By R K Bansal , ED , IDBI Bank Ltd.

Bankruptcy – Meaning

Bankruptcy offers an individual or business a

chance to start fresh by forgiving debts that simply

can't be paid while offering creditors a chance to

obtain some measure of repayment based on what

assets are available. In theory, the ability to file for

bankruptcy can benefit an overall economy by

giving persons and businesses another chance and

providing creditors with a measure of debtrepayment.

Bankruptcy – Definition

Legal procedure for liquidating a business (or

property owned by an individual) which cannot

fully pay its debts out of its current assets .

Bankruptcy can be brought upon itself by an

insolvent debtor (called voluntary bankruptcy) or it

can be filed by financial /operational creditors.

Bankruptcy – Present ScenarioPresently , Before a company goes into liquidation,

the debtors and creditors follow a complex

procedure which involves the following :

a) JLF/CDR

b) SDR

c) SARFAESI

d) DRT

e) BIFR

f) Winding Up.In the present scenario, creditors extend the funding ,

restructure the debt but the entire process to achieve turn

around is solely dependent on the capability of the present

promoters except in case of SDR where lenders search for a

new promoter for the company

Bankruptcy – Present ScenarioYear – wise cumulative CDR Statistics (Rs. in Crore)

*.

Particulars Upto FY 2012-13 Upto FY 2013-14 Upto FY 2014-15 FY 2015-16 Upto March 2016

No Amt No Amt No Amt No Amt

Approved (A) 398 226995 476 330444 530 403004 530 403004

Exited Successfully (B) 63 50324 75 58205 80 59604 86 62217

% of Successful to approved 16 22 16 18 15 15 16 15

Withdrawn on Failure (C) 86 15688 121 29980 165 56995 213 88552

% of Failure to approved 22 7 25 9 31 14 40 22

Total Exited(D= B+C) 149 66012 196 88185 245 116599 289 150769

Live cases (A-D) 249 160983 280 242259 285 286405 231 252235

Aggregate 289 (54%) and Rs 1,45,278 crore(37%) exited successfully / or failed &exited. Total cases referred 655(Rs 474002 cr)

Bankruptcy – Present ScenarioGross and Net NPA position

Gross & Net NPA Ratios

Bank Sector

Gross NPA Ratio (%)

Rank

Net NPA (%)

RankMar-15 Mar-16 ∆ bps Mar-15 Mar-16 ∆ bps

HDFC Bank Pvt. 0.93 0.94 1 1 0.25 0.28 3 1

Axis Bank Pvt. 1.34 1.67 33 2 0.44 0.70 26 2

ICICI Bank Pvt. 3.78 5.82 204 3 1.61 2.98 137 3

SBI PSB 4.25 6.50 225 4 2.12 3.81 169 4

BoB PSB 3.72 9.99 627 7 1.89 5.06 317 5

UBI PSB 4.96 8.70 374 5 2.71 5.25 254 6

Canara Bank PSB 3.89 9.40 551 6 2.65 6.42 377 7

IDBI Bank PSB 5.88 10.98 510 8 2.88 6.78 390 8

BoI PSB 5.39 13.07 768 10 3.36 7.79 443 9

PNB PSB 6.55 12.90 635 9 4.06 8.61 455 10

Note - Banks have been arrayed based on Mar-16 Net NPA % in ascending order

Bankruptcy – Present ScenarioGross and Net NPA position as on 31.03.2016

(Rs. Crore)

Bank Sector GNPA

Axis Bank Pvt. 6,088

BoB PSB 40,521

BoI PSB 49,879

Canara Bank PSB 31,638

HDFC Bank Pvt. 4,393

ICICI Bank Pvt. 26,221

IDBI Bank PSB 24,875

PNB PSB 55,818

SBI PSB 98,173

UBI PSB 24,171

Bankruptcy – Present Procedure• At Present , on sensing the stress signals, the banks attempt to correct the situation by

take various measures with due commitments from the Promoters to revive the positionof the company. Such measures include marking the accounts with Special Mentionaccount (SMA) , flexible restructuring , etc.

• When an account becomes SMA , the bankers form a JLF (Joint lenders Forum ) anddiscuss the various available revival options .

• If all bankers agree with the proposed revival plan given by the company, a Correctiveaction plan is proposed to be implemented in 210 days from the date of accountbecoming SMA2 .

• CAP under JLF is not restructuring but if the account does not get revived then theaccount is attmepted to be revived with restructuring process but any restructuring ofaccounts get the asset classification of account changed to NPA.

• After restructuring and corrective action plan , if the account still does not show any signof revival , then bankers resort to the recovery action and issue notice under SARFAESIand file a suit in DRT for taking the possession of the movable current and fixed assets ofthe company.

• In many such cases, the company makes a reference to BIFR for restructuring whichmany times delays the recovery process by the bank .

Bankruptcy – Proposed Procedure

• The Proposed procedure is a well structured framework wherein on sensing the stress , the client or banks or creditors will file a bankcruptcy application with NCLT ( National Company Law Tribunal ) or DRT ( in case of Firms and Individuals)

• After Filing the bankcruptcy application to the tribunal , The tribunal after hearing both the parties will announce a moratorium period which will be a stand still on part of the creditors and holding on operations for clients .

• During the process , All the creditors will form a committee and appoint an Insolvency resolution professional who will take decisions keeping in mind the two strategies in focus 1. revival strategy 2. recovery strategy

• In the revival phase , the creditors will try to revive the company by implementing various options. In case of banks , they are to follow RBI guidelines in the matter like SDR, CAP, JLF,S4A etcand give instructions to its agent to act accordingly .

• If the revival phase could not able to revive the company even after employing all the measures , the creditors will resort to the recovery phase and file liquidation with having consent of 75% lenders.

Bankruptcy – The Code

The Code offers a uniform, comprehensive insolvency

legislation encompassing all companies, partnerships and

individuals (other than financial firms). The Government is

proposing a separate framework for bankruptcy resolution

in failing banks and financial sector entities.

One of the fundamental features of the Code is that it allows creditors

to assess the viability of a debtor as a business decision, and agree

upon a plan for its revival or a speedy liquidation. The Code creates a

new institutional framework, consisting of a regulator, insolvency

professionals, information utilities and adjudicatory mechanisms, that

will facilitate a formal and time bound insolvency resolution process

and liquidation

Bankruptcy – Applicability

• Individuals • Partnership Firms• Companies and LLP

Bankruptcy – Triggering event

Default by Individuals and partnership firm : Rs 1,000/-Default by companies/LLPs : Rs 1,00,000/-

Bankruptcy – Proposed Model

The code proposes a two stage Model both for corporates and Individuals/partnership firms .

(i) Insolvency Resolution Process

(iI) Liquidation

Supermajority requires 75% voting in

favour/against of the resolution.

Insolvency Resolution Process Commencement of IRP : Individual and partnership firms will file

bankruptcy in DRT and the companies and LLP will file in National

Company Law Tribunal (NCLT)

Moratorium : NCLT will order a Moratorium period for Corrective

Action and all the beneficiaries will agree for holding on operation

during this period and stand still for any proceedings against the

company

Appointment of Resolution Professional : All the creditors will

form a credit committee who will appoint a Resoulution

professional who will act as agent of the credit committee and take

over the management charge from the company’s present

promoters.

Credit Committee and Revival Plan : All the creditors of the

company will form a credit committee where financial creditors

would be having voting power but operational creditor will not be

having any voting power. The committee will work on revival plan

and instruct the Resolution professional to act accordingly .

Liquidation ( 2nd stage of Bankruptcy)

Under the Code, a corporate debtor may be put into liquidation in the

following scenarios:

(i) A 75% majority of the creditor's committee resolves to liquidate the

corporate debtor at any time during the insolvency resolution process;

(ii) The creditor's committee does not approve a resolution plan within

180 days (or within the extended 90 days);

(iii) The NCLT rejects the resolution plan submitted to it on technical

grounds; or

(iv) The debtor contravenes the agreed resolution plan and an affected

person makes an application to the NCLT to liquidate the corporate

debtor.

Once the NCLT passes an order of liquidation, a moratorium is

imposed on the pending legal proceedings against the corporate debtor,

and the assets of the debtor (including the proceeds of liquidation) vest

in the liquidation estate.

Bankruptcy – Institutional Infrastructure

• Insolvency Regulator

• Insolvency Professional

• Information Utilities.

• Adjudicating Authorities

Bankruptcy – Priority of Claims

• Any cost of Bankruptcy resolution

(including interim finance).

• Secured Creditors and Workmen dues for

the preceding 24 months rank highest in

priority.

• Other unsecured Financial creditors

• Central and state Government Dues (Under

the earlier regime, Government dues were immediately

below the claims of secured creditors and workmen in

order of priority.)

Thank you