INSOLVENCY AND BANKRUPTCY CODE 2016
Brief summary of the code:
The Insolvency and Bankruptcy Code, 2016 became effective from 1st December, 2016 after receiving the Presidential assent. The Code has been a welcome step taken the government to curb the growing rate of NPA’s and is regarded as a useful tool for effective and timely recovery or restructuring of defaulted assets. One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates an institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that facilitates in formal and time bound insolvency resolution process and liquidation.
To initiate an insolvency process for corporate debtors by the creditors (financial or operational) , the default should be at least INR 100,000 (USD 1495) (which limit may be increased up to INR 10,000,000 (USD 149,500) by the Government).
Some important definitions covered under the Code:
a. Insolvency Professional: It shall mean a person enrolled with an insolvency professional agency as its member and registered with the Insolvency and Bankruptcy Board of India as a professional under the Code.
b. Financial Creditor: It shall mean any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.
c. Corporate Applicant: It shall mean a corporate debtor;or a member or partner of the corporate debtor who is authorised to make an application for the corporate insolvency resolution process under the constitutional document of the corporate debtor ; or an individual who is in charge of managing the operations and resources of the corporate debtor; or a person who has the control and supervision over the financial affairs of the corporate debtor.
d. Operational Creditor: It shall mean a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
Operation Debt: It shall mean a claim in respect of provision of goods or services including employment or a debt in respect of repayment of dues arising under any law or payable to any state govt. or any local authority or central govt.
e. Personal Guarantor: It shall mean an individual who is the surety in a contract of guarantee to a corporate debtor.
f. Resolution Applicant: It shall mean any person who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation.
g. Resolution Plan: It shall mean a plan proposed by any resolution applicant for insolvency resolution of the corporate person as a going concern.
Four Pillars of Insolvency and Bankruptcy Code, 2016.
The adherence to the rules, regulations and smooth functioning of the Code for the achievement of the objectives set therein, is ensured through various agencies and professional which can be called as the “Four Pillars” under the IBC Code, 2016.
Appointment and tenure of Interim Resolution Professional.
The Code provides that where an application for corporate insolvency is made by a Financial Creditor or the corporate debtor, the resolution professional as proposed in the application made for initiation of CIRP is appointed as interim resolution professional, provided no disciplinary proceeding is pending against him. Such appointment shall be made by the Tribunal within 14 days from the insolvency commencement date.
In case where the application for initiation of CIRP is made by an Operational Creditor and no proposal for an appointment of interim resolution professional is made, the Tribunal shall make a reference to the board for the recommendation of a professional who may act as a interim resolution professional. The board shall thereafter within 10 days from the receipt of reference from the Tribunal, recommend the name of an Insolvency Professional to the Tribunal against whom no disciplinary proceeding is pending. The term of the interim resolution professional shall not exceed 30 days. Moreover, the Code provides that from the appointment date the interim resolution professional shall manage the affairs and day to day operations of the corporate debtor. The Resolution Professional’s primary function is to take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors.
Committee of Creditors and appointment of Resolution Professional:
The Code provides that interim resolution professional shall after receiving all claims against the corporate debtor and determining its financial position, constitute a committee of creditors which shall comprise of Financial Creditors of the corporate debtors. However, the Code provides that a related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors.
In case where a corporate debtor owes financial debts to two or more Financial Creditors, each such Financial Creditor shall constitute a part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them. All decisions of the committee of
creditors shall be taken by a vote of not less than 75% of voting shares of the Financial Creditors, provided that where a corporate debtor does not have any Financial Creditors, the committee of creditors shall be constituted of such persons to exercise such functions in such manner as may be specified by the board. The committee of creditors shall have the right to require the resolution professional to furnish any financial information in relation to the corporate debtor at any time during the corporate insolvency resolution process and such information shall be made available to them within a period of 7 days of such requisition.
The members of the committee may meet either in person or by electronic means as specified and all such meeting of the committee of creditors shall be conducted by the resolution professional. The directors, partners and one representative of Operational Creditors may attend the meetings of committee of creditors, but shall not have any voting right in such meetings.
Appointment of Resolution Professional: Under the Code, the first meeting of the committee of creditors is held within 7 days from its constitution to appoint the interim resolution professional as resolution professional or to replace the interim resolution professional by another resolution professional. In case where the committee resolves to replace the interim resolution professional and application shall be made before the Adjudicating Authority for such appointment, who shall forward the name to the board for its confirmation and shall appoint such person after confirmation is done.
In case where the board does not confirm the name of the proposed resolution professional within 10 days of the receipt of the name, the Adjudicating Authority shall, by order, direct the interim resolution professional to continue to function as the resolution professional until such time as the board confirms the appointment of the proposed resolution professional. The resolution professional is to examine the resolution plan of the corporate debtor prepared by the resolution applicant on the basis of information memorandum. The resolution plan shall be confirmed by the confirmed by the Adjudicating Authority, if it meets all the requirements and shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.
Procedure for initiation of Corporate Insolvency Resolution Process (CIRP):
The Code provides that where any corporate debtor commits a default a Financial Creditor, an Operational Creditor or the corporate debtor itself may initiate corporate Insolvency Resolution
process in respect of such corporate debtor in the manner prescribed in the Code.
- Initiation of the CIRP at the instance of financial creditor:
The Code provides that a Financial Creditor either by itself or jointly with other Financial Creditors may file an application in such form and along with such fee as may be prescribed, for initiating Corporate Insolvency Resolution Process against a corporate debtor before the National Company Law Tribunal, which is the adjudicating authority, when a default has occurred. The application form shall be furnished along with the name of the resolution professional to act as interim resolution professional.The NCLT shall within 14 days from the receipt of application, ascertain the existence of default from the records of Information Utility and on being satisfied that a default has occurred ,application is complete and there is no disciplinary proceedings pending against the proposed resolution
professional, admit such application and in case where it appears that a default has not occurred , the Tribunal may reject the application. However, in case of any defect in the application made by the financial creditor, the Tribunal shall give a notice of such defect and allow him a time period of 7 days to rectify such defect, before rejecting such application.
- Initiation of the CIRP at the instance of operational creditor.
The Code provides that an Operational Creditor may, deliver a demand notice on unpaid Operational Debtor demanding payment of the amount involved in the default to the corporate debtor. On demand notice being served , the corporate debtor shall within 10 days of its receipt, bring to the notice of the Operational Creditor the existence of any dispute vis-a-vis the default amount, repayment of unpaid Operational Debt, and record of any pending suit or arbitration proceedings. On the expiry of period of 10 days from the date of serving notice , the Operational Creditor does not receive the default amount or notice of any dispute from the corporate debtor, an application may be filed for the initiation of CIRP before the Tribunal. Such application shall be furnished along with an invoice demanding payment delivered to the corporate debtor, affidavit evidencing that no notice of dispute was received by the creditor from the corporate debtor and no repayment has been made.
The Tribunal shall, within 14 days from receipt of application on being satisfied that it is complete accept the application and communicate the same to the Operational Creditor and the corporate debtor and in case where it is of the opinion that dispute exists as regards receipt of payment, pendency of any suit or arbitration proceedings, the Tribunal may reject the application, before giving 7 days time to the corporate debtor to rectify any default in the application. The CIRP shall commence from the date of admission of application.
- Initiation of the CIRP at the instance of corporate applicant.
The Code provides that where a corporate debtor has committed any default, corporate applicant may file an application for initiation of CIRP to the Tribunal, along with the information relating to the books of accounts and other documents as specified, resolution professional proposed to be appointed as interim resolution professional. The Tribunal shall within 14 days of receipt of application admit or reject such application after giving a time period of 7 days to the Corporate Applicant to rectify any defect in the application. 
NOTE: The costs incurred in conducting Corporate Insolvency Resolution Process shall be paid in priority to the repayments of other debts of the corporate debtor.
Time period for completion of Insolvency Resolution Process:
Under the Code, it has been mandated that the CIRP shall have to be completed within a period of 180 days from the date of admission of application to initiate such process. An application to the Tribunal shall be filed for extending the period of CIRP beyond the specified period, after the same is proposed at the meeting of the committee of creditors by passing a resolution , with a majority of 75% of the value of shares.
The Tribunal on receipt of application, after being satisfied that the CIRP cannot be completed within a specified period of 180 days, may order to extend the duration by a period of not more than 90 days, provided that such extension shall not be granted more than once.
CASE LAW : Surendra Trading Company vs Juggilal Kamlapat Jute Mills Company Limited, Septemeber, 2017.
In the aforementioned case, the Apex Court ruled that timelines of 14 days and 7 days (for removal of defect) as provided in Section 7, 9 and 10 of the Code respectively are directory in nature, and in case where a sufficient cause is shown to the satisfaction of the Tribunal as to why the applicant could not remove the defect in the application within a specified time period , then in such cases the Tribunal may entertain such application on merits .
However, in the same case Apex Court ruled that period of 180 days (270 days) for completion of CIRP is mandatory in nature.
Persons not entitled to make an application to initiate CIRP:
The Code lists out category of persons not entitled to make an application to initiate CIRP:
- a corporate debtor undergoing a Corporate Insolvency Resolution Process
- a corporate debtor having completed Corporate Insolvency Resolution Process twelve months preceding the date of making of the application;
- a corporate debtor or a Financial Creditor who has violated any of the terms of Resolution Plan which was approved twelve months before the date of making of an application;
- a corporate debtor in respect of whom a liquidation order has been made.
Moratorium Period provided under the Code and its applicability .
The Code provides that on the insolvency commencement date the NCLT shall orders a moratorium on the debtor's operations for the period of the Insolvency Resolution Process . This operates 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. However, the supply of essential goods and services to the corporate debtor shall not be suspended or interrupted during the moratorium period.
The order of moratorium shall be effective from the date of such order till the completion of the Corporate Insolvency Resolution Process. If at any time during the corporate insolvency resolution process, the Tribunal approves the Resolution Plan or passes an order for liquidation of corporate debtor, the moratorium shall cease to have effect from the date of such approval or liquidation order.
CASE LAW 1: Canara Bank vs. Deccan Chronicle Holding Limited, NCLAT September, 2017.
In this case it was held that moratorium period shall not affect any suit or case pending before the Supreme Court under Article 32 of the Constitution or where an order is passed under Article 136 of the Constitution dealing with Special Leave Petition or the power of the High Court under Article 226 of the Constitution. However, a money suit or suit for recovery against the corporate debtor cannot proceed after the declaration of moratorium under the Code.
CASE LAW 2: SBI vs. Veesons Energy Systems , NCLT Chennai September 2017.
In this case, the Court restrained the Financial Creditor from selling the assets of the personal guarantor who was the promoter of the corporate debtor, during the moratorium period . It was observed that it the assets of the personal guarantor are sold, then the personal guarantor will assume the rights of a creditor against the corporate debtor and this will vitiate the very purpose of granting moratorium under the Code. However, in the case of Phoenix ARC Pvt. Ltd. vs. Schweitzer Systemtek India Pvt. Ltd., it was held that Section 14(1) of the Code refers to the properties and security interests of the corporate debtor and not the promoters or guarantor, therefore it is only the assets of the corporate debtor which are prohibited from being sold during the moratorium period.
Initiation of Liquidation under the Code
The Code provides various circumstances under which liquidation order of the corporate debtor may be passed.
- where the Adjudicating Authority does not receive the Resolution Plan or rejects the Resolution Plan, an order is passed requiring the liquidation of the corporate debtor and public announcement to that effect is issued;
- where the resolution professional, at any time during the Corporate Insolvency Resolution Process but before confirmation of Resolution Plan, intimates the Adjudicating Authority of the decision of the committee of creditors to liquidate the corporate debtor;
- where the Resolution Plan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are affected by such contravention, may make an application to the Adjudicating Authority for a liquidation;
- where on receipt of application the Adjudicating Authority is of the opinion that corporate debtor has contravened the Resolution Plan , it shall pass a liquidation order.
The Code states that when a liquidation order is passed no suit or legal proceeding shall be instituted by or against the corporate debtor, provided that such suit or legal proceeding may be instituted by the liquidator with the prior approval of the Adjudicating Authority.
Once an order for liquidation of the corporate debtor is passed by the Adjudicating Authority, the resolution professional appointed for the CIRP shall act as the liquidator for the purpose of liquidation and all the powers of the directors, KMP’s of the corporate debtor shall cease to have effect and shall be vested in the liquidator. In case, where the Adjudicating Authority passes an order to replace the resolution professional, it may direct the board to propose the name of another resolution profession to act as liquidator and on approval by the board the Adjudicating authority shall appoint such person as the liquidator.
The liquidator shall charge such fees for the conduct of the liquidation proceedings and in such proportion to the value of liquidation estate agents, as may be specified by the board. The liquidator shall hold the liquidation estate of the corporate debtor as a fiduciary for the benefit of all the creditors.
Provision of Information: Under the Code the creditors may require the liquidator to provide them any financial information relating to the corporate debtor and such information shall be provided by the liquidator within 7 days or such request or provide reasons for not providing such information.
Consolidation of Claims: The liquidator shall receive or collect claims of the financial or operational creditors with such supporting documents verifying the existence of the claim within a period of thirty days from the date of commencement of liquidation process. A creditor may vary or withdraw his claim within 14 days of its submission.
The liquidator shall communicate his decision of accepting or rejecting claims to the corporate debtor and creditor within 7 days of such admission or rejection of claims. In case of rejection of claims by the liquidator an appeal may be preferred by the creditor against the decision of the liquidator. After accepting the claim, liquidator shall determine the value of the claims.
Dissolution of the Corporate Debtor : Under the Code where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor. The Adjudicating Authority shall on application filed by liquidator order the dissolution of the corporate debtor and a copy of the same shall be forwarded to the authority with which corporate debtor is registered.
Fast Track Corporate Insolvency Resolution Process:
The Code provides that a fast track CIRP shall be completed within a period of ninety days from the insolvency commencement date. Such period of ninety days may be extended, if an application regarding the same is filed by the resolution professional after having passed a resolution at the meeting of the committee of creditors, to the Adjudicating Authority. On receipt of application if the Adjudicating Authority is satisfied that the subject matter of the case is such that fast track Corporate Insolvency Resolution Process cannot be completed within a period of ninety days, it may, by order, extend the duration of such process by such further period, as it thinks fit, but not exceeding forty-five days. Such extension under the Code shall not be granted more than once.
An application for fast track Corporate Insolvency Resolution Process may be filed by a creditor or corporate debtor along with:
- the proof of the existence of default as evidenced by records available with an information utility or such other means evidencing the same;
- such other information as may be specified by the board to establish that the corporate debtor is eligible for fast track Corporate Insolvency Resolution Process.
Voluntary Liquidation of Corporate Persons:
The Code provides that a corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings, provided a declaration from the majority of the directors of the company is obtained verifying that either company has no debt or shall be able to pay its debt in full from the proceeds of the assets to be sold in the voluntary liquidation. The corporate person shall within four weeks from declaration of the same appoint an Insolvency Professional to act as liquidator in the general meeting of the company by passing a special resolution and stating that company requires to be liquidated voluntarily.
In case where company owes any debt to any persons, creditors representing two third in value of the debt of the company, the resolution shall be approved by such persons within seven days of passing such resolution. The company shall notify the Registrar of Companies and the board about the resolution to liquidate the company within seven days of such resolution or the subsequent approval by the creditors. The voluntary liquidation proceedings in respect of the company shall commence from the date of passing of resolution.
The Code provides that where the assets of the company have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for its dissolution and on receipt of the same, an order for dissolution shall accordingly be passed by the Adjudicating Authority. A copy of such order shall be forwarded to the authority with which the corporate person is registered. 
Fresh Start Process Under the Code:
The Code allows individual debtors, who are unable to pay the debt, to start afresh. As per the Code, a debtor, who is unable to pay his debt and fulfils the following conditions, shall be eligible to make application for a fresh start for discharge of his qualifying debt:
- Gross annual income - not more than sixty thousand rupees;
- The aggregate value of the asset - not more than twenty thousand rupees;
- The aggregate value of the qualifying debt – not more than thirty five thousand rupees;
- The person is not an undischarged bankrupt and does not own a dwelling unit;
Where an application is filed by the debtor an interim-moratorium shall commence on the date of filing of said application in relation to all the debts and shall cease to have effect on the date of admission or rejection of such application. An application shall be in such form containing such information supported by an affidavit and accompanied by such fee as may be prescribed. In case, when an application is filed through a resolution professional, the Adjudicating Authority shall direct the board within 7 days of receipt of the application and shall seek confirmation from the board that there are no disciplinary proceedings against the resolution professional who has submitted such application. The board shall thereafter confirm the appointment or rejection of the resolution professional. A resolution professional appointed by the adjudicating authority shall be provided a copy of the application for fresh start.
The resolution professional shall examine the application within ten days of his appointment, and submit a report to the Adjudicating Authority, either recommending acceptance or rejection of the application. The resolution professional may call for such further information or explanation in connection with the application as may be required from the debtor or any other person who, in the opinion of the resolution professional, may provide such information. The resolution professional shall record the reasons for recommending the acceptance or rejection of the application in the report to the Adjudicating Authority. The Adjudicating Authority may within fourteen days from the date of submission of the report by the resolution professional, pass an order either admitting or rejecting the application. On the date of admission of the application, the moratorium period shall commence in respect of all the debts. The moratorium ceases to have effect at the end of the period of one hundred and eighty days beginning with the date of admission unless the order admitting the application is revoked.
 Section 4 of the Insolvency and Bankruptcy Code, 2016
 Section 16 of the Insolvency and Bankruptcy Code, 2016
 Section 6 of the Insolvency and Bankruptcy Code, 2016
 Section 7 of the Insolvency and Bankruptcy Code, 2016
 Section 8 of the Insolvency and Bankruptcy Code, 2016
 Section 9 of the Insolvency and Bankruptcy Code, 2016
 Section 10 of the Insolvency and Bankruptcy Code, 2016
 Section 12 of the Insolvency and Bankruptcy Code, 2016
 Section 14 of Insolvency and Bankruptcy Code,2016.t
 Section 54 of the Insolvency and Bankruptcy Code, 2016.
 Section 56 of the Insolvency and Bankruptcy Code, 2016
 Section 57 of the Insolvency and Bankruptcy Code, 2016
 Section 59 of the Insolvency and Bankruptcy Code, 2016
 Section 80 of the Insolvency and Bankruptcy Code, 2016