India’s Bankruptcy Code: FAQs

Amid a global economic crisis, Neha Mehta answers some frequently asked questions about filing bankruptcy in India.

Q1. When is a Corporate Debtor in default?

A. “Default” is the non-payment of a whole, or a part, of a Corporate Debt when due and payable. Erosion of net worth is not a default under the Code.

Q2. Can a financial institution proceed against a Corporate Debtor under the Code although it may have already taken action under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI)?

A. Section 238 of the Code provides that its provisions shall have effect notwithstanding anything inconsistent in any other law or an instrument under any other law. Further the NCLT, Ahmedabad Bench, in Sarthak Creations Pvt. Ltd. vs Bank of Baroda & Others, held that pendency of proceedings before a Debt Recovery Tribunal (DRT) or invocation of SARFAESI Act, will not bar the commencement of CIRP, in view of the non-obstante provisions of section 238 of the Code.

Q3. What is a COC?

A. The COC (Committee of Creditors) is constituted of a Corporate Debtor’s financial creditors. It is a decision maker in CIRP.

Q4. Can a claim, or proof of claim, be filed, or submitted after the elapse of 14 days from the date of a demand notice?

A. Regulation 12 (2) of the CIRP Regulations provides that a Creditor, who fails to submit a claim with proof within the time stipulated in a public announcement inviting claims, may submit by the 19th day of the Insolvency Commencement Date. This amendment to the CIRP Regulations was made effective from July 2018.

Q5. Are home buyers deemed to ‘Creditors’ under the Code?

A. Section 5(8)(f) of the Code was brought into effect from 6th June, 2018 to provide that an amount raised from a real estate allottee is deemed to be a ‘borrowing’. The logic behind such amendment is that home buyers/allottees advance monies to buyers/allottees advance monies to developers, thereby financing a real estate project, and thus they will fall within the definition of a ‘Financial Creditor’ under the Code.

Q6. Would a moratorium ordered against a Corporate Debtor under the Code affect pending proceedings under section 138 of the Negotiable Instrument Act 1881 (NI Act)?

A. Section 138 of the NI Act is a penal provision empowering the competent court to order imprisonment or a fine. A fine is not a money claim or recovery against a Corporate Debtor, and an order of imprisonment against Directors of a Corporate Debtor does not affect CIRP. Therefore, proceedings under 138 of NI Act therefore will not be affected by a moratorium. Further, no criminal proceeding lie under Section 14 of the Code.

Q7. Does the Code provide for punishment against a Corporate Debtor that commits fraud?

A. Under Section 68 of the Code, if any officer of a Corporate Debtor wilfully conceals its property, he or she would be punishable with imprisonment for 3 to 5 years and a fine extending from INR 100,000 upto 10,000,000.

Q8. Can a Creditor and Corporate Debtor arrive at an ‘out of Court’ settlement and withdraw CIRP?

A. Yes, but with a 90% of COC members voting in favour of the settlement.

Q9. Can an RP reduce a claim amount if a Financial Creditor has claimed usurious or extortionate interest?

A. An RP can revise a claim admitted under Regulation 14 of the CIRP Regulations, subject to the RP collating information warranting the revision. While empowered to do so, the RP should, ideally, intimate the NCLT of the revision.

Q10. Can interest, overdue charges and related charges in respect of a credit facility be treated a part of a claim?

A. Yes.

Q11. In a liquidation of a Corporate Debtor, how will proceeds from the sale of assets charged to a secured creditor be treated?

A. If a secured creditor has participated in the liquidation process, it would relinquish its security interest to the liquidation estate, and receive proceeds from the sale of assets per the waterfall mechanism in Section 53 of the Code.

Q12. Can aggrieved employees, operational creditors appeal against not settlement of any outstanding claims?

A. Any person who is a party to, and aggrieved by, a resolution plan may appeal to the National Company Law Appellate Tribunal (NCLAT) under Section 61(3)(iii) of the Code. The appeal be within the grounds permitted.

Q13. Within what period from the approval of a resolution plan will a resolution applicant have to pay the resolution amount?

A. A payment schedule has to form part of a resolution plan, and on its approval, it binds all stakeholders. Therefore, the resolution plan will stipulate the period within which payment is to be made, and it will bound by it, upon the plan being approved by the COC and the NCLT.

Q14. What is the status of personal guarantors in a CIRP?

A. Notwithstanding the pendency of CIRP, Financial Creditors may invoke personal guarantees for causing payment of the debts of the Corporate Debtor.

Q15. Where would the CIRP process be initiated, if a Corporate Debtor has, for example, a corporate office in Delhi and its registered office in Mumbai?

A. The CIRP will have to be initiated in the jurisdiction of the Corporate Debtor’s registered office.

Q16. What is the application fee payable for initiating CIRP under the Code?

A. It is INR 2000 if the applicant is an Operational Creditor, and INR 25,000 if it is a Financial Creditor.

Disclaimer: This article is provided for informational purposes only and is not legal advice. For more advice on the topic, please contact the author.


Options for US Business in the Current Economic Downturn

Cost of EB 5 Visa

Duncan Hill is marketing director at Davies & Associates LLC. Duncan is not a lawyer and nothing in this blog constitutes legal advice.

 

Businesses across the United States are reeling from the economic impact of the Covid-19 Coronavirus outbreak. Furloughed employees, disrupted supply chain, cancelled purchase orders, nosediving share prices and shuttered premises are all compounding to create an unprecedented challenge.

Over the past decade, Davies & Associates has brought hundreds of businesses and entrepreneurs to the United States. Our L-1 clients have expanded their existing business to America, our E-2 Clients have set up new business or purchased franchises, and our EB-5 Immigrant Investor clients have been granted the freedom to pursue their own business objectives.

 

Cashflow is Key

These clients come from all over the world, and what they are finding is that America is one of the best places to own a business in a global economic downturn. The country’s resilience, stemming from its diverse economy and historic commitment to business, means there are a range of options available to help businesses weather this storm.

Cashflow is always key to a business, but never more so than over the next few months. Different businesses inevitably have different amounts of cash buffers available. While some may be able to withstand a few months of this crisis, others cannot survive more than a few weeks. Since no one knows for certain how long the current shutdown will last, many businesses are going to need help. The United States now has an unprecedented array of federal and state programs in place to assist through this crisis.

 

Payment Protection Program

The latest and most high-profile support measure to become available is the Payment Protection Program (PPP). This is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed by the president last week. The PPP is a loan scheme designed to prevent massive layoffs caused by disrupted trade and commerce.

The loans can be claimed for operating expenditures like salaries, health and retirement benefits, rent and mortgage payments, and utilities. Since funding is limited, loans to cover salaries are likely to be given preference.

Businesses claiming the loans are able to claim 100% forgiveness if they maintain headcount or rehire recently laid-off workers. You must also ensure not to reduce salaries by more than 25% for employees earning less than $100,000 a year. Those that do not comply will have to pay back some of the loan, deferred for 6-12 months, at an interest rate of 0.5%.

Businesses with 500 or fewer employees are eligible for this scheme, and this includes self-employed contractors. The CARES Act authorized $350 billion for the program. Because of its popularity it is advisable to apply early before funding runs out. Applications through approved lenders can be submitted from Friday 3rd April.

 

Economic Injury Disaster Loan

The Coronavirus pandemic has also been declared a disaster under the Small Business Administration Act, which means small businesses can also apply for an Economic Injury Disaster Loan (EIDL). Although businesses can apply for both EIDL and the PPP, there can be no double dipping with the PPP, so the loans must be used to cover different expenses.

Unlike the PPP, Economic Injury Disaster Loans are not new and have not been specifically introduced as a response to the Coronavirus pandemic. EIDLs include what is essentially a cash grant to businesses of $10,000. Any additional loan – up to the limit of $2 million- is subjected to repayment over three decades at low rates of interest.

 

State and Local Programs

Different states and municipalities are offering loans and grants of their own. For example, New York is offering grants to cover 40% of payroll and interest-free loans of up to $75,000 to businesses that can prove they have incurred losses of more than 25% because of Coronavirus.

Chicago is providing low interest loans to businesses with fewer than 50 employees and San Francisco is offering cash grants of up to $10,000 for companies with between 1 and 5 employees provided annual gross revenue is less than $2.5 million.

 

Tax incentives

Most people are aware that many taxpayers are in line for a $1,200 one-time rebate and that the deadline for filing federal taxes has been pushed from April to July. Other changes include the removal of a 10% penalty on people seeking to access retirement funds early, deferral of payroll taxes, and alterations to the tax on charitable contributions. Davies & Associates has a tax team able to assist clients with understanding their options.

 

International Debt Collection

Looking beyond the short-term assistance programs, the global economy is likely to be in disarray when it gets going again. One feature may be that people have difficulty paying their bills. D&A’s creditors’ advisory business can help chase payment of debts. Given the internationalization of modern supply chains, many debts will cut across national borders. D&A’s international reach, with offices and partnerships around the globe, means we can pursue debts for clients both in their home country and overseas. Debt collection in the United States is governed on a state by state basis

 

Bankruptcy

For firms struggling to pay their bills, one possible option is the bankruptcy system. While the term bankruptcy often implies something terminal, in the United States it is possible for firms to file for bankruptcy and continue operating. Under Chapter 11 of the bankruptcy code it is possible to reorganize your business and renegotiate your debts. Chapter 13 offers something similar for individuals on fixed incomes. The most common form of bankruptcy in the United States is Chapter 7 where assets are liquidated to pay off debts. It is important to engage an attorney to understand which assets could be legally protected from the liquidation process.

 

D&A Corporate Team

As you can see, there are lots of different measures in place to help individuals and businesses amid this unprecedented global crisis. And we are here to help. While D&A is most known for bringing people to the United States, we are often less well known for our corporate work once they get there.

Yet for certain visa categories, corporate work is essential. Immigration law and corporate law are natural bedfellows. For example, all new E-2 Visa applications and any “new office” L-1 Visas require a US entity to be established as part of the visa process.

Once these clients have moved to the United States, we stick by their side. Offering ongoing corporate services and tax advice in good times as well as tougher times.

 

These are some tough times and we are here to help.