Dissertation Report - 17IP63012

LEGAL JOURNEY OF INSOLVENCY & BANKRUPTCY
CODE, 2016 AND ITS EXISTING LOOPHOLES: A

COMPARATIVE PERSPECTIVE
Dissertation Submitted to
Indian Institute of Technology, Kharagpur

In partial fulfilment for the award of the degree
of
Bachelor of Law (Hons) In Intellectual Property Law
by
DEEPANSHU SARKAR
(Roll No. 17IP63012)
Under the guidance of
Dr. Arindam Basu
RAJIV GANDHI SCHOOL OF INTELLECTUAL PROPERTY LAW

INDIAN INSTITUTE OF TECHNOLOGY, KHARAGPUR
MAY 2020
LEGAL JOURNEY OF INSOLVENCY & BANKRUPTCY
CODE, 2016 AND ITS EXISTING LOOPHOLES: A
Dissertation submitted by
Deepanshu Sarkar
Roll No: 17IP63012
Approved by
Dr. Arindam Basu Prof. (Dr.) M. Padmavati

(Supervisor) (Dean, RGSOIPL)

INDIAN INSTITUTE OF TECHNOLOGY, KHARAGPUR
MAY 2020
LEGAL JOURNEY OF IBC, 2016 AND ITS EXISTING LOOPHOLES: A
TABLE OF CONTENTS
DECLARATION BY STUDENT ......................................................................................... iii
CERTIFICATE BY SUPERVISOR ..................................................................................... iv
ACKNOWLEDGEMENT ....................................................................................................... v
TABLE OF ABBREVIATIONS ............................................................................................ vi
ABSTRACT ............................................................................................................................vii
CHAPTER 1: INTRODUCTION ........................................................................................... 1
CHAPTER-2: EFFICACY OF INSOLVENCY AND BANKRUPTCY LAWS OF
INDIA ........................................................................................................................................ 3
2.1 Corporate Insolvency: Practice and Procedures ............................................................ 5
2.1.1 Resolution Plan in Corporate Insolvency Process ............................................................ 8
2.2 Voluntary Liquidation (Winding Up) ............................................................................ 12
2.3 IBC versus Companies Act, 2013 ................................................................................... 15
2.4 Insolvency Resolution and Liquidation Procedure for Individuals under Existing
and Previous Law................................................................................................................... 16
CHAPTER-3: LOOPHOLES IN THE INSOLVENCY & BANKRUPTCY CODE, 2016
& COMPARISON WITH THE FOREIGN PERSPECTIVE ........................................... 20
3.1 Existing Fallacy In The Code .......................................................................................... 22
3.2 The UNCITRAL Legislative Guide................................................................................ 27
3.2.1 The Recommendations by UNCITRAL Guide: - .................................................... 27
3.3 Legal Framework Of United States................................................................................ 29
3.3.1 Approach of Title 11 Towards Prepetition Contracts ................................................. 30
3.4 United Kingdom Insolvency Perspective ....................................................................... 31
CHAPTER-4: AUTHOR’S VIEWPOINT .......................................................................... 35
CHAPTER-5: CONCLUSION ............................................................................................. 37
BIBLIOGRAPHY .................................................................................................................. 39
ii
DECLARATION BY STUDENT
I certify that
a. The work contained in this report has been done by me under the guidance of
my supervisor.
b. The work has not been submitted to any other Institute for any degree or
diploma.
c. I have conformed to the norms and guidelines given in the Ethical Code of
Conduct of the Institute.
d. Whenever I have used materials (data, theoretical analysis, figures, and text)
from other sources, I have given due credit to them by citing them in the
text of the dissertation and giving their details in the references. Further, I
have taken permission from the copyright owners of the sources, whenever
necessary.
Date: 8th May, 2020 Deepanshu Sarkar
iii
CERTIFICATE BY SUPERVISOR
This is to certify that the report titled ___ submitted by Mr. Deepanshu Sarkar to Indian Institute
of Technology, Kharagpur is a bonafide work carried out by him under my supervision, in
fulfilment of the requirement for the degree of Bachelor of Laws (LL.B.)
Dr. Arindam Basu May 8, 2020
iv
ACKNOWLEDGEMENT
I take this opportunity to express my profound gratitude and deep regards to my guide
Dr. Arindam Basu (Rajiv Gandhi School of Intellectual Property Law, IIT
Kharagpur) for his exemplary guidance, monitoring and constant encouragement
throughout the course of this thesis. The blessing, help and guidance given by him
time to time shall carry me a long way in the journey of life on which I am about to
embark.
A special thanks all my friends and family, who kept me motivated to complete this
work. I am also grateful for department resources and library facilities that helped in
doing valuable research pertaining to this study.
08th May, 2020 Deepanshu Sarkar
v
TABLE OF ABBREVIATIONS
ABBREVIATION FULL FORM
§ Section
BomCR Bombay Cases Reporter
CDR Current Diwani Reports
Chap. Chapter
Dr. Doctor
e.g Example
F.3d Federal Reporter Third Series (US)
H.M.S.O Her Majesty’s Stationery Office
IBC Insolvency and Bankruptcy Code
LLP Limited Liability Partnership
NCLT National Company Law Tribunal
NPV Non-Performing Value
RBI Reserve Bank of India
RDDBFI Recovery of Debts Due to Banks &
Financial Institutions
s./ss. Section(s)
SARFAESI The Securitisation and Reconstruction of
Financial Assets and Enforcement of
Security Interest
SICA Sick Industrial Companies Act, 1985
SME Small & Medium Enterprises
SC Supreme Court
UK United Kingdom
UNCITRAL United National Committee on
International Trade Law
US United States
v. Versus
Vol. Volume
w.e.f With Effect From
vi
ABSTRACT
This paper examines the effectiveness of the new Insolvency and Bankruptcy Code (“The
Code”) which came into effect from 2016. The following paper makes an effort to distinguish
the efficacy of the pre-existing laws regarding bankruptcy and the Code. It also determines
whether the new Code will help in recovering the bad debts over which India is
overhanging in the corporate sector and speeding up the proceedings regarding
insolvency? The Indian Insolvency and Bankruptcy Code, 2016 deals with insolvency
procedures in the country. At the core of the administration of insolvency process, lies the
Interim Resolution Professional and the Resolution Professional with differing powers under
the Code leading to an incongruity whilst dealing with third-party owned as assets in the
possession of corporate debtor. The aim of this essay is to arrive at a plausible solution of this
incongruity by deriving wisdom from regimes matured over the years having withstood the test
of time.
Key Words: Insolvency, Bad debts, Interim Resolution Professional, Third-party Owned
Assets
vii
CHAPTER 1: INTRODUCTION
“The economy witnessed freedom of entry in the 1990s and the freedom to continue business
in the 2000s. The Insolvency and Bankruptcy Code, 2016 now provides the ultimate economic
freedom, freedom to exit, wherever required, and completes the suite of economic freedom.
This will unleash and realize the full potential of every person and promote inclusive growth.
By liberating resources stuck up in inefficient and defunct firms for continuous recycling, it
will change the script from ‘hopeless end’ to ‘endless hope’.”
-Dr. M.S. Sahoo
Chairperson
Insolvency and Bankruptcy Board of India
The Insolvency and Bankruptcy Code passed by the Parliament is a welcome refurbishment to
the existing framework dealing with insolvency of corporates, individuals, partnerships and
other entities. It paves the way for much needed reforms while focusing on creditor driven
insolvency resolution. Recognizing that reforms in the bankruptcy and insolvency regime are
critical for improving the business environment and alleviating distressed credit markets, the
Government introduced the Insolvency and Bankruptcy Code Bill in November 2015, drafted
by a specially constituted 'Bankruptcy Law Reforms Committee' (BLRC) under the Ministry
of Finance. The Code was finally passed in 2016 with certain sections came into force w.e.f
December 1, 2016. The main object of this Code is to consolidate and amend the existing laws
which are related to reorganization and insolvency resolution process concerning corporate
persons, partnership firms, and individuals in a time bound manner. It aims at balancing the
interest of all the stakeholders, and provides for establishment of Insolvency and Bankruptcy
Board for dealing with matters connected with the Code. The act also aims to ensure
maximization of the value of assets of the Debtor, availability of credit etc. In other words,
various banks are playing the role of financial creditors in the economy, by supplying credit
for carrying out economic activities and the code is also about speedy winding up of debt
related matters thus freeing up the bank resources for carrying out other productive activities.
Some Key Points of The Code are:
1. Paradigm shift from existing ‘debtor in possession’ to ‘creditor in control’ regime.

2. Consolidates all bank related laws.
1
3. Has an overriding effect1 on all other laws of Insolvency and Bankruptcy
4. The Code aims to resolve insolvency in a strict time frame i.e. 180 days.
5. It has a defined ‘order of priority’ i.e. it follows the waterfall mechanism in the
distribution of assets2.
1
IBC,2016 s.238
2
IBC,2016 s.53
2
CHAPTER-2: EFFICACY OF INSOLVENCY AND BANKRUPTCY LAWS OF
INDIA
The erstwhile legal framework existing(or which existed) in our country regarding the
bankruptcy and insolvency laws like Companies Act,20133, Companies Act,19564 ,
RDDBFI Act,19935 , SARFAESI Act,20026 , SICA Act,19857 , Presidency Towns
Insolvency Act,19098 , Provincial Insolvency Act,19209 , LLP Act,200810 before the
enactment of IBC, have seemed to provide creditors no say in the process of running the
business until default takes place in the firm. In an LLP, the equity owners only get
complete control of a firm when the debt obligations are met.
In today’s scenario, the secured creditors are not only banks but also some household and
financial firms who buy corporate bonds, but since these bond holders do not have much
power in their hands; the system has not worked properly and thus has far reaching
consequences in the corporate financing world like the difficulties in infrastructure
financing.
Under these conditions, the recovery rates obtained in India are among the lowest in the
world. When default takes place, broadly speaking, lenders seem to recover 20% of the
value of debt, on an NPV basis11.
This is a matter of critical importance: India is one of the youngest republics in the world,
with a high concentration of the most dynamic entrepreneurs. Yet these creditors (the
game changers and growth drivers) are crippled by an environment that takes some of the
longest times and highest costs by world standards to resolve any problems that arise
while repaying dues on debt. This problem leads to grave consequences: India has some
of the lowest credit compared to the size of its economy. This is a troublesome state to be
in, particularly for a young emerging economy with the entrepreneurial dynamism of
India. The Corporate firms in India had been facing multifold problems with the legal
regime before the IBC enactment. Some of them have been described below:
3
Companies Act,2013 Chap. XIX & XX amended by IBC,2016 s.255
4
Part VIA, VII & Section 391 of the Act
5
Recovery of Debts Due to Banks & Financial Institutions Act,1993 amended by IBC,2016 s.249
6
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
7
Sick Industrial Companies Act,1985 amended by IBC,2016 s.252
8
Repealed by IBC,2016 s.243
9
Repealed by IBC,2016 s.243
10
Limited Liability Partnership Act,2008 amended by Section 254
11
Bankruptcy Law Reforms Committee Report Vol1
3
1. The erstwhile legal framework i.e.( Companies Act,2013 , Companies Act,1956 ,
RDDBFI Act,1993 ,SARFAESI Act,2002 , SICA Act,1985 , Presidency Towns
Insolvency Act,1909 , Provincial Insolvency Act,1920 , LLP Act,2008) has resulted
in a highly fragmented system which has led to complex issues of how the various
statutes and the judicial forums reconcile with one another. The result being a slew
of often conflicting judgments by various High Courts and the Supreme Court of
India interpreting these statutes in a different manner. Thus, culminating in a
whopping 60,000 bankruptcy cases pending in the Indian courts.
2. The existing legal regime is also painfully out of sync with the present-day market
realities which ultimately hampers the ability to do business in India. Although
secured creditors such as banks and financial institutions as in the case of Kingfisher
Airlines Limited v. State Bank of India12 appear to have a safety net under the
present legal regime in the form of the RDDBFI Act and the SARFAESI Act, the
existing legal machinery and forums for the unsecured creditors, who comprise a
large chunk when compared to secured creditors also does not work with any
commendable degree of efficiency or success rate. That is why we have a recovery
rate of only 6% which is one of the worst recovery rates in the world.
3. While the insolvency laws dealing with companies and institutional creditors such
as banks and financial institutions have been revisited from time to time, the
bankruptcy laws relating to other debtors such as individuals, unlimited liability
partnerships and sole proprietorships has remained unchanged for nearly a
hundred years. This has so often resulted in a scenario where the creditor can pursue
a stronger action against the borrowing company but is left to resort to archaic
methods and remedies against the individual promoters or the management of the
company.
12
2017(3) CDR 589(SC)
4
2.1 Corporate Insolvency: Practice and Procedures
The issues involving corporate insolvency laws are closely linked to those surrounding
corporate borrowing. It is the creation of credit that gives rise to debtor-creditor
relationship and makes insolvency possible in the first place. If the corporations or
creditors face problems in an insolvency that arises from multiplicity and complexity
of arrangements for obtaining credit and the ensuing difficulty of resolving the
respective claims of different types of creditor, the best way to reform insolvency
arrangements might be well to rationalize the legal methods available for raising capital
and obtain credit rather than tinker with the insolvency rules that apply to various credit
devices.
Companies can raise capital by borrowing from a wide variety of individuals and
institutions (creditors). A first kind of creditor is the institutional lender which is
exemplified by a high street clearing bank that plays an important role in offering
companies not merely loans but flexible finance in form of overdrafts.
A second kind of commonly encountered lender is the trade creditor. The individual
or firm who supplies goods or services to the company but does not require immediate
payment. Such creditors will often transfer goods to a company and await payment at a
later date but they may also offer goods in return for a bill of exchange13. These latter
arrangements allow companies to spread the cost of purchasing an item (e.g. new
machinery) over a proportion, or all, of the asset’s lifetime.
The third type of creditor is a wealthy individual who may be persuaded to put money
into a venture. The term ‘business angel’ has developed to refer to individuals who
perform venture capital roles, usually offering loans, and, in return for these, combining
repayment conditions with the taking of an equity stake in the debtor company.
Another major category of corporate creditor is the employee. In so far as employees
have carried out work and are entitled contractually to wages and other benefits as yet
unpaid, they constitute creditors of the firm. Shareholders, moreover, may also be
creditors in that they may be owed money in their capacity as shareholders.
Credit arrangements are complex and creditors generally resort to four main ways of
providing credits:
13
e.g. Post-Dated Cheque
5
1. Security
When borrowing companies offer security to lenders this may prove attractive to
lenders because, inter alia, it reduces their loan risks by giving them privileged claims
to repayment in the event of borrowing company’s insolvency. The normal rule in a
corporate insolvency is supposedly that all unsecured creditors are treated on an equal
footing- pari passu – and share in insolvency assets pro rata according to their pre-
insolvency entitlements or sums they are owed. Security avoids the effect of pari passu
distribution by creating rights that have priority over the claims of unsecured creditors.
2. Unsecured Loans
A company can seek a loan without offering security but in such an arrangement the
lender bears the risk that if the debtor company becomes insolvent, its own debt will be
satisfied after the secured creditors have been paid. The unsecured creditor has,
moreover, no enforceable interest in the debtor’s property prior to bankruptcy or
winding up, only a right to sue for money owed and to enforce a court judgment against
the debtor.
3. Quasi (de-facto) Security
Companies can enter into a number of legal relationships that, prima facie, appear to
be sale arrangements but which operate in practice as security devices (such as
reservations of title; hire purchase agreements; sale and lease back; sale and repurchase;
and discounting of receivables). With reservations of title, for instance, the goods will
be sent to the ‘debtor’ company by the seller: ‘creditor’ A, but ownership will be
stipulated and will not pass until the full price has been paid. If the debtor company
becomes insolvent, the goods whose title remained with A, do not form part of the
insolvency assets. The creditor retains the title throughout and the goods do not form
part of the insolvency assets.
6
4. Third-party guarantees
Often a loan from a creditor such as bank will be ‘guaranteed’14 by a third party- which
may be an individual director of the debtor company but also could be a parent or
subsidiary company within a group. The guarantor undertakes to answer for the default
but he can only be sued after the principal debtor’s default. Usually the undertaking of
the guarantor is to meet the monetary liability arising out of default, but a guarantor
may assume secondary liability for performance as stipulated in the contract agreed by
the principal.
It is hence seen that ‘banks’ and ‘other financial institutions’ are the major suppliers of
institutional finance. Banks accounted for 63% of financial assets of all segments of
Indian financial system in 2012 and of this, commercial banks had a share of 92.4%
FIG 2.1: Source: Handbook on the Indian Economy, RBI.

Note: Figures refer to investment and credit of all commercial and co-operative banks
Banks thus remain the main providers of SMEs with more borrowing by term lending
than through overdrafts.
14
If A owes B a financial obligation, then B can make a contract with C, a third party who promises to meet A’s
obligation if he fails to do so (c being a ‘guarantor’)
7
2.1.1 Resolution Plan in Corporate Insolvency Process
The new Insolvency and Bankruptcy Code aims to resolve India’s $150 billion bad debt
overhung by speeding up proceedings and recouping more of the losses. The new regime
aims to significantly boost recoveries and put a firm timeline around case resolution in
the hope that this will help clean-up bank balance sheets and spur lending and also the
Code aims to move cases of company failure into a single forum, replacing an archaic
system of overlapping regulations under which banks, company promoters and other
creditors could all initiate competing proceedings in different courts, tribunals and
regions.
The Corporate Insolvency Resolution Process (CIRP) revolves around the following
ecosystem formed under IBC:
Insolvency and Bankruptcy Board (IBB)
Insolvency Information
Professional Utilities (IU)
Agency (IPA)
Insolvency
Professional (IP)
Committee of
Creditors (CoC)
Insolvent Entity
NCLT- The Adjudicating Authority (AA)
FIG 2.2 IBC ECOSYSTEM
8
NCLT15 – National Company Law Tribunal
IBB16 – Apex Body for promoting transparency and governance in administration of IBC.
IU17 – A centralized repository of financial and credit information of borrowers, would accept,
store, authenticate and provide access to financial data provided by creditors.
IP18 - Persons involved with IPA and regulated by IBB. IPA will conduct resolution process;
the IP would act as a liquidator/bankruptcy trustee who would be appointed by the
creditors and override the power of Board of Directors (BoD).
AA19 – The NCLT for corporate insolvency, would entertain or dispose any insolvency
application, approve/reject the resolution plan.
IPA20 – Registered by IBB, would enroll IPs.
15
mentioned in Companies Act, 2013 s.408 and IBC, 2016 s.60(1)
16
IBC, 2016 s.188(1)
17
IBC, 2016 s.210
18
IBC, 2016 s.207
19
IBC, 2016 s.60(1)
20
IBC, 2016 s.201
9
The CIRP procedure is described as follows:
Company applies
for default or debt No
66% of
payment
creditors Liquidation
approve?
IP appointed Yes
Implementation of
Moratorium Period Resolution Plan
(180 extendable
upto270 days)
Committee of
Creditors formed
FIG 2.3 CIRP SETUP
Some key highlights of the CIRP process are:
• The default or debtor company21 applies for the commencement of the Resolution
Process which can be filed by the Financial Creditor (FC)22, Operational Debtor (OD)
or Operational Creditor (OC) as the case may be to the Adjudicating Authority (AA).
The date on which the application is filed is known as the Initiation Date23.
• The AA within 14 days of receipt of the application will decide on the admission of the
application. The date on which the application is accepted in known as Insolvency
Commencement Date24.
• The applicant can propose an Insolvency Professional (IP) who will act as an Interim
Resolution Professional (IRP). With the 75% vote of Committee of Creditors (CoC)
21
IBC, 2016 s.6
22
IBC, 2016 s.7
23
IBC, 2016 s.5(11)
24
IBC, 2016 s.5(11)
10
they can change the IRP in the first meeting or the IRP can become Resolution
Professional (RP) if the committee gets sufficed by the IRP.
• From the date of appointment of IRP, no proceedings can be commenced against him
provided he works with a bona fide intention and he takes over the company, the Board
of Directors (BoD) is suspended and its power is vested in IRP.
• A Resolution Plan25 is formed by the appointed professional which is approved by the
75% voting share of the CoC and is finally approved by the AA provided that it does
not contravene any provision of the law.
• The maximum permissible time for completion of Corporate Insolvency Resolution
Process (CIRP) is 180 days which can be further extended by another 90 days with the
approval of NCLT upon an application made in this behalf by RP if instructed to do so
by the Committee of Creditors (CC) by a vote of 75%. This period is known as
Moratorium Period.
• If the Resolution Plan is not approved by the CoC, or is rejected by the AA on a
condition that it contravenes with the law or is rejected by the AA or the plan has not
been implemented within the moratorium period, then the company goes into
Liquidation26. In this case the IP acts as a liquidator who will form the estate of assets,
and consolidate, verify and determine the creditor’s claims. The IP exercises the powers
of BoD.
25
IBC, 2016 s.30
26
IBC, 2016 s.33
11
2.2 Voluntary Liquidation (Winding Up)
Prior to November 15, 2016, the term “winding-up” was neither defined under the Companies
Act, 1956 nor under the Companies Act, 2013. Section 255 of the Code has been notified w.e.f
November 15, 2016 and by its virtue, the 2013 Act stands amended in accordance with
Schedule XI of the Code. The above-mentioned Schedule XI now defines the term “winding
up” by introducing a new Section 2(94A) to the 2013 Act as “winding up under this Act or
liquidation under the Insolvency and Bankruptcy Code, 2016. However, the government has,
on 30 March 2017, notified, inter alia, Section 59 of the Insolvency and Bankruptcy Code,
2016 (Code) which deals with voluntary liquidation of corporate entities with effect from 1
April 2017.
At present there are 2 types of petitions:
1. Proceedings already pending and,

2. Those which will be initiated on and after 1 April 2017
Pending voluntary winding up proceedings:
Rule 4 of the Companies (Transfer of Pending Proceedings) Rules, 2016 (Transfer Rules),
which has been notified on 7 December 2016 and brought into force from 1 April 2017,
prescribes that all applications and petitions relating to voluntary winding up of companies
pending before the High Court before 1 April 2017, shall remain with the High Court according
to the provisions of the 1956 Act.
Fresh voluntary winding up proceedings to be instituted under the Code:
On combined reading Section 59 of the Code, Sections 434 (1) (c) and 465 of the Companies
Act, 2013 and Rule 4 of the Transfer Rules, all fresh proceedings for voluntary winding up on
and from 1 April 2017 shall be held before the NCLT and shall be governed as per the
provisions of the Code and the Regulations.
12
Remains with
Voluntary Pending as on
High Court under
Winding Up April 1, 2017 Yes
Companies Act,
before High
1956
Court
No
New
Application
under Section
59 of the Code
FIG 2.4: VOLUNTARY WINDING UP
All the proceedings pending before the High Courts till April 1, 2017, shall continue to
be dealt with by the High Courts according to the 1956 Act. The Hon’ble Bombay High
Court, in the case of West Hills Realty Private Ltd. and Ors v. Neelkamal Realtors Tower
Private Limited27, has further clarified that only the petitions which are at a pre-admission
stage and have not been served to the respondent, will be transferred to the Tribunal.
Petitions for which only the notice of hearing of the petition before the Court has not been
served, will not be transferred to the Tribunal. Therefore, High Courts would be dealing
in those petitions.
Initiation of the process:
As per Section 59 of the Code, any corporate entity may initiate a voluntary liquidation
proceeding if it satisfies all the following conditions:
1. It has not committed any default;
2. If majority of the directors or designated partners of the corporate entity make a

declaration verified by an affidavit to the effect that:
(i) The corporate person has no debt or it will be able to pay its debts in full out of
the sale proceeds of its assets under the proposed liquidation; and
27
2017(2) BomCR 693
13
(ii) Liquidation is not initiated to defraud any person;
3. Such declaration is accompanied by the audited financial statements and valuation

report of the corporate person;
4. Within 4 weeks of such declaration, a special resolution (or an ordinary resolution)

is passed by the contributories28 requiring the corporate person to be liquidated and
appointing an insolvency professional as a liquidator (Contributories’ Resolution) ;
and
5. Creditor(s) representing two-thirds in value of the total debt owed by the corporate
person, approve the Contributories’ Resolution within 7 days of its passage
(Creditors’ Approval).
With Creditors’ approval, the voluntary liquidation proceedings in respect of the entity
shall be deemed to have commenced from the date of passing of the Contributories’
Resolution i.e. Liquidation Commencement Date29.
From the Commencement Date, the entity shall cease to carry on its business unless it is
required for the beneficial winding up of its business.
Once the insolvency proceedings of the company have been completely wound up and
its assets fully liquidated, an application shall be made by the liquidator to the NCLT for
its dissolution along with a final report consisting of audited liquidation accounts, stating
details of the disposed assets and their manner of sale, and statements that all debts have
been discharged and sufficient provisions have been made in case of any adverse outcome
of a pending litigation of which the final report has to be filed with the BoD.
28
Any person liable to contribute towards the assets of the corporate person in the event of its liquidation.
29
IBC, 2016 s.5(17)
14
2.3 IBC versus Companies Act, 2013
The Insolvency Code has amended a catena of sections of the Companies Act, 2013
(herein referred to as the “2013 Act”) regarding the insolvency provisions enlisted in
the 2013 Act.
Some of the amendments have been discussed as follows:
• The term “winding up” used in 2013 Act meant winding up whereas “liquidation30”
has been used in IBC.
• The assets left after the distribution of all the assets shall be credited to the Insolvency
and Bankruptcy Fund31 instead of the Rehabilitation and Bankruptcy Fund as
mentioned in the 2013 Act.
• The creditor did not have the power to initiate winding up process under the 2013 Act
whereas now both the FC and OC can initiate proceedings before the NCLT.
• Now the workmen and secured creditors’ dues assume priority over all other dues32.
Earlier the secured creditor’s dues were pari passu according to Section 325(1) of the
2013 Act. Now a secured creditor having secured asset is entitled to priority, to claim
the balance of his dues.
• The distribution and preferential payment have different meaning in both 2013 Act as
well as IBC hence Section 326 is not applicable for liquidation under IBC.
Some Omissions too have been made which were felt to be redundant regarding the
insolvency provisions like Sections 253-269 which dealt with revival of sick companies
and subsequently the stay order of winding up application has also been repealed after
the enforcement of the Code.
30
IBC, 2016 s.33
31
IBC, 2016 s.224
32
Companies Act,2013 s.326 amended
15
2.4 Insolvency Resolution and Liquidation Procedure for Individuals under Existing and
Previous Law
The Chairman of IBBI Dr. M.S. Sahoo once quoted that:
“Individual bankruptcy is our next immediate priority. Any citizen will be able to use it.
Unlike companies which have homogenous legal structure, individuals are not that
homogenous. We really need to think through. It is difficult to give a timeline but it will be
faster than you think.”
The Previous Laws:
The previous laws related to bankruptcy regarding individuals were seldom used since the laws
are quite state specific and have a very tedious process attached to it. There were two statutes
(now repealed by the Code):
1. The Presidency Towns Insolvency Act,1909 (herein referred to as “1909 Act”)

2. The Provincial Insolvency Act,1920 (herein referred to as “1920 Act”)
According the provisions of previous law when the insolvency order was passed all the
personal properties were vested in the Official appointed by the Government of India and all
the resources were allocated to the creditors of the insolvent.
According to the Section 9(b) and (d) of the 1909 Act the situations by which insolvency could
be triggered were “makes a transfer of his property or of any part thereof with intent to defeat
or delay his creditors" or “departs from his dwelling-house or usual place of business or
otherwise absents himself" or “fails to comply with the demand notice accompanying the
decree of the Court for recovery as given by creditors.”
The time limit to file a petition by a creditor was 3 months from the act of insolvency and the
debtor’s petition was also an act of insolvency. These petitions were submitted in the district
court.
The court registrar had to check whether the conditions laid down in the petition were adhering
to the conditions laid down in the jurisdiction laid down by the particular court.
A Statement of Affairs was filed by the debtor and then by the adjudication of the evidences
and proofs by the court the proclamation of insolvency was made.
Once the proclamation was made, the property of the debtor now vested in the Official
Registrar (OR) and he used to distribute the assets (excluding the home of the insolvent) among
16
the creditors (including the unclaimed dividends) within 1 year under the supervision of the
Committee of Creditors.
The 1909 Act had its jurisdiction in only the High Courts of Calcutta, Bombay and Madras
whereas the 1920 Act had its jurisdiction over rest of the country. But, both acts had become
so redundant and outdated that it had become no longer applicable in the modern day society.
The people actually had started to resort to out-of-court settlements since the firms and other
non-corporate bodies were governed only under 1909 Act and therefore suits by and against
firms are possible only if states under the 1920 Act have adopted provisions for firms.
Thus a more comprehensive and up-to-date legislation was needed to deal with bankruptcy
cases in India.
The New Law:
A sound bankruptcy and insolvency framework requires the existence of an impartial, efficient
and expeditious administration. This is more likely to be possible for individual insolvency
when administrative proceedings are placed outside the court of law (not in the district court
as the previous petition was filed).
The new law provides greater flexibility in the repayment plans, and a time to execute the plans,
that can be acceptable to both parties completely overhauling the previous law. The BLRC
intended that the adjudicating authorities should be widespread delivering justice to every
citizen across the country.
The threshold limit for the applicability of the Code to individuals and proprietorship firms is
Rs.1000 and not exceeding Rs.100000.
In contrast, the Debt Recovery Tribunal (DRT) will deal with the insolvency cases for
individuals instead of the NCLT which was the adjudicating authority earlier. The DRT has a
wider presence across the country with 33 DRTs in the country spread across 23 cities as
against district courts in 673 districts under various high courts.
The Current law has two resolution processes available namely:
i. The Fresh Start Order (FSO)
ii. The Resolution Process
17
It can be explained as follows:
Individual in Financial
Distress
Eligible
Fresh Start Order Yes for debt
(FSO) Relief?
No
Insolvency
Resolution
Process
Resolution
Supervision of plan Yes Plan No Liquidation
by Insolvency Implemented?
Trustee
FIG.2.5 INDIVIDUAL INSOLVENCY RESOLUTION PROCESS
18
Fresh Start Order (FSO):
An individual is eligible for a FSO if he satisfies the debt relief conditions33 as mentioned in
the Code. Hence, only a debtor can file for FSO. A debtor not under another FSO, or IRP prior
to the application or not having secured debts, court fines, child support payments, student
loans, money owed under a criminal charge, and debts resulting from certain personal injury
claims against the debtor can file for FSO. If an individual is eligible for debt relief then a
resolution plan (RP) is formed for the individual firm so that he can be helped out of his
emerging insolvency.
Resolution Process:
The resolution process is implemented by appointing a Resolution Professional (RP) who

forms a resolution plan and within the moratorium period of 180 days the plan has to be
implemented otherwise the firm has to go into liquidation and the distribution of assets is done
by the Resolution Professional.
Thus, unlike the previous laws the Code proposes a process which will involve a process of
negotiation between debtors and creditors supervised by a Resolution Professional. The formal
oversight of the process of negotiation by the RP under the shadow of the law with no long
term adversarial effects to the debtor is a critical step towards a modern insolvency framework.
33
IBC,2016 s.80(2)
19
CHAPTER-3: LOOPHOLES IN THE INSOLVENCY & BANKRUPTCY
CODE, 2016 & COMPARISON WITH THE FOREIGN PERSPECTIVE
Insolvency laws in India underwent a major reform with the formulation of Insolvency and
Bankruptcy Code 2016. It streamlined the process of insolvency in India so as to enable the
creditors to recoup their value of investment in an otherwise failing company. One of the core
principles driving the design of the Code is to facilitate the assessment of feasibility of the
enterprise at a very early stage.34
The entire insolvency process in case of a defaulting company in India is managed by an
Insolvency Professional (IP) appointed by the Adjudicating authority which is the National
Company Law Tribunal (NCLT).35 The role of such an IP gains utmost importance as the fate
of the insolvent company and its creditors depends upon the skills and powers exercised by
him. In case of companies having a massive market capitalization pre-insolvency, every
decision by the IP during insolvency would have the potential to have wide-ranging market
effects. The role of IP embraces a wide range of judicial, accounting and financial functions.
The latter include the “identification of the assets and liabilities of the defaulting debtor, its
management during the insolvency proceedings if it is an enterprise, preparation of the
resolution proposal, implementation of the solution for individual resolution, the construction,
negotiation and mediation of deals as well as distribution of the realisation proceeds under
bankruptcy resolution”.36
In such a scenario, the statute from which such an IP derives powers has to be unambiguous.
This ensures efficient delegation of Adjudicating authority’s powers on the IP and in turn save
him from making inordinate delays. The Indian Insolvency and Bankruptcy Code, 2016,
(hereinafter referred to as the Code) being a recent legislation is yet to mature into a robust
34
Bankruptcy Law Reforms Committee, ‘The Report of the Bankruptcy Law Reforms Committee Volume I:
Rationale and Design’ (2015) I Bankruptcy Law Reforms Committee.
35
Insolvency and Bankruptcy Code, 2016, s.16
36
Committee (n 34).
20
regime. Though an example of excellent draftsman ship, an incongruity exists between powers
of Interim Resolution Professional and the Permanent Resolution Professional (or simply
Resolution Professional) which is discussed in Chapter I. This essay identifies that
inconsistency and proposes a possible solution in Chapter V by drawing narratives from UK
and US Insolvency laws in Chapters III and IV. This essay also touches upon the
recommendations provided in UNCITRAL Legislative Guide on Insolvency Law in Chapter
II. The issue is limited to the domain of corporate insolvency.
21
3.1 Existing Fallacy In The Code
Once the Insolvency Resolution Process is triggered as per the provisions of the Code, the
Adjudicating Authority issues a Moratorium prohibiting multiple litigations against the
company (corporate debtor) in question.37 It then has to appoint an Interim Resolution
Professional (IRP) within fourteen days from the Insolvency commencement date.38 IRP,
after collating all creditors’ claims and determining the financial position of the corporate
debtor, shall constitute a Committee Of Creditors (COC).39 This COC, in their first meeting
(which has to be set-up within seven days of constitution of COC40) shall either appoint the
existing IRP as a Resolution Professional or replace him to appoint a new Resolution
Professional (RP). Two sections specifically lay down the duties of IRP and that of RP. For
the sake of clarity, the relevant sections are reproduced below:
SECTION 18: - Duties of interim resolution professional
The interim resolution professional shall perform the following duties, namely: -
(a) collect all information relating to the assets, finances and operations of the
corporate debtor for determining the financial position of the corporate debtor,
including information relating to—
(i) business operations for the previous two years;
(ii) financial and operational payments for the previous two years;
(iii) list of assets and liabilities as on the initiation date; and
(iv) such other matters as may be specified;
(b) receive and collate all the claims submitted by creditors to him, pursuant to the
public announcement made under sections 13 and 15;
(c) constitute a committee of creditors;
(d) monitor the assets of the corporate debtor and manage its operations until a
resolution professional is appointed by the committee of creditors
(e) file information collected with the information utility, if necessary; and
37
Insolvency & Bankruptcy Code, 2016, s.14
38
Insolvency & Bankruptcy Code, 2016, s.16(1)
39
Insolvency & Bankruptcy Code, 2016, s.21(1)
22
(f) take control and custody of any asset over which the corporate debtor has ownership
rights as recorded in the balance sheet of the corporate debtor, or with information
utility or the depository of securities or any other registry that records the ownership
of assets including-
(i) assets over which the corporate debtor has ownership rights which may be
located in a foreign country;
(ii) assets that may or may not be in possession of the corporate debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the corporate debtor,
financial instruments, insurance policies;
(vi) assets subject to the determination of ownership by a court or authority;
(g) to perform such other duties as may be specified by the Board.
Explanation- For the purposes of this section, the term "assets" shall not include the
following, namely: -
(a) assets owned by a third party in possession of the corporate debtor held
under trust or under contractual arrangements including bailment;
(b) assets of any Indian or foreign subsidiary of the corporate debtor; and
(c) such other assets as may be notified by the Central Government in

consultation with any financial sector regulator.
SECTION 25: - Duties of resolution professional.
(1) It shall be the duty of the resolution professional to preserve and protect the assets
of the corporate debtor, including the continued business operations of the corporate
debtor.
(2) For the purposes of sub-section (1), the resolution professional shall undertake the
following actions, namely: -
(a) take immediate custody and control of all the assets of the corporate debtor,
including the business records of the corporate debtor;
23
(b) represent and act on behalf of the corporate debtor with third parties,
exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial
or arbitration proceedings;
(c) raise interim finances subject to the approval of the committee of creditors
under section 28;
(d) appoint accountants, legal or other professionals in the manner as specified

by Board;
(e) maintain an updated list of claims;
(f) convene and attend all meetings of the committee of creditors;
(g) prepare the information memorandum in accordance with section 29;
(h) invite prospective resolution applicants, who fulfil such criteria as may be
laid down by him with the approval of committee of creditors, having regard to
the complexity and scale of operations of the business of the corporate debtor
and such other conditions as may be specified by the Board, to submit a
resolution plan or plans.
(i) present all resolution plans at the meetings of the committee of creditors;
(j) file application for avoidance of transactions in accordance with Chapter

III, if any; and
(k) such other actions as may be specified by the Board.
Section 18 of the Code stipulates a duty on the IRP to "take control and custody of any
asset over which the corporate debtor has ownership rights” including the assets which
may or may not currently be in the possession of the corporate debtor. 41 However, the
Explanation to Section 18 bars the IRP from taking control of such assets which are owned
by a third party in possession of the corporate debtor held under contractual obligations,
trust and bailment.42 Thus to briefly conclude, an IRP is empowered to take control and
41
Insolvency & Bankruptcy Code, 2016, s.18(1) (f) (ii).
42
Insolvency & Bankruptcy Code, 2016, s.18 Explanation(a).
24
possession of all assets owned by the corporate debtor except those which are in possession
of the corporate debtor but owned by third party and held under trust or contractual
arrangements.
Section 25 of the Code puts a fiduciary duty on the Resolution Professional to “preserve
and protect the assets of the corporate debtor” and while doing so, the RP is bound43 to
“take immediate custody and control of all assets of the corporate debtor”. Thus, wide-
ranging duties are provided for the RP as compared to IRP. There is no Explanation clause
to Section 25 providing such exceptions vis-à-vis those given in Section 18. By this clause
construction, prima-facie it can be said that the RP can justify to take action in furtherance
of his duties even if he takes control of third-party owned assets in the possession of the
corporate debtor.
Section 23 of the Code specifies for the resolution professional to conduct the entire
corporate insolvency resolution process and manage the operations of the corporate debtor
during the corporate insolvency resolution process44. In doing so, the resolution professional
is to exercise powers and perform duties as are vested or conferred on the interim resolution
professional.45 This creates an anomaly in the powers and duties of the resolution
professional.
On one hand, Section 25 confers sweeping powers on the RP to take control and custody of
all assets of the corporate debtor (notice that no “ownership rights” term qualifying the term
“assets” is included in Section 25 vis-à-vis that in Section 1846), while on the other the RP
is directed to exercise powers and perform duties as are vested on the IRP, meaning, he
43
Insolvency & Bankruptcy Code, 2016, s.25(2)- “…the resolution professional shall undertake the following
actions…”
44
Insolvency & Bankruptcy Code, 2016, s.23(1).
45
Insolvency & Bankruptcy Code, 2016, s.23(2)- “The resolution professional shall exercise powers and perform
duties as are vested or conferred on the interim resolution professional under this Chapter.”
46
Insolvency & Bankruptcy Code, 2016, s.18(1)(f).
25
cannot take control or custody of those assets lying in the possession of corporate debtor but
owned by third-party under various arrangements47. It is also pertinent to note that Section
20 of the Code directs the IRP to make “every endeavour to protect and preserve the value
of the property of the corporate debtor” and for this purpose has sweeping powers to take
any actions or modify any contracts entered into prior to the institution of insolvency
proceedings48.
There are no amendments to clarify this statutory incongruence nor are there any
notifications, reports or case-laws to that effect. In such a scenario, wisdom can be drawn
from more matured insolvency regimes across the globe. The United States of America and
the United Kingdom have instituted robust insolvency frameworks way back in the years
1978 and 1986 respectively, followed by various amendments over the years. These
frameworks, themselves have been a result of comprehensive mellowing of their
predecessors over the decades. Hence, the US and UK insolvency regimes are discussed in
the subsequent chapters with a strong focus on studying the duties ascribed to Indian
Resolution Professional’s contemporaries in those frameworks. A reference to the
UNCITRAL Legislative Guide on Insolvency Law is also made to understand the
foundations of Insolvency Law. Brief commentary on solution to contractual issues in the
insolvency scenario are also made in the subsequent chapters.
47
Insolvency & Bankruptcy Code, 2016, s.23(2) read with Explanation to s.18.
48
Insolvency & Bankruptcy Code, 2016, s.20(2): “…the interim resolution professional shall have the authority-
…(b) “to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions
which were entered into before the commencement of the corporate insolvency resolution process".
(e) “to take all such actions as are necessary to keep the corporate debtor as a going concern.”
26
3.2 The UNCITRAL Legislative Guide
The IBC, 2016 apart from borrowing the jurisprudence of insolvency law from developed
jurisdictions of the world, has also considered the recommendations published by United
Nations Committee on International Trade Law in 2005 (also known as the “UNCITRAL
Legislative Guide”) on how the insolvency regime of a country should function. As a result, it
becomes pertinent to have a bird’s eye view on what the guide suggests.
3.2.1 The Recommendations by UNCITRAL Guide: -
The Legislative Guide on Insolvency Law (hereinafter referred to as “The Guide”) was prepared
by the United Nations Commission on International Trade Law (UNCITRAL). “It gives a
mandate to prepare a comprehensive statement of key objectives and core features for a strong
insolvency, debtor-creditor regime, including out-of-court restructuring, and a legislative
guide containing flexible approaches to the implementation of such objectives and features,
including a discussion on the alternative approaches possible and the perceived benefits and
detriments of such approaches”49.
The definition of “Assets of the debtor” provided on page 4 of The Guide, states that:
“Property, rights and interests in property, whether or not in the possession of the debtor,
tangible or intangible, movable or immovable, including the debtor’s interests in encumbered
assets or in third-party owned assets.”
The Guide suggests the following points that every insolvency law should incorporate in their
legal framework:50
• The Legal title to the assets is provided to the designated official (The Insolvency
Resolution Professional (IRP and RP) in India, Bankruptcy Trustee in US,
Administrator in UK) in some countries, but in some countries the debtor is the legal
49
Official Records of the General Assembly, Fifty-fifth Session, Supplement No. 17 (A/55/17), paras. 400-409.
50
UNCITRAL, United Nations Commission on International Trade Law (UNCITRAL). Legal Guide on
International Countertrade Transactions. (1993).Page 75-110
27
owner of the assets, but his power to administer and dispose the assets is limited. In
these cases, the guide suggests that irrespective of applicable legal tradition, insolvency
law will clearly identify the assets that are subject to insolvency proceedings and their
inclusion in insolvency estate and how they will be affected by those proceedings.
• Insolvency Estate is expected to include all the assets of debtor, whether or not in the
possession of the debtor at the time of commencement and also includes debtor’s rights
and interests in encumbered assets or in third-party owned assets.
• For Third-Party owned assets the creditor should retain the legal title or ownership
separate from the insolvency estate on the basis that insolvency law should respect the
creditor’s legal title in the asset.
• In some jurisdictions, the separation of asset may be subject to provision of insolvency
law relating to treatment of contracts.
28
3.3 Legal Framework Of United States
The US Bankruptcy Code (Title 11 of U.S. Code) of 1978 replaced the Chandler Act, 1938
to govern the bankruptcy proceedings of United States. Title 11 is a pro-debtor, pro-
restructuring and highly flexible insolvency regime, where the debtor has an exclusive right to
file a plan of reorganization for the first 120 days after it files the insolvency petition and must
provide creditors with a disclosure statement containing adequate information to enable
creditors to evaluate the plan.
“The Title 11 provisions primarily focus on the requisite legal protection which could
be provided to the debtor to reorganize, and thereby provide creditors with going concern
value rather than the possibility of meagre satisfaction of outstanding debts through
liquidation”51. As soon as the debtor files for insolvency, an automatic stay operates against
institution of claims against the debtor52 and all the assets of the debtor form part of Bankruptcy
Estate53. Invariably, it is only the debtor who manages the estate, however, a Bankruptcy
Trustee (as contrary to IRP and RP in India) can be appointed for a ‘cause’ by the courts. This
‘cause’ includes fraud, dishonesty, incompetence or gross mismanagement of the debtor by the
current management. The Bankruptcy Court has the power to appoint an examiner when the
insolvency proceedings are influenced by the aforementioned causes and when the debtor’s
“fixed, liquidated, unsecured debts, other debts than goods, services or taxes, or owing to an
insider exceed $ 5 million”54. Such trustee or the examiner performs his duties as envisaged in
Section 704(a) of Title 11 of U.S. Code, which are to oversee the entire process as well as to
ensure expeditious disposal of the bankruptcy proceedings.
51
Canadian Pacific Forest Products Ltd v. JD Irving Ltd (1995) 66 F 3d 1436, 1442.
52
Title 11 U.S Code § 362
53
Title 11 U.S Code § 541 states that a Bankruptcy estate comprises of all property of debtor, “wherever located
and by whomever held.” Bankruptcy estate is referred to as the collection of all the assets of the debtor which are
to be included in the insolvency resolution process.
54
Title 11 U.S Code § 1104
29
Besides this, the US Code also has a very sound legal framework in dealing with prepetition
contracts55 (including executory contracts), which ensure adequate performance to the non-
debtor party to the contract.
3.3.1 Approach of Title 11 Towards Prepetition Contracts
Title 11 USC § 365 deals with Executory Contracts (the contracts which remain under-
performed or non-performed just before institution of insolvency proceedings). The section
enables the debtor to reject a contract, subject to judicial determination of the Court, on the
very premise that it would ultimately benefit the reorganisation process of the debtor. As a
consequence of such a contractual rejection, adequate assurance and compensation has to be
provided by the Debtor/Trustee (in case a trustee is appointed)56 to the affected party for any
pecuniary loss resulting from such rejection.57 This approach seems to be viable as the non-
debtor party to the contract are shielded against post-bankruptcy losses due to such contracts.
This instils a faith in the economy to enter into contracts without worrying their fate, should
one of the parties file for bankruptcy.
Thus, even in a pro-debtor regime, without the consent of the court, adequate
assurance of the performance of the contract is a statutory requirement to be abided
by the debtor.
55
The contracts entered into by the parties before the entity has filed for insolvency
56
Here the Trustee is referred to as the Bankruptcy Trustee similar to IRP in the Indian Regime.
57
In Central Trust Co. v. Chicago Auditorium Association (1916), the debtor’s rejection of a contract during
bankruptcy was treated as a breach of contract.
30
3.4 United Kingdom Insolvency Perspective
The UK Insolvency law underwent a major reform upon the recommendations of the
Review Committee on Insolvency Law under the chairmanship of Sir Kenneth Cork. The Cork
Committee published its report in 1982.58 The objectives of the Cork Report were to promote
a ‘rescue culture’ capable of preserving the value of potentially viable businesses, and
simultaneously minimizing the social and personal detriment caused by shutdown and
wholesale redundancy.59 These aspirations and other such recommendations of this report
resulted in the enactment of the Insolvency Act, 1986, which is presently the Act in force in the
UK dealing with insolvency scenarios. The ‘Administration’ process provided by the Act is
analogous to Indian Insolvency framework. There is another creditor driven framework of
Company Voluntary Arrangements (CVA) in the UK, but that nowhere resembles the Indian
aspect. Hence, the present essay examines only ‘Administration’.
Schedule B1, specifying the provisions of administration was inserted by the Enterprise
Act, 2002 to replace Part II of Insolvency Act, 1986.60 The ‘rescue culture’ propaganda reflects
through the concept of Administration provided as a recourse to a company facing insolvency.
A company is said to undergo insolvency on the appointment of an administrator.61 A person
may be appointed as administrator of a company by “administration order of the court, by
holder of a floating charge or by the company or its directors”.62 Broadly speaking the
rationale of administration is to rescue the company as “a going concern” in order to achieve
58
Review Committee on Insolvency Law, Insolvency Law and Practice (Cmnd. 8558, generally known as The
Cork Report), (H.M.S.O. 1982).
59
Ian F Fletcher, ‘UK Corporate Rescue: Recent Developments - Changes to Administrative Receivership,
Administration, and Company Voluntary Arrangements - The Insolvency Act 2000, The White Paper 2001, and
the Enterprise Act 2002’ (2004) 5 European Business Organization Law Review 119.
60
Enterprise Act, 2002 (Part 10), s. 248
61
Insolvency Act, 1986, (UK), s.247: - (1) In this Group of Parts, except in so far as the context otherwise
requires, “insolvency”, in relation to a company, include the approval of a voluntary arrangement under Part I,
or the appointment of an administrator or administrative receiver.
62
Insolvency Act, 1986 (c.45) (UK), Schedule B1, para 2.
31
a better result for the creditors of the company than that which would result from winding up
without administration. The role of the Administrator is to carry out duties in furtherance of
the objective as specified, at the same time, being conscious about the fact that in doing so, he
is acting as the officer of the court.63 It may be noted that once an Administrator is appointed,
the company is said to go into administration64 and once in administration it is subjected to a
moratorium being imposed.
The imposition of such a moratorium makes the company immune from institution of
winding-up proceedings or any other legal proceedings until the end of administration. No step
to enforce security over the company’s property or to repossess goods in the company’s
possession under a hire-purchase agreement may be taken without the consent of the
administrator or without the permission of the court. Even a landlord willing to exercise a right
of forfeiture by peaceful re-entry into the premises let to the company cannot do so without the
consent of the administrator or without the permission of the court.65
Meanwhile, on appointment, the administrator is expected to compile a list of the
company’s creditors, send respective notices to them, request for the company’s statement of
affairs and shall formulate a proposal for achieving the purpose of administration.66 The
company’s creditors may approve these proposals with or without modification and the same
must be produced before the Court for its final approval.67 The administration ends once the
administration objective is achieved inter alia.68 The Court reserves the powers with itself to
end the administration in case one year and/or the extension therein is passed or when it finds
any substance in complaints against the administrator. It is thus evident that an administrator
63
Insolvency Act, 1986 (c.45) (UK), Schedule B1, para 5
64
Insolvency Act, 1986 (c.45) (UK), Schedule B1, para 1(2)(b) and 1(2)(a),
65
Insolvency Act, 1986 (c.45) (UK), Schedule B1, para 42 and 43,
66
ibid. paras 46,47 and 48.
67
ibid. para53
68
ibid. para 80
32
is the only person appointed to manage the company’s affairs throughout the administration
contrary to the Interim Resolution Professional and the Resolution Professional being
appointed in India.
Section 67 of Schedule B1 of the Insolvency Act, 1986 (UK) states that, “the
administrator of a company shall on his appointment take custody or control of all the property
to which he thinks the company is entitled.” The bare reading of this Section shows the
unbridled power69 conferred upon the Administrator for taking custody of assets. This also
includes any assets under hire-purchase agreements. Section 111(1)70 of the said Schedule
specifies that hire-purchase agreements include a retention of title agreement (retention of title
essentially with the third party). This thus encompasses any property in the possession of
company without passage of its title to the company before administration sets in. The
Administrator is thus empowered to take custody or control over such assets as well. The
Administrator is thus expected to act rationally while exercising his discretion. The
administrator being an agent of the company71 and entrusted with the care of its property and
its management, owes fiduciary obligations to it.72 The administrator is compared with Trustees
and the ‘rule in Hastings-Bass’ has been interpreted as to subject an administrator’s actions to
judicial review in cases of discretionary outreach.73
Sale of such “hire-purchase” properties by the administrator is enabled only by the
Court’s discretion. An application for the same may be made by the administrator to the Court
69
See also Schedule 1- Powers of Administrator, Insolvency Act, 1986 (c.45)
70
In this Schedule “hire-purchase agreement” includes a conditional sale agreement, a chattel leasing agreement
and a retention of title agreement.
71
Insolvency Act, 1986 (UK), Schedule B1, para 69
72
Rizwaan Jameel Mokal and John Armour, ‘The New UK Corporate Rescue Procedure — The Administrator’s
Duty to Act Rationally’ (2004) 1 1.
73
ibid. “The ‘rule in Hastings-Bass’ has been interpreted as providing that ‘where a trustee acts under a discretion
given to him by the terms of the trust, the court will interfere with his actions if it is clear that he would not have
acted as he did had he not failed to take into account considerations which he ought not to have taken into
account.”
33
or the latter may suo motu order for such enablement.74 The net proceeds of such a sale are to
be used to make good the obligation under hire-purchase agreement.75 In case the administrator
acts otherwise, the creditor can avail remedy available under Para 74 and challenge the
administrator’s conduct before the Court. The latter while adjudicating upon the same, may
consider whether the administrator has acted in exercise of his powers under Schedule B1 or
that the action was taken in reliance upon the Court’s orders.76 The administrator is also enabled
to seek directions form the Court with respect to his functions under the said Schedule.77
Thus, it is quite evident, that for any act of the administrator, performed in furtherance
of his powers and duties and affecting third parties in contractual obligations with the debtor
company, the Court’s leave is to be taken. This ensures that there are no iniquitous results at
the end.
74
75
Insolvency Act, 1986 (c.45) (UK), Schedule B1, para 72 (3)
76
Insolvency Act, 1986 (c.45) (UK), Schedule B1, para 74(5)
77
34
CHAPTER-4: AUTHOR’S VIEWPOINT
It is evident from the above-mentioned paragraphs that US Insolvency regime is a debtor-
driven regime while that of UK being a creditor-driven one. Diametrically opposite, as they
may be, a striking similarity exists when it comes to exercise of powers by the person in-charge
during insolvency proceedings. When such a person is deciding upon the fate of third-party
assets (whether to take control or custody, accept or reject the contract, or make any contractual
modifications), judicial determination on the same is a must. As described above, a
debtor/trustee has to seek leave of the Court before deciding on the fate of contracts. In the UK,
the administrator, has to seek Court’s approval before disposing off the assets held under “hire-
purchase” agreements. The US and UK regimes require the Court granting such permission to
the person-in-charge of insolvency resolution process acting on such assets to first make good
the outstanding contractual amount from the realised value of such assets or ensure future
performance of the existing contract to the affected party. This can also be included under the
Indian Insolvency regime. In India, too, a provision needs to be inserted by statutory
amendment, requiring the Resolution Professional to seek the leave of the adjudicating
authority (NCLT) before taking possession or otherwise acting on assets which are qualifying
the Explanation clause to Section 18. As to determine the after-effects if the Court does grant
such a leave, the authors are in favour of the western approach described above. The authors,
however, don’t wish to delve any deeper into the contractual aspect in this essay as that is to
be decided after the present incongruence between IRP and RP’s powers gets resolved.
Another aspect of the US and UK frameworks is that there exists a single person-in-
charge throughout the insolvency resolution process contrary to the Indian framework. The
UNCITRAL guide also recommends the same78. Moreover, there is no rationale mentioned for
78UNCITRAL (n 50). p.134, para 35
35
separately instituting and conferring powers on Interim Resolution Professional and Resolution
Professional anywhere in the Code nor in the Bankruptcy Law Reforms Committee Report
(BLRC Report)79. No case laws or notifications to that extent exist either. As per the current
law, the Committee of Creditors (COC) in their first meeting have to vote and decide as to
whether to continue with the same Interim RP as RP or seek a new RP 80. Instead only one
Resolution Professional may be statutorily provided to act through the insolvency resolution
process. Section 27 provides for replacement of such a Resolution Professional at any time
during the process by the Committee of Creditors. Thus, in case, the COC in their first meeting,
seek to change the Resolution Professional and appoint another, they can do so. Or else, they
may even continue with the same RP.81
79
Committee (n 34). See Paras 4.3 and 5.3.1
80
Insolvency & Bankruptcy Code, 2016, s. 22
81
Insolvency & Bankruptcy Code, 2016, s. 22 read with s.27.
36
CHAPTER-5: CONCLUSION
World Bank in 2014 reported that the average time for insolvency resolution in India was
four years as compared to 8 months in Singapore and 1 year in the UK82. In order to reduce
this delay, a streamlined Insolvency & Bankruptcy Code was brought in force in 2016. The
Resolution professionals, be it interim or otherwise, form the backbone of the current
Insolvency proceedings, which aim to ensure a speedy redressal of the insolvent debtor as a
going concern. Ambiguity in the statute relating to them will result in inconsistent decisions
being taken by the IRP and/or RP leading to multiplicity of proceedings before the judicial
forums thereby defeating the intent of legislature.
The uncertainty of third-parties over the fate of their contracts with debtors, post-
commencement of insolvency proceedings, may take a toll on confidence of the
businessmen and corporates to enter into contracts leading to a butterfly effect. To avoid
such a scenario, it is imperative for the Legislature to cure the existing defect in the Code or
for the Courts to clarify the same.
The Code thus proposes some very important changes to the procedure so that the present
recovery rate of India is at par with other jurisdictions. Apart from distribution of assets the
insolvency professionals will see whether the assets do not get alienated during the pendency
of the resolution process.
While the Code has brought a myriad of amendments but on the other side it raises many
concerns as a piecemeal modernization in a country like India where changes in legal system
are hard to enforce, is a tough task.
82 Committee (n 34).
37
But still it has been the talk of the town in the past few months and is expected to improve
the present condition in the insolvency and bankruptcy of the corporate firms
38
BIBLIOGRAPHY
PRIMARY SOURCES:
Treaties/Statutes Referred:
India
1. Insolvency & Bankruptcy Code, 2016

2. Companies Act, 1956
3. Companies Act, 2013
4. RDDBFI Act, 1993
5. SARFAESI Act, 2002
6. SICA Act, 1985
7. Presidency Towns Insolvency Act, 1909
8. Provincial Insolvency Act, 1920
9. LLP Act, 2008
United States
1. Chandler Act, 1938

2. US Bankruptcy Code (Title 11 of U.S. Code) of 1978
United Kingdom
1. Insolvency Act, 1986

2. Enterprise Act, 2002
SECONDARY SOURCES:
Cases Referred:
India
1. Kingfisher Airlines Limited v. State Bank of India 2017(3) CDR 589(SC)
2. West Hills Realty Private Ltd. and Ors v. Neelkamal Realtors Tower Private Limited
2017(2) BomCR 693
United States
1. Canadian Pacific Forest Products Ltd v. JD Irving Ltd (1995) 66 F 3d 1436, 1442.
39
2. Central Trust Co. v. Chicago Auditorium Association (1916),
Books Referred:
1. Corporate Insolvency Law: Perspectives and Principles. Cambridge: Cambridge

University Press. Finch, V., & Milman, D. (2017) doi:10.1017/9781139626811
Reports Referred:
India
1. Bankruptcy Law Reforms Committee Report Volume 1, 2015

2. UNCITRAL, United Nations Commission on International Trade Law (UNCITRAL).
Legal Guide on International Countertrade Transactions. (1993).
3. Official Records of the General Assembly, Fifty-fifth Session, Supplement No. 17
(A/55/17)
United Kingdom
1. Review Committee on Insolvency Law, Insolvency Law and Practice (Cmnd. 8558,
generally known as The Cork Report), (H.M.S.O. 1982
Articles/Journals Referred:
1. Ian F Fletcher, ‘UK Corporate Rescue: Recent Developments - Changes to

Administrative Receivership, Administration, and Company Voluntary Arrangements
- The Insolvency Act 2000, The White Paper 2001, and the Enterprise Act 2002’ (2004)
5 European Business Organization Law Review 119
2. Rizwaan Jameel Mokal and John Armour, ‘The New UK Corporate Rescue Procedure
— The Administrator’s Duty to Act Rationally’ (2004) 1 1.
40

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LEGAL JOURNEY OF INSOLVENCY & BANKRUPTCY

CODE, 2016 AND ITS EXISTING LOOPHOLES: A

Indian Institute of Technology, Kharagpur

Bachelor of Law (Hons) In Intellectual Property Law

RAJIV GANDHI SCHOOL OF INTELLECTUAL PROPERTY LAW

Dr. Arindam Basu Prof. (Dr.) M. Padmavati

RAJIV GANDHI SCHOOL OF INTELLECTUAL PROPERTY LAW

Date: 8th May, 2020 Deepanshu Sarkar

Dr. Arindam Basu May 8, 2020

08th May, 2020 Deepanshu Sarkar

Some Key Points of The Code are:

1. Paradigm shift from existing ‘debtor in possession’ to ‘creditor in control’ regime.

3. Quasi (de-facto) Security

FIG 2.1: Source: Handbook on the Indian Economy, RBI.

Insolvency and Bankruptcy Board (IBB)

NCLT- The Adjudicating Authority (AA)

FIG 2.2 IBC ECOSYSTEM

IPA20 – Registered by IBB, would enroll IPs.

FIG 2.3 CIRP SETUP

Some key highlights of the CIRP process are:

At present there are 2 types of petitions:

1. Proceedings already pending and,

Pending voluntary winding up proceedings:

Fresh voluntary winding up proceedings to be instituted under the Code:

FIG 2.4: VOLUNTARY WINDING UP

Initiation of the process:

1. It has not committed any default;

2. If majority of the directors or designated partners of the corporate entity make a

3. Such declaration is accompanied by the audited financial statements and valuation

4. Within 4 weeks of such declaration, a special resolution (or an ordinary resolution)

Some of the amendments have been discussed as follows:

The Previous Laws:

1. The Presidency Towns Insolvency Act,1909 (herein referred to as “1909 Act”)

The New Law:

FIG.2.5 INDIVIDUAL INSOLVENCY RESOLUTION PROCESS

The resolution process is implemented by appointing a Resolution Professional (RP) who

The entire insolvency process in case of a defaulting company in India is managed by an

him. In case of companies having a massive market capitalization pre-insolvency, every

management during the insolvency proceedings if it is an enterprise, preparation of the

Resolution Professional) which is discussed in Chapter I. This essay identifies that

inconsistency and proposes a possible solution in Chapter V by drawing narratives from UK

recommendations provided in UNCITRAL Legislative Guide on Insolvency Law in Chapter

II. The issue is limited to the domain of corporate insolvency.

SECTION 18: - Duties of interim resolution professional

(i) business operations for the previous two years;

(iii) list of assets and liabilities as on the initiation date; and

(iv) such other matters as may be specified;

(c) constitute a committee of creditors;

(iii) tangible assets, whether movable or immovable;

(iv) intangible assets including intellectual property;

(vi) assets subject to the determination of ownership by a court or authority;

(g) to perform such other duties as may be specified by the Board.

(c) such other assets as may be notified by the Central Government in

SECTION 25: - Duties of resolution professional.

(d) appoint accountants, legal or other professionals in the manner as specified

(e) maintain an updated list of claims;

(f) convene and attend all meetings of the committee of creditors;

(g) prepare the information memorandum in accordance with section 29;

(j) file application for avoidance of transactions in accordance with Chapter

(k) such other actions as may be specified by the Board.

frameworks, themselves have been a result of comprehensive mellowing of their

Resolution Professional’s contemporaries in those frameworks. A reference to the

UNCITRAL Legislative Guide on Insolvency Law is also made to understand the