Resolving Insolvency Questionnaire – Mumbai www.doingbusiness.org

Dear Contributor , We would like to thank you for your participation in the Doing Business project. Your expertise in the area of insolvency in Mumbai is essential to the success of the Doing Business report, one of the flagship publications of the World Bank Group that benchmarks business regulations in 190 economies worldwide. The resolving insolvency indicators, which measure the time, cost and outcome of insolvency proceedings involving domestic entities and the quality of the insolvency laws and regulations, are one of the 11 indicator sets published by the Doing Business report. The report attracts much attention around the world. The latest edition, Doing Business 2017: Equal Opportunity for All, introduced improvements in the paying taxes and protecting minority investors indicators, and included a gender component in 3 out of 11 Doing Business indicator sets. It received over 7,000 media citations within just a week of its publication on October 25, 2016 and the report was downloaded almost 40,000 times within that same period. A record 137 economies implemented a total of 283 reforms. Low and middle income countries carried out more than 75% of these reforms, with Sub-Saharan Africa accounting for 80 of them. Governments worldwide read the report with interest every year, and your contribution makes it possible for the Doing Business project to disseminate the regulatory best practices that continue to inspire their regulatory reform efforts. Since 2010, economies worldwide have implemented 121 insolvency reforms, including 24 economies in 2015/16. We are honored to be able to count on your expertise for Doing Business 2018. Please do the following in completing the questionnaire:

Be sure to update your name and address if necessary, so that we can mail you a complimentary copy of the report.

Describe in detail any reform that has affected the process for resolving insolvency since June 1, 2016.

Review the assumptions of the case study before updating last year's information in the questionnaire.

Kindly return the questionnaire to dbinsolvency@worldbank.org.

We thank you again for your invaluable contribution to the work of the World Bank Group. Sincerely,

Olena Koltko Tel: (202) 473-5211 Fax: (202) 473-5758 dbinsolvency@worldbank.org

Maria Quesada Tel: (202) 473-3830 Fax: (202) 473-5758 dbinsolvency@worldbank.org

Faiza El Fezzazi El Maziani Tel: (202) 473-7673 Fax: (202) 473-5758 dbinsolvency@worldbank.org

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1. DEFINITIONS OF TERMS USED IN THIS QUESTIONNAIRE In completing sections 4 and 5 of the questionnaire, please keep in mind the following definitions: “Foreclosure” is a process through which a secured creditor brings a claim in court demanding to

recover the balance of a secured loan when the debtor fails to make payment. The claim is satisfied through sale of the assets used as collateral. For the purpose of this study, foreclosure refers to a

substantive review by a court of the merits of the creditor‘s claim and the debtor‘s possible defense in formal court proceedings, as well as the subsequent enforcement of the judgment through sale of the assets. Foreclosure includes enforcement of security interests other than real estate mortgages.

“Insolvency” means that a debtor is generally unable to pay its debts as they mature and/or that its liabilities exceed the value of its assets. “Insolvency representative” is a person or body (including one appointed on an interim basis) authorized in insolvency proceedings to administer, supervise, oversee or monitor the reorganization or the liquidation of the insolvency estate. “Liquidation” is a process of assembling and selling the assets of an insolvent debtor in order to dissolve it and distribute the proceeds to its creditors. Liquidation may include the piecemeal sale of the debtor‘s assets or the sale of all or most of the debtor‘s assets as a going concern. For the purpose of this study, the term Liquidation refers only to formal in-court proceedings and does not include voluntary winding up of a company. “Post-commencement credit” refers to new funding provided to an insolvent company after the start of insolvency proceedings by existing or new creditors to finance the on-going operations of the insolvent company during the insolvency process. For the purpose of this study, the term post-commencement credit does not include new loans offered as part of a reorganization plan. “Receivership” is the process of appointment by a court, a contract or a government official of a receiver to take custody of the property, business, rents and profits of a debtor that has breached the terms of its borrowing from a creditor with an enterprise charge. A receiver may be authorized to continue the debtor‘s business before selling the business as a going concern or before selling the assets separately to satisfy the debt. For the purpose of this study, the term receivership refers only to formal in-court proceedings. “Reorganization” is a process through which the financial well-being and viability of a debtor's business may be restored based on a reorganization plan, so that the business can continue to operate through means that may include debt forgiveness, debt rescheduling, debt equity conversions and sale of the business (or parts of it) as a going concern. For the purpose of this study, the term reorganization refers only to formal in-court proceedings available to all commercial debtors and does not include schemes of arrangement, out-of-court agreements with creditors or reorganization before administrative bodies. “Reorganization plan” is a plan by which the financial well-being and viability of the debtor‘s business can be restored.

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2. REFORMS AND STATISTICS 2.1. Have there been any reforms in the area of corporate insolvency between June 1, 2016, and now, including any developments in the laws or practices relating to foreclosure, liquidation or reorganization? Please describe.

Response Description

Yes IThe Insolvency and Bankruptcy Code, 2016 (the Code hereafter) is a landmark reform vis-a-vis the debt recovery, insolvency and bankruptcy regime of India. The Code has provided a market determined, time bound mechanism for orderly resolution of insolvency, wherever possible, and ease of exit, wherever required. The main focus of this legislation is at provision of assistance with resurrection and resolution in a time bound manner. The Code has put forth an overarching framework to aid sick companies in Reviving it's sick unit(s), if not, Winding up their business. Notably, the Code has also empowered the operational creditors (workmen, suppliers etc.) to initiate the insolvency resolution process if default occurs. Another important feature of the Code is that it does not make any distinction between the rights of international and domestic creditors or between classes of financial institutions. The Code has sought to balance the interest of all the stakeholders including alteration in the order of priority of payment of Government dues. * All the new elements of the Indian corporate insolvency ecosystem, namely, the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT), the Insolvency Professionals (IP), the Insolvency Professional Agency (IPA), the Insolvency Professional Entity (IPE) and the Insolvency and Bankruptcy Board of India (IBBI) are in place. Eleven benches of the NCLT, 977 insolvency professionals, 3 IPAs and 2 IPEs are in operation all over the country. * All rules and regulations with respect to the Code for facilitation of corporate insolvency resolution process and liquidation process have been and are being notified. Details available at : http://nclt.gov.in/notifications.html Code available at: http://www.mca.gov.in/MinistryV2/insolvency+and+bankruptcy+code.html Chapter II on ―Corporate Insolvency Resolution Process‖ has been notified and is operational since December 1, 2016. According to Section 14(2) of the Insolvency Code, ―The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.‖ The order of moratorium shall have effect from the date of the initiation of the insolvency resolution process till its completion. The new framework puts in place the following important

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reforms: i) Since the matters would be adjudicated by NCLT, the requirement of attorney fee and stamp duty are no more applicable under the Code. The costs would comprise the application fee with the Tribunal (ranging from INR 2000 - 25,000), costs for notification and publication of announcement in local newspapers (INR 25,000), and professional engagement fee of the insolvency representative which is market determined. ii) A Corporate Debtor can initiate reorganization or liquidation proceedings (refer section 10 of the Insolvency & Bankruptcy Code, 2016 (the Code) and section 271 of the Companies Act, 2013). (iii) The Code (Sections 7, 8 and 9) read with the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides for the insolvency resolution process to be initated by a creditor. The proceedings under section 7 or 9 of the Code, as the case may be, can result in liquidation under conditions laid down under section 33 of the Code. Sub-section 3 of section 33 read with the Liquidation Regulations, 2016 lays down that the Tribunal can pass a liquidation order on decision of Committee of Creditors to liquidate the corporate debtor, anytime during the corporate insolvency resolution process or in the event that the resolution proceedings fail [which can be as early as the first meeting of the Committee]. The framework, therefore, allows for both liquidation and reorganization options to the creditor. (iv) The framework specifically allows for continuation of existing contracts supplying essential services and goods to performing contracts to the corporate debtor, essential for its survival. According to Section 14(2) of the Code, ―The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.‖ The order of moratorium shall have effect from the date of the initiation of the insolvency resolution process till its completion. Section 20 of the Code may also be referred to. (v) The Code specifically provides for the possibility of the debtor obtaining credit after commendment of insolvency proceedings (post-commencemnt finance). The Code (Section 20(2)(c), 25(2)(c) and 28(1)(a)) provides that a resolution professional can raise interim finance to function during the insolvency proceedings. (vi) Section 30(2)(a), 53(1)(a) read with Section 5(13) and Section 5(15) of the Code prioritises post commencement credit. Section 53(1)(a) of the Code prioritises insolvency resolution process costs and liquidation costs paid in full while distributing the proceeds from sale of the liquidation assets. Section 5(13) (a) of the Code provides that ‗insolvency resolution process cost‘ means the amount of any interim finance and cost incurred in raising such finance. Section 5(15) of the Code provides that ‗interim finance‘ means any financial debt raised by the resolution professional during the insolvency resolution process period. (vii) The Code divides creditors into two classes - financial creditors and operational creditors. The Code requires (Section 21) that a Committee of Creditors be constituted of all financial creditors (in certain circumstances, of operational creditors). The resolution (reorganization) plan has to be approved by creditors representing 75% voting power, where a creditor has voting power in proportion to the value of debt. (viii) The Code requires that dissenting creditors receive as much under the reorganization plan as they would have received in liquidation. Regulation

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38(1)(c) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 makes it mandatory requirement of the resolution plan to provide for liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan. Section 30(2)(b) of the Code provides for repayment of the debts of operations creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53. Regulation 35(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 defines liquidation value as the estimated realisable value of the assets of the corporate debtor, if it were to be liquidated on the insolvency commencement date. (ix) The Resolution Professional is appointed by Tribunal as per the resolution of the Committee of Creditors [section 22 of the Code]. Section 22 (2) of the Code provide that the Committee of Creditors may, in the first meeting, by a majority vote of not less than 75% of the voting share of the financial creditors, either resolve to appoint the interim resolution professional as a resolution professional or to replace him with another resolution professional. (x) As per Section 29(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the sale of assets of the debtors requires the approval of the Committee of Creditors, set up under Chapter V of the same regulations. Section 28(1)(k) provides that resolution professional shall not transfer rights or financial debts or occasional debts under material contracts otherwise than in the ordinary course of business without the prior approval of the Committee of Creditors. All decisions of the committee of creditors (including a decision to sell the assets) must be taken by 75% of the financial creditors by value. (Section 21 (8) of the Code). (xi) Section 42 of the Code provides that a creditor may appeal to the Adjudicating Authority against the decision of the liquidator rejecting the claims within fourteen days of the receipt of such decision. 3. Chapter II on ―Corporate Insolvency Resolution Process‖ has been notified and is operational since December 1, 2016. According to Section 20(2)(c) and Section 25(2)(c) of the Code, the interim resolution professional shall have the authority to raise interim finance to function during the insolvency proceedings, subject to prior approval from the Committee of Creditors. 4. All rules and regulations with respect to the Code for facilitation of corporate insolvency resolution process and liquidation process were notified. 5. Section 5 of the Code defines ‗insolvency resolution process cost‘ as the amount of any interim finance and cost incurred in raising such finance. And defines ‗interim finance‘ as any financial debt raised by the resolution professional during the insolvency resolution process period. 6. As per Section 29(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution

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Process for Corporate Persons) Regulations, 2016, the sale of assets of the debtors requires the approval of the Committee of Creditors, set up under Chapter V of the same regulations. 7. With regard to the question "Based on the procedure you selectied in Question 4.1, how much will the entire process cost" the response would be 0.78% as NCLT is not a court in the traditional sense, the requirement of attorney fee and stamp duty are no more applicable under the Code. In this case, the costs would comprise application fee with the Tribunal (INR 2,000-25,000) and professional

2.2. Are any reforms in the area of corporate insolvency expected to come into effect prior to June 1, 2017, or in the longer term? Please describe.

Response Description Yes Reforms in the area of corporate insolvency expected to take shape and bear

results prior to June 1, 2017 include the following – * Voluntary Liquidation of corporate persons * Fast Track Corporate Insolvency Resolution Process * Ahead of contemporary global standards in the area, a unique reformist structure in the form of Information Utilities is also embedded in the Code to ensure timely transactions. Regulations for the same were notified on March 31 2017. (Details at: http://www.ibbi.gov.in/Press%20Release%20for%20IU-1.pdf, http://www.ibbi.gov.in/IBBI%20%20Information%20Utility%20in%20Hindi.pdf)

2.3. How many insolvency cases involving commercial entities did you or your firm handle in 2016? Please count all foreclosure, liquidation and reorganization proceedings completed between January 1 and December 31, 2016, or pending as of December 31, 2016.

Response Precise number or approximate estimate

-Click to Select- Not Applicable

2.4. How many insolvency cases against commercial entities were filed in your economy in 2016? Please provide the estimates for foreclosure, liquidation and reorganization proceedings separately. Please note that we do not consider cases that involve unincorporated sole proprietorships.

Response Precise number or approximate estimate

(d) 51-100 As regards the new regime of the Code, in a short span, 67 cases have been filed till date across 11 NCLT benches. Some of them involve large defaults (above INR 10 billion).

2.5. In your opinion, what proportion of distressed businesses filing for insolvency continued to operate as a going concern upon completion of insolvency proceedings in 2016, including sale as a going concern through liquidation as well as through reorganization? Please provide details in the comments section, if any, or reference to available statistics.

Response Comment

75-100% As regards proceedings under the Code, such details are not available.

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3. CASE STUDY ASSUMPTIONS Please answer the questions in section 4 of this questionnaire on the basis of the case study assumptions below. (a) Mirage is a local limited liability company that runs a hotel in Mumbai; its only asset and source of income is the hotel property. The value of the hotel is INR 12,866,614. On January 1, 2011, Mirage signed a 10-year loan agreement with BizBank, a local bank. The loan was secured by the hotel property and/or by a universal business charge (an enterprise charge) in those economies where this type of collateral is allowed. BizBank‘s outstanding credit is INR 12,866,614, which represents 74% of Mirage‘s total outstanding debt. The outstanding amount owed to BizBank is exactly equal to the market value of the hotel business. (b) Unsecured creditors (e.g. suppliers, tax authorities and employees) hold the remaining 26% of Mirage‘s debt, which is equivalent to INR 4,520,702. Among unsecured creditors, the largest group is Mirage‘s suppliers (50 in total), all of which are owed payment for their last deliveries. (c) Mirage‘s founder owns 51% of the company and is the chairman of its board of directors (or equivalent supervisory body). No other shareholder holds more than 5% of the voting power. The company has a professional general manager and 201 employees. All parties in this scenario are local entities or citizens. The founder and Mirage‘s management both want to keep the firm operating. (d) Today is January 1, 2017. Since the execution of the loan agreement with BizBank, Mirage has met all conditions of its loan and made all payments on time. However, at the end of 2016, Mirage experienced an unexpected operating loss due to worsened market conditions. As a result, Mirage will default on its next loan payment to BizBank, which is due tomorrow, January 2, 2017. Mirage can neither obtain a new loan from another financial institution nor renegotiate its current loan with BizBank. (e) The company expects to have negative net worth and operating losses in both 2017 and 2018. The company‘s expected 2017 cash flow will cover all operating expenses, including supplier payments, salaries, maintenance costs and taxes. It will not cover principal or interest payments to BizBank. (f) If Mirage is sold as a going concern (i.e. as a business that has the resources needed in order to continue to operate in the foreseeable future), it would fetch 100% of its current market value. But if Mirage‘s assets are sold piecemeal, they would fetch only 70% of Mirage‘s current market value.

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4. CHOICE OF PROCEDURE, APPLICABLE LAWS AND GENERAL ESTIMATES Please update the data in this section on the basis of the case study assumptions in section 3. For your convenience, we have included, where available, a summary of the responses provided by our contributors last year to the same questions. Because they represent the responses from all Doing Business contributors in your economy, they may not match the specific answers that you or colleagues in your firm provided last year. 4.1. According to common practice in Mumbai, which in-court procedure is most likely to apply in Mirage's case? Please explain why, in your opinion, this would be the most likely procedure. Please refer to definitions of possible procedures in section 1.

Last Year This Year

Procedure Comment Procedure Comment Foreclosure To enforce its security interest,

Bizbank would file a petition to the Debt Recovery Tribunal, governed by The Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The debtor or other creditors will object before the High Court.

Reorganization Resolution (reorganization) appears to be the most likely option in Mirage‘s case, as it will preserve value for all stakeholders. Mirage's current financial position appears to be owing to worsened market conditions, which is normal in business cycles. In 2017, cash flow will cover all operating expenses, though not principal or interest payments. If the operating expenses are met, reorganization may lead to Mirage continuing as a going concern. Further, the founder and the management wish to keep the firm operating. From the creditors' point of view also, liquidation, leading to piecemeal sale of assets, will enable them recover 70% of Mirage's market value only whereas reorganization will ensure preservation of full value. Thus, it will be in mutual interest of all stakeholders to preserve the organisational capital and opt for reorganization of the firm and maximise value therefrom. The reorganization process can be triggered by the financial creditor, namely BizBank, the other creditors including operational creditors, namely the suppliers, tax authorities and employees. It can also be triggered by Mirage. Thus, they will prefer reorganization as it is less costly, time bound with very high probability of success.

4.2. Which court will be involved in Mirage’s case? For example, Mirage's management applies to a city court for reorganization or BizBank commences judicial foreclosure proceedings in a commercial court.

Last Year This Year

Debt Recovery Tribunal and the High Court The National Company Law Tribunal, Delhi Bench

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4.3. Based on the procedure you selected in question 4.1, will the hotel be able to continue operating upon completion of the entire insolvency process? Please explain why, in your opinion, this would be the most likely outcome. Please note that the hotel may survive as a going concern either through continuation of its operations or through a sale as an operating whole. Going concern means that a business has the resources and viability needed in order to continue to operate in the foreseeable future.

Last Year This Year

Response Comment Response Comment No, the hotel will stop operating and Mirage assets will be sold piecemeal

The reason for initiation of insolvency process by BizBank is that the hotel is unable to pay its debts and the hotel expects operating losses in 2016 as well as 2017. Hence, in order to pay the debts of the Bank the assets of the hotel will be sold piecemeal and the hotel will stop operating.

Yes, the hotel will continue operating as a going concern Even though the current financial position of Mirage has deteriorated owing to worsened market conditions, which is normal in business cycles, it has the potential to operate as a going concern as hospitality/hotel industry is doing good and expected to remain buoyant in medium to long term due to continuing fast growth of Indian economy. Indian economy is still the fastest growing economy in the world and the Indian growth story remains intact reflected by surge in Indian stock market indices, particularly on back of robust portfolios inflows into the stock market from domestic financial institutions and retail investors through mutual fund route. The default is not on account of mischief or willful default. It is also not attributable to inefficiency of the business. The cash flow will be able to meet operating expenses in 2017, though not principal or interest payments. The founder and the management wish to keep the firm operating. As the organizational capital is preserved, and cash flow is able to cover operating expenses, it may be in the mutual interest of all stakeholders to reorganize the firm and maximise its value. Reorganization will provide Mirage an opportunity to recover and function as a going concern. Liquidation, leading to piecemeal sale of assets of a business otherwise doing well, will enable the creditors to recover only 70% of Mirage's market value whereas reorganization will ensure preservation of full value.

4.4. Based on the procedure you selected in question 4.1, how long will the entire insolvency process take? Please provide the most likely estimate based on your experience. Please, indicate the main procedural steps required to complete the entire process and how much time each procedural step will take in practice. The time begins at the moment of Mirage’s default and ends when BizBank is repaid all or some of the money owed to it. If the procedure is reorganization, the

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timeframe ends when the reorganization plan is approved. If the initial procedure is converted from one to another, please take into account the time of the second procedure as well.

Last Year This Year

Response Comment Response Comment 52 months Bizbank will apply to the Debt

Recovery Tribunal to enforce its security. This will take a couple of months. But other creditors (including tax authorities) and Mirage itself will file objections in front of the High Court, which will delay the proceedings substantially. Given the high backlog of cases in India's High Courts, the foreclosure procedure until BizBank is repaid some or all of the money owed to it takes about 4.3 years.

2 months On occurrence of default in payment of debts on maturity, an application for the reorganization process will be made before the NCLT, Delhi Bench (Adjudicating Authority). The NCLT will ascertain the existence of default within 14 days of receipt of the application under (Section 7(4) of the Code). Once NCLT admits the application, the corporate insolvency reorganization process can be completed in less than 45 days. In the instant case, Mirage has few operational creditors and one financial creditor and the insolvency representative will not require much time to complete the reorganization process. The Committee of Creditor can decide the reorganization plan quickly as BizBank can take a quick decision and the entire reorganization process can therefore be completed within 60 days.

Based on your experience and the same case study assumptions, what can be the fastest time in practice to complete the applicable procedure?

1.5 months In all probability Mirage will be eligible for the Fast Track Corporate Insolvency Resolution Process. The process of reorgaization will be completed in one meeting of the Committee of Creditors and the fastest period for reorganization will be 1.5 months (14 days with Appelate Authority and 30 days for reorganization)

Based on your experience and the same case study assumptions, what can be the longest time in practice to complete the applicable procedure?

3.5 months In practice this case may be done within the fastest time (as stated earlier, 1.5 months). The longest time, in practice, in the case of reorganisation of Mirage will be 3.5 months. This indicates the maximum time provided under the Code to complete the Fast Track Process (30 days), for which Mirage will be eligible, if debtors and creditors conduct the process in a lazy manner.

If there is a difference between the fastest and longest time estimate, what is the main reason behind the difference?

The difference between the minimum and maximum takes into account the longest periods available for the insolvency process to get completed under the Code. However, in the instant case, where the creditors and other stakeholders may be in unison regarding the feasibility of the insolvency process, much time may not be required. Information requirements in the process of reorganization here may also be furnished faster.

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4.5. Based on the procedure you selected in question 4.1, how much will the entire process cost? Please provide the most likely estimate based on your experience. The estimate below should be expressed as percentage of the value of Mirage’s estate, which is INR 12,866,614. Please indicate the applicability of and the estimates for the following cost components: court fees, fees of lawyers, insolvency representatives, auctioneers and other professionals involved in the proceedings, and all other applicable fees and costs. Not all of the fee categories listed below may be applicable in your country. If the initial procedure is converted from one to another, please take into account the cost of the second procedure as well.

Last Year This Year

Response Comment Response Comment Total Cost 9% The costs associated with

the case would amount to approximately 9% of the value of the debtor's estate. Costs incurred during the entire foreclosure process mainly include court or government agency fees (INR 300,000, according to Mumbai Court fees Act, 1959), attorney fees (INR 100,000), costs of notification and publication (INR 25,000), fees of accountants, assessors, inspectors and other professionals (INR 100,000), fees of auctioneers (INR 50,000), fees of service providers and/or government levies (INR 100,000-200,000), and other fees (INR 100,000).

0.78 %

Since NCLT is not a court in the traditional sense, the requirement of attorney fee and stamp duty are no more applicable under the Code. In this simple case, the costs would comprise the application fee with the Tribunal (ranging from INR 2000 - 25,000), costs for notification and publication of announcement in local newspapers (INR 25,000), and professional engagement fee of the insolvency representative which is market determined. Given the lack of complexity of the case it is unlikely to exceed INR 50,000.

Court fees 0.19 %

INR 25,000/-

Attorney's fees % Not necessary

Fees of insolvency representative or receiver 0.39 %

INR 50,000/-

Auctioneer's fees % Not Applicable

Fees of accountants and other professionals % Not Necessary

Other (please specify) 0.19 %

INR 25,000 (cost of publication)

4.6. What laws and supporting regulations/rules will apply in Mirage's case?

Last Year This Year Companies Act (1956), Recovery of Debts Due to Banks and Financial Institutions Act (1993), Income Tax Act (1961); Code of Civil Procedure (1908)

The Insolvency and Bankruptcy Code, 2016 and the rules and regulations made thereunder. Details available at:

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http://www.mca.gov.in/MinistryV2/insolvency+and+bankruptcy+code.html

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5. LEGAL FRAMEWORK This section focuses on the legal framework applicable to judicial REORGANIZATION and LIQUIDATION of commercial entities (personal insolvency excluded) in your economy. When answering the questions in this section, please keep in mind the applicable legal framework and specify the relevant article of the law for each answer. If the legal framework has no provisions explicitly addressing the questions below, please indicate so in your answers. For your convenience, we have included a summary of the responses provided by our contributors last year to the same questions. Because they represent the responses from all Doing Business contributors in your economy, they may not match the specific answers that you or colleagues in your firm provided last year. Please refer to section 1 for definitions of legal terms used below. 5.1. COMMENCEMENT OF PROCEEDINGS 5.1.1. What insolvency procedures are available to a DEBTOR when commencing insolvency proceedings?

Last Year This year

Response Comment/Legal Basis Response Comment/Legal Basis (b) Debtor may file for liquidation only

A company may file an application for its winding up (section 439(1)(a), Companies Act of 1956). No judicial reorganization in India.

(a) Debtor may file for both liquidation and reorganization The Insolvency & Bankruptcy Code, 2016 (the Code) read with the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides for a framework wherein a debtor can file application for resolution of corporate insolvency (Section 6 and 10) and on its admission the process begins. After the process starts, the Committee of Creditors will approve the resolution plan or they may decide to go for liquidation. A corporate debtor who has not committed default may also initiate liquidation proceeding (Section 59) subject to creditors representing two thirds in value of debt approving the same. A company (corporate debtor) can initiate liquidation proceedings directly under section 271 of the Companies Act, 2013. Details available at: (http://www.mca.gov.in/MCASearch/search_table.html)

5.1.2. Does the insolvency framework allow a CREDITOR to file for insolvency of the debtor?

Last Year This year

Response Comment/Legal Basis Response Comment/Legal Basis (b) Yes, but a creditor An application for winding up (a) Yes, a creditor may file for both liquidation and reorganization The Insolvency & Bankruptcy

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may file for liquidation only

can be petitioned by a creditor (Section 439(1)(b), the Companies Act, 1956). No judicial reorganization in India.

Code, 2016 (the Code) read with the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides for a framework wherein a debtor can file application for resolution of corporate insolvency (Section 6 and 10) and on its admission the process begins. After the process starts, the Committee of Creditors will approve the resolution plan or they may decide to go for liquidation. A corporate debtor who has not committed default may also initiate liquidation proceeding (Section 59) subject to creditors representing two thirds in value of debt approving the same. A company (corporate debtor) can initiate liquidation proceedings directly under section 271 of the Companies Act, 2013. Details available at: (http://www.mca.gov.in/MCASearch/search_table.html)

5.1.3. What basis for commencement of insolvency proceedings is allowed under the insolvency framework? If different tests are available in your economy for different proceedings, please explain the distinctions in the comment section.

Last Year This year

Response Comment/Legal Basis Response Comment/Legal Basis (a) Debtor is generally unable to pay its debts as they mature

A company may be wound up by the tribunal if the company is unable to pay its debts. A company shall be deemed to be unable to pay its debts: i) if a creditor has served on the company a demand requiring the company to pay the sum due (exceeding INR 100,000) and the debtor has for three weeks neglected to pay the sum; ii) if it is proved to the satisfaction of the tribunal that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the tribunal shall take into account the contingent and prospective liabilities of the company (sections 433 and 434, Companies Act of 1956).

(a) Debtor is generally unable to pay its debts as they mature In order to commence the insolvency proceedings, the standard test used, is that the debtor is generally unable to pay its debts on maturity. Section 6 of the Code provides that where a corporate debtor has defaulted in paying a debt which has become due, the corporate insolvency resolution process may be initiated. The Code (Section 4(1)) provides for insolvency resolution where minimum amount of default is INR 100,000. Section 3(12) of the Code defines default as non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

5.2. MANAGEMENT OF DEBTOR'S ASSETS

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5.2.1. Does the insolvency framework explicitly provide for the continuation of existing contracts supplying essential goods and services to the debtor (goods and services necessary for the survival of the business)?

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Response Comment/Legal Basis Response Comment/Legal Basis No The only applicable provision states

that a liquidator has the power, with the sanction of the tribunal, to carry on the business of the company so far as may be necessary for the beneficial winding up of the company (section 457(1)(b) of the Companies Act, 1956). However, no specific provisions on continuation of essential contracts.

Yes The Code provides that the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period (Section 14(2)). Essential goods and services have been listed under Regulation 32 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The Code provides for management of the operations of the corporate debtor as a going concern and enjoins upon the resolution professional to preserve the value of the company as a going concern (Section 20, 25).

5.2.2. Does the insolvency framework explicitly provide for the rejection by the debtor (or by insolvency representative or by court on debtor’s behalf) of overly burdensome contracts (the cost of performance is greater than the benefit to be received), where both parties have not fully performed their obligations?

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Response Comment/Legal Basis Response Comment/Legal Basis Yes Where any part of the property of a

company which is being wound up consists of unprofitable contracts, the liquidator of the company, notwithstanding that he has done anything in pursuance of the contract, may, with the leave of the Tribunal, disclaim the contract (section 535 of the Companies Act, 1956).

Yes The resolution professional has the powers of the management, including the power to enforce or terminate contracts (Sections 17, 20 read with Section 23 (2)). Further, the Liquidation Regulations notified by the IBBI have provisions on disclaimer of onerous property and contracts (Regulation 10). Under Section 50(1) of the Code the resolution professional may make an application for avoidance of extortionate credit transactions to the Adjudicating Authority if the terms of such transaction required exhorbitant payments to be made by the corporate debtor. Regulation 5 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 defines an extortionate credit transaction as one where the terms require the corporate debtor to make exhorbitant payments in respect of the credit provided or are unconscionable under the principles of law relating to contracts.

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Liquidation Regulations available at: http://www.mca.gov.in/MinistryV2/insolvency+and+bankruptcy+code.html

5.2.3. Does the insolvency framework explicitly provide for the avoidance (invalidation) of the following transactions concluded before the filing for insolvency/commencement of insolvency proceedings?

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Response Comment/Legal Basis Response Comment/Legal Basis

(a) Preferential transactions, which resulted in a creditor obtaining more than its pro rata share of the debtor‘s assets and which occurred when the debtor was insolvent or resulted in the debtor becoming insolvent

Yes Any transfer of the company's property or payment by way of a fraudulent preference to a creditor made by the company within 6 months before the winding-up petition, shall be invalid (section 531, the Companies Act).

Yes The Code provides for the avoidance of preferences given by the corporate debtor to the related parties before insolvency has set in (Section 43-44).

(b) Undervalued transactions, which were made as a gift or in exchange for less than equivalent value and which occurred when the debtor was insolvent or resulted in the debtor becoming insolvent

Yes Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of business or in favor of a purchaser or encumbrancer in good faith and for valuable consideration, if made, within a period of one year before the presentation of a petition for winding up by the Tribunal or the passing of a resolution for voluntary winding up of the company shall be void against the liquidator. (Section 531A, the Companies Act)

Yes Section 45-49 of the Code provide for the avoidance of undervalued transactions such as gifts and transactions where the value of the consideration received by the corporate debtor is significantly less than the value provided by such corporate debtor. They also define the relevant period for such transactions to be considered for this purpose.

5.2.4. Does the insolvency framework explicitly provide for the possibility of the debtor obtaining credit after commencement of insolvency proceedings (post-commencement credit) to finance its on-going needs during the proceedings? The term post-commencement credit does not include new loans offered as part of a reorganization plan, but includes loans issued after commencement of insolvency proceedings and before approval of a reorganization plan.

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Response Comment/Legal Basis Response Comment/Legal Basis No The only applicable provision is Section

457(1)(d) of the Companies Act of 1956, which establishes that the liquidator in a winding-up by the court may raise on the security of the assets of the company any money requisite.

Yes Post Commencement credit is known as interim finance in the Code. The Code (Section 20(2)(c), 25(2)(c) and 28(1)(a)) provides that a resolution professional can raise interim finance to

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However, this is different from regular post-commencement credit provisions, which allow new loans with or without security.

function during the insolvency proceedings, subject to prior approval from the Committee of Creditors.

5.2.5. Does the insolvency framework assign priority to post-commencement credit?

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Response Comment/Legal Basis Response Comment/Legal Basis (c) No priority is assigned to post-commencement creditors

No applicable provisions (a) Yes, over all pre-commencement creditors, secured or unsecured Section 30(2)(a), 53(1)(a) read with Section 5(13) and Section 5(15) of the Code prioritises post commencement credit. Section 53(1)(a) of the Code prioritises insolvency resolution process costs and liquidation costs paid in full while distributing the proceeds from sale of the liquidation assets. Section 5(13) (a) of the Code provides that ‗insolvency resolution process cost‘ means the amount of any interim finance and cost incurred in raising such finance. Section 5(15) of the Code provides that ‗interim finance‘ means any financial debt raised by the resolution professional during the insolvency resolution process period.

5.3. REORGANIZATION PROCEEDINGS 5.3.1. Which creditors vote on the proposed reorganization plan?

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Response Comment/Legal Basis Response Comment/Legal Basis N/A No judicial reorganization in

India. (b) Only those creditors whose rights are modified or affected by the plan The Code requires (Section 21)

that a Committee of Creditors be constituted of all financial creditors (in certain circumstances, of operational creditors). The resolution plan has to be approved by creditors representing 75% voting power, where a creditor has voting power in proportion to the value of debt.

5.3.2. Does the insolvency framework require that the following provisions must be followed in order for the reorganization plan to be approved?

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Response Comment/Legal Basis Response Comment/Legal Basis

(a) Creditors entitled to vote on the reorganization plan are divided into classes according to their

N/A No judicial reorganization in India.

Yes The Code requires (Section 21) that a Committee of Creditors be constituted of all financial creditors (in certain circumstances, of operational creditors). The resolution plan has to be approved by creditors representing 75%

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respective rights voting power, where a creditor has voting power in proportion to the value of debt. The Code enables consideration of ‗n‘ resolution plans and approval of the best by the Committee of Creditors. If these are to be voted by different classes of creditors, each class of creditors will approve the best from its perspective. Consequently, there may be more than one approved plans with each being the best for a class of creditors, and not the best for all. In that case, another body or person would be required to approve / select the plan out of the more than one approved plans for implementation or there will be unending disputes. It is important to note that any resolution plan would impact rights / interests of all creditors. The Code, therefore, provides for at least the liquidation value to be given to dissenting creditors. These are sufficient safeguards to ensure that large creditors do not discriminate against smaller creditors while the debtor get the best resolution plan.

(b) Each class of creditors votes separately

N/A No judicial reorganization in India.

No The Code requires (Section 21) that a Committee of Creditors be constituted of all financial creditors (in certain circumstances, of operational creditors). The resolution plan has to be approved by creditors representing 75% voting power, where a creditor has voting power in proportion to the value of debt. The Code enables consideration of ‗n‘ resolution plans and approval of the best by the Committee of Creditors. If these are to be voted by different classes of creditors, each class of creditors will approve the best from its perspective. Consequently, there may be more than one approved plans with each being the best for a class of creditors, and not the best for all. In that case, another body or person would be required to

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approve / select the plan out of the more than one approved plans for implementation or there will be unending disputes. It is important to note that any resolution plan would impact rights / interests of all creditors. The Code, therefore, provides for at least the liquidation value to be given to dissenting creditors. These are sufficient safeguards to ensure that large creditors do not discriminate against smaller creditors while the debtor get the best resolution plan.

(c) Creditors of the same class receive the same treatment under the reorganization plan

N/A No judicial reorganization in India.

N/A

5.3.3. Does the insolvency framework require that a reorganization plan must specify that the anticipated return to dissenting creditors will be at least equal to the return that they would obtain in a liquidation?

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Response Comment/Legal Basis Response Comment/Legal Basis N/A No judicial reorganization in India. Yes Regulation 38(1)(c) of Insolvency and

Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 makes it mandatory requirement of the resolution plan to provide for liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan. Further, section 30(2)(b) of the Code provides for repayment of the debts of operations creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53. Regulation 35(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 defines liquidation value as the estimated realisable value of the assets of the corporate debtor, if it were to be liquidated on the insolvency commencement date.

5.4. CREDITOR PARTICIPATION

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5.4.1. Does the insolvency framework explicitly require that creditors (through either a decision of the creditors’ meeting or a decision of the creditors’ committee) appoint the insolvency representative or approve/ratify/reject the appointment of the insolvency representative?

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Response Comment/Legal Basis Response Comment/Legal Basis No The official liquidator is appointed by the

tribunal, after listening to the views or opinions of the secured creditors and workmen (section 448, Companies Act of 1956).

Yes The applicant under section 7,9 or 10, as the case may be, propose the name of the Interim Resolution Professional. The appointment is made by the Tribunal, which can disallow the creditor‘s choice only on the limited ground of disciplinary proceedings pending against the IP in question. The Resolution Professional shall be appointed by Tribunal as per the resolution of the Committee of Creditors (comprising of financial creditors). [section 22 of the Code]. Section 22 (2) of the Code provide that the Committee of Creditors may, in the first meeting, by a majority vote of not less than 75% of the voting share of the financial creditors, either resolve to appoint the interim resolution professional as a resolution professional or to replace him with another resolution professional.

5.4.2. Does the insolvency framework explicitly require that creditors (through either a decision of the creditors’ meeting or a decision of the creditors’ committee) approve the sale of substantial assets of the debtor, if such sale is made in the course of the insolvency proceedings?

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Response Comment/Legal Basis Response Comment/Legal Basis No The liquidator has the power to sell the

immovable and movable property and actionable claims of the company by public auction or private contract, with approval from the tribunal but not of the creditors (section 457, Companies Act of 1956).

Yes Under the Code, read with the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, substantial sale of assets of the corporate debtor is not envisaged as the purpose is to maintain the business of the corporate debtor as a going concern. Under Regulation 29(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the resolution professional may sell unencumbered asset(s) of the corporate debtor, other than in the ordinary course of business, if he is of the opinion that such a sale is necessary for a better realisation of value under the facts and circumstances of the case, subject to the approval of the Committee of Creditors. However, the book value of all such sold during corporate insolvency resolution process period in aggregate under this Regulation shall not exceed ten percent of the total claims admitted by the interim resolution

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professional.

5.4.3. Does the insolvency framework explicitly provide that an individual creditor has the right to request at any time information from the insolvency representative on the debtor’s business and financial affairs?

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Response Comment/Legal Basis Response Comment/Legal Basis Yes Any creditor of the company may, if the

Supreme Court, by rules prescribed, so permit and in accordance with and subject to such rules but not further or otherwise, inspect the books and papers of the company (section 549(1) of the Companies Act, 1956). The Supreme Court rules of 1966 (Order XII) allow the inspection of records of the case.

Yes Sections 29 (2) of the Code provides as follows. 29. (1) The resolution professional shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan. (2) The resolution professional shall provide to the resolution applicant access to all relevant information in physical and electronic form, provided such resolution applicant undertakes— (a) to comply with provisions of law for the time being in force relating to confidentiality and insider trading; (b) to protect any intellectual property of the corporate debtor it may have access to; and (c) not to share relevant information with third parties unless clauses (a) and (b) of this sub-section are complied with. Regulation 36 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that a resolution professional shall suo motu, submit an information memorandum in electronic form to each member of the Committee of Creditors and any potential resolution applicant containing elaborate financial information and other important information of the corporate debtor, as specified. In case a member of the Committee requires further information, the resolution professional shall provide such information to all members within reasonable time

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(Regulation 36(3)). Further, Section 21 of the Code, provides that,- …………. (9) The committee of creditors shall have the right to require the resolution professional to furnish any financial information in relation to the corporate debtor at any time during the corporate insolvency resolution process. (10) The resolution professional shall make available any financial information so required by the committee of creditors under sub-section (9) within a period of seven days of such requisition.‖

5.4.4. Does the insolvency framework explicitly provide that an individual creditor has the right to object to the decision accepting or rejecting its own claims AND claims of other creditors?

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Response Comment/Legal Basis Response Comment/Legal Basis No There is no specific provision. However,

under section 518 of the Companies Act, a creditor may apply to the tribunal to determine any question arising in the winding up of a company.

Yes Section 42 of the Code provides that a creditor may appeal to the Adjudicating Authority against the decision of the liquidator rejecting the claims within fourteen days of the receipt of such decision.Further, section 60(5) of the Code also provides for National Company Law Tribunal to have jurisdiction in this regard.

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