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Management Notes

Constituents of Insurance Market

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The insurance market has evolved from the establishment of the first automobile insurance policy to the various types of life insurance products that are available today. The insurance market has a structure that involves property and casualty insurers, life insurers as well as health insurers. Each of these types of insurers have regulations that apply to the policies that they provide. Insurers are regulated by a combination of state and federal laws, depending on the type of insurance they offer.

Common Ownership

Many insurance companies are under a common ownership in which one corporation has one or more insurance business that act as independent companies. The most common type of common ownership for an insurance company is when it is established as a captive insurer. A captive insurer can be formed to provide coverage for various types of business risks. The most common type of captive insurer provides reinsurance coverage. This is a type of insurance where multiple insurance companies share the same loss.

Mutual Insurance Companies

A mutual insurance company is a company owned by policyholders. This means that each policyholder is given a vote to decide who will sit on the board of directors. A mutual insurance company can sell types of insurance or only provide one type of product or service to their customers. The earnings from a mutual insurance company are distributed to policyholders in the form of dividends.

Health Insurance

The insurance market also contains companies that provide health insurance policies to individuals as well as employers in the form of a group health insurance policy. Companies that provide a group health insurance policy to an employer are regulated by a combination of federal and state laws. States can also provide health insurance to residents if it is unavailable from a private insurer because of cost or ineligibility.

Life Insurance

Property and casualty insurers can also provide types of life insurance. A life insurance company can be a mutual insurance company or part of a stock insurance company. Companies that provide life insurance usually offer financial products to their policyholders, such as annuities and certain types of mutual funds.

Stock Insurance Companies

A stock insurance company is a company owned by stockholders. Unlike a mutual insurance company, a stock insurer not only needs to protect its policyholders but also maximize profits for the company’s policyholders. A stock insurance company can pay dividends to stockholders but generally do not pay dividends to their policyholders.

Property and Casualty

Property and casualty insurers offer various types of insurance for individuals to purchase, such as automobile and homeowners insurance. A property and casualty insurer can also offer types of commercial insurance, such as a small business package, general business liability, umbrella policies and workers compensation. Property and casualty insurers are regulated by laws in each state where they sell policies.

Management Notes

Importance of Ethical Behavior in Insurance Sector

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The Insurance Institute encourages the highest professional and ethical standards in insurance and financial services worldwide.

The Council and membership of The Insurance Institute look to all members to meet these standards and to maintain the reputation of The Insurance Institute by following this Code of Ethics and Conduct (the Code). It sets down the principles which all members should follow in the course of their professional duties.

Members are obliged to comply with this Code. If they do not comply, this may result in the Institute taking disciplinary action against the member.

The key values which set the standards for the behaviour of all members in respect of the key stakeholders in sections 1 to 5 are:

(a) Behaving with responsibility and integrity in their professional life and taking into account their wider responsibilities to society as a whole. Acting in a courteous, honest and fair manner towards anyone they deal with. Being trustworthy and never putting their interests or the interests of others above the legitimate interests of their stakeholders;

(b) Complying with all relevant Laws (including the laws of the Institute) and meeting the requirements of all applicable regulatory authorities, and appropriate codes of practice and codes of conduct.

(c) Demonstrating professional competence and due care including:

Meeting the technical and professional standards relating to their level of qualification, role and position of responsibility;

Completing their duties with due skill, care and diligence;

(d) Upholding professional standards in all dealings and relationships;

(e) Respecting the confidentiality of information;

(f) Applying objectivity in making professional judgements and in giving opinions and statements, not allowing prejudice or bias or the influence of others to override objectivity.

Members should respect the traditions and cultures of each country in which they operate. They should carry out business in any country according to all applicable local Laws, Rules and Regulations. Where there is a conflict between local custom and thevalues stated above, the Code will act as a guide to help members act professionally.

A member operating in a professional capacity has duties, arising from these key values, to a number of different groups. Within these relationships a member should always act ethically and their behaviour and conduct should meet the following principles:

Relations with customers

Members will seek to earn and maintain the trust of their customers at all times and should:

  • Give fair and proper consideration and the appropriate priority to the interests and requirements of all customers. Obtain and provide relevant information, including all necessary documentation and respect the confidentiality of information;
  • Avoid conflict between personal interests, or the interests of any associated company, person or group of persons, and their duties to all customers;
  • Avoid conflict between any competing interests of one or more customer(s), stepping aside in one or all matters if such conflicts cannot be resolved;
  • Act at all times with due skill, care and diligence;
  • Act only within the limits of personal competence and any limits of authorisation;
  • Act in a financially honest and prudent manner, including ensuring the protection of any money and /or property held on behalf of customers;
  • Act openly, fairly and respectfully at all times, providing all customers with due respect, consideration and opportunity;
  • Be honest and trustworthy with customers and communicate with them in a clear, prompt and appropriate manner;
  • Provide suitable and objective recommendations to customers;
  • Comply with all Laws and Regulations regarding the supply of goods and services to customers;
  • Not provide or accept money, gifts, entertainment, loans or any other benefit or preferential treatment from or to any existing or potential customer or provider, other than occasional gifts, entertainment or remuneration, which are provided as part of accepted business practice, and which are not likely to conflict with duties to customers.

Relations in employment

Members should aim to ensure good relations with their employer and employees and should:

  • Avoid conflict between personal interests, or the interests of any associated company or person, and their duty to their employer;
  • Not make improper use of information obtained as an employee or disclose, or allow to be disclosed, information confidential to their employer;
  • Seek to be a responsible employer or employee and be honest and trustworthy at work;
  • Act openly, fairly and respectfully at all times, treating other employees, colleagues, customers and suppliers with equal respect, consideration and opportunity;
  • Aim to take every opportunity to improve their professional capability, knowledge and skills;
  • Accurately and completely account for and report in employer records all business dealings;
  • Not provide or accept money, gifts, entertainment, loans or any other benefit or preferential treatment from or to any existing or potential supplier or business associate, other than occasional gifts, entertainment or remuneration, which are provided as part of accepted business practice, provided this is not likely to conflict with any duty that is owed to their employer.

In addition, where a member holds a position of influence within an organisation they should:

  • Provide, or encourage their employer to provide, suitable arrangements for the internal review of decisions, policies and actions where an employee raises concerns of unethical behaviour. (Employees should not be penalized for raising matters of ethical concern even if this results in a loss to the organisation or a customer);
  • Incorporate, or encourage their employer to incorporate, ethical standards into the organization’s governance standards, including the development of an ethical code.
  • Not disclose any employer/organisational confidential or sensitive information in written assignments.
Management Notes

Management of Risk by Individuals and Insurers

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Insurance Risk Management is the assessment and quantification of the likelihood and financial impact of events that may occur in the customer’s world that require settlement by the insurer; and the ability to spread the risk of these events occurring across other insurance underwriter’s in the market. Risk Management work typically involves the application of mathematical and statistical modelling to determine appropriate premium cover and the value of insurance risk to ‘hold’ vs ‘distribute’.

Risk = Probability x Severity

Probability is the likelihood of an event occurring, and severity is the extent and cost of the resulting loss.

Speculative Risk: Risks where the possible outcomes are either a loss, profit, or status quo. It includes things like stock market investments and business decisions such as new product lines, new locations, etc.

Pure Risk: Risks where the possible outcomes are either a loss or no loss. It includes things like fire loss, a building being burglarized, having an employee involved in a motor vehicle accident, etc.

Steps to Implement Risk Management:

  • Quantify and prioritize: Risk mapping is one way to do this. Essentially, you chart all of the identified risks on the map. The map will make you aware of those risks on which you need to focus. Work with your broker to make sure that you are covered for all of the appropriate risks and look for ways to prevent and mitigate these risks. The image on the right is a sample of a common risk map. However, risk maps are often altered to reflect organizational needs.
  • Risk identification: It is a good idea to chart your risks in a way that allows you to identify the more common and serious risks so that you know the areas to which you need to commit resources.
  • Be risk sensitive, not risk adverse: Being risk sensitive is not the same as being paranoid. Realize that there are risks associated with everything. Take a deliberate and methodical approach to dealing with risk, while at the same time being realistic.
  • Identify risk in business decisions: Identifying risks in business decisions is much the same as with the process of identifying any risk. The key is to be thorough and use all the sources available. These risks can be prioritized and mapped in the same way as all other risks.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick and mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

  • Implement controls for mitigation and prevention.
  • Invest in adequate insurance coverage.
  • Develop a foolproof business continuity plan that is proactively communicated with your entire organization.

Product or service issues

When customers feel that their product did not meet expectations, challenges and risks are inevitable.

Mitigation options:

  • Implement ERM software into your organization to prevent negligence claims.
  • Invest in professional liability insurance.
  • Conduct vendor due diligence to prevent third party providers from producing products or services that don’t meet your organization’s standards.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick-and-mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

  • Implement controls for mitigation and prevention.
  • Invest in adequate insurance coverage.
  • Develop a foolproof business continuity plan that is proactively communicated with your entire organization.
Management Notes

Operations of Insurance Companies

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The most important insurance company operations consist of the following:

  • Ratemaking
  • Underwriting
  • Production
  • Claim settlement
  • Reinsurance

Insurers also engage in other operations, such as accounting, legal services, loss control, and information systems.

Rating and Ratemaking

  • Rating is a process of multiplying a rate determined by actuaries by the number of exposure units, and then adjusting by various rating plans.
  • In life insurance, the actuary determines the premiums for life and health insurance policies and annuities also determine the legal reserves a company needs for future obligations.
  • In property and casualty insurance, actuaries also determine the rates for different lines of insurance and also determine the adequacy of loss reserves, allocate expenses, and compile statistics for company management and for state regulatory.

Rating and Ratemaking

  • Ratemaking refers to the pricing of insurance and the calculation of insurance premiums.
  • A rate is the price per unit of insurance.
  • An exposure unit is the unit of measurement used in insurance pricing, which varies by line of insurance.
  • The person who determines rates and premiums is known as an actuary. An actuary is a highly skilled mathematician who is involved in all phases of insurance company operations, including planning, pricing, and research.

Underwriting

  • The insurer’s underwriting policy is determined by top-level management in charge of underwriting.
  • The underwriting policy is stated in detail in an underwriting guide that specifies the lines of insurance to be written; territories to be developed; forms and rating plans to be used; acceptable, borderline, and prohibited business; amounts of insurance to be written; business that requires approval by a senior underwriter; and other underwriting details.

Insurance Service Operations services

Operating model enhancement: Assessing process, technology, and organization and performance management against other insurers as well the company’s own strategy and goals to help transform its operating model, including shifting of fixed costs to variable, shedding non-differentiating processes and technology, and increasing focus on growth, distribution, and product innovation objectives.

Streamlining legacy processes and supporting technologies: Identifying ways to help improve customer service, employee morale, and cost efficiencies by upgrading policy administration and other systems, streamlining processes, and creating an efficient customer experience across product lines and distribution channels.

Performance benchmarking: Evaluating carrier performance against industry leaders to identify areas for potentially improving operations and customer service quality while managing costs.

Improved inforce management: Leveraging data and analytic tools and techniques to support cross-sell and up-sell programs, help improve retention, and enhance risk selection capabilities.

Strategic underwriting: Helping insurers create a base of profitable customer relationships by executing more effective risk selection and sound underwriting decisions that help balance risk and price. We also help carriers grow the business by identifying potentially profitable and high-risk customer segments using predictive tools and analytic models.

Claims cost containment: Streamlining and automating claims administration, devising ways to anticipate potential claim losses, enhancing processes for managing third-party suppliers, creating processes to help improve litigation results, and employing advanced fraud detection processes to help mitigate losses.

Enterprise cost management: Developing sustainable, cost-effective approaches to managing resources in alignment with the company’s strategic goals, as well as striving to refine processes, simplify the organization, rationalize infrastructure, and improve spend management.

Potential bottom-line benefits

  • Improve profitability
  • Reduce operating expenses by up to 20 percent
  • Increase process standardization and compliance
  • Improve system reliability and accuracy
  • Lower underwriting loss ratios by up to 7 points in an 18- to 24-month time frame
  • Reduce claims costs through improved claims management
  • Improve system reliability and accuracy
  • Enhance the customer experience (for both policyholders and distribution partners)
  • Increase ability to adapt to changing customer demands
Management Notes

Role of Insurance in Economic Development and Social Security

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The world we live in is full of uncertainties and risks. Individuals, families, businesses, properties and assets are exposed to different types and levels of risks. These include risk of losses of life, health, assets, property, etc. While it is not always possible to prevent unwanted events from occurring, financial world has developed products that protect individuals and businesses against such losses by compensating them with financial resources. Insurance is a financial product that reduces or eliminates the cost of loss or effect of loss caused by different types of risks.

Apart from protecting individuals and businesses from many kinds of potential risks, the Insurance sector contributes significantly to the general economic growth of the nation by providing stability to the functioning of businesses and generating long-term financial resources for the industrial projects. Among other things, Insurance sector also encourages the virtue of savings among individuals and generates employments for millions, especially in a country like India, where savings and employment are important.

Spreads Risk: Insurance facilitates moving of risk of loss from the insured to the insurer. The basic principle of insurance is to spread risk among a large number of people. A large population gets insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of corpus of funds collected from the millions of policyholders.

Promotes Economic Growth: The Insurance sector makes a significant impact on the overall economy by mobilizing domestic savings. Insurance turn accumulated capital into productive investments. Insurance also enables mitigation of losses, financial stability and promotes trade and commerce activities those results into sustainable economic growth and development. Thus, insurance plays a crucial role in the sustainable growth of an economy.

Provides Safety and Security to Individuals and Businesses: Insurance provides financial support and reduces uncertainties that individuals and businesses face at every step of their lifecycles. It provides an ideal risk mitigation mechanism against events that can potentially cause financial distress to individuals and businesses). For instance, with medical inflation growing at approximately15% per annum, even simple medical procedures cost enough to disturb a family’s well-calculated budget, but a Health Insurance would ensure financial security for the family. In case of business insurance, financial compensation is provided against financial loss due to fire, theft, mishaps related to marine activities, other accidents etc.

Provides Support to Families during Medical Emergencies: Well-being of family is important for all and health of family members is the biggest concern for most. From elderly parents to newborn children, medication and hospitalization play important role while ensuring well-being of families. Rising medical treatment costs and soaring medicine prices are enough to drain your savings if not well prepared. Anyone can fall victim to critical illnesses (such as heart attack, stroke, cancer etc.) unexpectedly. And rising medical expense is of great concern. Medical Insurance is a policy that protects individuals financially against different type of health risks. With a Health Insurance policy, an insured gets financial support in case of medical emergency.

Generates Long-term Financial Resources: The Insurance sector generates funds by way of premiums from millions of policyholders. Due to the long-term nature of these funds, these are invested in building long-term infrastructure assets (such as roads, ports, power plants, dams, etc.) that are significant to nation-building. Employment opportunities are increased by big investments leading to capital formation in the economy.

Bangalore University B.com Notes

Cyber Crimes Offences and Penalties

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Offences

Cyber offences are the illegitimate actions, which are carried out in a classy manner where either the computer is the tool or target or both.

Cyber-crime usually includes the following:

  • Unauthorized access of the computers
  • Data diddling
  • Virus/worms attack
  • Theft of computer system
  • Hacking
  • Denial of attacks
  • Logic bombs
  • Trojan attacks
  • Internet time theft
  • Web jacking
  • Email bombing
  • Salami attacks
  • Physically damaging computer system.

The offences included in the I.T. Act 2000 are as follows:

  • Tampering with the computer source documents.
  • Hacking with computer system.
  • Publishing of information which is obscene in electronic form.
  • Power of Controller to give directions.
  • Directions of Controller to a subscriber to extend facilities to decrypt information.
  • Protected system.
  • Penalty for misrepresentation.
  • Penalty for breach of confidentiality and privacy.
  • Penalty for publishing Digital Signature Certificate false in certain particulars.
  • Publication for fraudulent purpose.
  • Act to apply for offence or contravention committed outside India Confiscation.
  • Penalties or confiscation not to interfere with other punishments.
  • Power to investigate offences.

Receipt of stolen property: Section 66B of the IT Act prescribes punishment for dishonestly receiving any stolen computer resource or communication device. This section requires that the person receiving the stolen property ought to have done so dishonestly or should have reason to believe that it was stolen property. The punishment for this offence under Section 66B of the IT Act is imprisonment of up to 3 (three) years or a fine of up to Rs. 1,00,000 (Rupees one lac) or both.

Identity theft and cheating by personation: Section 66C of the IT Act prescribes punishment for identity theft and provides that anyone who fraudulently or dishonestly makes use of the electronic signature, password or any other unique identification feature of any other person shall be punished with imprisonment of either description for a term which may extend to 3 (three) years and shall also be liable to fine which may extend to Rs. 1,00,000 (Rupees one lac)

Obscenity: Sections 67, 67A and 67B of the IT Act prescribe punishment for publishing or transmitting, in electronic form:

(i) Obscene material

(ii) Material containing sexually explicit act, etc.

(iii) Material depicting children in sexually explicit act, etc. respectively.

The punishment prescribed for an offence under section 67 of the IT Act is, on the first conviction, imprisonment of either description for a term which may extend to 3 (three) years, to be accompanied by a fine which may extend to Rs. 5,00,000 (Rupees five lac), and in the event of a second or subsequent conviction, imprisonment of either description for a term which may extend to 5 (five) years, to be accompanied by a fine which may extend to Rs. 10,00,000 (Rupees ten lac). The punishment prescribed for offences under sections 67A and 67B of the IT Act is on first conviction, imprisonment of either description for a term which may extend to 5 (five) years, to be accompanied by a fine which may extend to Rs. 10,00,000 (Rupees ten lac) and in the event of second or subsequent conviction, imprisonment of either description for a term which may extend to 7 (seven) years and also with fine which may extend to Rs. 10,00,000 (Rupees ten lac).

Hacking and Data Theft: Sections 43 and 66 of the IT Act penalise a number of activities ranging from hacking into a computer network, data theft, introducing and spreading viruses through computer networks, damaging computers or computer networks or computer programmes, disrupting any computer or computer system or computer network, denying an authorised person access to a computer or computer network, damaging or destroying information residing in a computer etc. The maximum punishment for the above offences is imprisonment of up to 3 (three) years or a fine or Rs. 5,00,000 (Rupees five lac) or both.

Bangalore University B.com Notes

IPR in abroad

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While many countries have some form of IPR protection, the degree to which IPR is protected varies greatly. For economists, IPR protection represents a trade-off between the benefits of innovation and the costs of exclusivity. Property rights encourage the development of new technologies, products, music, and other creative output. Exclusivity, however, protects IP owners from competition and, in some cases, can grant monopoly power. For this reason, IPR protection is always limited in either the length or scope of protection. After expiration, for example, the knowledge embodied by a patent enters the public domain.

The U.S. has a relatively well-defined IPR policy that is enforced and protected by its applicable laws. However, this is not the case for many of its trading partners around the world. In particular, developing countries often lack any substantial IPR protection. In a recent report, the Organization for Economic Co-operation and Development (OECD) estimated that “international trade in counterfeit and pirated goods could account for up to US$200 billion in 2005.” (OECD 2007) This amount does not include any counterfeit products produced and consumed in the same country or counterfeit digital products sold over the Internet. Consequently, the U.S. and other developed countries have called on other, often less-developed, nations to adopt IPR protection or increase its current protection in order to stop counterfeiting and piracy.

The US government’s Office of the United States Trade Representative (USTR) monitors intellectual property rights around the world and fights IP theft because IP theft impacts the 18 million Americans whose livelihood depends on IP protection. United States Trade Representative, “USTR Releases 2010 Special 301 Report on Intellectual Property Rights.

The USTR evaluates countries and rates them according to how those countries enforce IP rights. The Special 301 Report is an annual review of the global state of IPR protection and enforcement issued by the USTR. The worst offenders are put on a “Priority Watch List.” The countries on the 2010 Priority Watch list are China, Russia, Algeria, Argentina, Canada, Chile, India, Indonesia, Pakistan, Thailand, and Venezuela. China, which has been on the Watch List before, continues to be on the list not only because of IP theft and counterfeiting but also because of government practices that severely restrict the market for foreign goods while giving favored treatment to “indigenous innovation. “United States Trade Representative”.

Management Notes

Plant Varieties and Layout Design

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Plant Varieties

The objective of this act is to recognize the role of farmers as cultivators and conservers and the contribution of traditional, rural and tribal communities to the country’s agro biodiversity by rewarding them for their contribution and to stimulate investment for R & D for the development new plant varieties to facilitate the growth of the seed industry.

The Plant Variety Protection and Farmers Rights act 2001 was enacted in India to protect the New Plant Variety; the act has come into force on 30.10.2005 through Authority. Initially 12 crop species have been identified for regt. i.e. Rice, Wheat, Maize, Sorghum, Pearl millet, Chickpea, Green gram, Black gram, Lentil, Kidney bean etc. India has opted for sui- generic system instead of patents for protecting new plant variety. Department Agriculture and Cooperation is the administrative ministry looking after its registration and other matters.

Layout Design

Industrial designs refer to creative activity, which result in the ornamental or formal appearance of a product, and design right refers to a novel or original design that is accorded to the proprietor of a validly registered design. Industrial designs are an element of intellectual property. Under the TRIPS Agreement, minimum standards of protection of industrial designs have been provided for. As a developing country, India has already amended its national legislation to provide for these minimal standards.

The essential purpose of design law it to promote and protect the design element of industrial production. It is also intended to promote innovative activity in the field of industries. The existing legislation on industrial designs in India is contained in the New Designs Act, 2000 and this Act will serve its purpose well in the rapid changes in technology and international developments. India has also achieved a mature status in the field of industrial designs and in view of globalization of the economy, the present legislation is aligned with the changed technical and commercial scenario and made to conform to international trends in design administration.

This replacement Act is also aimed to enact a more detailed classification of design to conform to the international system and to take care of the proliferation of design related activities in various fields.

Semiconductor Integrated Circuit means a product having transistors and other circuitry elements, which are inseparably formed on a semiconductor material or an insulating material or inside the semiconductor material and designed to perform an electronic circuitry function.

The aim of the Semiconductor Integrated Circuits Layout-Design Act 2000 is to provide protection of Intellectual Property Right (IPR) in the area of Semiconductor Integrated Circuit Layout Designs and for matters connected therewith or incidental thereto. The main focus of SICLD Act is to provide for routes and mechanism for protection of IPR in Chip Layout Designs created and matters related to it. The SICLD Act empowers the registered proprietor of the layout-design an inherent right to use the layout-design, commercially exploit it and obtain relief in respect of any infringement. The initial term of registration is for 10 years; thereafter it may be renewed from time to time. Department of Information Technology Ministry of Communications and Information Technology is the administrative ministry looking after its registration and other matters.

Management Notes

Authorities and Enforcement Mechanism in IBC 2016

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NCLT and DRT are judicially constituted special bodies for adjudicating resolution of matters related to insolvency and bankruptcy. NCLT appeals lies to National Company Law Appellate Tribunal (NCLAT) and after NCLAT, the party can appeal to the Supreme court of India. Similarly, for DRT, appeals lie to the Debt Recovery Appellate Tribunal and then to the supreme court of India. NCLT and DRT are separate tribunals. NCLT is for companies and limited liability partnerships and DRT is for unlimited liability partnerships and sole proprietors.

Section 13 (Declaration of moratorium and public announcement) provides that the Adjudicating Authority shall:

(a) Declare a moratorium for the purposes referred to under Section 14.

(b) Cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15.

(c) Appoint an interim resolution professional in the manner as laid down in Section 16. A public announcement is to be made immediately after the appointment of the interim resolution professional.

Section 14 (Moratorium) provides that on the insolvency commencement date, the Adjudicating Authority shall declare a moratorium prohibiting

(a) The institution or continuation of suits or proceedings against the corporate debtor including execution of a judgment, decree, order, etc.

(b) Transferring, encumbering alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest.

(c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

(d) Recovery of any property by an owner or lessor where such property is occupied by, or in the possession of the corporate debtor. Section 16 provides for the appointment and tenure of an interim resolution professional.

The resolution professional has to work under the broad guidelines of the committee of creditors (or “COC”- in terms of Section 21 of the Code). The CoC includes all the financial creditors of the corporate debtor, except all related parties and operational creditors. Further, Section 22 of the Code provides that the CoC has to appoint the resolution professional. This resolution professional can also be the interim resolution professional. A vote of 75% of the voting share shall determine the decisions of the committee to opt for either a revival or liquidation (Section 30). The decision of the CoC is binding not only on debtors, but also on all the other creditors. Different types of revival plans include fresh finance, sale of assets, haircuts (i.e. acceptance by creditors of amounts lower than what is due to them), change of management etc. The committee should approve the resolution plan forwarded by the creditor. Only upon approval does the resolution professional forward the plan to the adjudicating authority for final approval. The resolution plan has to be approved by the NCLT; while doing so, it can consider objections to the resolution plan by any party interested in voicing such objections (i.e. operational creditors, financial creditors, etc).

There can also be no enforcement of securities, sale or transfer of assets or termination of essential contracts against the debtor. The next step is appointment of an Interim Resolution Professional under Section 16 of the Code.

After the commencement of corporate insolvency resolution, the NCLT orders a moratorium on the debtor’s operations for the period of 180 days. This is termed as a ‘calm period’ during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor.

Management Notes

Insolvency of Individuals and Partnership firms

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The Insolvency and Bankruptcy Code 2016 recently completed its second anniversary successfully. In these two years, the harvests through the IBC process proved to be extremely satisfactory. The entire scenario of the debtor creditor relationship changed after the implementation of the Code.

After the enforcement of the Code, the creditors are not required to chase the debtor but it’s the debtor who chases the creditors. After the entry of the code, the NCLT has become a trusted forum with high credibility.

With the coming of Code into execution numerous cases commenced to be filed before NCLT due to NCLT became overcrowded and therefore seeing alarming situation the capacity of NCLT was further enhanced within due time and matter under this legislation were disposed off expeditiously in time bound manner.

The major points of difference between the insolvency proceedings of corporate persons and individuals & partnership firm is that the application by corporate persons is filed with NCLT whereas application by individuals & partnership firms is filed with DRT.

Adjudicating Authority

In relation to insolvency matters of individuals and firms, the Adjudicating Authority shall be the Debt Recovery Tribunal (DRT) having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business

or personally works for gain – section 179(2) of Insolvency Code, 2016.

“Adjudicating Authority” means the Debt Recovery Tribunal constituted under sub-section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 – section 79(1) of Insolvency Code, 2016.

However, in case of personal guarantors to corporate debtors, NCLT will be ‘adjudicating authority’ as per section 60 of Insolvency Code.

Powers of Adjudicating Authority (DRT)

The Debt Recovery Tribunal shall have overriding jurisdiction to entertain or dispose of (a) any suit or proceeding by or against the individual debtor (b) any claim made by or against the individual debtor (c) any question of priorities or any other question whether of law or facts, arising out of or in relation to insolvency and bankruptcy of the individual debtor or firm under this Code – section 179(2) of Insolvency Code, 2016.

Firm: “Firm” means a body of individuals carrying on business in partnership whether or not registered under section 59 of the Indian Partnership Act, 1932 (9 of 1932) – section 79(16) of Insolvency Code, 2016.

Claim: “Claim” means (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, un-matured, disputed, undisputed, secured or unsecured – section 3(6) of Insolvency Code, 2016 [definition notified and effective from 1-11-2016].

Period of moratorium to be excluded for purpose of limitation

While computing the period of limitation specified for any suit or application in the name and on behalf of a debtor, the period during which there was moratorium shall be excluded – section 179(3) of Insolvency Code, 2016.

Civil court not to have jurisdiction

Civil court or any authority shall not have jurisdiction to entertain any suit or proceedings in respect of any matter on which DRT or DRAT have jurisdiction under Insolvency Code, 2016 – section180(1) of Insolvency Code, 2016.

No injunction shall be granted by any court, Tribunal or authority in respect of any action taken, or to be taken, in pursuance of any power conferred on DRT or DRAT under the Insolvency Code, 2016 – section180(2) of Insolvency Code, 2016.

Appeal against order of DRT

Appeal against order of DRT shall be filed with DRAT (Debt Recovery Appellate Tribunal) within 30 days. This period can be extended by further 15 days by DRAT if sufficient cause is shown – section 181 of Insolvency Code, 2016.

Appeal to Supreme Court

An appeal from an order of DRAT can be filed before Supreme Court within 45 days only on question of law. This period can be extended by further 15 days by Supreme Court if sufficient cause is shown – section 182 of Insolvency Code, 2016.

Debtor

The concerned debtor may by invoking Section 94 of the Code file an application for initiating insolvency proceedings in respect of himself. The application may either be submitted personally by the concerned debtor or through the resolution professional.

In the scenario where the debtor is a partner of a firm then in such a situation the concerned debtor may make an application for initiating insolvency proceedings with the approval of all or majority partners. While making application for initiating insolvency proceedings, the concerned debtor is required to comply with the perquisites thereafter he becomes eligible for making application for initiating the insolvency proceedings. The prerequisites that need to be complied prior to making an application are as follows:

  • The debtor should not be an undischarged bankrupt;
  • The debtor should be undergoing fresh start process in relation to his debts;
  • No insolvency resolution proceedings should be in process in relation to the debts against the debtor;
  • The debtor should not be undergoing bankruptcy proceedings
  • No insolvency resolution proceedings should have been admitted during the preceding twelve months to be counted from the date on which a fresh application is filed for invoking insolvency resolution process.

By Creditor

A creditor for initiating insolvency resolution process in respect of individuals & partnership firm may make an application for the same either by himself, through a consortium with other creditors or through resolution professional. In the scenario where the debtor is a partnership firm then the creditor can make an application against either of the partners or the firm.

The application as made by the creditor(s) shall contain the required attachments as are prescribed in the Code. The creditor shall also furnish a copy of the application as filed to the debtor for hid reference. The creditor shall while making the application ensure that the application in the appropriate format as prescribed in the Code.

Interim Moratorium

On an application being filed by either of the aforesaid, an interim moratorium shall come into force from the date on which application for initiating insolvency proceedings is made and thereafter shall cease to have an effect on the date of admission of the application by DRT.

Appointment of Resolution Professional

The Resolution professional is the key person in the insolvency resolution process. He may be said to be the driver of the entire proceedings that fall within the ambit of the insolvency resolution process.

Pre-existing Resolution Professional

There may be scenarios where application for initiating insolvency resolution process is filed by the Resolution Professional on behalf of the debtor or creditor as the case may be. Under this state the adjudicating authority i.e. DRT shall direct the board (IBBI) to verify that as on date there is no disciplinary proceeding pending against the proposed resolution professional. The verification shall be directed to conducted by the board within a period of seven days from the date of receipt of application. The board shall on receipt of direction report its decision i.e. recommending appointment or rejection of resolution professional to the directing adjudicating authority within seven days of receipt of direction.

Fresh Appointment

In the cases where application for initiating insolvency proceedings is filed by the debtor or creditor without the involvement of resolution professional then in such situation the adjudicating authority shall direct the board to nominate a resolution professional who can drive forward the initiated insolvency resolution process. On receipt of the aforesaid direction, the board shall nominate a suitable resolution professional within a period of ten days. The board while nominating resolution professional shall verify that no disciplinary proceedings are currently pending against the proposed resolution professional.

The adjudicating authority shall via order appoint the resolution professional as recommended or nominated above to drive forward the insolvency proceedings. The appointed resolution professional shall be provided a copy of the insolvency resolution process application as received by the adjudicating authority from the debtor or creditor.

Submission of Report by Resolution Professional

On receipt of the application as filed initiating for insolvency resolution process, the appointed resolution professional shall examine the application as submitted by the debtor or creditor within a span of ten days to be counted from the date of his appointment. Once the submitted application has been examined the resolution professional shall then prepare a report thereby recommending his decision as to whether the submitted application should be admitted or rejected.

The resolutions professional may for arriving at decision ask the debtor to prove repayment of the debts that are being claimed to be unpaid by the creditors. The report as compiled by the resolution professional shall clearly highlight the reasons based on which the decision related to admission or rejection of submitted application is undertaken. The resolution professional shall furnish a copy of his report to the concerned debtor or creditor as well.

Decision of Adjudicating Authority

Once the adjudicating authority receives the report as submitted by the resolution profession, it shall thereafter within a period of fourteen days pass an order either admitting the application or rejecting the same as, as it feels appropriate. In the scenario where application, as submitted for initiating insolvency resolution process, is admitted by the adjudicating authority, then the adjudicating authority may vide instructions conduct negotiations between the debtor and creditors to finalize a repayment plan.

The adjudicating authority shall furnish a copy of its order admitting or rejecting the application; report of resolution professional as submitted to the adjudicating authority and application as initially submitted for initiating insolvency resolution process to the creditor within a period of seven days from the date of passing the aforesaid order.

Moratorium Period

On the application for insolvency resolution process being admitted by the adjudicating authority, a moratorium period shall come into force and thereafter it shall terminate at the end of one hundred and eighty day commencing from the date on which application for insolvency resolution process is admitted by the adjudicating authority or the date on which order is passed by adjudicating authority on repayment plan. The similar situation as that of interim moratorium shall prevail during the moratorium period in relation to the debtor as well as his pending legal actions and debts.

Public Notice and Inviting Claim from Creditors

The adjudicating authority shall after admitting the application for initiating the insolvency resolution process issue a general public notice within a period of seven days from the date of passing order for the sake of inviting claims form all the creditors’ within a period of twenty-one days from the date of public notice.

The aforesaid notice shall be published in one English and one vernacular language newspaper. The notice shall also be affixed in the premises of adjudicating authority and shall also be displayed on the website of the adjudicating authority.

Registration of Claims of Creditors

The resolution professional is the sole authority where the claims are required to be registered by the creditors. Forgetting the claim registered the creditors may use of the following medium of communication: electronic communication; courier; speed post or registered post. 

Preparation of List of Creditors

After the invitation and registration of claims received from creditors, the resolution professional shall collate a list of creditors based on the information received from application as filed by debtor for initiating fresh start process and claims received from creditors. The resolution professional shall make best efforts to draft the said list within thirty days from the date of notice.

Repayment Plan

The debtor shall in collaboration with the resolution professional draft a layout of repayment plan which shall contain a proposal to creditors to restructure their debts. The repayment plan shall also authorize or grant the resolution professional various powers like: carrying on business off debtor on his behalf; realization of assets of debtor and administration or disposal of assets of the debtor.

Resolution Professional’s Report on Repayment Plan

The resolution professional shall after successfully draft of repayment plan submit the same along with report to the adjudicating authority within a period of twenty one days to be counted from the last date of submission of the claims.

The report as drafted by the resolution professional shall also highlight the date; time and place of the meeting if there appears need to summon meeting of creditors. While fixing date of meeting it should be note that date of meeting should not be less that fourteen days and at the same time not more than twenty eight days to be counted from the date of submission of report. Also while booking calendar for convening meeting the convenience and availability of creditors shall also be taken into consideration.

Calling Meeting of Committee of Creditors

The resolution professional shall after preparation of his report on repayment plan call meeting of committee of creditors by issuing a prior notice in this regard atleast fourteen days in advance to the finalized date of meeting.

The notice of the aforesaid meeting shall be provided to all the creditors mentioned in the list of creditors as chalked out by resolution professional. The notice of the meeting shall incorporate within it the address of adjudicating authority to whom the repayment plan along with the report of resolution professional on repayment plan was served supported by required annexures.

Convening Meeting of Committee of Creditors

The meeting once called shall be conducted in accordance with the procedures and provisions as are highlighted in the Code. During the course of the convened meeting the creditors may vide their decision approve, modify or reject the repayment plan as drafted by the resolution professional.

In the convened meetings creditors shall be eligible to vote in proportion to the voting share as assigned to them. The proportion of voting share shall be determined by the resolution professional. The secured creditors shall also be eligible to participate and vote in the convened meeting.

Seeking Approval of Creditors on Repayment Plan

The approval of creditors is a must requirement for carrying on any business on behalf of the debtor. In this regard approval of majority of creditors representing three fourth in value of the creditors that were present in person or via proxy at the convened meeting of committee of creditors is a mandatory requirement for seeking approval of repayment plan or any subsequent modification in the repayment plan therein.

Report of Convened Meeting of Creditors 

Once the meeting of creditors has been duly convened for seeking approval of the creditors, it shall the duty of the resolution professional to compile a report of the duly convened meeting of the creditors. The report as compiled above shall include the minute-to-minute details of all decisions and discussion that were made during the convened meeting.

Decision of Adjudicating Authority on Repayment Plan

On receipt of the report of the duly convened meeting of creditors, the adjudicating authority shall thereafter vide its decision either approve or reject the repayment plan. The adjudicating authority shall form its decision on the basis of the report of the convened meeting of creditors as received by it from the resolution professional.

The decision of the adjudicating authority as passed shall also contain the directions for implementing the approved resolution plan. In the scenario where the repayment plan is approved by the adjudicating authority then the approved repayment plan shall be in effect as if it was proposed by the debtor and thereafter the plan shall be binding on the creditors as mentioned in the repayment plan and also on the debtor.

Implementation of Repayment Plan

The repayment plan once approved by the committee of creditors and adjudicating authority shall come into force and thereafter commence to be in implementation. On coming of the repayment plan into execution it shall be the sole responsibility of the resolution professional to monitor the implementation and execution of the approved repayment plan.

If any hindrances arise in the smooth execution of the repayment plan then the resolution professional is free to approach the adjudicating authority for seeking the required directions that will enable the smooth execution of the approved repayment plan. On being satisfied by the plea as raised by the resolution professional the adjudicating authority shall pass the necessary directions in this regard.

Completion of Repayment Plan

The resolution professional shall make his best endeavours to complete the execution of repayment plan within the prescribed time limits in time bound manner. In this connection the resolution professional shall after the successful completion of repayment plan furnish the prescribed documents to the persons who are covered under the horizon of repayment plan and to the adjudicating authority as well.

The resolution professional shall ensure that the documents are furnished within duration of fourteen days from the completion of the repayment plan. If the resolution professional is unable to furnish the same within due time then in such a scenario he may approach the adjudicating authority for seeking extension in the time limit for furnishing the same. Once the adjudicating authority is satisfied then it shall grant an extension of not more than seven days to comply with the requirement.

Discharge Order

On time-bound and successful implementation of the approved repayment plan the resolution professional shall approach the concerned adjudicating authority for seeking a discharge order for debts as are mentioned in the repayment plan.

The resolution professional may approach the adjudicating authority for seeking discharge order only if the approved repayment plan provides for early discharge or discharge on completion of repayment plan. The, discharge order as granted by the adjudicating authority shall also be furnished to the board for its record.

The insolvency resolution process is the initial step that can be taken against the defaulting individual & partnership firms. On successful completion of insolvency resolution process or during the course of the insolvency resolution process an application can be made for a bankruptcy order.

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