Insolvency Act, 2063

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Insolvency Act, 2063

• Jogendra Ghimire

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Fundamentals

• Deals with insolvency of corporate entities
• Provides for either rehabilitation or liquidation
  of companies
• Also provides for commercial court, insolvency
  office and insolvency practice
• Time bound procedures

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Insolvency proceeding can be initiated by --

• The company itself
• 10 of the total creditors
• 5 of either shareholders or debenture holders
• Liquidator of a voluntary liquidation
• By NRB in case of banks Insurance Board in case
  of insurance companies
• Withdrawal of petition allowed only by court
  order
• No matter who initiates, has to be sufficiently
  justified, with due compliance

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Initiation of insolvency proceedings by creditors

• Balance Sheet test v cash flow test
• Can be initiated only by Court Order
• Which is preceded by a notice for payment
• Which is preceded by a default

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Petition to set aside notice

• If there is a genuine dispute on the existence of
  debt
• Or that the debt is payable
• But no ex-parte ruling
• Creditor given seven days to appear

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Insolvent when?

• Share holders say so through a special resolution
  or the Board says so
• Company fails to pay debt demand notice, or does
  not challenge it
• Total assets are less than liabilities

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After submission of petition

• Hearing date within 15 days
• Interim administrator may be appointed
• Information to all interested parties
• Provision for continuous hearing
• Could result in --- insolvency review
  administrator
• And, interim order if there are risks related to
  wrongful disposal of assets, management of
  company, or enforcement proceedings

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Insolvency review to check....

• Finances of the company to consider
• Immediate liquidation
• Restructuring/rehabilitation
• If really insolvent
• Recommendation on the basis of creditors
  resolution and company proposal (comparable to
  voluntary/informal restructure)
• Possible outcomes
• 1. Appointment of liquidator
• Restructure manager
• Declaration that the company is solvent
• Additional time

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During insolvency review

• Management to continue to work under supervision
  of review administrator
• Could remove directors from control of company
• May raise funds to be treated as priority
  creditors
• Report with recommendations and justification for
  future course of action

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During insolvency proceedings...

• Freeze on all transactions and enforcement
  actions essentially anything that could result
  in reduction in optimum value of company
• A general moratorium on creditors rights and
  contractual rights
• Idea is to maximize the returns from the assets
  of company and to have all options open

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Creditors Meeting

• 15 day notice to make claims
• 7 day notice for meeting
• Creditors have to accept the restructure
  proposal or else vote for liquidation
• Secured creditors can not vote
• But they can be restrained by court from disposal
  of assets if that jeopardizes the whole
  restructuring

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Creditors meeting

• The outcomes can be challenged
• substantial injustice test
• If the resolutions are unfair to the unsecured
  creditors
• Serious irregularities in the conduct of the
  meeting
• Misleading information on the health of the
  company

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Restructure proposal can include either of --

• Debt to equity conversion, with creditors
  participation
• Disposal of non essential assets
• Conversion of debt into bond or preference shares
• Change in the company management
• Merger with another company

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Role of the Court

• The judge is not a restructure expert, and should
  not act as one
• Primarily supervise the procedure, ensure no
  unfair dealing, and proper compliance with law
• Should be extremely careful about the efficiency
  and certainty of the process
• But is that possible, looking at track record?

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Liquidation

• Only by court order in case of company under
  insolvency restructure
• Based on the report of the insolvency review
  administrator
• Of if creditors reject restructure proposal
• Once appointed, the liquidator takes charge,
  invites claims from creditors, disposes off
  assets and distributes

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Seniority of claims

• Liquidation expenses
• Staff salaries at the time of liquidation order
• Other claims of staff leave, gratuity etc
• Creditors claims

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Other provisions

• Concept of voidable transactions preferential
  non arms length transactions fraudulent
  transactions
• Regulation of the profession of insolvency
  practitioners
• CRO to act as temporary Office