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Lesson ID 261019
Version 01/31052019

Insolvency & Bankruptcy Code, 2016

Background:

There was no single law dealing with insolvency and bankruptcy in India.

The liquidation of companies and individuals were handled under various Acts. Some of the important
one’s are:

 Presidency Towns Insolvency Act, 1909

 The Provincial Insolvency Act, 1920
 Sick Industrial Companies Act
 SARFAESI Act, 2002
 Companies Act 2013
 Recovery of debts due to banks and financial Institutions Act

It led to an overlapping jurisdiction of different authorities like High Court, Company Law Board, BIFR
and DRT.

This overlapping jurisdictions and multiplicity of laws made the process of insolvency resolution very
cumbersome in India.

As per the World Bank data, it takes an average 4.3 years to wind up a company in India. It is
easier to start a business than to exit it.

Why IBC Needed?

 To ensure revival before liquidation

 Reduce the burden of NPA’s on Banks
 Need of a Unified Code
 To provide an easy exit for corporates
 Faster Recovery of Debt

Introduction:

 Insolvency:
Insolvency is defined as the failure of a debtor to pay the due amount.

 Bankruptcy:
Bankruptcy is the legal declaration if insolvency by an adjudicating body (Court or Tribunal).

 The Insolvency and Bankruptcy Code (IBC), 2016, passed by the Govt. of India to promote
entrepreneurship, availability of credit, and balance the interests of all stakeholders.
 Code = Collection of Acts already passed into law

Four Pillars of IBC, 2016

Pillar 1: Insolvency resolution professional

Pillar 2: Information Utilities
Pillar 3: NCLT/ DRT
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Pillar 4: Insolvency and Bankruptcy Board of India

Who can Initiate Insolvency Resolution Process ?

Eligibility:

The Corporate Insolvency Resolution Process can be initiated by filing an application by the
following entities before the Adjudicating Authority (NCLT) where the default amount is of Rs 1.00
lakh & above.
i. By Financial Creditor
ii. By Operational Creditor (input/service providers)
iii. By the Corporate Debtor itself
Note:

1. The Corporate Insolvency Resolution Process can be triggered in all Stressed Assets;
including SMA-0 accounts.
2. The amount due to operational creditors under a resolution plan shall be given priority in
payment over financial creditors.

Cases where CIRP cannot be initiated:

 A corporate debtor or a financial creditor who has violated any of the terms of a Resolution
Plan which was approved 12 months before the date of making an application for initiation of
the CIRP under the Code; or
 A corporate debtor in respect of whom a liquidation order has been made.

Sound start New Entities in Insolvency & Bankruptcy Code, 2016:

1. Insolvency and Bankruptcy Board of India (IBBI):

It regulates the Insolvency Professional Agencies, Insolvency Professionals and Information
Utilities constituted under the Code.
2. Insolvency Professionals (IP):
Insolvency Professionals (IPs) is the licensed individual professional who can act as an Interim
Resolution Professional (IRP), Resolution Professional (RP), Liquidator and/or a Bankruptcy
Trustee during the resolution process.

The IPs has to be registered with the IBBI and enrolled with an Insolvency Professional
Agencies (IPA), prior to undertaking any actions as an IP under the Code.

Besides individual professionals, a company, a registered partnership firm or a limited liability

partnership shall also be eligible for recognition as an insolvency professional entity, if –
i. Its sole objective is to provide support services to insolvency professionals, who are its
partners or directors, as the case may be;
ii. It has a net worth of not less than one crore rupees;
3. Insolvency Professional Agencies (IPA):
At present, the following 3 agencies are registered as IPA:
i. The Institute of Company Secretaries of India
ii. The Institute of Chartered Accountants of India
iii. The Institute of Cost Accountants of India

4. Information Utilities (IU):

 An information utility is an agency that is in charge of collecting, collating and
disseminating financial information.
 It shall be registered with the Insolvency and Bankruptcy Board of India.
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 Information utility (IU) receives information from Financial Creditors, gets it

authenticated from parties concerned, stores and disseminates the same to be used in
insolvency and bankruptcy proceedings.
 The services of National e-Governance Services Ltd. (NeSL) may be utilised as bank’s
service provider for Information Utility Services.

Important Authorities:

a) National Company Law Tribunal (NCLT): It is the adjudicating authority for the insolvency/
liquidation of Corporate (Company, LLPs and other limited liability entities).
b) The Debt Recovery Tribunal (DRT): The DRT is the adjudicating authority for the bankruptcy
of partnerships and individuals.
c) National Company Law Appellate Tribunal (NCLAT): All appeals against the orders of
NCLT will lie with the National Company Law Appellate Tribunal.
d) Debt Recovery Appellate Tribunal (DRAT): All appeals against the orders of DRT will lie
with the Debt Recovery Appellate Tribunal (DRAT).
e) The Supreme Court of India: The S. C. has the final Appellate Jurisdiction over the NCLAT
and DRAT.

Two stages of Corporate Debtor Resolution Process:

Stage 1: Insolvency Resolution Process (IRP)

Stage 2: Liquidation

Stage 1: Insolvency Resolution Process

The code envisages following step in IRP :

 Commencement of IRP
a. By Operational Creditor
b. By Corporate Debtor
c. By Financial Creditor
 Moratorium
 Appointment of Resolution Professional
 Creditors Committee and Revival Plan

Initiation of CIRP by Operational Creditor:

 An operational creditor (provider of goods & services, government dues, employees &
workmen, etc.) can initiate resolution process against a corporate debtor by filing application to
Adjudicating Authority before NCLT claiming dues of Rs. 1.00 lac or above.
 Before filing such application, 10 days demand notice must be given by the operational
creditor to the Corporate Debtor demanding the due amount.
Initiation of CIRP by the Corporate Debtor:
 A Corporate applicant/debtor can initiate a resolution process where the corporate debtor has
committed a default by filing an application along with its books of account, other relevant
documents and the name of resolution professional proposed to be appointed as an interim
resolution professional.
 The Adjudicating Authority shall, within 14 days of the receipt of the application, by an order
admit such application if the application is complete and no disciplinary proceeding is pending
against the proposed interim resolution professional.
Insolvency Resolution Process for Companies by Financial Creditors:
 A case can be referred to NCLT by a financial creditor.
 If NCLT accepts such application, it imposes moratorium (a calm period) and appoints
Insolvency Professional (IP) when Board of the company is suspended.
 IP explores the possibility of resolution and constitutes a committee of creditors.
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 If NCLT rejects the application; the creditor can rectify the defect within 7 days.
 IP collects information from IUs, relating to lenders, terms and conditions of loans; securities
etc. and prepare IRP for approval of creditors.
 If IRP approved by 66 % of creditors by vote (voting rights are in the ratio of debt), the NCLT
passes an order binding the debtor and creditors to the repayment plan.
Note:
1. For successful completion of resolution process, a decision is to be taken by the CoC and
approved by the Adjudicating Authority and such decision to be taken jointly with the consent
of Financial Creditors having voting share of not less than 51% of Financial Creditors.
2. The Committee of Creditors (CoC), also take several decisions like:
i. Settlement of fees of Resolution Professionals,
ii. Appointment of consultants/professionals, etc.

Moratorium
The moratorium in terms of Insolvency and Bankruptcy Code, 2016 (‘IBC’) means a period wherein
no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or
termination of essential contracts can be instituted or continued against the Corporate Debtor.

The moratorium will be declared by the NCLT for prohibiting the following:

1. Institution of any suit or pending suit including execution of any judgement or decree
against the corporate debtor.
2. Transferring, encumbering, alienating or disposing of any property or right or beneficial
interest.
3. Any action to foreclose, recover or any security interest created by the corporate debtor in
respect of his property.
4. Recovery of any property by the owner or lessor which is under the possession of the
corporate debtor.
5. Terminate the supply of goods and services to the corporate debtor.

Moratorium will expire when:

 Liquidation is ordered during resolution process period, or Resolution Plan is approved during
resolution process period,
 If Resolution plan is not completed after commencement of insolvency process within
prescribed moratorium period,
 The Adjudicating Authority may allow withdrawal of application admitted on an application
made by the applicant with the approval of 90% voting share of the committee of creditors.

Appointment of Insolvency Resolution Professional

1. Interim resolution professional(IRP) is appointed by NCLT within 14 days from the insolvency
commencement date and the term of his appointment shall not exceed 30 days from the date of
appointment.
2. The committee of creditors, may, in the first meeting, by a majority vote of not less than sixty-six
per cent (66%) of the voting share of the financial creditors, either resolve to appoint the interim
resolution professional as a resolution professional or to replace the interim resolution professional by
another resolution professional.
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Committee of Creditors
 The interim resolution professional shall after collation of all claims received against the
corporate debtor and determination of their financial position of the corporate debtor,
constitute a committee of creditors.

 The committee of creditors shall comprise all financial creditors of the corporate debtor:

 Where any person is a financial creditor as well as an operational creditor,—

 such person shall be a financial creditor to the extent of the financial debt owed by the
corporate debtor,and shall be included in the committee of creditors, with voting share
proportionate to the extent of financial debts owed to such creditor;
 such person shall be considered to be an operational creditor to the extent of the
operational debt owed by the corporate debtor to such creditor.
 The corporate debtor owes financial debts to two or more financial creditors as part of a
consortium or agreement, each such financial creditor shall be part of the committee of
creditors and their voting share shall be determined on the basis of the financial
debts owed to them.

 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.
 The resolution professional shall make available any financial information so required by
the committee of creditors under sub-section (9) within a period of seven days of such
requisition.
 The first meeting of the committee of creditors shall be held within seven days of the
constitution of the committee of creditors.

Revival Plan

 All decisions pertaining to revival and implementation of the effective resolution plan are
required to be taken by the committee of creditors (comprising of only financial creditors)
("CoC") by majority vote of not less than 66% of the voting share of the financial creditors.

 The operational creditors are not allowed to be a part of CoC and to vote in favour or against
such resolution plan except when there is no financial creditor pertaining to the corporate
debtor and such operational creditors meet the prescribed criteria under IBC.

 Such operational creditors have limited rights to receive notice of CoC meeting and to attend
such meeting provided their aggregate dues are at least equivalent to 10% of the total debt.

Stage 2: Liquidation

 A 66 % majority of the creditors ‘committee decides to liquidate the corporate debtor.

 Creditor`s Committee does not approve a resolution plan within 180 days (or within the
extended 90 days)
 The NCLT rejects resolution plan submitted to it.
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 The debtor contravenes the agreed resolution plan and an affected person makes an
application to the NCLT to liquidate the corporate Debtor.
On NCLT passing the order of liquidation, a moratorium is imposed on the pending legal proceedings
against the corporate debtor and the assets of the debtor (including the proceeds of liquidation) vest
in the liquidation estate.

Time Lines of Corporate Insolvency Resolution Process (CIRP):

1. Application before NCLT: Within 14 days either admit or reject the application.
2. Appointment of IRP: Within 14 days after acceptance of application.
3. Take over control over the asset of corporate and appointment of 2 registered valuers to
determine the value for liquidation: Within 7 days after the appointment of IRP.
4. Make a public announcement and invite claim of stakeholders within 14 days: Within 3 days
after the appointment of IRP.
5. Convene 1st meeting of CoC in which CoC to confirm his appointment or replace RP with
approval of NCLT: Within 7 days of filing the report.
6. IP is required to place insolvency resolution plan within 180 days.
7. The NCLT can allow extension by 90 days, if 66 % creditors by value agree. Hence, the total
period can be 270 days.
8. The fast-track resolution period of small corporate is 90 days, extendable by 45 days.

Priority of dues for distribution of proceeds of Assets to stakeholders

1. The insolvency resolution process costs and the liquidation costs paid in full;
2. The following debts which shall rank equally between and among the following :—
i. workmen's dues for the period of twenty-four months preceding the liquidation
commencement date; and
ii. debts owed to a secured creditor in the event such secured creditor has
relinquished its security to the liquidation estate;
3. Wages and any unpaid dues owed to employees other than workmen for the period of twelve
months preceding the liquidation commencement date;
4. Financial debts owed to unsecured creditors;
5. The following dues shall rank equally between and among the following:-
i. any amount due to the Central Government/ State Government/ Consolidated Fund of
India/ Consolidated Fund of a State in respect of the whole or any part of the period of
two years preceding the liquidation commencement date;
ii. remaining debts owed to a secured creditor for any amount unpaid/ unrealized
after enforcement of security interest;
6. Any remaining debts and dues;
7. Preference shareholders, if any; and
8. Equity shareholders or partners, as the case may be.

Ineligibility to be a resolution applicant

A person will be ineligible to submit a plan if:

 an undischarged insolvent (individual unable to repay his debt),
 a wilful defaulter identified by the RBI,
 a person having with a NPA account for more than a year,
 convicted of an offence punishable with two or more years of imprisonment,
 disqualified as a director under the Companies Act, 2013,
 prohibited from trading in securities by SEBI,
 indulged in preferential, undervalued or fraudulent transactions,
 executed an enforceable guarantee in favour of a person who is a creditor to a defaulter
undergoing a resolution process,

Proposal for reference of account under IBC, 2016

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The proposal shall be initiated by the branch and submitted to IBC Cell, HO/FGMO, through their
concerned ZO and/or FGMO
Authorised Signatory for filing petitions under IBC, 2016
All Officers of Scale IV (Chief Manager) and above are authorized to file the petitions.
Filing of Application with Adjudicating Authority (NCLT) for initiating CIRP
 It is advisable that before filing the application before NCLT, a demand notice should be
issued to the borrower/ guarantors.
 Under consortium or Multiple banking arrangements, it is advisable that before filing petition
under IBC, 2016, the other lender’s view/ mandate may also be obtained, particularly where
our Bank is the Leader or having majority share in Multiple Banking Arrangement and its
impact may also be assessed in case it is intended to file application before NCLT
independently.
 To engage an empanelled Advocate/ law firms/ Insolvency Resolution Professional for filing
applications on behalf of the Bank as a financial creditor or any other application as may be
required for admission of the case by NCLT as also for other matters incidental to the
proceeding to protect the interest of the Bank.

Precautions to be taken before filing Application:

All liquid securities available should be adjusted in the account.
 Notice of demand / recall notice should be issued to the borrower / personal Guarantors /
corporate guarantor thereby crystallizing bank’s claim against the borrower and invoking the
available guarantee.
 While filing application before NCLT / claim before IRP, the entire dues along with contractual
rate of interest, cost, expenses, etc. up to the date of filing should be mentioned in such
application / claim, including Non-Funded exposure.
 In case exclusive security is available especially in the name of guarantor, preference should
be given for enforcement of such security under SARFAESI Act before initiating action under
IBC against the borrower.

Appeal against order of NCLT:

A person aggrieved by order of NCLT can file appeal in Supreme Court within 45 days from the date
of receipt of order.
Punishment for malicious initiation of IRP or liquidation Process:

i. Punishment for concealment of property / Punishment for transactions defrauding

creditors/Punishment for misconduct in course of corporate insolvency resolution
process - imprisonment for a term which shall not be less than three years but which may
extend to five years, or with fine, which shall not be less than one lakh rupees, but may
extend to two crore rupees, or with both.

ii. If an insolvency professional deliberately contravenes the provisions of this Part, he shall
be punishable with imprisonment for a term which may extend to six months, or with fine
which shall not be less than one lakh rupees, but may extend to five lakhs rupees, or with.

References:

S. No. Cir. No. Date Description

1. 15866 16.08.2018 Policy on Operational Aspects of I & B Code,2016
2. 15995 22.10.2018 Amendment to IBBI Regulation