Module 8-12 Flashcards

Question

**The Concept of Haircuts under IBC**: ---

Answer 1

**FLASHCARD — Concept of Haircuts (IBC)** **📌 What Are Haircuts?** * **Haircut = Admitted Claims − Actual Recovery** * Represents the **loss / sacrifice / write-off** by creditors. * Occurs when the debtor cannot fully repay obligations. --- **📌 Why Are Haircuts Important?** * Central to evaluating IBC’s effectiveness. * Shows the **real financial impact** on creditors and distressed-asset markets. * Influences: * Banking sector stability * Creditor confidence * Economic health --- **📌 Reasons for Haircuts** **1. Deteriorated Financial Condition** * Debtor is usually distressed **long before CIRP**. * Operations shut or losses continuing. * Insufficient cash flows → enterprise value collapses. * Assets over-leveraged, non-productive. --- **2. Poor Asset Quality & Valuation** * Obsolete machines, non-operational plants, aging technology. * Land under litigation. * Brand value erodes as operations stop. * Realizable value << book value → deep haircuts. --- **3. Market Conditions** * Sectoral downturns → fewer buyers, lower bids (steel, power, real estate). * Weak credit availability + investor pessimism. * Niche industries → limited bidders. --- **4. Legal Complexities** * Litigation over title, security interests, avoidance transactions. * Challenges in NCLT/NCLAT/Supreme Court delay sales. * Prolonged disputes erode value → lower recovery. --- **5. Extended Resolution Timelines** * Although IBC mandates **330 days**, many cases exceed it. * Delays in admission, valuation, plan approval, etc. * Asset deterioration + market shifts → lower realization. --- **📌 Major Case Examples** **✔ Essar Steel** * **Claims:** ₹54,550 cr * **Recovery:** ₹50,200 cr * **Impact:** ~85% recovery → *minimal haircut* **✔ Bhushan Steel** * **Claims:** ₹57,000 cr * **Recovery:** ₹37,200 cr * **Impact:** ~63% recovery → *moderate haircut* **✔ Videocon Group** * **Claims:** ₹64,000 cr * **Recovery:** ₹3,000 cr * **Impact:** ~95% haircut → *near-total loss* --- **📌 Likely Impact on Creditors** **Financial Creditors (FCs)** * Massive losses, increased NPAs. * Higher provisioning requirements. * Reduced willingness to lend to risk-heavy sectors. **Operational Creditors (OCs)** * Usually lowest in priority → severe losses. * MSMEs hit hardest; disruption to supply chains. * Reduced trust in IBC mechanisms.

Answer 2

**🔹 What Is a Zero Haircut?** A **zero haircut** means **creditors recover 100% of their admitted claims**, i.e., *no loss at all*. **Characteristics:** * The resolution applicant pays the **entire admitted debt**. * Happens mostly in cases where: * The company is financially healthy but facing temporary issues. * Assets are of **high value** (brand, technology, land banks, operating profits). * There is strong business continuity and buyer interest. * Rare in insolvency cases because debtors usually reach CIRP at a late stage of financial distress. **Examples:** * Some MSMEs or firms where **going concern value** is high and liabilities are low. * Rare large-corporate cases (e.g., where promoters settle everything pre-admission under Section 12A). --- **🔹 What Is a Deep Haircut?** A **deep haircut** means creditors recover only a **small fraction** of their admitted claims — often **less than 20%**, sometimes **less than 5%**, or even **near-zero** recovery. **Characteristics:** * Indicates severe financial distress and value destruction. * Occurs when: * Assets are highly depreciated or obsolete. * The company has *no viable business model left*. * Heavy secured borrowings and very low realizable value. * Litigation, poor valuations, or negligible market interest. **Examples:** * **Videocon Group** – ~95% haircut. * **ABG Shipyard** – ~95%+ haircut. * Many real-estate and power sector insolvencies with near-zero recoveries. --- **🔹 Why Do These Haircuts Occur?** **Zero Haircut – Possible When:** * Business still has strong operational value. * Positive EBITDA or future profitability. * Strong bidders (strategic buyers). * Assets are premium: hospitals, steel plants, IT units, pharma units, etc. * Low complexity and limited litigation. * CoC strongly negotiates favourable terms. **Deep Haircut – Occurs When:** * Enterprise value severely eroded over years of default. * Assets are old, encumbered, or outdated. * Company is loss-making for long periods. * Insufficient bidder interest → low competition → low bids. * Heavy secured financing and very little unencumbered asset base. * Delays in CIRP → value erosion. --- **🔹 Economic Implications** **Zero Haircut Cases:** ✔ Strengthen creditor confidence ✔ Positive for banking sector ✔ Encourages bidders to compete aggressively ✔ Signals that IBC is functioning as intended **Deep Haircut Cases:** ✘ Weakens bank balance sheets ✘ Large economic losses + provisioning burdens ✘ Lower willingness to lend to risky sectors ✘ Criticism of IBC outcomes ✘ Concerns about valuation, delay, and liquidation efficiency --- **🔹 Why Aren’t Zero Haircuts Common?** Because most companies enter IBC **extremely late**, often after: * years of defaults, * legal disputes, * failed restructuring, and * operational shutdowns. By the time CIRP begins, **value destruction is already irreversible**.

Answer 3

📘 **💡 What Are Haircuts?** The reduction between **admitted claims** and **actual recovery** by creditors during **CIRP or liquidation**. Not expressly defined in IBC, but **derived from Sections 30, 31, and 53**. --- **📜 Where Does the IBC Refer to Haircuts?** **1. Section 30(2)(b) — Resolution Applicant Must Provide Payment Priorities** * RA must pay: * **Operational creditors** at least the amount they would receive in liquidation. * **Dissenting FCs** at least liquidation value. * Implies that CoC may approve a plan even if creditors accept a **significant haircut**. **2. Section 31 — Binding Nature of Approved Resolution Plan** * Once NCLT approves a plan, all stakeholders are bound by the **haircuts** imposed in it. --- **3. Section 53 — Liquidation Waterfall (Core Legal Basis for Haircuts)** * Establishes the priority order of distribution. * Haircuts arise when proceeds are insufficient to meet claims in full. * Unsecured creditors, government dues, and equity often face **massive haircuts**. --- **4. Regulation 35 — Valuation Rules** * Two registered valuers determine: * **Fair Value** * **Liquidation Value** * Haircuts become large when liquidation value is far lower than admitted claims. --- **5. Section 52 — Secured Creditors Realizing Security** * If sale proceeds of secured assets are lower than debt → deficit becomes **unsecured debt** → haircut arises under Section 53(e)(ii). --- **6. Section 12 / 12A — Timelines** * Delays reduce enterprise value → indirectly increase haircuts. --- **⚖️ Key Judicial Principles on Haircuts** *** *Essar Steel v. Satish Kumar Gupta* (SC, 2019)** * CoC has **commercial wisdom** to approve haircuts of any size. * NCLT/NCLAT cannot question the **reasonableness** of haircuts. *** *Swiss Ribbons (2019)* — Supreme Court** * Haircuts are logical because businesses come to IBC in distress. *** *Jaypee Infratech / Amtek Auto* judgments** * Even deep haircuts are permissible if justified through valuation and CoC votes. --- **🎯 Why Haircuts Occur (Legal Context)** * Value deterioration before admission. * Liquidation being value-destructive. * Low bidder interest. * Outdated assets → low valuation. * Large financial debt vs. limited realizable assets. --- **📌 Practical Indicators of Haircuts** * **Recovery % = Realisation / Admitted Claims** * Deep Haircut = less than 20% recovery. * Zero Haircut = 100% recovery (rare). --- **🔥 Exam Tip** Haircuts arise **not because IBC mandates them**, but because: * **Section 53’s waterfall + valuation rules + commercial wisdom of CoC** determine how much creditors actually recover.

Answer 4

**📌 What is Voluntary Liquidation?** * An **exit route for a solvent corporate person** who wants to cease operations. * Available only when the company **has not committed any default**. * Particularly useful for **small companies (< ₹1 crore paid-up capital)** because it offers an **easy, structured exit mechanism**. **📍 When Do Companies Opt for Voluntary Liquidation?** * The company has **ceased to operate its business**. * Business has become **commercially unviable**. * **Minimal or no revenue**. * Company simply wants to **shut down legally and dissolve**. --- **⭐ Essential Statutory Basis** * **Section 59, Insolvency & Bankruptcy Code (IBC)**. * **Voluntary liquidation** must meet conditions and procedural requirements as prescribed by the **IBBI Voluntary Liquidation Regulations**. --- **📝 Mandatory Declaration of Solvency** Majority of directors must give a declaration (with affidavit) stating: 1. They have **made a full inquiry** and the company **has no debt**, or will **pay debts in full** from sale proceeds. 2. The liquidation is **not intended to defraud any person**. **Supporting Documents:** * Audited financial statements of previous **2 years** (or since incorporation). * **Valuation report** by a registered valuer. --- **📌 Stakeholder Approval + Appointment of Liquidator** Within **4 weeks** of declaration: * **Special Resolution (75%)** to liquidate and appoint an **Insolvency Professional (IP)** as **Liquidator**, **OR** * A resolution triggered by **expiry of duration** of the company. **If the company has debt:** * **Creditors representing 2/3rd in value** must approve the resolution within **7 days**. --- **📩 Notification & Commencement** * Company must notify **ROC** and **IBBI** **within 7 days** of member approval or creditor approval. * **Liquidation Commencement Date (LCD):** * Date of **members’ resolution**, but **conditional** upon creditors’ approval (if applicable). ---

Answer 5

**📣 Public Announcement** * Liquidator must make a **public announcement** within **5 days** of LCD. * Stakeholders must submit claims within **30 days** of LCD. --- **📑 Key Timelines** * **Preliminary Report:** LCD + **75 days**. * **Completion of Liquidation:** LCD + **270 days** (regulatory framework). * **Distribution of proceeds:** Within **30 days** of realization. --- **⚙️ Conduct of Voluntary Liquidation** Sections **35 to 53 of IBC** apply with necessary modifications: * Powers & duties of the liquidator. * Verification and admission of claims. * Formation of the liquidation estate. * Sale of assets. * Distribution waterfall (Section 53). * Dissolution procedure. **Important:** * Liquidator **does NOT need** an NOC/NDC from the **Income Tax Department** (IBC overrides). --- **📤 Final Steps: Completion & Dissolution** When assets are fully liquidated: 1. Liquidator files an **application to NCLT (AA)** for **dissolution**. 2. NCLT passes an order dissolving the corporate person from that date. 3. Liquidator sends a copy of the order to the **registration authority** within **14 days**. --- If you want, I can also make a **1-page exam-summary** for voluntary liquidation, or separate flashcards on: * Declaration of Solvency * Public Announcement * Liquidator’s Powers (Section 35) * Distribution under Section 53 in voluntary liquidation

Answer 6

**📌 What is Voluntary Liquidation?** * An **exit route for a solvent corporate person** who wants to cease operations. * Available only when the company **has not committed any default**. * Particularly useful for **small companies (< ₹1 crore paid-up capital)** because it offers an **easy, structured exit mechanism**. **📍 When Do Companies Opt for Voluntary Liquidation?** * The company has **ceased to operate its business**. * Business has become **commercially unviable**. * **Minimal or no revenue**. * Company simply wants to **shut down legally and dissolve**. --- **⭐ Essential Statutory Basis** * **Section 59, Insolvency & Bankruptcy Code (IBC)**. * **Voluntary liquidation** must meet conditions and procedural requirements as prescribed by the **IBBI Voluntary Liquidation Regulations**. --- **📝 Mandatory Declaration of Solvency** Majority of directors must give a declaration (with affidavit) stating: 1. They have **made a full inquiry** and the company **has no debt**, or will **pay debts in full** from sale proceeds. 2. The liquidation is **not intended to defraud any person**. **Supporting Documents:** * Audited financial statements of previous **2 years** (or since incorporation). * **Valuation report** by a registered valuer. --- **📌 Stakeholder Approval + Appointment of Liquidator** Within **4 weeks** of declaration: * **Special Resolution (75%)** to liquidate and appoint an **Insolvency Professional (IP)** as **Liquidator**, **OR** * A resolution triggered by **expiry of duration** of the company. **If the company has debt:** * **Creditors representing 2/3rd in value** must approve the resolution within **7 days**. --- **📩 Notification & Commencement** * Company must notify **ROC** and **IBBI** **within 7 days** of member approval or creditor approval. * **Liquidation Commencement Date (LCD):** * Date of **members’ resolution**, but **conditional** upon creditors’ approval (if applicable).

Answer 7

--- * **📣 Public Announcement** * Liquidator must make a **public announcement** within **5 days** of LCD. * Stakeholders must submit claims within **30 days** of LCD. --- **📑 Key Timelines** * **Preliminary Report:** LCD + **75 days**. * **Completion of Liquidation:** LCD + **270 days** (regulatory framework). * **Distribution of proceeds:** Within **30 days** of realization. --- **⚙️ Conduct of Voluntary Liquidation** Sections **35 to 53 of IBC** apply with necessary modifications: * Powers & duties of the liquidator. * Verification and admission of claims. * Formation of the liquidation estate. * Sale of assets. * Distribution waterfall (Section 53). * Dissolution procedure. **Important:** * Liquidator **does NOT need** an NOC/NDC from the **Income Tax Department** (IBC overrides). --- **📤 Final Steps: Completion & Dissolution** When assets are fully liquidated: 1. Liquidator files an **application to NCLT (AA)** for **dissolution**. 2. NCLT passes an order dissolving the corporate person from that date. 3. Liquidator sends a copy of the order to the **registration authority** within **14 days**

Answer 8

**📌 Regulation 35 — Valuation of Assets Intended to Be Sold** * Liquidator must **first check if CIRP valuation reports exist** and whether **fresh valuation is needed**. * Appoint **two independent Registered Valuers**. * Each valuer determines **realizable value** of assets/business(es). * Liquidator computes **the average of both valuations** (final value). * Must maintain **strict confidentiality** of valuation figures. * Valuation feeds directly into the **Asset Memorandum (Reg 34)**. --- **📌 Regulation 36 — Asset Sale Report** After each sale, the Liquidator must prepare an **Asset Sale Report** stating: * **Realized value**. * **Cost of realization**, if any. * **Manner and mode of sale** (auction/private sale). * If realized value < Asset Memorandum value → **give reasons**. * **Name of the buyer**. * **Any additional relevant details**. --- **📌 Regulation 37A — Assignment of Not Readily Realisable Assets (NRRA)** * Liquidator may **assign/transfer** a “Not Readily Realisable Asset” (NRRA) through an **assignment agreement**. * Must be done **in consultation with the Consultation Committee**. * NRRA includes: contingent claims, disputed receivables, litigation claims, sub-judice assets, etc. * Assignment allows quicker cash recovery instead of waiting for litigation. --- **📅 Liquidation Timeline (Key Milestones)** * **T = Liquidation Commencement Date (LCD)** * **T + 5 days:** Public Announcement (PA). * **T + 7 days:** * Appointment of **Registered Valuers**. * Formation of **Stakeholders Consultation Committee (SCC)**. * **T + 30 days:** Asset Memorandum. * **T + 75 days:** Preliminary Report. * **T + 365 days:** Target completion of liquidation (Reg 44 — 1 year for most cases). --- **📑 Key Reports Required During Liquidation** **📝 Preliminary Report (T + 75 days)** Must include: * Capital structure. * Assets & liabilities as on LCD. * Enquiries/investigations conducted. * Proposed mode of sale; timeline for completion. * Whether early dissolution application under **Reg 14** is possible. --- **📊 Quarterly Progress Reports** Filed **within 15 days from end of every quarter**, covering: * Appointment & tenure of professionals. * List of stakeholders. * Details of assets: sold / realized / unsold. * Amounts distributed. * Fees paid to professionals. * Liquidator’s fee. * Ongoing material litigation. * Statement of receipts & payments in Liquidation Account.

Answer 9

**FLASHCARD — Essential Conditions for Voluntary Liquidation (Section 59 IBC + VL Regulations)** **1️⃣ Declaration of Solvency (Mandatory Starting Point)** Made by **majority of directors**, verified by **affidavit**, stating: * They have made **full inquiry** into the affairs. * **Company has no debt**, OR **will be able to pay debts in full** from liquidation proceeds. * The liquidation is **not intended to defraud any person**. **Mandatory Supporting Documents** * Declaration of Solvency. * **Audited financial statements** for last **2 years** (or since incorporation). * **Valuation report** by a Registered Valuer. --- **2️⃣ Stakeholder Approval + Appointment of Liquidator** Within **4 weeks of Declaration of Solvency**, members must pass: * A **Special Resolution (75%)** to liquidate voluntarily **and** appoint an Insolvency Professional as Liquidator; **OR** * A resolution for voluntary liquidation due to **expiry of duration** of the company + appointment of IP. **If the company owes debt**: * **Creditors representing 2/3rd in value** must approve the resolution **within 7 days**. --- **3️⃣ Notification & Commencement of Liquidation** * Company must **notify RoC and IBBI** within **7 days** of: * Members’ Resolution, or * Creditor Approval (if required). **Liquidation Commencement Date (LCD)** * Effective from **date of Members’ Resolution**, * **BUT conditional** on creditor approval where required. --- **4️⃣ Application of IBC Provisions (Sections 35–53)** Voluntary liquidation applies provisions relating to: * Powers & duties of Liquidator, * Claims management, * Asset sale & realization, * **Section 53 waterfall** for distribution. --- **5️⃣ End of Process — Dissolution** After full winding up & liquidation: * Liquidator files application before **Adjudicating Authority (NCLT)**. * NCLT passes **Dissolution Order** → Company stands dissolved. * Order to be filed with **RoC within 14 days**. --- **6️⃣ Statutory Public Announcement & Timelines** **Public Announcement** * Within **5 days of LCD**. * Stakeholders must submit claims within **30 days from LCD**. **Key Timelines** * **Preliminary Report + Stakeholders List**: LCD + **75 days** * **Completion of Liquidation**: LCD + **270 days** (Reg. 44) * **Distribution of proceeds**: Within **30 days** of realization. **Important** * **No requirement** for Liquidator to obtain NOC/NDC from Income Tax Department.

Answer 10

**Viyes Consultancy (P.) Ltd. vs. Registrar of Companies** It was held that when no claims were received pursuant to notice of claims by the liquidator and all the compliances were duly made u/s 59 of the Code, the Tribunal held the company to be liquidated. **GTS COIL (P.) Ltd. vs. NCLT–** The Directors and the members of the company decided to voluntarily liquidate itself on the ground that it was not financially viable for them to continue the business, The NCLT held the company was to be dissolved, provided statutory compliances are met. **RAD-MRO Manufacturing (P.) Ltd.,re** The directors made a declaration, the required majority approval of members was received and the company had no debt, the tribunal held, the company was eligible for ‘instant dissolution’.

Answer 11

**FLASHCARD — Essential Conditions for Voluntary Liquidation (Section 59 IBC + VL Regulations)** Made by **majority of directors**, verified by **affidavit**, stating: * They have made **full inquiry** into the affairs. * **Company has no debt**, OR **will be able to pay debts in full** from liquidation proceeds. * The liquidation is **not intended to defraud any person**. **Mandatory Supporting Documents** * Declaration of Solvency. * **Audited financial statements** for last **2 years** (or since incorporation). * **Valuation report** by a Registered Valuer. --- **2️⃣ Stakeholder Approval + Appointment of Liquidator** Within **4 weeks of Declaration of Solvency**, members must pass: * A **Special Resolution (75%)** to liquidate voluntarily **and** appoint an Insolvency Professional as Liquidator; **OR** * A resolution for voluntary liquidation due to **expiry of duration** of the company + appointment of IP. **If the company owes debt**: * **Creditors representing 2/3rd in value** must approve the resolution **within 7 days**. --- **3️⃣ Notification & Commencement of Liquidation** * Company must **notify RoC and IBBI** within **7 days** of: * Members’ Resolution, or * Creditor Approval (if required). **Liquidation Commencement Date (LCD)** * Effective from **date of Members’ Resolution**, * **BUT conditional** on creditor approval where required. --- **4️⃣ Application of IBC Provisions (Sections 35–53)** Voluntary liquidation applies provisions relating to: * Powers & duties of Liquidator, * Claims management, * Asset sale & realization, * **Section 53 waterfall** for distribution. --- **5️⃣ End of Process — Dissolution** After full winding up & liquidation: * Liquidator files application before **Adjudicating Authority (NCLT)**. * NCLT passes **Dissolution Order** → Company stands dissolved. * Order to be filed with **RoC within 14 days**. --- **6️⃣ Statutory Public Announcement & Timelines** **Public Announcement** * Within **5 days of LCD**. * Stakeholders must submit claims within **30 days from LCD**. **Key Timelines** * **Preliminary Report + Stakeholders List**: LCD + **75 days** * **Completion of Liquidation**: LCD + **270 days** (Reg. 44) * **Distribution of proceeds**: Within **30 days** of realization. **Important** * **No requirement** for Liquidator to obtain NOC/NDC from Income Tax Department. -

Answer 12

**Modes of Business (Non-corporate forms)** * **One Person Company (OPC)** * **Personal Guarantors (PGs) to Corporate Debtors** * **Proprietorships** * **Partnership Firms** * **Independent Individuals** – farmers, small traders, artisans, etc. --- **Government Policies Affecting Insolvency** **Loan Waivers** * Government-driven relief (e.g., farm loan waivers). * **Debt is legally extinguished → No default → No insolvency can be initiated on that waived debt.** **Bail-outs** * Capital infusion (equity or debt) to prevent failure. * Reduces or eliminates default → avoids CIRP/insolvency proceedings. **Enforcement of Security Interest** * **Moratorium** prohibits enforcement once insolvency begins. * In liquidation, a secured creditor may: * **Relinquish security** to liquidation estate **OR** * **Realize security outside liquidation** under Section 52. --- **Adjudicating Authorities** * **Individuals & Partnership Firms** → **DRT / DRAT** * **Personal Guarantors to Corporate Debtors** → **NCLT** * *Confirmed in* **Lalit Kumar Jain v. Union of India** – PG insolvency lies before NCLT. --- **Modes of Resolution under IBC for Individuals & Firms** **1️⃣ Fresh Start Process (FSP)** * For **low-income individuals** with **small “qualifying debts”**. * Complete discharge of eligible debts → genuine **clean slate**. **2️⃣ Individual Insolvency Resolution Process (IIRP)** * For any individual who commits default. * Focuses on a **Repayment Plan** negotiated between debtor & creditors. * Court-approved plan similar to a corporate resolution plan. **3️⃣ Bankruptcy** * Triggered when: * IIRP fails, **or** * Debtor/creditor directly applies. * Leads to **liquidation of individual’s assets** by a Bankruptcy Trustee → proceeds distributed to creditors.

Answer 13

**Chapter II, Part III — Sections 80 to 93** --- **Key Concept** A mechanism allowing financially distressed individuals with **very low income, minimal assets, and small debts** to obtain a **complete discharge of qualifying debts**. --- **Section 79(19): Qualifying Debt** Includes → *Amount due + interest + any sum due under a contract*. **Excludes:** * **Excluded debts** (fines, court-ordered damages, maintenance, student loans). * **Secured debts** (unless security value is deducted). * **Debts incurred within 3 months** prior to FSP application. --- **Section 80 — Eligibility for Fresh Start** The debtor (self or through RP) must meet **all** conditions: * Annual income **≤ ₹60,000** * Total asset value **≤ ₹20,000** * Total qualifying debt **≤ ₹35,000** * Not an **undischarged bankrupt** * **No dwelling unit** ownership * No ongoing: * Fresh Start Process * Individual Insolvency * Bankruptcy proceedings * No FSP application in the **preceding 12 months** --- **Section 81(2): Interim Moratorium** Starts **from the date of filing** and lasts until AA **admits or rejects** the application. * **All legal actions (pending or new)** regarding any debt are stayed. * Provides temporary **breathing space** for the debtor. --- **Section 81(4): Information Required** Debtor must submit: * List of **all debts** and creditors, with amounts & interest * Details of **security** held * Financial information of debtor + immediate family * Personal details * Reasons for seeking FSP * Details of any legal proceedings * Confirmation of **no FSP in past 12 months**

Answer 14

--- **Section 82 — Appointment of Resolution Professional (RP)** * After receiving the application, the **Adjudicating Authority (AA)** must **within 7 days**: → Direct the **IBBI Board** to confirm that no disciplinary proceedings are pending against the RP proposed. * If the Board rejects the proposed RP’s name → **Board must propose a new RP**. * If the debtor files the application **without an RP**, AA must ask the Board (within 7 days) to **nominate an RP**. * The Board must nominate an RP **within 10 days** of AA’s direction. --- **Section 83 — RP’s Opinion** The RP must examine the application + evidence to assess: * Whether **Section 80 eligibility criteria** are satisfied (income, assets, debt limits, etc.). * Whether listed debts are actually **qualifying debts**, not: → Excluded debts → Secured debts → Recent debts (incurred within 3 months) * The RP must submit a **Report to the AA** recommending **admission or rejection** of the application. --- **Section 84 — Admission or Rejection by AA** The **AA (DRT)** reviews the RP’s report and decides: * **Admission** if debtor satisfies all eligibility requirements and debts qualify. * **Rejection** if eligibility is not met or debts are non-qualifying. * The AA must send a copy of its order + application to **all listed creditors** within **7 days** of the order.

Answer 15

--- **Section 85 — Moratorium (Post Admission)** **Duration:** 180 days from date of admission. **Restrictions on the Debtor:** * Cannot act as a **director**. * Cannot **dispose of assets**. * Must inform **business partners** about the fresh start process. * Must disclose the process **before entering any financial or commercial transaction**. * Cannot **travel outside India** without AA permission. --- **Section 86 — Objections by Creditors** * After admission, creditors receive notice. * They may object within **10 days** on grounds that the debt is: * An **excluded debt**, * A **secured debt**, * A debt **incurred within 3 months** before application. * RP examines objections and finalizes the **list of qualifying debts**. --- **Section 87 — Appeal to AA** * A creditor/debtor may challenge RP’s Section 86 decision before AA **within 10 days**. * Grounds: lack of opportunity, procedural issues, collusion, etc. --- **Section 88 — Duties of Debtor** * Must **cooperate fully** with RP. * Provide financial information, attend meetings, update errors/changes. --- **Section 89 — Replacement of RP** * Debtor or creditor can apply to AA to replace RP. * AA refers matter to IBBI Board for nominating a new RP. --- **Section 90 — RP May Seek Directions** * RP can approach AA to compel debtor’s compliance with restrictions or duties. --- **Section 91 — Revocation of Order (By AA)** Grounds for revocation (application filed by RP): * Debtor becomes **ineligible** due to change in circumstances. * **Non-compliance** with statutory restrictions. * **Mala fide** conduct by debtor. AA must decide **within 14 days**. If revoked → Process ends and **moratorium ceases**. --- **Section 92 — Discharge Order** * RP submits final list of qualifying debts **7 days before moratorium ends**. * AA issues **Discharge Order** at end of moratorium. **Effects:** * Debtor discharged from all **qualifying debts**, including penalties & interest. * Does **not discharge guarantors** or any other persons liable for those debts.

Answer 16

**Purpose of IIRP** A structured process to resolve an individual’s debt through a **negotiated Repayment Plan**, initiated by either: * The **Debtor (Personal Guarantor)**, or * The **Creditor**. --- **Section 94 — Application by Debtor** A debtor who has committed a **default** may apply: * **Personally** or * **Through a Resolution Professional (RP)** to the **Adjudicating Authority (NCLT)**. --- **Eligibility Conditions (Who CAN apply)** * Application must relate **only to debts that are *not* excluded debts**. * Can be filed for any debt default, except those barred under the Act. --- **Who CANNOT apply (Disqualifications)** A debtor is **not entitled** to apply if they are: * An **undischarged bankrupt**; * **Undergoing**: * Fresh Start Process, * Insolvency Resolution Process (IIRP), or * Bankruptcy Process; * Have had **any application admitted in the last 12 months** (whether filed by the debtor or any creditor). * In case of a **partnership firm** → **A single partner cannot initiate IIRP alone** for the firm’s liabilities.

Answer 17

**📌 What is IIRP?** A structured, statutory process for resolving individual or partnership-firm debt through a **negotiated Repayment Plan**, initiated by: * **Debtor (including Personal Guarantor)** – Section 94 * **Creditor** – Section 95 --- **Section 94 – Application by Debtor** * Debtor who has **committed a default** may apply personally or through an RP. * AA: **NCLT**. * A single partner **cannot** file IIRP for entire firm’s liabilities. * Application can be filed **only for non-excluded debts**. **Debtor cannot apply if:** * Undischarged bankrupt * Under Fresh Start process * Under IIRP already * Under bankruptcy proceedings * OR had any IIRP application admitted in last 12 months --- **Section 95 – Application by Creditor** * Filed by creditor individually, jointly, or through an RP. * Can be filed **against firm or against individual partners**. * If filed against multiple partners, all applications shift to the AA hearing the first one. * Must issue a **14-day demand notice** first. * Must submit evidence of **default**. --- **Section 96 – Interim Moratorium** * Begins **immediately on filing** of S.94 or S.95 application. * Applies to **all debts** of the debtor. * Continues until AA **admits or rejects** application. * Stays existing legal proceedings; no new ones may be initiated. * If firm debt: protection extends to **all partners**. * Government may exempt transactions from moratorium. --- **Sections 97–99 – RP Appointment, Replacement & Report** **Section 97 – Appointment** * If application filed through RP: AA seeks Board confirmation within **7 days**. * If filed directly: AA asks Board to **nominate** an RP (within 10 days). **Section 98 – Replacement** * Debtor/creditor may seek RP replacement → AA → Board (10 days). **Section 99 – RP’s Report** * RP submits report within **10 days** of appointment. * Checks compliance, eligibility, cooperation. * Recommends acceptance or rejection. * If debt is registered with an IU, debtor **cannot dispute it**. * RP may recommend Fresh Start instead, if debtor qualifies.

Answer 18

--- **Section 100 – Admission or Rejection** * AA must decide **within 14 days** of receiving RP’s report. * Interim Moratorium under S.96 **ends here**. * If admitted → **Section 101 Moratorium** begins. --- **Section 101 – Moratorium (Post-Admission)** * Protects debtor from: * All debt recovery actions * Legal proceedings * Enforcement of security * Moratorium continues **until the Repayment Plan is approved, completed, or rejected**. --- **Transition to Repayment Plan** Once admitted under S.100: * Process shifts to preparing a **Repayment Plan** (Sections 102–104). * RP facilitates meetings with creditors. * Creditors vote to approve or modify the plan. --- **Fraudulent Intent** If AA finds the debtor filed the application **to defraud creditors**, the application is rejected and: * The creditor is expressly permitted to **initiate Bankruptcy proceedings**.

Answer 19

**Section 101: Moratorium** * Begins **from the date the application is admitted** by the AA. * Applies to **all debts of the debtor**. * Ends on the earlier of: * **180 days from admission**, OR * The date AA passes an order **approving/rejecting the Repayment Plan**. * All existing legal proceedings regarding any debt are **stayed automatically**. * Creditors **cannot initiate new suits or recovery actions**. * Debtor **cannot sell, transfer, mortgage, or dispose of assets**. * If the application concerns a **partnership firm**, moratorium protection **extends to all partners**. * Central Government may **exempt certain categories of transactions** from the moratorium. --- **Section 102: Public Announcement & Claims** * AA must issue a **public notice within 7 days** of admitting the application. * Creditors must submit claims **within 21 days** of the notice. * Notice includes: * Details of admission order * Name and contact details of the RP * Last date for submitting claims * Publication must be in: * One English daily * One vernacular daily **in the state where the debtor lives**. --- **LIST OF CREDITORS + REPAYMENT PLAN** **Section 104: Preparation of List of Creditors** * RP prepares the list **based on:** * Debtor’s disclosures in the application * Claims submitted by creditors * Must be prepared **within 30 days** from the public notice under Section 102. --- **Section 105: Repayment Plan** * **Debtor is primarily responsible** for drafting the plan. * Must be prepared **in consultation with the RP**. * Plan may give RP **enhanced powers**, including: * Managing debtor’s assets * Realizing non-exempt assets for repayment * Must be **fair, viable, and logically structured**. * Must include **clear provisions for payment of RP’s fees and costs**.

Answer 20

--- **1. Section 79(19) – Narrow Definition of “Qualifying Debt”** **Why it causes lapses** * Only *qualifying debt* can be discharged. * Excludes a wide range of debts: * **Excluded debts:** fines, penalties, damages, maintenance, student loans * **Secured debts:** any portion covered by security is removed * **Debts incurred within 3 months** prior to application * Many individuals with real financial distress carry exactly these types of obligations. **Effect** * **Majority of low-income distressed individuals do not qualify.** * Artificially narrows the scope of relief. * Undermines the "fresh start" philosophy because the debtor still remains burdened with essential debts (maintenance, penalties, secured loans, education loans). --- **2. Section 80 – Stringent Eligibility Thresholds** **Why it causes lapses** The eligibility conditions are extremely restrictive: * Annual income ≤ **₹60,000** * Asset value ≤ **₹20,000** * Total qualifying debt ≤ **₹35,000** * Must not own a dwelling unit * No ongoing insolvency, bankruptcy, or fresh start proceedings **Effect** * **Almost no one qualifies in reality** because DPIIT’s poverty thresholds and RBI household debt studies show higher levels of income/asset ownership even among the poor. * Personal dwelling criterion excludes even slum dwellers with occupancy rights. * The limits have **not been revised since 2016**, making them outdated against inflation. --- **3. Section 81 – Interim Moratorium: Too Short & Too Weak** **Why it causes lapses** * Starts from the date of filing and lasts only until admission/rejection. * Many DRTs are delayed; moratorium period becomes uncertain. * Protects only “debts” and **not criminal actions**, penalties, or secured enforcement until RP classifies debts. **Effect** * **Insufficient protection** for debtors facing coercive recovery actions. * Encourages creditors to hurry enforcement **before RP’s classification**. * Interim moratorium becomes practically ineffective due to procedural delays. --- **4. Section 86 – Creditor Objection Window Creates Litigation** **Why it causes lapses** * Creditors can object on any of these grounds: * Debt is excluded * Debt is secured * Debt incurred within 3 months * Objection period is **10 days**, but hearings and adjudication often drag on. **Effect** * **Delays the entire FSP**, defeating its purpose of providing quick relief. * Empowers creditors in a process aimed at rehabilitating low-income debtors. * Creates adversarial conflict in what is meant to be a welfare mechanism. --- **5. Section 87 – Easy Challenge Against RP’s Decisions** **Why it causes lapses** * Creditors can appeal to the AA against RP’s decision within 10 days. * Grounds are wide: procedural lapses, lack of opportunity, collusion, etc. **Effect** * Heightens litigation, increasing delays. * Adds burden on DRTs, which already face significant backlogs. * Undermines RP’s role and the intended simplicity of the process. --- **6. Section 91 – Revocation of Order** **Why it causes lapses** * RP can apply to AA to revoke FSP on broad grounds: * Debtor becomes ineligible * Debtor fails to comply with restrictions * Debtor acted malafide **Effect** * Creates **insecurity and uncertainty** for debtors — relief is not guaranteed even after admission. * Strict compliance requirements make process hostile for uneducated or low-income individuals unfamiliar with legal formalities. * Even minor procedural lapses can lead to revocation. --- **7. Section 92 – Narrow Scope of Discharge** **Why it causes lapses** * Debtor is discharged only from **qualifying debts**. * Excluded debts remain fully enforceable. * Debtor receives no relief for: * Secured loans * Penalties, fines * Court-ordered compensation * Maintenance obligations * Student loans **Effect** * Post-discharge financial recovery remains poor because significant debts survive. * Achieves only **partial relief**, inconsistent with the international meaning of “fresh start.” * Creates a situation where the debtor comes out of the process still burdened. --- **Summary: Why FSP Has Structural Weaknesses** The following systemic gaps create inherent deficiencies: 1. **Eligibility is too strict** (Section 80) 2. **Very narrow definition of dischargeable debt** (Section 79(19)) 3. **Weak protection during interim moratorium** (Section 81) 4. **Excessive creditor rights to object** (Section 86) 5. **Appeals against RP decisions delay process** (Section 87) 6. **Revocation risk keeps debtor insecure** (Section 91) 7. **Discharge is limited and incomplete** (Section 92) Result: ➡️ **Fresh Start Process becomes impractical, rarely used, and ineffective as a debt-relief mechanism.** ➡️ It fails to offer a true "fresh start".

Answer 21

**Overview** * Introduced in **2009** under UK Tribunals and Courts. * Governed by **Part 7A of the UK Insolvency Act 1986**. * Designed as an accessible, low-cost insolvency remedy for **low-income individuals with minimal assets** who cannot repay their debts within a reasonable period. --- **Eligibility Criteria** To apply for a DRO, the debtor must satisfy **all** the following: **1. Residency / Business Link** * Must be a **resident of England or Wales**, or * Must have conducted business there **within the last 3 years**. **2. No Recent DRO or Ongoing Insolvency** * No DRO obtained in the **last 6 years**. * Must not be: * Undischarged bankrupt * Subject to an existing IVA (Individual Voluntary Arrangement) * Subject to any other ongoing formal insolvency proceedings **3. Asset Limit** * Total **non-exempt assets < £1000**. * Debtor’s vehicle value **< £1000** (unless exempt for disability). **4. Debt Limit** * Total **unsecured debts < £20,000**. **5. Income Condition** * **Surplus disposable income ≤ £50/month** (after tax, national insurance, and reasonable household expenses). **6. Disqualifying Transactions** * In the **last 2 years**, debtor must not have: * Entered into **transactions at undervalue**, or * Given **preferential treatment** to certain creditors Otherwise → **DRO application rejected**. --- **Effect of a DRO** **Duration** * DRO lasts **12 months** from the date of issuance. **During the DRO Period:** 1. **Unsecured creditors are barred** from: * Taking legal action * Commencing enforcement * Contacting debtor for payment 2. **Debtor is not required to make payments** toward unsecured debts. 3. **Secured creditors**: * Continue to have full rights * May still enforce their security (e.g., repossession or mortgage enforcement) --- **Qualifying vs Non-Qualifying Debts** ✔ **Qualifying Debts (covered under DRO)** * Only unsecured debts that must be paid “now or in the future” * **Excluded debts are not included** in discharge. ✘ **Debts that Survive the DRO** Debtor must still pay these even after discharge: 1. **Child maintenance** and family-court ordered payments 2. **Student loans** 3. **Budgeting loans / crisis loans** from the Social Fund 4. **Secured debts** (mortgages, car loans) 5. **Court-ordered fines**, including drug-related offence fines 6. **TV licence fines / criminal penalties** 7. **Ongoing rent and regular household bills** 8. **Any debts incurred *after* the DRO is granted** --- **Purpose and Impact** * Acts as a **low-cost alternative to bankruptcy** for vulnerable and low-income individuals. * Offers genuine debt relief but maintains strict safeguards to prevent abuse. * Helps individuals with limited assets and income obtain a financial reset after 12 months.

Answer 22

**Statutory Basis** * Governed by **Title 11 of the United States Code (U.S. Bankruptcy Code)** * **Chapter 7** covers liquidation for individuals and businesses. * The most common form of personal bankruptcy in the U.S. --- **Purpose** * Designed for **individuals with little to no disposable income** who cannot repay debts. * Provides a **quick discharge** of most unsecured debts (credit cards, medical bills, utility arrears, unsecured loans). --- **Core Features** **1. No Repayment Plan** * Unlike Chapter 13, Chapter 7 has **no repayment plan**. * Instead, a **court-appointed Bankruptcy Trustee** liquidates *non-exempt* assets. --- **2. Role of the Bankruptcy Trustee** * Collects and sells non-exempt assets. * Investigates the debtor’s financial affairs. * Challenges fraudulent transfers (lookback period of 2–4 years depending on type). * Distributes sale proceeds to creditors according to U.S. priority rules. --- **3. Exempt vs Non-Exempt Assets** Debtor may keep (“exempt”) essential property, e.g.: * Basic household goods * Modest car or home equity * Clothing, tools of trade * Retirement accounts (401k, IRA – largely protected) Non-exempt assets (sold by trustee) may include: * Luxury items * Second home/vehicle * Investment property *Exemption levels vary by state; debtor may choose state or federal exemptions in most states.* --- **4. Automatic Stay (11 U.S.C. §362)** On filing the petition: * **All collection actions stop immediately**, including: * Lawsuits * Wage garnishment * Repossession * Foreclosure * Collection calls * Acts as a complete legal shield during the case. --- **5. Means Test (11 U.S.C. §707)** Prevents abuse of Chapter 7. Debtor qualifies if: * Income < state median → **automatic qualification**, or * Income ≥ median → must pass disposable-income calculation. If not eligible → case is dismissed or converted to Chapter 13. --- **6. Meeting of Creditors (341 Meeting)** * Debtor must attend. * Trustee and creditors may question the debtor under oath. * Usually short and procedural unless fraud is suspected. --- **7. Discharge (Typically within 60–90 days of the 341 Meeting)** * Most unsecured debts are permanently discharged. * Creditors can never collect discharged debts again. **Debts that *cannot* be discharged** * Domestic support obligations (alimony, child support) * Certain tax debts * Student loans (unless extreme hardship is proven – very rare) * Fines and penalties * Debts obtained through fraud, misrepresentation, or willful injury *A discharge does **not** eliminate liens; secured creditors may still take back collateral.* --- **8. Additional Debtor Options** * **Reaffirmation**: Debtor may voluntarily agree to keep paying a secured debt (e.g., car loan). * **Redemption**: Debtor pays market value of collateral in a lump sum to keep it. --- **9. Effect of Discharge** * Debtor gets a “fresh start.” * Case is closed after distribution and discharge. * Appears on credit report for **10 years**, affecting future credit access. --- **Why This Matters for Exams** Chapter 7 aligns closely with: * India’s **Fresh Start** and **Individual Insolvency Resolution** concepts * UK’s **DROs** and **bankruptcy** * Comparative analysis of liquidation-based vs repayment-based models ---

Answer 23

✅ **Clarification** * **CIRP** (Corporate Insolvency Resolution Process) * **Liquidation** * **Fresh Start**, **Individual Insolvency**, **Bankruptcy** …but **no Chapters 11 or Chapter 13 equivalents**. --- 📌 **FLASHCARD — U.S. Individual & Business Insolvency: Chapter 11 vs Chapter 13** **Chapter 11 – Reorganization Bankruptcy (U.S.)** **Purpose** * Allows corporations, partnerships, LLCs, and certain high-income individuals to **restructure their debts while continuing operations**. **Debtor in Possession (DIP)** * No trustee is automatically appointed. * Debtor becomes **DIP**, continues operating the business, and performs trustee duties (asset management, reporting, examining claims). * DIP may obtain **DIP financing** with *super-priority* over other creditors. **Reorganization Plan** * Debtor has **exclusive right** (120 days, extendable to 18 months) to file a plan. * After exclusivity expires, creditors can propose competing plans. * Impaired creditors vote on the plan. * Court holds ***confirmation hearing*** and approves plan if legal standards are met (feasibility, fairness, best-interests-of-creditors test). --- **Chapter 13 – Wage Earner’s Repayment Plan (U.S.)** **Purpose** * For individuals with regular income who want to **repay debt over time instead of liquidating assets**. **Repayment Plan** * Duration: * **3 years** if income < state median * **5 years** if income > state median * Maximum = **5 years** **Trustee’s Role** * A **Chapter 13 Trustee** collects monthly payments and distributes them to creditors. * Debtor deals **only** with trustee, not individual creditors. **Requirements** * Debtor must contribute all **projected disposable income** (income remaining after essential living expenses) into the plan. **Outcome** * After completion, remaining unpaid *eligible* debts are discharged.

Module 8-12 Flashcards

(47 cards)