First Notes - 28 April 2017

Issuance of draft regulations for fast track insolvency

Issuance of draft regulations for fast track insolvency of corporate persons covered under the Insolvency and Bankruptcy Code

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Background

A unified insolvency code was the need of the hour and a key policy priority for the government, given that India’s bankruptcy regime was considered outdated and ineffective towards the recovery of debt compared to global standards. The key policy charter of the Insolvency and Bankruptcy Code (the Code) is to facilitate the time bound and early assessment of the viability and liquidity of an enterprise which has been found unviable. 

Chapter II of Part II of the Code, inter alia, provides that in case any corporate debtor commits a default, then a financial creditor, an operational creditor or the corporate debtor itself could initiate corporate insolvency resolution process in respect of such corporate debtor in the specified manner. The corporate insolvency resolution process should be completed within a period of 180 days from the date of admission of the application to initiate such process.

Chapter IV of Part II of the Code contains the manner in which a fast track corporate insolvency resolution process could be carried out which, inter alia, prescribes that the fast track corporate insolvency resolution process should be completed within a period of 90 days from the insolvency commencement date.

New developments

On 18 April 2017, the Insolvency and Bankruptcy Board of India has issued the below rules for public comments :

  • Draft Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (draft Insolvency Regulations, 2017)
  • Draft notification for eligible corporate debtors under Section 55(2) of the Code

To enhance the stability of the financial sector, RBI issued a circular advising banks to ensure that they have adequate provisions for loans and advances at all times. It encouraged banks to consider higher provisioning rates for standard assets (as compared to the minimum rates prescribed in the Master Circular) and review the provisions made for advances to stressed sectors of the economy.

Overview of the draft provisions

  • Eligible corporate persons: Section 55(2) of the Code provides that an application for fast track corporate insolvency resolution process could be made in respect of the following corporate debtors:

    a) A corporate debtor with assets and income below a level as may be notified by the Central Government (CG)
    b) A corporate debtor with such class of creditors or such amount of debt as may be notified by the CG, or
    c) Such other category of corporate persons as may be notified by the CG

    The draft notification now prescribes the eligible corporate debtors to whom the provisions of fast track corporate insolvency resolution process would apply. Following are the classes of corporate persons prescribed under the draft notification:
    • Small company: As per Section 2(85) of the Companies Act, 2013 (2013 Act), ‘small company’ means a company, other than a public company fulfilling both the given criteria:
      • Paid-up share capital does not exceed INR50 lakh or such higher amount as may be prescribed which should not be more than INR5 crore and
      • Turnover as per its last statement of profit and loss does not exceed INR2 crore or such higher amount as may be prescribed which should not be more than INR20 crore
    • However, the above mentioned conditions are not applicable to the following classes of companies
      • A holding company or a subsidiary company
      • A company registered under Section 8 of the 2013 Act or
      • A company or body corporate governed by any special Act.
         
    • Start-ups: An entity should be considered as a 'start-up' if it meets the following conditions*:
      • i) It would remain as a start-up up to five years from the date of its incorporation/registration
      • ii) Its turnover for any of the financial years has not exceeded INR25 crore and
      • iii) It is working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual 

However, an entity formed by splitting up or reconstructing of a business already in existence should not be considered as a start-up.

(*Source: Department of Industrial Policy and Promotion (DIPP) notification no. G.S.R. 180(E) dated 17 February 2016)

  • Other company: Company/Limited Liability Partnership (LLP) which has borrowed money not exceeding INR2 crore in any manner.

  • Conduct of fast track corporate insolvency resolution process: The draft Insolvency Regulations, 2017 provide that the provisions of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (Insolvency Regulations, 2016) should, mutatis mutandis, apply to the conduct of a fast track corporate insolvency resolution process subject to given amendments to the Insolvency Regulations, 2016:

- Substitution of words: The words ‘corporate insolvency resolution process’ should be substituted by ‘fast track corporate insolvency resolution process’.

- Extortionate credit transaction: Section 50(1) of the Code provide that in case the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, then the liquidator or the resolution professional as the case may be, could make an application for avoidance of such transaction to the adjudicating authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor.

Further, Regulation 5 of the Insolvency Regulations, 2016 prescribe that a transaction should be considered extortionate under Section 50(2) of the Code if the terms:

  • Require the corporate debtor to make exorbitant payments in respect of the credit provided or
  • Are unconscionable under the principles of law relating to contracts.

An explanation has been added by the draft Insolvency Regulations, 2017 which clarifies that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt should in no event be considered as an extortionate credit transaction.

Comments on each provision of the draft Insolvency Regulations, 2017 and draft notification for eligible corporate persons could be submitted up to 8 May 2017.

Our comments

The draft Insolvency Regulations, 2017 and draft notification for eligible corporate persons are aimed to facilitate a faster insolvency resolution process for the specified classes of corporate persons (i.e. small companies, start-ups and companies/LLP with borrowings less than INR2 crore).

The normal insolvency resolution process under the Code is required to be completed within 180 days from the date of admission of the application whereas under the fast track insolvency resolution process, it has to be completed within 90 days.

We encourage stakeholders to actively participate and provide their comments on the draft regulations by 8 May 2017.

To access the text of the draft regulations for fast track insolvency resolution of corporate persons, please click here.

To access the text of the draft notification under Section 55(2) of the Code for eligible corporate debtors, please click here.

© 2017 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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