Tag: IBC

Laws Opening The Doors For Start-Up In India

March 25, 2022
/ Leave a Comment on Laws Opening The Doors For Start-Up In India

9 min
2 years
1,718 word
1

Tagged capital, eligible start-ups, Finance, funding, IBC

Laws Opening The Doors For Start-Up In India

Keywords:- Start-up, Indian start-ups, finance, funding, capital, eligible start-ups

Author – Riya Garg

Introduction
Role of Finance in Development of a Start-up
Conditions for Becoming an Eligible Start-up
Benefits of Start-up India
Other Measures to Promote Start-ups
Conclusion

Introduction

Start-ups are the future of India. In fact, India is the third largest start-up ecosystem in the world. Although the coronavirus (COVID-19) pandemic affected the Indian economy hard, the start-up environment grew in contrast to the national recession. As on June 3, 2021, over 50,000 start-ups have been recognized as start-ups by the DPIIT. Out of this 19,896 were recognized as early as since April 1, 2020. Unfortunately, the majority of these start-ups fail to make it big. One of the biggest reasons for the same is the failure to secure investments.

Role of Finance in Development of a Start-up

Finance is crucial for companies, and obtaining sufficient quantities is usually a challenge. A timely inflow of finance is required for business scaling. A recent report reveals that about 85% of the new companies are ‘underfunded’ indicating potential failure in the future. In recent years, large Indian companies including the Tata conglomerate and the founders of Flipkart had ventured into investing in small businesses. Many companies known by their brand names benefitted from funding and saw significant growth over the last decade. Eventually they became common household names. Ride-hailing business Ola, lodging chain OYO, digital payment provider Paytm, as well as online food app Swiggy are among them.

Conditions for Becoming an Eligible Start-up

The Indian government is aware of the role of these start-ups in country’s economy. Thus, they have made serious efforts to extend support to them. Prominent among them would be the Stand-up India campaign launched in 2016, by the government of India. It was established with an aim to promote and support the start-ups in India by providing bank finances. The scheme provides a number of benefits as well as exemptions to ‘eligible start-ups’. However, before discussing about them, it is necessary to know what qualifies as an ‘eligible’ start-up. For a start-up to be recognized as ‘eligible’ for availing benefits under the scheme, the following conditions should be met:

Should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership. It can be incorporated in various forms such as company including a one-person company, limited-liability partnership or a partnership firm
Should have a turnover of less than INR 100 Crores in any of the previous financial years since its incorporation
Should not have completed 10 years since the date of its incorporation. Start-ups in the biotechnology sector have been provided an extended period of three more years from its incorporation. But there are certain further stipulations like the turnover for any of the financial years since incorporation has not exceeded ₹25 crores (as per the Companies Act). Further, the entity is working towards innovation, development or improvement of products or processes or services. If it is a scalable business model with a high potential of employment generation or wealth creation it is also ₹25 crores
Should be working towards innovation/ improvement of existing products, services as well as processes. It should also have the potential to generate employment/ create wealth

Benefits of Start-up India

Moreover, an entity formed by splitting up or reconstruction of an existing business shall not be considered a “Start-up”. Some of the key benefits of Start-up India are as follows:

To reduce the patent registration fees.
Improvement of the Bankruptcy Code ensuring a 90-day exit window.
To provide freedom from mystifying inspections as well as capital gain tax for the first 3 years of operation.
To create an innovation hub under the Atal Innovation Mission. The GoI launched the Atal Innovation Mission to promote entrepreneurship through Self-Employment and Talent Utilization (SETU). It is a platform where innovators would be supported and mentored to become successful entrepreneurs.
Targeting 5 lakh schools along with the involvement of 10 lakh children in innovation-related programs.
To develop new schemes that will provide IPR protection to start-up firms.
Encourage entrepreneurship throughout the country.
Promote India as a start-up hub across the world.

Other Measures to Promote Start-ups

Other measures taken by the government that promote start-up culture in India are:

Make in India

The “Make in India” policy recommends holding a “Start-Up fest” at the national level every year. It brings all stakeholders in the start-up ecosystem together on one platform.

Incubator

Incubator set up by PPP – Incubators are organizations set up with the specific goal of assisting entrepreneurs with building and launching their start-ups. Incubators provide a variety of value-added services (office space, utilities, administrative and legal support, and so on). They also frequently make grants, debt, and equity investments. In order to ensure professional management of Government-sponsored or funded incubators, it will create a policy and framework for setting-up of incubators across the country in public-private partnerships. The incubator shall be managed as well as operated by the private sector.

Section 54 (G) (B) of the Income Tax, 1961

It offers an exemption of tax on capital gains made by selling a residential property or a piece of land. It also includes investing the sum in equity shares of a start-up company. This exemption was available for investments made only till 31 March 2019. As per the latest amendment, the exemption is now extended until 31 March 2021.

Certain start-ups which are incorporated between the 1st day of April, 2016 and the 1st day of April, 2019 (now extended by two more years to 1st day of April, 2021) are also eligible for tax benefits. A certificate of an eligible business from the Inter-Ministerial Board of Certification of Department of Industrial Policy and Promotion is a pre-requisite for availing the benefits. The definition of “eligible business” under the Income Tax Act has been now expanded. It means a business carried out by an eligible start-up engaged in innovation, development or improvement of products, processes or services. It also includes a scalable business model with a high potential of employment generation or wealth creation.

Labour Laws

Start-ups essentially need compliance of the prevailing labour laws. To ease the labour law compliances the Ministry of Labour & Employment has allowed the start-ups to self-certify compliance under various Labour Laws. It includes The Payment of Gratuity Act, 1972, The Employee’s State Insurance Act, 1948, The Contract Labour (Regulation And Abolition) Act, 1970, Employees’ Provident Funds & Miscellaneous Provisions Act, 1952, The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979). It has increased the tenure of compliance of self-certification under the Labour laws from 3 to 5 years. Also, certain type of Start-ups will not require certain environment clearances under some Environmental Acts.

Reduced Patent Fees

Reduced patent fees (rebate up to 80% of ordinary expenses) for patent applicants will undoubtedly stimulate innovation under the Start-ups Intellectual Property Protection Act. Start-ups will receive a 50 percent discount on trademark filing fees under the new revised Trademark Rules. It’s also a good idea to provide patent and trademark facilitators. The Ministry of Corporate Affairs has notified sections 55 to 58 of the Insolvency and Bankruptcy Code, 2016, to expedite the insolvency resolution process. Also, the fast track process covers a Start-up (other than a partnership firm) as per government policy.

Encourage Finance for Start-ups

To further encourage investments in start-ups by Foreign Venture Capital Investors (FVCI), the regulatory provisions have been accordingly amended. It includes Schedule 6 of Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000. It is also inclusive of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment) Regulations, 2016. A FVCI may contribute up to 100 percent of the capital of an Indian company engaged in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000. This is inclusive of start-ups irrespective of the sector in which it is engaged, under the automatic route. Start-ups can issue equity or equity-linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the FEMA Regulation.

Indian Start-up with Overseas Subsidiary

Indian start-ups with an overseas subsidiary can open a foreign currency account with a bank outside of India. It can also deposit foreign exchange earnings from exports/sales produced by the start-up or its overseas company into the account. The balances which represent exports from India shall be repatriated to India. This will be done within the period prescribed for realization of exports, in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12, 2016.

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) has also allowed Indian start-ups to raise funds through a ‘Convertible Note’. It is an instrument issued by a start-up company. As an Evidence of receipt of money initially as debt, which is repayable at the holder’s option or which is convertible into equity shares of the start-up company. It needs to be done within a period not exceeding five years from the date of issue on the occurrence of certain specified events. This is as per the other terms and conditions, within a period not exceeding five years. A person residing outside of India can buy these convertible notes.

The ones that are issued by an Indian start-up company for a single tranche of Rs. 25 lakh or more can be easily bought. However, a start-up operating in a sector that requires government approval for foreign investment can only offer convertible notes to people who live outside of India with such approval.

Government Loan Schemes

The government has initiated a few loan schemes to provide collateral-free debt to aspiring entrepreneurs. It is done to help them gain access to low-cost capital. The schemes include Start-up India Seed Fund Scheme as well as SIDBI Fund of Funds.

Conclusion

A sound knowledge of all the legal intricacies in starting and managing the start-ups can help a long way to scale up the start-ups which will in turn result in the overall growth of the Indian economy.

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Technological Development Relevant to the Future of Growing Startups

Technological Development Relevant to the Future of Growing Startups

This Write-up is edited by Somprikta Banerjee

Scope of Mediation in Insolvency Proceedings

Article / Law

February 27, 2022
/ Leave a Comment on Scope of Mediation in Insolvency Proceedings

6 min
2 years
1,174 word

Tagged IBC, Insolvency and Bankruptcy, Keywords:- Mediation

Scope of Mediation in Insolvency Proceedings

The Insolvency and Bankruptcy Code of 2016, (IBC) was enacted to protect creditors’ rights to the timely payment of their debts and to reduce non-performing assets.

Keywords:- Mediation, Insolvency and Bankruptcy, IBC

Author: Sonali Singh

Mediation, according to BLACK’s legal dictionary, is a non-binding conflict settlement approach employing a neutral third person who attempts to assist disputing parties in reaching a mutually accepted solution. However, using a mediator to reach an agreement is a novel addition to the corporate insolvency resolution procedure.

Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code of 2016, (IBC) was enacted to protect creditors’ rights to the timely payment of their debts and to reduce non-performing assets. This Act empowers creditors to seize control of debtor corporations and devise a resolution plan for the company’s reorganisation and rebirth. On behalf of the creditors, the insolvency experts authorised under the Code assume control of the company, its management, and its assets. This is a time-limited process that is estimated to take 180 days to complete, with a maximum extension of 90 days.

Mediation is an essential kind of alternative dispute resolution. It’s a private, voluntary process in which parties interact and negotiate with the help of a neutral third-party mediator. It is a cost-effective and quick procedure. It’s a method that allows all stakeholders to directly participate in the process.

Three objectives of insolvency mediation:

resolution of the plan and bankruptcy-related disputes;
facilitation of negotiations on a restructuring plan;
prevention of insolvency.

Scope for Reform under IBC

Firstly, insolvency mediation can be used to resolve disputes for individuals and partnership firms. In cases of personal insolvency, court proceedings help in managing repayment and availing discharge under the Code. However, this process alone may not adequately achieve the aim of personal insolvency rehabilitating the debtor and avoiding repeated insolvency.

The Insolvency and Bankruptcy Board of India (IBBI) Working Group on Individual Insolvency recommended mediation for personal insolvency as “the majority of insolvency and bankruptcy proceedings involving individuals may not involve contentious issues, voluminous stakeholders, and high amount of debt or disputes justifying adjudication by authorities such as the Debt Recovery Tribunals (DRT). Following this recommendation, the Code can be suitably amended to allow for court-ordered informal and out-of-court mediated settlements in individual insolvency cases.

Secondly, through multi-party negotiations, mediation can be utilised to aid the collective settlement of several creditors’ claims against the corporate debtor company. In this case, mediation could be initiated by the creditors’ committee and the bankruptcy resolution expert. As previously stated, this would aid in the formulation of a holistic resolution strategy that takes into account the shared interests of all stakeholders.

Finally, due to the fact that the IBC is a new law and mediation in the country is still in its early-stages. Court-ordered mediation on a case-by-case basis will be more suited for all sorts of insolvency cases than required pre-litigation mediation. In this case, judicial guidance on when insolvency mediation should be initiated is required. These provisions should meet the Code’s requirement that insolvency matters be referred to mediation by the courts. These can be made based on a set of standards for income, assets, and debt.

Mediation

Mediation is a type of ADR in which a neutral third party strives to assist disputing parties in reaching an amicable settlement and a mutually acceptable agreement. It is a type of Alternative Dispute Resolution that has been given legal standing in India.

The Insolvency & Bankruptcy Code governs insolvency processes in the country, and it has proven to be effective in helping lenders recover their funds. Despite its strong recovery rate, it has produced a persistent fear of persecution among businesses, particularly small and medium-sized businesses (SMEs). Under normal circumstances, corporate insolvency should take 270 days to complete from start to end. However, because of the large backlog of cases that overburdens the National Firm Law Tribunal, and the time-consuming process of choosing whether to liquidate the company or adopt a resolution plan, the pendency in most cases exceeds a year.

What happens if the parties reach an agreement?

Mediation is successful when all the parties reach an agreement. The parties sign a “mediation settlement agreement.” The bankrupt will be required to comply with all conditions of the agreement.

What happens if the parties cannot agree?

Surplus income mediation

If mediation fails, the Licensed Insolvency Trustee (LIT) may apply to the court to fix, by order, the amount the bankrupt is required to pay the bankruptcy estate.

Discharge mediation

If mediation fails or the bankrupt does not comply with the conditions of the mediation settlement agreement, the LIT asks the court for a hearing to decide the matter

HIGH COURTS

The Calcutta High Court concluded in Gouri Prasad Goenka v. State Bank of India that the moratorium provided by Section 14 of the Code does not prevent a wilful defaulter declaration proceeding. This refers to the dissemination of credit information about wilful defaulters in order to alert banks and financial institutions so that no further bank finance is made available to them. Rather than for the recovery of the corporate debtor’s debts or assets, which could stymie the insolvency resolution process (CIRP). The High Court further stated that an act of intentional default done by a promoter/whole-time director/guarantor of the corporate debtor who was in charge at the time is not automatically wiped out by the statute of limitations.

NATIONAL COMPANY LAW APPELLATE TRIBUNALS

In Mr. Rakesh Kumar Agarwal and Others v. Mr. Devendra P. Jain, the National Company Law Appellate Tribunal (NCLAT) of New Delhi held that the government notification dated June 1, 2020. Concerning changes to the classification of micro, small and medium enterprises (MSME) under the Micro, Small and Medium Enterprises Development Act, 2006, will apply to corporate debtors whose liquidation process was still pending under the Code. The NCLAT in New Delhi overturned an adjudicating authority’s decision that the notification was inapplicable to corporate debtors. As it went into effect at a later date while reiterating that the Code’s main goal is to resolve insolvency and that liquidation of a corporate debtor is only a last resort.

In Jayanta Banerjee v. Shashi Agarwal Liquidator of INCAB Industries Ltd and Ors. the NCLAT in New Delhi decided that the term ‘collation’ under Section 21(1) of the Code. It refers to the verification of creditors’ claims, or the comparison of a copy with its original to verify its validity. According to the NCLAT in New Delhi, a meeting of the committee of the creditors (CoC) cannot be held without the verification and admission of the creditors’ claims, followed by the assignment of voting shares to such creditors.

Conclusion

Mediation is viewed as a more efficient, quick, and cost-effective alternative to going to court to resolve a disagreement. Several initiatives have been made to promote the use of insolvency mediation in practise and legislation, particularly in pre-insolvency procedures without the involvement of an insolvency practitioner. Although research is currently limited, the Dutch pilot on insolvency mediation has shown promise. In this case, views from the United States could be useful. Given their success in creating a professional and seasoned practise.

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Article

December 12, 2020
/ Leave a Comment on Position of Guarantors under the IBC

4 min
3 years
772 words

Tagged CIRP, IBC, IBC 2016

Position of Guarantors under the IBC

AUTHOR : ISHIKA CHATTOPADHYAY In the judgment of Dr. Vishnu Kumar Agarwal v. M/s Piramal Enterprises Limited [Company Appeal (AT) (Insolvency) No. 346 and 347 of 2018, NCLAT (order dated January 8, 2019)], the NCLAT had […]

AUTHOR : ISHIKA CHATTOPADHYAY

In the judgment of Dr. Vishnu Kumar Agarwal v. M/s Piramal Enterprises Limited [Company Appeal (AT) (Insolvency) No. 346 and 347 of 2018, NCLAT (order dated January 8, 2019)], the NCLAT had to decide on two contentious issues, viz. whether two separate Corporate Insolvency Resolution Processes (CIRP) initiated against two corporate guarantors will be maintainable in case the claim or default is same; and whether a CIRP can be initiated against a corporate guarantor in case the principal debtor is not a corporate person. The NCLAT held that in case of the same set of claims or default, a financial creditor cannot initiate a CIRP against one corporate debtor, which may either be the principal borrower or the corporate guarantor, if an application for initiating CIRP has already been admitted against another corporate debtor. The dilemma with the abovementioned Piramal judgment is that it takes a route contrary to settled position of law regarding the treatment of guarantors under insolvency proceedings.

Position of guarantors under Indian Contract Act, 1872

Under Section 128 of the Indian Contract Act, 1872 it is provided that in a contract of guarantee, the surety has a liability that is “co-extensive” with the liability of the principal debtor, which essentially means that a creditor can initiate simultaneous proceedings against the principal debtor and the surety, in recovery of his dues, and it is not mandatory that the creditor has to exhaust his remedy against the principal debtor before initiating proceedings against the surety.

Position of guarantors under the Insolvency and Bankruptcy Code, 2016

Section 14 of the IBC provides for the imposition of a moratorium which prohibits institution or continuation of any suit or proceeding against the corporate debtor as well as any action to recover or enforce any security interest created by the corporate debtor on its property. There has been confusion with respect to applicability of moratorium under Section 14 of the Code since its very inception, and several cases have ensued before the NCLTs as well as NCLAT. The Insolvency Law Committee was constituted by the Ministry of Corporate Affairs to find solutions to this confusion. The Committee suggested that all assets of the guarantors to the corporate debtor should be kept outside the ambit of moratorium imposed under the IBC. Accordingly, the Insolvency and Bankruptcy Code (Second Amendment Act), 2018 came into being, whereby clause (b) was inserted to sub-section (3) of Section 14 of the Code, which provided that the moratorium will not be applicable to the guarantor of a corporate debtor. There are therefore no provisions in the Code which restricts a creditor to institute a CIRP against the principal debtor and the guarantor at the same time.

It must be mentioned in this context that the very purpose of the enactment of the IBC was to induce availability of more credit in the market by facilitating the recovery of dues by creditors. The Amendment Act of 2018 goes in the same direction as it upholds the basic principles of a contract of guarantee even during a period of moratorium.

Dilemma regarding the Piramal Judgment

The very nature of a contract of guarantee is to secure the lender by enabling him to proceed against both the principal debtor and the surety, without a requirement to exhaust the remedy against one of them before he can proceed against the other. The Piramal judgment goes against this very principle by saying that a financial creditor cannot initiate a CIRP against one corporate debtor when an application for initiating CIRP has already been admitted against another corporate debtor. It may be argued here that IBC being a special law, its effects will override those of the Contract Act, but the IBC itself does not have any bar on the institution of a second CIRP as ruled in the judgment. In fact, the IBC, under Section 14 excludes the assets of the surety in a contract of guarantee from the moratorium, thus enabling the institution of CIRPs against it. Also, under Sections 60(2) and (3) of the IBC, it has been provided that the same bench of the NCLT will be dealing with insolvency proceedings against a principal debtor and its corporate guarantor, thus once again implying that simultaneous proceedings may be instituted against them.

This judgment basically gives an escape route to a guarantor, thereby negating the very purpose of the enactment of the IBC as well as that of the Amendment Act of 2018. An appeal has been filed against the judgment in the Supreme Court and it will be interesting to see how the Apex Court interprets the position of guarantors and whether any subsequent amendments are brought about in the Code.

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