Mills Private Limited was admitted by the Tribunal.
• The Appellant’s main grievance in the case was that he had already initiated proceedings under the SARFAESI Act, 2002 for recovery against the Corporate Debtor.
• The NCLAT in view of the issue involved in the case, made reference to Supreme Court’s verdict in the case of Innoventive Industries Ltd. v. ICICI Bank, whereby the Apex Court was of the view that if the application under Section 9 is complete and there is no ‘existence of dispute’ and there is a ‘debt’ and ‘default’ then the Adjudicating Authority is bound to admit the application.
• Thus, NCLAT upheld NCLT’s decision and also noted that such action cannot continue as the Code will prevail over SARFAESI Act, 2002.

Chapter 9 Adjudication and Appeals for Corporate Persons – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Adjudication and Appeals for Corporate Persons – CS Professional Insolvency Law and Practice Study Material

Question 1.
After acceptance of the application for initiating Corporate Insolvency Resolution Process (CIRP) by National Company Law Tribunal (NCLT), the powers of the Board of Directors of the Company (Corporate Debtor) is suspended. The Company wants to make an appeal against the order of the NCLT. Whether the suspended Board of the Company can make appeal? Elucidate quoting relevant case law, if any. (Dec 2020, 6 marks)
Answer:
The present case is similar to the case of Steel Konnect (India) Private Limited v/s. Hero Fincorp Ltd., In the case of Steel Konnect (India) Private Limited v/s. Hero Fincorp Ltd., Initially Courts were of view that once an insolvency application is admitted, the Code does not permit erstwhile company directors to maintain an appeal on behalf of the corporate debtor and only the interim resolution professional (IRP”) can maintain an appeal on behalf of the company.
Further, it was observed the power of the IRP as provided under the Code does not include the power to initiate proceedings on behalf of the Corporate Debtor. The aforesaid issue was raised in Steel Konnect (India) Pvt Ltd. v. M/s Hero Fincorp Ltd. where it was held that upon admission of application under the Insolvency and Bankruptcy Code, 2016 and commencement of corporate insolvency resolution process, for preferring an appeal before NCLAT; the corporate debtor can appear through its Board of Directors or its officer or its authorized representative.
If corporate debtor is represented before Adjudicating Authority during appeal through its Board of Directors, no objection can be raised in this regard as initiation of corporate insolvency resolution process only suspends functioning of Board of Directors in that corporate debtor not the Board of Directors as a whole. Also, the directors continue to be in their position and are still present in the records maintained by the Registrar of Companies. They are just put in temporary suspension for 180/270 days till continuation of the insolvency resolution process.
Therefore, suspended Board of Directors being aggrieved party can make an appeal against the order of NCLT.

Question 2.
Liquidation of ABC Private Ltd. has been ordered by Adjudicating Authority. Mumbai vide its order dated 27th May, 2018. Amit Kumar was appointed as Liquidator of ABC Private Limited. The particulars relating to ABC Private Ltd. which has gone into liquidation are as follows:

Particulars	Amount (₹)
1. Amount realized from the sale of liquidation of assets	16,00,000
2. Secured Creditor who has relinquished the security	5,00,000
3. Unsecured Financial Creditors	4,00,000
4. Income-tax payable within a period of 3 years preceding the Liquidation commencement date. The Income Tax payable is ₹ 25,000 in each Financial Year.	75,000
5. CESS payable to State Government within a period of one year preceding the liquidation commencement              date.	20,000
6. Fees payable to Resolution Professional	75,000
7. Expenses incurred by the Resolution Professional in running the business of the ABC Private Ltd. as a going concern.	25,000
8. Workmen salary payable for a period of thirty months preceding the liquidation commencement date. The workmen’s salary is the same for each of the 30 months.	3,00,000
9. Preference Shareholders	1,00,000
10. Equity Shareholders	10,00,000

Distribute the proceeds among all categories of dues as per the priority order in terms of the provisions of the IBC, 2016. While distributing the proceeds, it may be presumed that the proportionate contribution of each in all categories to the fees payable to the Resolution Professional has been taken into account already and need not be recalculated. (Dec 20216 marks)
Answer:

(i) Fees payable to Resolution Professional in full (deducted from the amounts payable to all categories below as per the provision of sub-section 3 of section 53 of the Code. The amount shown as payable is after deducting proportional amount)	75,000
(ii) Expenses incurred by the Resolution Professional in running the business on going concern (deducted from sale proceeds)	25,000
(iii) Workmen Salary outstanding for a period of 24 months (proportionate to 24 months only). The balance ₹ 60,000 is considered as remaining debts and dues and will be settled before preference shareholder/equity shareholder.	2,40,000
(iv) Secured creditor who has relinquished the security.	5,00,000
(v) Unsecured Financial Creditors	4,00,000
(vi) Income-Tax payable within the period of 2 years	50,000
(vii) CESS to State Government payable within a period of one year	20,000
(viii) Balance amount in workmen salary	60,000
(ix) Balance amount for income tax	25,000
(x) Total distribution in the above priority	13,95,000
(xi) Amount realized from the sale of Liquidation of Assets	16,00,000
(xii) Preference shareholders	1,00,000
(xiii) Balance available to Equity Shareholders on pro rata basis	1,05,000

Alternate Answer:

Particulars		Amount (₹)
(a) Insolvency resolution process cost (to be paid in full)	Fees payable to Resolution Professional in full (deducted from the amounts payable to all categories below as per the provision of sub section 3 of section 53 of the Code. The amount shown as payable is after deducting proportional amount)	75,000
	Expenses incurred by the Resolution Professional in running the business on going concern (deducted from sale proceeds)	25,000
(b) Workmen’s dues (24 months preceding liquidation commencement date) and debts owed to secured creditors who have relinquished their security interest (equally ranked)	Workmen Salary outstanding for a period of 24 months (proportionate to 24 months only).The balance ₹ 60,000 is considered as remaining debts and dues and will be settled before preference shareholder / equity shareholder.	2,40,000
	Secured creditor who has relinquished the security.	5,00,000
(c) Financial debts owed to unsecured financial creditors		4,00,000
(d) Amount due to Central govt, and State govt, (two years preceding liquidation commencement date)	Income Tax payable within the period of 2 years.	50,000
	CESS to State Government payable within a period of one year.	20,000
(e) Any remaining debts and dues	Balance amount in workmen salary	60,000
	Balance amount in Income Tax	25,000
Total distribution in the above priority		13,95,000
Amount realized from the sale of Liquidation of Assets		16,00,000
(f) Preference Shareholders		1,00,000
(g) Equity Shareholders		1,05,000

Question 3.
Operational Creditor (OC) filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiation of Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor (CD). The Adjudicating Authority (AA) admitted the application.
The CD challenged the order on the ground that the application under Section 9 of IBC was filed fraudulently with malicious intent for the purpose, other than for the resolution of insolvency or liquidation and attracts penal amount in terms of Section 65(1) of the IBC.
The OC is claiming the amount, on the basis of two Memorandum of Understanding(s), (MOUs), first one is for claim against invoices raised and the second one is for reimbursement of custom duty, paid to the relevant authorities.
As per CD, he offered 100% of the amount actually payable in terms of the first MOU on account of the invoices raised by the OC, but the OC declined to settle the amount and asked for more.
Further, the OC also demands for customs duty paid to the relevant authorities. However, no such arrangement has been made as per the MOU terms.
CD appealed to, the National Company Law Appellate Tribunal (NCLAT). During the proceedings, NCLAT, on request of CD, allowed CD to pay entire amount as mentioned in 1st MOU, and also to pay certain additional amount. However, the OC refused to accept the same and asked for more interest. Discuss, whetherthe appeal filed by the CD at NCLAT, will be maintainable? (June 2022, 6 marks)

Question 4.
An Appeal is filed by the Appellant-Anil Sharma, Resolution Professional (RP) of S. K. Oils Ltd. under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against the impugned order passed by the Adjudicating Authority (AA).
The grievance of the Appellant-RP is that, despite lapse of 985 days from the date of filing of the Application seeking broadly to consider passing orders for liquidation of the Corporate Debtor (CD) i.e. S. K. Oils Ltd., as no Resolution Plan has been approved by the Committee of Creditors (CoC) before the maximum period permitted for the Corporate Insolvency Resolution Process (‘CIRP’) under Section 12 of the IBC, instead the AA has dismissed the Application as not maintainable and being infructuous.
The Appellant-RP has sought the following reliefs:
(i) Allow the instant appeal and set aside/quash the impugned order passed by the AA.
(ii) Pass an order initiating liquidation of the Corporate Debtor M/s. S. K. Oils Ltd., under Section 33(1) of IBC.
Discuss based on decided case law, whether Appellant-RP will succeed in getting relief ? (June 2022, 6 marks)

Question 5.
Who is the adjudicating authority for the purpose of insolvency and liquidation of corporate persons?
Answer:
National Company Law Tribunal (NCLT) constituted under section 408 of the Companies Act, 2013 is the adjudicating authority for the purpose of insolvency and liquidation of corporate persons.
Also, the NCLT replaced the jurisdiction of the erstwhile Company Law Board (CLB), the Board for Industrial and Financial Restructuring (BIFR) and the High Court in exercise of its jurisdiction as Company Court.
The application for initiating the insolvency resolution process or liquidation of corporate debtors shall be filed before NCLT having jurisdiction over the place where the registered office of the company is situated.

Question 6.
Explain the role of Adjudicating Authority.
Answer:

• Adjudicating Authority plays a two-fold role while functioning under the Code.
• One role is administrative in nature and other is judicial in nature.
• By administrative it means that Adjudicating Authority has to ascertain whether a particular case is complete in terms of Sections 7/9/10 of the Insolvency and Bankruptcy Code, 2016 (as the case may be) or it suffers from some defect.
• Whereas by judicial it means to decide whether to admit corporate insolvency resolution process or liquidation of a corporate debtor or not.

Question 7.
Can two parallel proceeding against the corporate debtor and the personal guarantor go simultaneously in two different jurisdictions?
Answer:
In the case of Sanjeev Shriya v/s. State Bank of India, Allahabad High Court held that two parallel proceeding against the corporate debtor and the personal guarantor cannot go simultaneously in two different jurisdictions. (Allahabad High Court order dated 6th September, 2017)

Question 8.
Discuss the powers of NCLT regarding the entertainment and disposal of application against the corporate person or debtor.
Answer:
Notwithstanding anything to the contrary contained in any other law for the time being in force, NCLT shall have jurisdiction to entertain or dispose of:
(a) any application or proceeding by or against the corporate debtor or corporate person
(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and
(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

Question 9.
Explain the grounds on which appeals can be made against the order of Adjudicating Authority.
Answer:

• Section 61 of the Insolvency and Bankruptcy Code, 2016 provides that notwithstanding anything to the contrary contained underthe Companies Act 2013, any person aggrieved by the order of the Adjudicating Authority in the context of corporate insolvency resolution process or liquidation of corporate person may prefer an appeal to the National Company Law Appellate Tribunal (NCLAT).
• Every appeal before NCLAT shall be filed within thirty days (30 days) from the date of receipt of such order.’
• However, NCLAT may allow one-time extension of fifteen days (15 days) to file an appeal after the expiry of 30 days if it is satisfied that there was sufficient cause for not filing the appeal within first 30 days.

An appeal against an order approving a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016 may be filed on the following grounds:
(a) The approved resolution plan is in contravention of the provisions of any law for the time being in force;
(b) There has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period;
(c) The debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Insolvency and Bankruptcy Board of India (“Board”);
(d) The insolvency resolution process costs have not been provided for repayment in priority to all other debts; or
(e) The resolution plan does not comply with any other criteria specified by the Board.

Question 10.
Can the erstwhile company directors make an appeal on behalf of the corporate debtor against the order of Adjudicating order?
Answer:

• It was observed the power of the Insolvency Resolution Professional as provided under the Code does not include the power to initiate proceedings on behalf of the Corporate Debtor.
• The aforesaid issue was raised in Steel Konnect (India) Pvt Ltd v M/s Hero Fincorp Ltd, where it was held that upon admission of application under the Insolvency and Bankruptcy Code, 2016 and commencement of corporate insolvency resolution process, for preferring an appeal before NCLAT; the corporate debtor can appear through its Board of Directors or its officer or its authorized representative.
• If corporate debtor is represented during appeal through its Board of Directors, no objection can be raised in this regard as initiation of corporate insolvency resolution process only suspends functioning of Board of Directors in that corporate debtor not the Board of Directors as a whole.
• Also, the directors continue to be in their position and are still present in the records maintained by the Registrar of Companies and are just put in temporary suspension for 180/270 days till continuation of the insolvency resolution process. (NCLAT order dated 29th August, 2017)

Question 11.
Discuss the provisions related to appeal to Supreme Court against the order of NCLAT.
Answer:

• Section 62 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) provides that, any person aggrieved by the order of NCLAT may prefer an appeal to the Supreme Court (SC) on a question of law arising out of such order.
• Every appeal before SC shall be filed within forty five (45 days) from the date of receipt of such order.
• However SC may allow one time extension of fifteen days (15 days) to file an appeal after the expiry of 45 days if it is satisfied that there was sufficient cause for not filing the appeal within first 45 days.

Question 12.
Name the benches of NCLT and their respective jurisdiction.
Answer:

Name of the NCLT Bench	Location	Territorial Jurisdiction of the NCLT Bench
1. (a) Principal Bench	New Delhi	Union territory of Delhi
2. Ahmedabad Bench	Ahmedabad	State of Gujarat, Union territory of Dadra and Nagar Haveli and Union territory of Daman and Diu
3. Allahabad Bench	Allahabad	State of Uttar Pradesh and State of Uttarakhand
4. Amravati Bench Bench	Amravati	State of Andhra Pradesh
5. Bengaluru Bench	Bengaluru	State of Karnataka
6. Chandigarh Bench	Chandigarh	State of Himachal Pradesh, State of Jammu and Kashmir, State of Punjab, Union territory of Chandigarh and State of Haryana
7. Chennai Bench	Chennai	State of Tamil Nadu and Union territory of Puducherry
8. Cuttack Bench	Cuttack	State of Chattisgarh and State of Odisha
9. Guwahati Bench	Guwahati	State of Arunachal Pradesh, State of Assam, State of Manipur, State of Mizoram, State of Meghalaya, State of Nagaland, State of Sikkim and State of Tripura
10. Hyderabad Bench	Hyderabad	State of Telangana
11. Indore Bench	Indore	State of Madhya Pradesh
12. Jaipur Bench	Jaipur	State of Rajasthan
13. Kochi Bench	Kochi	State of Kerala and Union Territory of Lakshadweep
14. Kolkata Bench	Kolkata	State of Bihar, State of Jharkhand, State of West Bengal and Union territory of Andaman and Nicobar Islands
15. Mumbai Bench	Mumbai	State of Goa and State of Maharashtra

Question 13.
Whether any civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which NCLT/NCLAT has jurisdiction under Insolvency and Bankruptcy Code, 2016?
Answer:
Section 63 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) provides that no civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which NCLT/NCLAT has jurisdiction under this Code.

Question 14.
Discuss the penal provisions with regards to Fraudulent or malicious initiation of proceedings.
Answer:

• Section 65 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) provides that if any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, Adjudicating Authority may impose upon a such person a penalty which shall not be less than One Lakh Rupees, but may extend to One Crore Rupees.
• Whereas, if any person initiates voluntary liquidation proceedings with the intent to defraud any person, Adjudicating Authority may impose upon such person a penalty which shall not be less than One Lakh Rupees, but may extend to One Crore Rupees.

Question 15.
Discuss the relevant provisions of Section 66 and 67 of Insolvency and Bankruptcy Code, 2016.
Answer:
Section 66 of the Insolvency and Bankruptcy Code, 2016 :

• It provides that if during corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, than Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.
• On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if:
  (a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
  (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

Section 67 of the Insolvency and Bankruptcy Code, 2016:
It provides that where the Adjudicating Authority passes an order under sub-section (1) or subsection (2) of section 66, as the case may be, it may give such further directions as it may deem appropriate for giving effect to the order, and in particular, the Adjudicating Authority may:
(a) provide for the liability of any person under the order to be a charge on any debt or obligation due from the corporate debtor to him, or on any mortgage or charge or any interest in a mortgage or charge on assets of the corporate debtor held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf; and
(b) from time to time, make such further directions as may be necessary for enforcing any charge imposed under this section.