Corporate recovery - Page 2 of 2

Winding Up Of A Company – IBC, 2016 Vs Companies Act, 2013

October 3, 2022 by Amit Karia

Reading Time: 3 minutes

There are several grounds on which a company may be wound up in India. The two major laws governing winding up of a company are the Insolvency and Bankruptcy Code (IBC), 2016 and the Companies Act, 2013.

In this blog, we’ll be looking at the grounds which are covered for winding up of a company under both these above named laws.

Winding Up Of A Company Under IBC, 2016
Voluntary Winding Up of Company Under IBC, 2016
Winding Up Of A Company Under Companies Act, 2013
Conclusion
Why Choose Incorp?
FAQs On Winding Up Of A Company

Winding Up of a Company under IBC, 2016

The ground for winding up ‘inability to pay debts’ was earlier covered under Section 271 of the Companies Act, 2013 and was one of the six grounds for winding up under that section. However after the passing of IBC, 2016, the said ground has been omitted from Companies Act, 2013 and is now exclusively covered under IBC, 2016.

Hence, if an entity is unable to pay debts and has committed a default of the minimum amount prescribed, it will have to undergo a process called ‘Corporate Insolvency Resolution Process’ (CIRP) under IBC,2016. The application can be filed by the creditors of the entity or by the entity itself. An attempt will be made to rescue the entity (corporate debtor) and revive it.

If the revival / rescue / rehabilitation is not possible within the prescribed timelines, then the entity will have to undergo winding up and a liquidator will be appointed to execute the process. Hence, the entity may or may not have to undergo liquidation, depending upon the result of insolvency resolution.

Voluntary Winding up of a Company Under IBC, 2016

Apart from the inability to pay debts, there is another mode of winding up a company under IBC called “Voluntary Winding Up.” Section 59 of IBC, 2016 provides that “A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under this chapter”.

The Code mandates a ‘Declaration of Solvency’ by majority of the directors of the company by passing a resolution verified by an affidavit stating that the liquidation is not for the purposes of defrauding anyone. This mode is applicable when the reason for winding up is other than insolvency like completion of the business / project of the company, completion of the duration for which the company was incorporated etc.

Winding Up of a Company under Companies Act, 2013

Grounds Covered under Companies Act, 2013

This is also referred to as ‘Compulsory Winding Up’ / ‘Winding Up by National Company Law Tribunal (NCLT)’ and Section 271 of the Companies Act, 2013 has provided 5 grounds for the same. As stated before, there was one more ground “Inability to pay debts” earlier, which has now been omitted from the Companies Act, 2013. The grounds prescribed are:

Special Resolution (SR) passed by the members for winding up by NCLT;
Actions against the sovereignty, integrity of India or security of the State or against public order / decency / morality;
Affairs conducted in a fraudulent manner or there is misconduct / misfeasance;
Default in filing financial statements or annual returns for 5 consecutive financial years;
Other just and equitable ground for winding up.

Conclusion

The lawmaker has tried to avoid an overlap between IBC, 2016 and Companies Act, 2013. The grounds under which a particular law would be applicable to the case are thoroughly prescribed. Some of the points to be checked before deciding upon the Law applicable are:

Whether the entity is insolvent or solvent
Whether the entity has defaulted in repayment of debt(s)
Whether the reason for winding up of a company is as per Section 271 of the Companies Act, 2013
Whether the solvent entity is to be voluntarily liquidated

Why choose Incorp?

With the advent of the Insolvency and Bankruptcy Code (IBC), our team actively guides financial as well as operational creditors through the turmoil of the non-recovery of debts and dues from defaulting entities.

Our professionals offer Corporate Recovery and Corporate Restructuring services under the framework of Companies Act as well as the Insolvency and Bankruptcy Code.

FAQs

Contact us for a hassle-free winding up and corporate recovery process.

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Insolvency Laws – What Is Cross-Border Insolvency?

September 8, 2021 by InCorp Advisory

Reading Time: 5 minutes

An Overview
What is Cross-Border Insolvency?
What is the need for Cross-Border Insolvency?
What is the legal framework under IBC?
What are the UNCITRAL Model Laws?
What are the significant aspects of Model Law?
What is the International Perspective – UK, USA, UAE, Singapore?
Why Choose Us

An Overview

Inorder to seek international exposure India seeks to attract foreign companies to set up manufacturing facilities in India. However, only foreign investment alone is not enough. When any company gets insolvent, India has to take all the necessary steps to protect the shareholder’s investments.
“Insolvency” refers to a state where an organization or an individual is unable to fulfil its financial burdens. They are due against the lenders as debts.
Cross-Border insolvency denotes the treatment of financially burdened debtors where:
- Their assets are in more than one country, or
- The creditors are in more than one country.
In order to assure foreign investors and to protect their rights, you need proper cross-border insolvency laws. This will ensure the foreign investors that their investments are safe in India.
The Insolvency Law Committee, on the adoption of the United Nations Commission on International Trade Law Model Law (UNCITRAL Model Law) on Cross-Border Insolvency, was proposed to be added as part of the Insolvency Bankruptcy Code (IBC).

What is Cross-Border Insolvency??

For example – Jet Airways (India) was one such case wherein Insolvency proceedings were initiated in the Netherlands and India simultaneously.

What Is The Importance Of Cross-Border Insolvency?

Indian law does not recognise foreign proceedings related to insolvency, such as re-organizations.
Mutual (reciprocal) agreements require individual long-drawn-out negotiations with each country. Different agreements with different countries will complicate insolvency proceedings.
Also, such agreements do not address issues relating to co-ordination or recognition of insolvency proceedings that have commenced in multiple jurisdictions and involving various branches of a single company.
In the absence of such joint agreements, there is no guidance to an Insolvency Resolution Professional for availing evidence or taking action concerning foreign assets.

What Is The Legal Framework For Cross-Border Insolvency Under The IBC Code?

Currently, cross-border insolvency can be dealt with under the Insolvency Bankruptcy Code (IBC). It empowers the Central Government to enter into bilateral agreements with other countries to resolve situations about cross-border insolvency. Further, a letter of request can be issued to a court in a country where an agreement has been entered. It shall specify how one can deal with the assets situated in that country.
The agreements under IBC will apply both when proceedings in India would require recognition, assistance, etc., abroad and vice-a-versa.
The Civil Procedure Code and English common law principles in India will be applicable for recognising foreign proceedings. Similarly, for Indian proceedings to be recognised abroad, the procedural rules of that foreign jurisdiction will be applicable.
Most industrialised countries have adopted the UNCITRAL Model Law. They are required to provide recognition, assistance, co-operation, and appropriate relief concerning insolvency proceedings commenced in India (except where that country has otherwise required reciprocity).

What Is The Uncitral Model And Its Implications?

United Nations Commission on International Trade Law (UNCITRAL) received the consent of Model Law on Cross Border Insolvency issues on 30 May 1997. It thereby was passed by United Nations (UN) General Assembly on 15 December 1997. Countries such as the USA, Japan, UK, Australia, Canada, Mexico, and South Africa have implemented the model law into their domestic legislation.
In case of international insolvency, you need to be aware of 2 concepts:
- Main proceedings – They are initiated where the debtor has its Centre of Main Interest (COMI).
- Non-main proceedings – These proceedings may be initiated in any place where the debtor has a commercial establishment.
There is no longer a bias between local creditors over foreign creditors. It enables countries to assist insolvency officials from other countries.

What Are The Significant Aspects Of Uncitral Model?

India will become a prime destination for foreign creditors for investment after the enactment of this model law. The three main economic benefits of the Model Law are as follows:
- Faster exchange of necessary information between countries
- Assistance and co-operation in preserving the organisation’s assets leading to successful reorganisation and
- Efficient credit recovery mechanism
Regarding procedures followed for foreign entities, this law is much more precise than the IBC. This law is flexible as a country can change the model law according to the conditions and the local insolvency laws.
Further, if the foreign proceedings are against the country’s public policy, then a country could refuse the validity of such proceedings.
The UNCITRAL Model law helps coordinate between courts and insolvency professionals in both domestic and foreign jurisdictions.

What Are The International Perspectives?

United States America

USA recognises the principle of dual citizenship for corporations. The “place of incorporation” plays a vital role in determining which law has to be applied.
Thus, if the branch of a company is at one place and the company is carrying out its core business operations in another place, the corporation shall be deemed a citizen of both states. For cross border insolvency, US bankruptcy courts will recognise foreign proceedings when the conditions laid down in the Bankruptcy Code of the US are satisfied.
The code allows concurrent proceedings against the debtor once foreign proceedings are recognised.

United Kingdom

When the English Law is read with EC Regulations, the “Centre of Main Interest (COMI)” plays a vital role in the proceedings.
The “place of incorporation” will not be a determining factor for determining jurisdiction. It has to be read conjointly with COMI. The interpretation of depends upon common sense and commercial perception of judges.

UAE

UAE has not incorporated national law with UNCITRAL Model Law on Cross-Border Insolvency. Also, there are no provisions for co-operations and coordination with the courts of other jurisdictions.
UAE has the civil law system and the common law systems. The UAE civil law regime does not recognise a foreign insolvency order or proceeding. Instead, they are treated as foreign judgments under the provisions of the Civil Procedures Law.
The DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Markets), by contrast, have embraced the UNCITRAL Model Law on Cross-Broder Insolvency. It is incorporated with certain modifications into each of the DIFC’s and ADGM’s Insolvency Law.

Singapore

In 2013, the Insolvency Law Review Committee recommended the adoption of the Model Law. In three years, the Model Law was implemented in Singapore.
Under the Model Law, a foreign representative can apply to the Singapore High Court to recognise foreign insolvency proceedings.
The application must be accompanied by:
- a certified copy of the decision commencing the foreign insolvency proceedings and appointing the foreign representative; and
- a statement identifying all insolvency proceedings in respect of the debtor known to the foreign representative.

Why Choose Us

Cross Border Insolvency involves multiple jurisdictions and hence laws, rules, and regulations of all the jurisdictions involved need to be taken care of. We at Incorp have a presence across various parts of the world including offices in Singapore, Hong Kong, Indonesia, the Philippines, and Vietnam and have domain expertise in the field of Insolvency Laws and hence are in the best possible position to guide you and support you in cases where the Corporate Debtor has a presence in multiple countries.

Contact Our Experts Today!

Pre-Packaged Insolvency Resolution Process for MSMEs

April 14, 2021 by InCorp Advisory

Reading Time: 6 minutes

With respect to the unique nature of their businesses and simpler corporate structures, the Indian Government has considered it necessary to introduce an insolvency resolution process for MSME (Micro, Small, and Medium Enterprises).

In the pandemic, the government suspended the filing of applications for initiation of corporate insolvency resolution process in respect of the defaults arising during One Year beginning from 25th March 2020 till 24th March 2021.

The Government also considered it expedient to provide an efficient alternative insolvency resolution process to ensure quicker, cost-effective, and value-maximizing outcomes for all the stakeholders, in a manner that is least disruptive to the continuity of their businesses and which preserves jobs.

To achieve these objectives, the Government introduced a pre-packaged insolvency resolution process for Corporate Persons classified as MSMEs through Insolvency and Bankruptcy Code (IBC, 2016) (Amendment) Ordinance 2021 – 04-04-2021.

In this article, we help you understand the pre-packaged Insolvency Resolution Process.

First, Let Us Understand Who Are The Corporate Persons Classified As MSMEs?

Corporate Persons such as
- Any Company as per Companies Act 2013 or
- Limited Liability Partnership
  Registered as Micro, Small, and Medium Enterprises based on the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006. However, it does not include any financial service provider.
Corporate Person should either be engaged in manufacturing or production of goods in any industry or engaged in providing or rendering services.

What Are Pre-packs?

“Pre-Pack” means a resolution of the Debt Amount of the Corporate Debtor through an agreement or arrangement with Secured Creditor/s. In other words, its restructuring of the Corporate Debt with consensus from the Lender.

Who Can Apply For The Pre-packaged Insolvency Resolution Process?

Only a Corporate Debtor is entitled to initiate a pre-packaged Insolvency Resolution Process. In other words, neither Financial Creditors nor Operational Creditors can initiate a pre-packaged Insolvency Resolution Process against Corporate Debtors.

Further, the amount of default for Corporate Debtor to apply for pre-packaged Insolvency Resolution Process shall not be more than One Crore Rupees.

What Are The Main Differences Between The Corporate Insolvency Resolution Process (CIRP) And The Pre-packaged Insolvency Resolution Process?

The time limit to complete the CIRP is 270 days, whereas pre-pack, in contrast, is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT (National Company Law Tribunal).
In pre-packs, existing management retains control, while under CIRP, the resolution professional takes control of the debtor as a representative of financial creditors.
Litigation by erstwhile promoters and potential bidders under the pre-packaged insolvency process will be minimal in contrast to CIRP resulting in effective and timely resolution of debt of the corporate debtor.

What Are The Pre-requisites For A Corporate Debtor Classified As MSMEs To Initiate A Pre-packaged Insolvency Resolution Process?

Corporate Debtor should not have undergone pre-packaged Insolvency Resolution Process, nor have completed CIRP during the last three years from the initiation date.
A Corporate Debtor under CIRP or liquidation cannot initiate a pre-packaged insolvency resolution process.
66% in the value of the Financial Creditor unrelated to Corporate Debtor need to approve the proposal of the pre-packaged insolvency resolution process and propose the name of Insolvency Professional for conducting the pre-packaged insolvency resolution process.
The majority of the Directors or the Partners of the Corporate Debtors have to file a declaration that
- Corporate Debtor will initiate pre-pack insolvency resolution process within 90 days;
- That the process is not initiated to defraud anyone and
- Declares the name of an insolvency professional proposed and approved to be as the resolution professional.
Corporate Debtor should pass a special resolution or approve with not less than three-fourths of the total number of partners, and pass the resolution approving the filing of an application to initiate the pre-packaged insolvency resolution process.
66% in value of the Financial Creditors unrelated to the Corporate Debtor need to approve the filing of the application before the Adjudicating Authority for initiating the pre-packaged insolvency resolution process.

What Are The Timelines Under The Pre-packaged Insolvency Resolution Process?

Within One Hundred Twenty (120) days from the date of admission of the pre-packaged insolvency resolution process of Corporate Debtor by Adjudicating Authority, the pre-packaged insolvency resolution process should be completed.
Within Fourteen (14) days of submission of application for initiating the pre-packaged insolvency resolution process, Adjudicating Authority should either accept or reject the application.
Within Ninety (90) days from the date of admission of the pre-packaged insolvency resolution process of Corporate Debtor by Adjudicating Authority, Resolution Professional should submit the Resolution Plan.
Within Thirty (30) days of receipt of the Resolution Plan, the Adjudicating Authority should either accept or reject the Resolution Plan.

Now, let us understand the duties and powers of a Resolution Professional.

Following are the duties of an Interim Resolution Professional before the corporate insolvency resolution process:

Prepare a report that Corporate Debtor is eligible to initiate the pre-packaged insolvency resolution process.
Prepares a report that the base resolution plan submitted by Corporate Debtor is in compliance with the provisions of the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 – 04-04-2021.
Submitting the report to the appropriate authority.
Perform any other duties as may be specified.
Public announcement of the initiation of pre-packaged insolvency resolution process in the case of Corporate Debtor.
Confirm the list of claims submitted by the Corporate Debtor.
Inform creditors about the claims on Corporate Debtor.
Maintain the updated list of Claims on Corporate Debtor.
Constitute the Committee of Creditors and convene and attend all the meetings.
Prepare Information Memorandum based on preliminary information memorandum submitted by Corporate Debtor.
Monitor affairs of management of Corporate Debtors.
Intimate Committee of Creditors about the breach of any of the obligations by the management of the Corporate Debtors.
File an application for the avoidance of transaction or fraudulent or wrongful trading before the appropriate authority.

Following are the duties of Resolution Professional during the pre-packaged insolvency resolution process:

Access to books of accounts, records and information available with Corporate Debtor physically or in electronic mode available with any information utility or with Government or with the statutory auditor or with any other specified person.
Attend all meetings of the Management of Corporate Debtor i.e., board meetings or meetings of the committee of directors or partners./li>
Appoint any accountants, legal or other professionals.
Collect all information about assets, finance and operations of Corporate Debtor to assess its financial position and the existence of any avoidance of transaction or fraudulent or wrongful trading.

Now, let us take a look at the Corporate Debtor

What Are The Duties Of The Corporate Debtor In The Pre-packaged Insolvency Resolution Process?

Within Two (2) days, prepare a list of claims with details, security interest and guarantees, if any.
Within Two (2) days, prepare an information Memorandum containing information relevant for formulating a Resolution Plan.

Responsibility Of Management Of Affairs Of Corporate Debtor

In the pre-packaged insolvency resolution process, the management of affairs of Corporate Debtor will be with the existing management i.e., the Board of Director or Partners as the case may be.
Alternatively, the Committee of Creditors during the pre-packaged insolvency resolution process having no less than 66% of the voting shares can resolve to vest the management of Corporate Debtors with Resolution Professional.

What Are The Considerations And Processes For Approval Of The Resolution Plan In The Pre-packaged Insolvency Resolution Process?

Corporate Debtor shall submit a base Resolution Plan within two (2) days of initiation of the pre-packaged insolvency resolution process.
The Resolution Professional will present it to the Committee of Creditors.
The Committee of Creditors may provide an opportunity to Corporate Debtor to revise the base Resolution Plan.
The Base Resolution Plan submitted by the Corporate Debtor should not impair any claim of its Operational Creditors.
Committee of Creditors upon rejection of the base resolution plan of Corporate Debtor may instruct Resolution Professional to invite a prospective resolution applicant to submit the resolution plan and decide the criteria that the prospective resolution applicant must fulfill and the basis of the evaluation of prospective resolution applicant.
Resolution Professional then presents the Resolution Plan which confirms all the requirements to the Committee of Creditors for its evaluation.
The Committee of Creditors evaluates the Resolution Plan and if they find it better than the base resolution plan, they shall select a resolution plan amongst them.
The Committee of Creditors shall, by not less than 66% of the voting shares after considering its feasibility and viability and manner of distribution and other requirements, approve the resolution plan.
Suppose the resolution plan submitted by the Corporate Debtor requires impairment of any claim, the Committee of Creditors may need the promoter of the Corporate Debtor to dilute their shareholding or voting or control rights in the Corporate Debtor.
Suppose the resolution plan submitted by the Corporate Debtor does not provide for dilution of shareholding or voting or control rights in the Corporate Debtor. In that case, the Committee of Creditor should record a reason for the same.
A Resolution Professional shall then submit the resolution plan approved by the Committee of Creditors to the Adjudicating Authority.
If the Adjudicating Authority is satisfied that the resolution plan submitted by a resolution professional is in conformity with the provisions of the law, then within 30 days of filing an application, may approve the Resolution Plan.
If the Adjudicating Authority is satisfied that the resolution plan submitted by a resolution professional is in non-conformity with the provision of the law, within 30 days of filing an application may reject the Resolution Plan.

Why Choose Incorp?

Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 – 04-04-2021 tries to address the specific requirements of MSMEs relating to the resolution of their insolvency by providing an efficient alternative insolvency resolution process. At Incorp, we have the expertise and skills to guide you through the entire nuance of pre-packaged insolvency processes and thus maximizing outcomes for all the stakeholders.

Contact for consultancy on pre-packaged insolvency resolution process today