IBC & FRDI

By
Malepati Yaswanth {1727613}
Suraj Srivatsav R {1727631}
Earlier Insolvency Regimes in India

 Prior to enactment of the Insolvency and Bankruptcy Code, 2016 (the

“Insolvency Code”) the existing framework was governed by:-
 The Companies Act, 1956 and the Companies Act, 2013;
 The Sick Industrial Companies (Special Provisions) Act, 1985;
 The Recovery of Debts Due to Banks and Financial Institutions (“RDDBFI”)
Act, 1993;
 The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (“SARFAESI”) Act, 2003;
 The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency
Act, 1920;
 Regulations, directions, circulars, rules, notifications and guidelines of the
Reserve Bank of India (“RBI”).
Benefits of the Code

 Overcame the challenges of systematic delays and complexities in process

 The code could ensure quicker resolution of NPA problems.
 Bankruptcy laws accept that business ventures can fail and allow
entrepreneurs to make a new start.
 Reduction in burden on the courts - National Company Law Tribunal (NCLT)
Objective of the code

 An Act to consolidate and amend the laws relating to reorganisation and

insolvency resolution
 a time bound manner for maximisation of value of assets
 to promote entrepreneurship, availability of credit and balance the
interests of all the stakeholders
 alteration in the order of priority of payment of Government dues
 to establish an Insolvency and Bankruptcy Board of India (IBBI)
Road to Code
21.12.2015- IBC Bill of 2015 -introduced in LS

23.12.2015 - IBC Bill of 2015 - Referred to Joint Committee of both Houses of Parliament

28.04.2016- IBC Bill of 2015 -Joint Committee placed its Report to both Houses of
Parliament

05.05.2016- IBC Bill of 2015 -passed by LS

11.05.2016- IBC Bill of 2015 -passed by RS

28.05.2016- IBC, 2016 -Assented by President of India & Notified

 Applicability
Any Company incorporated under the
Companies Act, 2013 or under any provisions

Any other Company governed by any Special

Act

Any LLP incorporated under the LLP Act,

2008

Any other body, as notified by the

Central Government

Partnership Firm & Individuals

Who can Invoke

 Financial Creditor
 Operational Creditor
 Corporate Debtor
Adjudicating Authority

 NCLT
- Deal with insolvency matters of Co. & LLP
- Appeal to NCLAT
 Debt Recovery Tribunal
- Deal with insolvency matters of individual & Partnership firm
- Appeal as to DRAT
 Time Line

180 days 90 days 270 days

(Maximum)

FAST TRACK :

45 days 135 days

90 days (One time)
Moratorium Effect

 Adjudicating Authority shall by order prohibit the following:

 Institution/continuation/proceedings of suits including execution of any
judgment, decree or order in any Court
 Transferring, encumbering, alienating or disposing of assets/legal
right/beneficial interest
 Any action to Foreclosure, Recover or enforce any security interest created
including any action under SARFAESI Act, 2002
 Recovery of any property by owner or lessor where such property is
occupied
Objective

 Maximizing value of the Entity to Continue Operation

 No additional stress on Business
- Supply of essential goods or services to the Corporate Debtor as may be
specified shall not be terminated or suspended or interrupted
- Central Government in consultation with any financial regulator may
specify such transactions.
Interim Resolution Professional

 Appointment
 Within 14 days from Admission of Application

 the CIRP application is filed by Financial Creditor or Corporate Debtor

 the CIRP application is filed by Operational Creditor
 Tenure
 Shall not exceed 30 days from the date of appointment
Once appointed…

 Management of affairs of Corp. Debtor shall vest with IRP

 Powers of BOD/ Partners (LLP) shall stand suspended & will be exercised by
IRP
 Officers & Managers of Corp. Debtor shall report to IRP
 FI maintaining accounts of Corp. Debtor shall follow instructions of IRP
Duties

 Resolution Professional shall conduct the entire Insolvency Resolution Process

and manage the operations of the company during the corporate Insolvency
Resolution Process Period.
 Resolution Professional shall exercise all such powers and duties as are
vested on the Interim Resolution Professional.
 All Meetings of the Committee of Creditors shall be conducted by the
Resolution Professional
 Should also maintain an updated list of claims and also prepare the information
memorandum
Replacement of IRP

 CoC to replace the Resolution Professional any time during the pendency of
IRP.
 CoC may forward name of another Insolvency Professional to the Adjudicating
Authority
 The Adjudicating Authority shall forward name of proposed Resolution
Professional to the Board for confirmation
 On confirmation being received from the Board, appoint him as Resolution
Professional
IBC Ecosystem
 Resolution Process
Appointment of a Moratorium
Default Resolution Period
Professional (180/270 days)

75% of the
Formation of
creditors
to Committee of
approve Creditors

NO YES

Goes into Implement the

Liquidation Resolution Plan
Corporate Resolution Process Timeline
Liquidation Process
Key Benefits
WHY FRDI?

 The global financial crisis of 2008

 No comprehensive framework to deal with bankruptcy.
 In this context, Government has come with a solution for bankruptcy cases
for both financial entities include (banks, NBFCs, pension fund, mutual fund,
insurance companies, stock exchanges, clearance houses etc.) and non-
financial entities
 IBC Vs FRDI

 IBC was enacted to consolidate all the existing laws related to

insolvency of non financial entities in India and to simplify the process of
insolvency resolution.
 FRDI Bill seeks to provide a comprehensive resolution framework to deal
with insolvency issues in the financial sector without creating financial
burdens for the tax payers
 Existing Framework – DICGC Act,
1961
 There is no specific law dealing with the insolvency of banks in India. The
RBI and the other regulators have used tools like mergers and
amalgamations in the past. But, these were ad-hoc solutions.
 But, DICGC Act, 1961 guarantees that deposits up to Rs.100000 would be
insured, if a bank becomes insolvent/ bankrupt. DIGCC is a subsidiary of
RBI
 There is no clarity on what will happen to the deposits above Rs.100000
 Key Features of FRDI
 FRDI Bill, 2017 seeks to protect customers of financial service providers in
times of financial distress.
 It aims to inculcate discipline among financial service providers in the
event of financial crises, by limiting the use of public money to bail out
distressed entities.
 The Bill would help in maintaining financial stability in the economy by
ensuring adequate preventive measures
 The Bill aims to strengthen and streamline the current framework of
deposit insurance for the benefit of retail depositors.
 It seeks to decrease the time and costs involved in resolving distressed
financial entities.
 Resolution Corporation

 The bill provides for the setting up of an independent new regulator, the
Resolution Corporation (RC).
 The RC will have representatives from all financial sector regulators
namely RBI, SEBI, IRDA and PFRDA
 The existing DICGC Act will be repealed and DICGC will be closed.
 The Resolution Corporation or RC will insure deposits. The insured amount
will be determined in consultation with the RBI and is unlikely to be below
the existing Rs.100000.
 What does RC do?

 The important task of the RC is to closely monitor financial firms and

classify financial firms on the basis of their risk of failure — low, moderate,
material, imminent, or critical.
 The factors to be considered while classifying are capital adequacy ratio,
liquidity, asset, liabilities, leverage ratio etc.
 The monitoring will help the banks to anticipate failure and take
necessary corrective actions in advance.
Contd...

 If the bank is classified as critical, the RC will step-in to resolve and take over
the management of the bank.
 The RC has various tools at its disposal for resolution: mergers, acquisitions,
portfolio transfers, bail-in, setting up of bridge service providers etc.
 The last resort is liquidation. In case of liquidation, the RC will oversee its
orderly demise.
 Bridge-service provider is a temporary institution established to take over
the operations of a financial institution, for a maximum period of 1 year.
 Bail-in Clause
 It is one of the tools at the RC’s disposal to resolve a failed bank. It means
that the cost of bank failure should be borne by the stakeholders of the
bank.
 In ‘bail-out’, the Government uses the taxpayers’ funds to support the
bank.
 In ‘bail-in’, stakeholders funds (shareholders, depositors etc.) is used to
provide support to the bank.
 It implies that the deposits over the insured amount (Rs.100000) will be
used support the bank. These deposits can be converted into equity
shares.
 Conclusion
 The Bill has generated unnecessary controversies
 The finance ministry has clarified in a statement
“The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify
present protections to the depositors adversely at all. They provide additional
protections to the depositors in a more transparent manner. The FRDI Bill will
strengthen the system by adding a comprehensive resolution regime that will help
ensure that, in the rare event of failure of a financial service provider, there is a system
of quick, orderly and efficient resolution in favour of depositors.”