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Impacts of Covid-19 w.r.t IBC,2016 and Government acts Pre-Covid-19

April 23, 2020 Insolvency and Bankruptcy no comments
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Pre-Covid-19

At the outset, let me give the brief on IBC, 2016 and the scenario which was at the pre-covid 2019 time.

  • Insolvency and Bankruptcy code, 2016 has been one of the options for a creditor in case of non-payment of dues which are accrued from corporate debtor (CD).
  • Financial creditors prefer filing of petition under IBC, 2016 when they found minimal chance of recovery from the available secured assets (as they have edge under SARFESIA act if CD has good assets ) or when they found that, all the other options are not suitable for recovery looking to the percentage of recovery by FCs thorough IBC, 2016.
  • At, Pre-covid time, the petition filing limit was Rs. 100000/- as per section 4 of the Code. So, in case of any default at least of the amount of Rs 1 lakh, the creditor has all the power under the act to file a petition which may lead to corporate insolvency resolution process. (CIRP)
  • As established by Insolvency Law committee and by various pronouncements, the purpose of IBC, 2016 is not at all recovery but to have resolution, to maintain business as going concern and finally to protect assets of CD & thereby to protect interest of the stakeholders.

During Covid-19

Covid-19 is the scenario, where business and economy is literally in a shut done mode. Indian Boarders are closed – State wise and District wise social distancing is forced. It is needless to state here that, procurement, production, dispatch, sale, recovery etc. is currently at a halt. Due to long period closure, the liquidity has been hampered and hence, it is most likely that, business may not be in a position to repay the “Debt” in time.

Considering the present situation, Finance ministry has made the following actions:

(1) Threshold limit of application for IBC, 2016 has been increased to Rs 1 Crores by Finance Ministry. The Central Government vide Notification No. S.O. 1205(E) dated 24th March, 2020, in exercise of the powers conferred by the proviso to Section 4 of the Code has increased the said limit. And as per the Code, CG has the power to enhance the limit upto Rs 1 Crore ..which government has enhanced. (beyond Rs. 1 crores, CG has no authority but to pass the same before the parliament ).

Intention of Honorable FM was to prevent MSME going under IBC, 2016.

Previously, this threshold was only Rs 1 Lacs. Meaning there by that, any person whether supplier or financer, had pending recovery of more than Rs 1 Lacs and for which there was default by the Corporate Debtor, he had the power to apply under IBC, 2016 before NCLT.

My views in favor:

Legislature like IBC, 2016 is backing up the creditors who lend money/goods/services to the business.

IBC, 2016 is a sward or a Stick which is providing a shield, disheartens the negative intent of business and hence, the very purpose is to have a Shield and not to Hit anybody!!

Triggering event is a “Default”. A meager amount of default of debt which is only Rs 1 lacs, should not be used as a recovery mechanism during / after the lockdown period considering the impact of covid-19. Covid-19 is a pandemic which is unprecedented and due to the same, business across the world including India are closed down. Naturally, there will be “default” which will trigger unnecessary cases under IBC, 2019.

To curb small cases, the Government has dealt with this default threshold so that, due to Covid-19, large number of cases does not go to NCLTs.  The Government expects to have so many petitions at the NCLT under IBC, 2016 if the present limit of Rs 1 lakh persists. The fantastic move is only to save a situation where, NCLTs are not jammed with small cases and to save over crowded situation before the adjudicating authority. It’s a “Capacity to process” issue that has resulted into increase of threshold limit to Rs. 1 Crore.

My views against:

In India, more than 85% of the business are in category of SME/MSME. Normally looking to their size of business, we all know that, per head / per vendor outstanding is generally lower than Rs. 1 Crores dur to their limited liquidity.

Taking a situation of an Operational Creditor who is SME/MSME, due to the recent increase in the threshold limit to Rs 1 Crores, they will not be in position to file any application under IBC,2016 for default of their collectibles.

To put it differently, if post covid-19, any business is not paying to such creditors having lower outstanding balance than the threshold limit of Rs 1 Crore, they will have the only option to have recovery outside IBC, 2016. This can definitely ruin the working capital of small and medium business units!!

Let me clarify on the applicability of this recent clarification of finance ministry that, as it is due to Covid-19, all the petitions, which are already filed and are pending before various NCLTs, will be heard as it is and will not be impacted. So, petitions already filed by FC/OCs before this notification, where the default amount is lower than Rs 1 Crores (new threshold) but higher than Rs 1 Lac, the same should be heard and will not be per se rejected.

(2) RBI’s move for Moratorium for Installments and Interest payment:

This has provided a BIG relief to field of IBC, 2016. Moratorium has saved the cases to go to IBC. As we all know, that overdue accounts are classified as regular and non performing, considering the period of non-payment or considering the period of default. RBI has suggested to give moratorium from 1st March 2020 to 1st June 2020 i.e. 3 full months wherein, no installment and no interest will be due and accrued.

Due to this move of RBI, business accounts which are unable to pay due to liquidity crunch will not be treated as NPA and hence, there won’t be a pressure on the Banks for recovery and filing of petition under IBC, 2016. In my view, this is a welcome indirect relief considering IBC, 2016.

(3)Moratorium of 3 months for CIRP period:

IBC, 2016 is a time bound legislature. Wherein, insolvency resolution professional has to observe the hanging sward of “timeline” which is not otherwise binding for any judiciaries.

Due to preserving “social distancing” and close down, NCLT suo moto ordered for extension of CIRP by the moratorium period of 3 months i.e. time of covid-19 close down has been given as moratorium by treating the same as blackout period. This has taken away the timeline issue of a resolution professional.

But, real challenge of a resolution professional is how to protect assets of the CD which is a main and utmost responsibility.

  • Challenge will be for the followings-
  • How to have going concern of CD’s business during / post lockdown?
  • How to manage Liquidity and inventory management?
  • How to protect employees from threat of corona virus and to manage robust safety? – a social responsibility too.
  • The unanswered question is that, whether this moratorium of 3 month for Covid-19 will be over and above the total maximum available timeline of 330 days which also includes the time of proceedings and litigation time?  In my view yes.

But, it may be a matter of litigation, due to the latest Honorable SC ruling: M/s Manibhadra Polycot & Ors. Civil appeal no. 4392-4393 of 2019- wherein, honorable SC has specifically denied for any relaxation of timeline if demanded “time of extension” is not towards litigation.

(4) Finance minister has also announced a possible temporary suspension of section 7,9 and 10 of the IBC,2016.

This must be the learning from the China economy, were it is heard that, there are more than 200000 IBC cases filed post covid-19!

Nobody knows the real impact of covid-19 but considering vision of our government, it seems that, ministry is expecting a bad time of economy due to the pandemic. And for that, it has given us hint that, if situation demands, ministry will think for suspension of section 7-9-10, so that no more IBC, 2016 petitions can be filed before NCLT and NCLT can function smoothly with the existing cases.

Of course, if such a prohibition comes, it will be a terrible time for creditors who are facing issues with defaults. Banks and FIs have to make the accounts NPA as per the norms of RBI, but they can’t opt for IBC and again the old and time consuming options for recovery will be left out for them to recovery money which results into deterioration of assets of CD as in non-IBC regime, “Control is with CD and not with Creditors”!!

(5) What about the Fees of Insolvency resolution professionals?  

There is a common question across RPs and the CoCs for payment of professional fees of a resolution professional which is generally on a monthly basis.

My views:

There is no doubt that, the lockdown has totally stopped the unit and business of corporate debtor. But the challenges for an RP is on many fronts which we have already understood in para 3 above. The RPs are even working from home and taking care of “protecting assets of CD” for the stakeholders.  Needless to say that at least professional fees as agreed on monthly basis must be paid to them which they surely deserve!!

(6) Resolution Applicant where his plan is agreed by the CoC and also approved by the AA?

We all know that IBC, 2016 focuses on the “Resolution and Reconstruction” of a corporate debtor. In the process of CIRP, the interested resolution applicants are bidding for the company/unit for fresh infusion of the funds and providing a going concern status to the ailing corporate debtor. The decision of the RA is based on the internal assessment and the same carry the perspective of business valuation if the same is merged with the existing business and/or considering synergy impacts.

The issue is that post-covid 19 there are high chances that, valuation of such ailing business and units may fall drastically or may loose market. So, for a successful resolution applicant, who is not been handed over the unit, he has to infuse funds and complete the legal formalities under IBC, 2016, may think about the potential loss due to covid-19 being unforeseen event. So, the question is, whether he can disown the quote/bid or can he apply for the reduction of quote (for the potential loss due to covid-19) even after the resolution plan is approved and RA is selected?

My views:

At present, the situation is that Resolution applicant has to honor the resolution plan fully if the same is approved by the Adjudicating authority. There is no clarification till date on this issue.

(7) Valuation to be reconsidered with the impact of Covid-19 on the Corporate debtors under IBC.

I think, one of the most badly impacted area under IBC,2016 is the Valuation. As we know, all the Corporate debtors who are under IBC,2016 need to be valued by two independent valuers – who give fair value and liquidation value for the CD.  Any case which is at stage of preparation of information memorandum etc, it the responsibility of RP to reconsider the valuation aspects and he can not shut his eyes.

Probably, resolution applicants may demand re-valuation of the corporate debtor considering impact of covid-19. And in my view, this may result into severe delay, additional valuation cost.

(8) “Market for Stressed assets” will be the need of an hour and will a real challenge for Resolution applicants during post Covid-19 era. I expect there will be huge reduction in number of resolution applicants due to rough time of liquidity crises. When the business itself is struggling with the liquidity, one should not expect them as the resolution applicants!

In my view, after Covid-19, government should dilute section 29A to a great extent, which basically deals with ineligibility of a resolution applicant and try to push and develop a platform which can be used by RPs for resolution.  

  • Pre-Pack chapter under IBC,2016 for Resolution of stressed assets before the admission of CIRP – a very likely scenario in near future.

A Pre-packs procedure is a preplanned insolvency in which, corporate debtor arranges necessary finance by selling its assets or business units prior to filing of insolvency and shareholder and Creditors file reorganization plan of Pre-packs before the respective adjudicating authority or a forum for pre-packs. Currently, pre-packs are popular in UK, Germany, Japan and US and are successfully operated under Bankruptcy Law.

My view in favour: Pre-packs can definitely result into speedy recovery with continuation of business and without hinderance. The same is expected at very low cost of resolution and saves time of government machinery like NCLT and litigation pain. I think, before CIRP process, corporate debtors would be having more power to bargain as they are having full controls at the stage of going concern. While under IBC, 2016 once the petition is admitted, creditors have the right of control.

My view against:  It will be having negative impact on the unsecure creditors and Operational creditors as the pre-package result into reduction of available assets of the corporate debtors. The reorganization normally result into solving secured creditors first. This will have impact of reducing assets available for other creditors and OCs.

I have tried to analyze the impact of Covid-19 and the government actions w.r.t areas of Insolvency and Bankruptcy Code, 2016. CA Darshan Patel, is a practicing FCA, IP, RV(SFA) and active in the field of IBC and valuations.

Disclaimer: These are my own views and should not be construed as any advice or promotion.

An Article by CA Darshan Patel – Senior Partner at B J Patel & J L Shah, FCA, DISA (ICAI), IP and RV

https://ipdarshan.home.blog/

Draft Valuers Bill, 2020

April 18, 2020 Valuation no comments

Draft Valuers Bill, 2020

(after passing on official Gazette by CG, the same will be called as Valuers Act, 2020)

: Overriding Effect :

Valuers Act, 2020 has overriding effects – That means, the proposed act will override any other law if there is anything inconsistencies in other existing laws.

: What about Existing Valuations which are required by various laws?:

The first question comes to our mind is that, what about the present valuations carried on by different valuers, registered under different laws, having different skill sets and in majority of cases, there is no regulatory body for their governance And, Whether this new Act has any impact on the same?

The answer to that is YES !!!

Let me clarify on this, that, Valuers Act, 2020 is suggesting a new era of India where Governance is a pre-requisite. Government has the clear intent of making a common Valuation Institute / Governance / Authority /Regulations etc across India. So that, a valuer can be regulated, inspected and if need arise, can be punished for professional misconduct.

Far-reaching impacts can be understood from the below paras: –

  • It has been drafted that, with effect from such date as the C.G. may appoint, the Companies (Registered Valuers and Valuation) Rules, 2017 made under Section 247 of the Companies Act, 2013 shall stand rescinded. Related changes are suggested in Companies Act, 2013.
  • Valuation Services has been defined in great detail and it means the services relating to valuation of any asset or liability which is required under the following provisions of-

(i) the Banking Regulation Act, 1949

(ii) the Securities Contacts (Regulation) Act, 1956 : SCRA

(iii) the Wealth Tax Act, 1957

(iv) the Income Tax Act, 1961

(v) the Securities Exchange Board of India Act, 1992

(vi) the Insurance Regulatory and Development Authority Act, 1999

(vii) the Foreign Exchange Management Act, 1999

(viii) the SARFAESIA Act, 2002

(ix) the Prevention of Money Laundering Act, 2002 : PMLA

(x) the Limited Liability Partnership Act, 2008

(xi) the Companies Act, 2013

(xii) the Pension Funds Regulatory and Development Authority Act, 2013

(xiii) the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act,2015

(xiv) the Insolvency and Bankruptcy Code, 2016 or

(xv) any other law, as may be prescribed.

To my opinion, this proposed act has covered 15 different acts for the purpose of valuation. And, after passing of OG, valuer under this new act will have wide applicability.

At present, valuation practise, which is directly under regulation is as per Companies Act, 2013. Which covers valuation cases for various company matters and also for cases under IBC, 2016. Other 12 are out of the regulations and are presently handled by unregulated practitioners!!

: What is Proposed New Model of Governance?:

  • National Institute of Valuers : NIV

It’s a special regulatory body under the new Act like, IBBI for IBC-2016. Till that time, IBBI will act at the Institute. Will notify the valuation standards and has role as a regulator, promoter, creating market for valuation services and to protect interest of users of valuation services. It has inspection & investigation rights. NIV decides about Asset classes, add or delete asset class etc – for the purpose of education, examination and Registration of valuers.

  •         Valuation professional organizations : Like ICAI RVO. Shall not act as Valuer.
  •          Valuers – Individuals and Valuer Entity. Total 4 class of valuers. a) Valuation Entity, b) Associate Valuer upto 5 years of practise as valuer under the act,  c) Fellow valuers having more than 5 years of practise as valuer d) Honorary valuer = person having extra ordinary contribution. But he shall not render Valuation services.
  •  Valuer Institute – will deliver educational courses. Shall not act as Valuer.

: Some Important Proposals :

  • Separate Degree “AV” “FV” and “HV” will be allotted to valuers as Prefix.
  • Draft has the provision to allow Big4s as Multi-disciplinary firms !
  • All Existing Valuers under Company law 2013 under companies ( Registered Valuers and valuation ) Rules, 2017 – shall be deemed to be an Associate valuers registered under this act.
  • Valuer can get the opinion from the other valuer only when, that valuer is not dealing in same class of assets. Otherwise, the same may tantamount to outsourcing.
  • Valuer can get the Expert Assistance from CA, ICWA, CS or any other person who is not a Valuer.
  • Section 59(7) of the proposed draft, states that, a valuation report shall not carry a disclaimer or condition, which has potential to dilute the responsibility of the valuer under this Act or makes the valuation unsuitable for the purpose for which the valuation was conducted.
  • Valuation report shall be admissible as expert evidence as per Evidence Act, 1872.
  • Two Schedules are proposed for professional misconduct of Valuers.
  • 1st Schedule deals with deemed professional misconducts which are not sever but which may lead to penalty extending to Rs 2 Lakh or 3 times the amount of loss – Being higher of the two.
  • 2nd Schedule deals with deemed professional misconducts which are more sever and which may lead to penalty extending to Rs 10 Lakh or 3 times the amount of loss – Being higher of the two.
  • Criminal complaint can be lodged against valuer for misconducts listed in 2nd Schedule of the proposed draft.

It is expected to have full fledged Valuers Act, 2020 in the near future with required changes in the area of deletion of criminal liability, reduction of penalty clauses etc.

Surely, Modi Government has done a fantastic job to have an idea of having full fledged “Valuation Professionals” and a separate act dedicated for new breed of professionals.

An Article by CA Darshan Patel – Senior Partner at B J Patel & J L Shah, IP and RV

https://ipdarshan.home.blog/

Why IBC is at a Buzz

April 18, 2020 Insolvency and Bankruptcy no comments

Why IBC is at a Buzz and why Modi Government introduced the same?

As a layman, it is very important to under one of the new laws introduced by our “MODI” government. As we all are now aware of so much talked GST (Goods and Service Tax) which is testing its spirit, till today, the other one of the landmark Legislature is IBC, 2016 i.e Insolvency and Bankruptcy Code, 2016.

We all know, that any financial facility, when not repaid either in the form of principal or even it’s interest, beyond certain days from its due date, is called as Non- performing asset. NPAs are resulting in weaker incomes to banks, blockage of funds of a fundable amount and is leading to lower economic growth.

Hence, NPAs are required to be recovered as early as possible, the same as in the case of any disease. Before the IBC era, mainly Banks and financial institutions opt for RDDFI ie. Recovery of Debt due to Banks and Financial Institutions Act, 1993 & SARFAESI ie.  Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

The old law has resulted in:-
• Delay in NPA recovery.
• Failure to resolve NPAs which has poses major systemic risks
• There was an urgent need for legislation which would expedite NPA resolution.
• The old regime was corporate debtor centric ie. Business decisions were taken as per the decision
of the Board of director and Banks have no role. Even no diversion of funds and best use of assets
and resources were not ensured.

The IBC 2016 has important changes that have solved age-old “Root-cause” of failure of recovery by banks and financial institutions.

  1. IBC code is the latest law and is overriding all other laws if inconsistent with provisions of IBC. So, even if any matter is pending before adjudicating authorities under previous or existing laws for recovery etc., an application can be made under IBC.
  2. It is time bound. The code has prescribed a timeline which has to be followed. This is a boon for stakeholders, as it is protecting corporate debtors assets and focusing on resolution aspects in a time-bound manner.
  3. Under IBC the debtor is no more in possession of business or any decision. IBC has given powers to Financial creditors, who have taken a risk and provided necessary finance for running of a business / for setting up etc. IBC aims for creditor driven resolution which is necessary for the earliest recovery and revival.
  4. IBC code also gives power to non-financial creditors i.e. any supplier of goods or services. They can apply against defaulting corporate debtor and whole CIRP ( corporate insolvency resolution process can be started. )
  5. IBC gives breathing time i.e. time for resolution, time for analysing wrongs as the same has provided for Moratorium period. During the time of moratorium, any recovery proceeding, suit matters etc are kept as status quo situation. So, that, the corporate debtor can be revived at earliest.
  6. IBC appoints Insolvency resolution professional as a mediator, as a helping hand for the completion of CIRP or Liquidation matters. IRP is a backbone in addition to Adjudicating authority and IBBI which is the main regulator for IBC.

An Article by CA Darshan Patel – Senior Partner at B J Patel & J L Shah, IP and RV

https://ipdarshan.home.blog/

MCA : DIRECTORS KYC UPDATE

August 4, 2019 MCA / ROC / LLP , New Updates no comments

In September 2018, MCA introduced KYC of Directors. Every person who has Director’s Identification Number (DIN) needs to do KYC by filing Form DIR-3 KYC with MCA. The KYC has to be done after the end of every financial year.

On July 25, 2019, MCA introduced web-based service for doing annual KYC of Directors known as ‘DIR-3 KYC-WEB’. The process of KYC is made simpler with this online service.

What is web-service DIR-3 KYC?

This online service enables the persons holding DIN, to do KYC without filing any form with MCA.

All persons holding DIN, whether they are directors in any company or not, and who have done their KYC in the previous financial year, have to use this web-based service to do KYC.

This service is just to verify the details of KYC of Directors submitted previously to MCA. This service can be used only if there is no update in any of the details submitted earlier.

So, in this online service there is no requirement to:

 

  • submit copy of PAN or address proof again
  • affix digital signature of director
  • get the form certified by a practicing professional

 

Now, what if any director, who has filed KYC in previous year, wants to update the details?

In that case, the director has to file Form DIR-3 KYC (previously introduced form) with MCA to update the details.

Any person who has been newly allotted DIN has to first file Form DIR-3 KYC and then use web-based service from next financial year onwards.

 

Due-date

Form DIR-3 KYC or web-based DIR-3 KYC has to be submitted on or before September 30 of immediately next financial year. E.g. due date for financial year 2018-19 is September 30, 2019.

 

Fees

There is no fees if filing is done before the due date. If the form is filed after the due-date or filed for the previous years, fee of Rs. 5,000 is charged.

 

Here are the steps to do KYC through web-based service:

 

  1. Login to MCA and click on ‘DIR-3-KYC-WEB’.
  2. Enter your DIN.
  3. Once you click submit, your email id and mobile number will appear.
  4. Click on ‘Send OTP’ button.
  5. Different OTPs will be received on mobile number and email id. Enter the respective OTPs and click on submit.
  1. A table with all your details will be displayed.
  2. Check and ensure that all the details are correct. If yes, click on ‘Submit’ button. If you wish to update details, click on ‘Cancel’ button.
  1. Once you proceed, a challan will be generated in your name.

 

If you press ‘Cancel’ button in Step 8, i.e if you want to update or modify details submitted earlier, you need to submit form DIR-3-KYC.  Please note that once you submit web-based KYC, you cannot change the details and file form DIR-3 KYC for that financial year.

 

BLACK MONEY – CLARIFICATIONS ON TAX COMPLIANCE FOR UNDISCLOSED FOREIGN INCOME AND ASSETS BY CBDT

July 12, 2015 Income Tax , New Updates , Tax Updates no comments

CBDT releases 32 clarifications on compliance window in Q & A format.

BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND ASSETS) AND IMPOSITION OF TAX ACT, 2015 – CLARIFICATIONS ON TAX COMPLIANCE FOR UNDISCLOSED FOREIGN INCOME AND ASSETS CIRCULAR NO.13 OF 2015 [F.NO.142/18/2015-TPL], DATED 6-7-2015.

CBDT releases 32 clarifications on compliance window on Black Money