TELANGANA UNIVERSITY

UNIVERSITY COLLEGE OF LAW

A STUDY ON CORPORATE INSOLVENCY IN INDIA:

WITH SPECIAL REFERENCE TO TELANGANA STATE

A DISSERTATION SUBMITTED TO TELANGANA UNIVERSITY IN

PARTIALFULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF
THE DEGREEOF
MASTEROF LAW[LL.M]

SUBMITTEDBY
MR. SRINIVAS JAKKANI
MASTEROF LAW [LL.M]
(HTNO.505521834009)

GUIDE
Prof.(Dr.)B.SRAVANTHI

HEAD OF THE DEPARTMENT OF LAW

TELANGNANAUNIVERSITY
DICHPALLY, NIZAMABAD, TELANGANA.
SEPTEMBER, 2023
Page 1 of 40
 DECLARATION

I hereby declare that this dissertation entitled “A STUDY ON

CORPORATE INSOLVENCY IN INDIA: WITH SPECIAL REFERENCE
TO TELANGANA STATE” has been prepared by me during the year 2021-
2023 under the supervision of Prof. (Dr.). B. Sravanthi, MBA, LL.M, Ph.D.,
Professor in Law, University College of Law, Telangana University, Dichpally,
Nizamabad, Telangana – 503322.

I also declare that this dissertation is my own effort and has not been
submitted to any other University or for publication before.

Place: Bengaluru [SRINIVAS JAKKANI]

Date: 08-09-2023

Page 2 of 40
 Dr. B. Sravanthi, MBA, LL.M, Ph.D. University College o f Law,
Professor in Law Telangana University,
Dichpally-503322

CERTIFICATE

This is to certify that the Dissertation entitled, “A STUDY ON CORPORATE

INSOLVENCY IN INDIA: WITH SPECIAL REFERENCE TO TELANGANA
STATE” submitted in partial fulfillment of the requirements for the Award of the
Degree of MASTER OF LAW (LL.M.) is the record of the research work done by
Mr. SRINIVAS JAKKANI under my guidance and supervision during the period
2021-2023.

This is to certify that this is a bona-fide work of Mr. SRINIVAS JAKKANI.

Place: Nizamabad [Dr. B. Sravanthi]

Date: 08-09-2023

Page 3 of 40
 APPROVAL

The dissertation entitled “A STUDYON CORPORATE INSOLVENCY IN

INDIA: WITH SECIAL REFERENCE TO TELANGANA STATE” by Mr.
SRINIVAS JAKKANI is hereby approved for the Degree of MASTER OF LAW
(LL.M).

Examiners:
Name Signature

1.

2.

Guide:
Date:
Place:

Page 4 of 40
 ACKNOWLEDGEMENT

I am in debted to many people who helped me accomplish this dissertation successfully.

First, I thank Vice-Chancellor Dr. Ravindra Reddy, Telangana University for giving me
the opportunity to do my research.

I thank Dr. B. Prasanna Rani, Dean, and Dr. Yellosha, Professor, and Dr. B. Sravanthi,
Professor and Head –University College of Law for their kind support.

I again thank Dr. B. Sravanthi, for her support and guidance during the course of my
research. I remember him with much gratitude for his patience and motivation, otherwise,
I could not have submitted the work.

I thank my parents, for their unending sport and encouragement, without which this
dissertation would not have seen the light of day.

NIZAMABAD SRINVIAS JAKKANI

Date:

Page 5 of 40
 TABLE OF CONTENTS

DECLARATION..................................................................................................................ii

CERTIFICATE.....................................................................................................................iii

APPROVAL……………………………………………………………………………….iv

ACKNOWLEDGEMENT....................................................................................................v

LISTOFSTATUTES……………………………………………………………………...vi

LIST OF ABBREVIATIONS..............................................................................................vii

TABBLEOF CASES……………………………………………………………………...viii

CHAPTER–I-INTRODUCTION

1.1. STATEMENTOFPROBLEM.
………………………………………………..7

1.2. OBJECTIVEOFTHE STUDY.

………………………………………………..7

1.3. METHODOFSTUDY………….
……………………………………………...7

1.4. SCHEMEOFSTUDY…………….
……………………………………………7

1.5. LIMITATIONOFSTUDY……….
…………………………………………….9

CHAPTER-II-LITERATURE REVIEW

2.1BOOKS………………………………………………………………………..11

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 2.2ARTICLES……………………………………………………………………12

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 CHAPTER - III - THE CREDITOR REGULATORY
REGIME ININDIA

3.1DEVELOPMENTOFCORPORATEINSOLVENCYLAWS………………19

3.2 HISTORICAL PERSPECTIVE OF INDIAN PERSONAL AND

CORPORATE INSOLVENCY

LAW……………………………………..19

3.3 PRIORITIES ON WHICH MONEY REALIZED UPON LIQUIDATION

IS

APPLIED…………………………………………………………………....

.26

3.4AGENCIES INVOLVED IN INSOLVENCY……………………………….29

3.5ROLE OF THE COURT……………………………………..………………30

3.6CORPORATE INSOLVENCY AND SARFAESI ACT, 2002……………...34

3.7INSOLVENCY AND RECOVERY OF DEBT DUE TO BANKS…………36

3.8POSITION OF FOREIGN LENDERS IN INDIA…………………………..37

CHAPTER – IV

A COMPARATIVE STUDY OF CREDITOR

PROTECTIONINOTHERJURISDICTION

4.1 CORPORATEINSOLVENCYINTHEUNITED

STATESOFAMERICA……40

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 4.1.1 COMPANYUNDER LIQUIDATION……………………..41

4.1.2 REORGANISATIONOFTHECOMPANY……………….42

4.1.3 CROSS BORDER

BANKRUPTCY………………………..45

4.2 CORPORATEINSOLVENCY
INTHEUNITEDKINGDOM…………………….45

4.3 DIFFERENCEBETWEENTHEU.S.CODEANDTHEU.K.1986

INSOLVENCYACT………………………………………………………

………………………….48

4.4 A COMPARISON OF THE MAIN CHARACTERISTICS OF THE

INSOLVENCYPROCESSIN THE UK AND

US………………………………………………….48

CHAPTER-V-CONCLUSIONANDSUGGESTIONS

BIBLIOGRAPHY

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 CHAPTER I

INTRODUCTION
When a person, company, association or any other institution do not fulfill its money related
obligation it is known as Insolvency, it is basically a state of being not able to pay the money
borrowed by an individual or company within a specified time on the other hand the expression
bankruptcy is nothing but a ground which makes a company or an organization capable to file a
petition in the court of law in the situation when it fails to fulfill any financial obligation or repay
the owed amount to the creditors. The petition is supposed to be lodged in the court where each
and every outstanding debts of an organization are valued and cashed out. Bankruptcy lodging is
a lawful approach carried out by an organization to free itself from any financial or debt
obligation. Debts which are basically not fully paid to the lenders and creditors. However the
procedure to be followed in the event of filing a petition for bankruptcy varies in different
countries for instance in India if an individual files a petition for bankruptcy, it will not be good
for his credit rating as the filing of bankruptcy will make it very hard for a company to get a
fresh loan from any creditor. It can occur due to event of specific things such as substandard
money administration, increment in original money costs, or depletion in cash flow and the list
goes on. There was a time when India spotted the industries are being surrounded by rampant
industrial illness which gave rise to the situations where creditors remained unpaid which was
certainly influencing the interest of creditors and lenders as they did not have any instrument to
recover their money, this is when it has been realized that there is a need of an enactment which
will regulate the expressions such as insolvency and bankruptcy. Consequently huge efforts
made to set up a framework in order to deal with the same.

SCOPE OF STUDY:

The chapter pays special attention on knowing by what means Indian legislation and regulation
with concern to the insolvency resulted in the development of insolvency and bankruptcy Code
2016, by examining the existing legislation came into existence for the purpose to regulate the
acts arising out of liquidation.

OBJECTIVES:

The principle goal of this research is to find out how Indian legislation with concern to the
insolvency caused to the evolvement of insolvency and bankruptcy laws in India.
The primary and main objective of the Code is to capture the suffering as well as settle it at the
earliest possible date and along with that it basically aimed to balance the chaos between the
lender and borrower by resolving the issue. To accomplish the same, it provides an opportunity
to the IRP to be launched on the occurrence of a unique infringement. However the procedure is
slightly diverse for all the borrowers or we can say debtors, financial lenders and functional creditors
which are explained below.
Financial creditors upon the occurrence of the payment default for amounts indebted to them or any
all of the other commercial lender can lodge a request cum application in front of NCLT in order to
activate the IRP. For an operational borrower cause spark in IRP, an announcement by the
Operational Creditor to the borrower on the event of the non-payment is needed or required.
Following this kind or type of updates, notification the borrower is imperative to whether reimburse
or provide rationale because of the subsistence for an authentic dispute. Within specified time of ten
working days if the defaulter omits to do such condition from the notification which has been
published, further the OC is authorized to lodge a complaint before the appropriate authority i.e.
NCLT for the purpose and in order to initiate the IRP. Borrower like shareholders (an individual or
an organization who owns at minimum one share of a company’s stock), administrative personnel
and any other staff member or who provider a particular service of a company 13 are totally allowed to
lodge for an IRP on the occasion of a failure granted that aforementioned debtors should be eligible
of generating in-depth verified commercial details. The Code sets out provisions for criminalization
for fake and silly or lightweight triggers in an effort to dissuade lenders mistakenly activating IRP.

NEED OF THE STUDY:

The existing bankruptcy enactment and finance obligation reconstructing acts is by no means the
liquidation and discontinuance of matter of insolvency but somewhat on the renewal of the
substances concerning capital and gradable construction of account possessors confronting issues
concerning money for the purpose of allowing the restoration and business of themselves. There
are other parts as well, where it is a crime in context to the bankruptcy laws for a business to
move forward in the world of business whilst blotted out. To regulate any activity we depend
on law, the aim of any legislation is to balance things which are good for society and a
decent society needs laws so that an individual’s right remains protected. For instance if we
talk about traffic laws, what will happen if there is no traffic laws isn’t there will be chaos
everywhere. Yes there will be, thus we understand that nothing could remain regulated unless
and until a mechanism regulates it and for us that mechanism is so called legislation. The same
goes for bankruptcy and insolvency also, any new age company would require capital to
flourish thus it will take loan, it is compelled to borrow money but in the event it defaults to
fulfill its obligation owed to creditors then creditors will start losing the interest to lend
money so basically there is need to protect the interest of lender so that the process of
borrowing and lending will be continue which even helps the country to grow the economy
so we understand that everything is interlinked with each other and virtually benefitting us,
this is why it becomes very important to ensure that this remains active and that the interest of a
creditor remains protected thus the legislation related to indebtness was needed. The legislation
for indebtness is nothing but a cordial statute which has been set in motion to provide interval as
well as assuagement to the equitable account possessors who for the reason any kind of serious
or unexpected requirement end up clearly incompetent for repayment of their commitments. Its
query is in addition of guaranteeing dissemination of an indebted person’s sphere amongst his
creditors in an impartial manner and on the basis of that point to dismiss him pursuant to
particular circumstances from taking a chance concerning to his commitments. If we look into
the Act of bankruptcy we find that it has been certainly ignored. In the event that a person is
declared insolvent, he is not viewed as trustworthy. Despite whatever has been said the statute of
bankruptcy safeguards the account holder from the embarrassment, humiliation and abuse of his
creditors. In a case when a person is pronounced bankrupt, his creditors are exiled from filing
any suit or legal procedures in counter to him as well as they cannot even look for any remedy
against his assets related to their commitments supportable under the law of indebtness. On
arbitration of a debtor as destroyed his whole assets entrust to official collector. His banks are
anxious on the betterment of their commitments than confronting the individuals being indebted.
Consequently after vesting interest of assets in official beneficiary, it is believed that they are
disburdening of being deceived by the one indebted person or of the concern of the account
possessor taking away his assets. The indebted, in case any circumstance flies far away from the
location of the Insolvency Court, it not in any way disturbs them as the authentic consignee
being the person in whom the property of the bankrupt entrusted. On the top of that their
commitments are to be recognized on the basis of returns collected by recipients in the formal
discharge of his abilities within the Insolvency law. Speaking about the way about liquidation of
an association is regulated according to Companies Act and is under the auspices of the court.
But as per the Article 19 (1)(g) of the Constitution of India it says about the ability to exercise
whatsoever profession or to keep on any occupation, trade or business to every inhabitants of
India, there are restrictions on completion of any contemporary Endeavour. Aforementioned
constraint is protected on the basis that it is in extensive dawn eagerness to anticipate the state of
being unemployed. In view of fact that such strategy there is a possibility to seek any liberal
action, nevertheless there is no elasticity to exit.
 CHAPTER II
HISTORY AND DEVELEOPEMENT
THE EVOLUTION OF BANKRUPTCY LAWS IN INDIA:

In the Presidency – towns the foremost Insolvency court were put in place by means of statute 9
Geo.4,c. 73, go in the year 18284. Basically those were the courts established to help the
Insolvent Debtors. They were individual courts as well as courts of records. Any person
disturbed because of the choice of the abovementioned court can move or proceed to the
Supreme Court which is to be regarded as above all. The Supreme Court organized the capacity
to hear the collection and transfer such kind of requests as it distinguished fair and considerable
and identical application or demand is to be deferred through the courts for the mitigation of
insolvent or the borrower. The workers of the court of insolvency were entrusted by the Supreme
Court. One of such official was regarded as “normal appointee”. In the event that an appeal for
mediation was initiated or originated by one lender as well an order for arbitration was created
the property interest of the indebted entrusted in the simple selected one by uprightness of the
request. Agreement was in further made for the break guarantee orders.

Indian Insolvency Act, 1848

It was the year 1848 when the past approvals were revoked and other Act was adopted so-called
the Indian Insolvency Act, being 11 and 12 Vict. c. 21.5 The Act stored the provisions among all
merchants and non-brokers make specific reference6. Through this Act the Courts only for the
alleviation of Insolvent Debtors established by the Act of 1828 were supposed to be moved
however the Court was to take place within the persistent watch of judges of Supreme Court.

Administration towns Insolvency Act, 1909

In advance of agenda in the twentieth century it was believed that the Indian Insolvency Act,
1848 has proven out to be antiquated and it was elected or we can say nominated to create
separate law based on English Bankruptcy Acts. Same Act i.e. The Act of 1848 was to be
believed as having no value or so called annulled and consequently a different separate Act
was approved in 1909 being the Presidency-towns Insolvency Act7 taking into account of the
Bankruptcy demonstration 1883 and the Bankruptcy Act 1890. As everything has a flaw likewise
the Indian Insolvency Act also has its own flaws, one of the main and solid defaults was that the
Act was rather benefitting the borrowers to greater extent but not lenders. The troops of
legal assignee were exceedingly restrained. He just brought assets together and had no strength
to consider the measures. By means of new Act enormous strength was provided rather given to
the courts to push the disclosure of the indebted property. Section 79 speaks and requires the
official trustee to investigate or inspect the case of bankruptcy and provide an answer or respond
to the court upon whatsoever application for liberating stating whether there is encouragement to
trust that the wiped out had granted any indebtedness crimes or certain other crimes mentioned
under segment 421 to 424 of the Indian Penal Code8 with concern to his indebtedness or which
would justify the court in cannot, interrupting or limiting a request for his release.

THE PRINCIPLE LEGISLATION FOR CORPORATE INSOLVENCY

The Indian Constitution set up in 1950 provides listed the expressions such as “Insolvency” and
“Bankruptcy” in the third list of schedule 7 i.e. concurrent List. On the other hand, the terms
such as incorporation, command and liquidation of enterprises are mentioned under the Union
List.
With these strengths or we can say strong points provided in the Constitution, Companies Act,
1956 came into the existence which gave a new shape to corporate field. In fact this Act
contained virtually all provisions concerned or related to the workings of companies along with
the process of winding up. And it is believed that it even decreased the fraudulent activities. But
the main point to be noted is the despite the Act was a good initiative by the government but the
other fact which attempts to say that this Act never made any sense with regard to
expressions like insolvency or bankruptcy and has no power to deal with payment of debts
notwithstanding that this Act was chief law for the purpose of adjusting corporate
bankruptcy. The Companies Act, 1956 included particular measures by which the association or
its lenders could try to restructure it. However, these were particular regulations and not specific
to bankruptcy or insolvency conditions. It is noteworthy and important to know that in the year
two thousand thirteen, there were approximately 13.5 lakh enrolled organisations in our country
India of which only 9.4 lakh were active. Strangely enough on a regular note in the proximity of
2008 and 2010, not more than 6,455 cases of twisting up were enlisted with the High Courts. Just
near two hundred to three hundred cases were incorporated each and every year and above that
approximately three hundred to six hundred fifty completed each year. These characteristics or
we can say indicators showed that the less application of the Companies Act approaches for
handling corporate indebtedness. Furthermore it demonstrates a deficiency of limit at the courts
to deal with such case volumes. Occasional evidence suggests or rather prefers that winding up
or liquidation under the said Act, generally, requires nearly five to seven years getting end as
well as in exorbitant cases evening twenty six to thirty one years. However there was a time
when innumerable changes concerned with the insolvency related measures mentioned under
Companies Act, 1956 was proposed by the Act so called “The Companies (Amendment) Act,
2003”. Be that as it may these couldn’t be successful since legitimate challenges. Following this
in the year 2013 the new Companies Act was approved. And a significant proportion of the
measures of the 2013 Act were in conformity with those planned under the last amendment
which occurred in the year 2002. Implementation issues concerning to the corporate insolvency
measures moved equal with the new Companies Act, 2013.

DEVELOPMENT (PROGRESS) OF INSOLVENCY AND BANKRUPTCY CODE, 2016

The Bankruptcy Law Reforms Committee Report

In 2014, an essential struggle at far sighted bankruptcy amendment was cherished when the
Ministry of Finance established by the by the Bankruptcy Law Reforms Committee
(BLRC) under the Chairmanship of Dr. T. K Viswanathan9. The order of the BLRC was to
specify an Indian Bankruptcy Code that supposed to be relevant to entire non- financial
associated corporations and people as an individual, and would supersede the present
system. The aforementioned committee submitted its report and a deep seated proposal
Insolvency and Bankruptcy Code (IBC) to the administration in November 2015.
The Committee put forward its report on December 4, 2015 which is believed to be divided into
two sections comprises of “volume one” and “volume two”. Volume – 1 of the report lays down
the base and structure on the other hand Volume – 2 of report certainly talked about the
absolute draft of the Insolvency and Bankruptcy Code, coating the whole matter. The
technique of Insolvency settlement and winding up under the code is asseverated on the
escorting institutional foundation.
 I. A comptroller especially, the Insolvency and Bankruptcy Board of India10
(Regulator);
II. A structure of directed insolvency professionals and controlled data utilities
III. The adjudicating management, in particular the National Company Law Tribunal
which governs corporate components as well as the Debt Recovery Tribunals which
supervises number of people.
As a consequence, the Code suggests for the coverage of the full gamut of entities, not just only
corporate entities along with limited liability partnerships, but on top of that individuals also, and
stipulates procedures for handling with issues concerned to bankruptcy for every aforementioned
entity. The Code intends substituting the existing corporate insolvency regulations through a
single widespread law that

 authorizes entire lenders (whether secured, unsecured, domestic, international, financial

or operational) to activate determination procedures;
 makes it possible that the procedures of resolution to begin at the earliest as possible as a
sign of financial hardship ;
 permits for a sole platform to monitor whole insolvency and liquidation procedures;
 allows a soothe duration wherein fresh prosecution do not dissuade current ones;
 lays down for substituting present administration throughout insolvency processes while
balancing the undertaking in the normal operation;
 provides a bounded time limit during the time the debtor’s practicability can be
evaluated: and
 Sets out a lineal liquidation instrument.

Uniform Legislation
The code stipulates for a uniform law. Each and every previous legislations, enactments
concerning with insolvency and bankruptcy those are spread are to be carried within the
frame of single legislation. It abrogated couple of laws as well as modified half of dozen
regulations handling the expressions insolvency and bankruptcy. The Presidency Towns
Insolvency act, 1909 as well as the Provincial Insolvency Act, 1920 got abrogated11. Companies
Act, 2013, Sick Industrial Companies (Special Provisions) Repeal Act, 2013, limited Liability
Partnership Act, 2008, SARFAESI Act, 2002, RDDBFI Act, 1993 and Indian Partnership Act,
1932 was modified following the passing of the code12.

Statutes
a. Company Act,1956
b. Company Act 2013,
c. Sick Industrial Companies Act, 1985( SICA),
d. Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI),
e. Insolvency and Bankruptcy Code (IBC),
f. The Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies)
Regulations 2016,
g. The Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing
Board of Insolvency Professional Agencies) Regulations 2016,
h. The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations
2016,
i. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016,
j. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations,2016

SCOPE OF THE STUDY:

DESIGN OF INSOLVENCY ACROSS COUNTRIES:

Legal environment of any country always play a vital role in its economic development. If the
legal environment of that country is well-built and implemented then definitely the global
background of the country will be strong. Policies affecting the way failing firms can exit
markets or be restructured can shape aggregate productivity through a variety of channels
(Adalet McGowan and Andrews, 2016). These include the strength of market selection – which
increases in the economy’s ability to dispose of non-viable firms and facilitate the restructuring
of viable firms – and the scope and speed at which scarce resources consumed by failing firms
can be reallocated to more productive uses. But market imperfections often generate obstacles to
the orderly exit of failing firms, implying that well-designed insolvency regimes are crucial to
realise the potential productivity gains from firm exit. Yet, the available crosscountry indicators
of insolvency regimes (e.g. World Bank Doing Business) have a number of drawbacks, which
make it difficult to identify the contribution of insolvency regimes to productivity performance
and generate country-specific proposals for reform (Adalet McGowan and Andrews, 2016). 2.
To fill the gaps in the existing indicators, this paper presents new cross-country policy indicators
of insolvency regimes for 36 countries, based on countries’ responses to a recent OECD
questionnaire. The indicators explicitly focus on features of insolvency regimes that may carry
adverse consequences for productivity growth by delaying the initiation of and increasing the
length of insolvency proceedings. Specifically, thirteen key features are identified based on
international best practice and existing research, which include: i) two features that raise the
personal costs to failed entrepreneurs: time to discharge and fewer exemptions; ii) the absence of
three mechanisms that aid prevention and streamlining: early warning mechanisms, pre-
insolvency regimes and special insolvency procedures for SMEs; iii) five features that may
potentially impose barriers to restructuring: creditors' inability to initiate restructuring, an
indefinite stay on assets, lack of priority given to new financing, no cram-down of restructuring
plans on dissenting creditors and the dismissal of incumbent management during restructuring;
and iv) three other factors: a high degree of court involvement, a lack of a distinction between
honest and fraudulent bankruptcy and restrictions on individual and collective dismissals during
proceedings. While the indicators were designed to address the insolvency-productivity nexus,
they are potentially relevant for understanding other economic phenomenon,
This paper explores cross-country differences in the design of insolvency regimes, based on
quantitative indicators constructed from countries’ responses to a recent OECD policy
questionnaire. The indicators – which are available for 36 countries for 2010 and 2016 – aim to
better capture the key design features of insolvency which impact the timely initiation and
resolution of personal and corporate insolvency proceedings. According to these metrics, the
design of insolvency regimes varies significantly across countries, with important differences
emerging with respect to the treatment of failed entrepreneurs, the availability of preventative
and streamlining tools and ease of corporate restructuring. While a comparison of indicator
values for 2010 and 2016 imply that recent reform efforts have improved policy design, there
remains much scope to reform insolvency regimes in many OECD countries. This is particularly
significant in light of complementary analysis which shows that the design of insolvency regimes
is relevant for understanding three inter-related sources of contemporary labour productivity
weakness: the survival of “zombie” firms, capital misallocation and stalling technological
diffusion including the propagation of macroeconomic shocks, financial sector behaviour and a
range of labour market outcomes. 3. According to these indicators, the design of insolvency
regimes varies significantly across countries. The insolvency regime in the United Kingdom for
example, entails relatively low personal costs to failed entrepreneurs and barriers to
restructuring, while it contains a number of provisions to aid prevention and streamlining. In
Estonia and Hungary, however, the reverse is true. For example, a high time to discharge in
Estonia and Hungary means that failed entrepreneurs must wait five years before starting another
business, compared to just one year in the United Kingdom. Similarly, an inability of creditors to
initiate restructuring and a lack of priority given to new financing over unsecured creditors in
both countries (plus an indefinite stay on assets in Estonia) translates into significant barriers to
restructuring. Finally, a lack of early warning mechanisms, pre-insolvency regimes and special
insolvency procedures for SMEs also imply that prevention and streamlining is weak. 4. A
comparison of the 2010 and 2016 values suggests that recent reform efforts have been largest for
prevention and streamlining, with reforms observable in 11 countries, especially European
countries (e.g. Portugal). This may reflect the fact that such measures have been recently
endorsed by the European Commission and the IMF, in response to the crisis (Carcea et al.,
2015; Bergthaler et al., 2015). Barriers to restructuring have also declined in 10 countries, while
reform activity affecting the personal costs to failed entrepreneurs has been less ambitious, with
only Chile, Greece and Spain undertaking reforms since 2010. 5. The new indicators are an
important tool to assess the impact of insolvency regimes on economic performance and will
allow for a better integration of the exit margin in economic analysis based on policy indicators,
such as Going for Growth. For example, using the new indicators, recent research shows that
reforms to insolvency regimes can: i) reduce the share of capital sunk in zombie firms, which in
turn spurs the reallocation of capital to more productive firms (Adalet McGowan, Andrews and
Millot, 2017a); and ii) facilitate technological diffusion by promoting experimentation and
providing laggard firms with the scope to implement the necessary business changes to move
closer to the technological frontier (Adalet McGowan, Andrews and Millot, 2017b). The
indicators will also allow for cross-country comparisons of certain design features of insolvency
regimes and the monitoring of their reform over time, providing key information for OECD
country reviews. 6. The next section lays out a framework for assessing insolvency regimes and
describes the OECD questionnaire on insolvency regimes. Section 3 presents the new OECD
indicator, displaying cross-country evidence on the design of insolvency regimes. Section 4
documents the recent empirical evidence linking insolvency regimes and productivity, based on
the new indicator, including the propagation of macroeconomic shocks, financial sector
behaviour and a range of labour market outcomes. 3. According to these indicators, the design of
insolvency regimes varies significantly across countries. The insolvency regime in the United
Kingdom for example, entails relatively low personal costs to failed entrepreneurs and barriers to
restructuring, while it contains a number of provisions to aid prevention and streamlining. In
Estonia and Hungary, however, the reverse is true. For example, a high time to discharge in
Estonia and Hungary means that failed entrepreneurs must wait five years before starting another
business, compared to just one year in the United Kingdom. Similarly, an inability of creditors to
initiate restructuring and a lack of priority given to new financing over unsecured creditors in
both countries (plus an indefinite stay on assets in Estonia) translates into significant barriers to
restructuring. Finally, a lack of early warning mechanisms, pre-insolvency regimes and special
insolvency procedures for SMEs also imply that prevention and streamlining is weak. 4. A
comparison of the 2010 and 2016 values suggests that recent reform efforts have been largest for
prevention and streamlining, with reforms observable in 11 countries, especially European
countries (e.g. Portugal). This may reflect the fact that such measures have been recently
endorsed by the European Commission and the IMF, in response to the crisis (Carcea et al.,
2015; Bergthaler et al., 2015). Barriers to restructuring have also declined in 10 countries, while
reform activity affecting the personal costs to failed entrepreneurs has been less ambitious, with
only Chile, Greece and Spain undertaking reforms since 2010. 5. The new indicators are an
important tool to assess the impact of insolvency regimes on economic performance and will
allow for a better integration of the exit margin in economic analysis based on policy indicators,
such as Going for Growth. For example, using the new indicators, recent research shows that
reforms to insolvency regimes can: i) reduce the share of capital sunk in zombie firms, which in
turn spurs the reallocation of capital to more productive firms (Adalet McGowan, Andrews and
Millot, 2017a); and ii) facilitate technological diffusion by promoting experimentation and
providing laggard firms with the scope to implement the necessary business changes to move
closer to the technological frontier (Adalet McGowan, Andrews and Millot, 2017b). The
indicators will also allow for cross-country comparisons of certain design features of insolvency
regimes and the monitoring of their reform over time, providing key information for OECD
country reviews. 6. The next section lays out a framework for assessing insolvency regimes and
describes the OECD questionnaire on insolvency regimes. Section 3 presents the new OECD
indicator, displaying cross-country evidence on the design of insolvency regimes. Section 4
documents the recent empirical evidence linking insolvency regimes and productivity, based on
the new indicator.

IN UNISTED STATES OF AMERICA (USA):

The Bankruptcy Code defines “insolvent” as “financial condition such that the sum of such
entity's debts is greater than all such entity's property, at a fair valuation.” Hence, under the
Bankruptcy Code, insolvency is “essentially a balance sheet test.” A debtor is insolvent when the
debtor's liabilities exceed the... There are two principal definitions of insolvency in the United
States: the first, balance sheet insolvency, occurs when the debtor’s liabilities exceed its assets.
The second, cash flow insolvency, occurs when the debtor cannot pay its debts as they mature
due to the debtor’s lack of financial liquidity–but not for her lack of assets.
Balance Sheet Insolvency
The balance sheet test asks whether a firm’s assets are greater than its liabilities. The Bankruptcy
Code defines “insolvent” as “financial condition such that the sum of such entity’s debts is
greater than all such entity’s property, at a fair valuation.” Hence, under the Bankruptcy Code,
insolvency is “essentially a balance sheet test.” A debtor is insolvent when the debtor’s liabilities
exceed the debtor’s assets, excluding the value of preferences, fraudulent conveyances, and
exemptions; in this situation, a debtor has negative net assets. As the Fifth Circuit accurately
stated in Langham, Langston & Burnett v. Blanchard, “[o]ne is insolvent under the [bankruptcy]
statute when his assets, if converted into cash, at a fair not forced sale will not pay [his debts].”
The definition of “insolvent” depends on whether the debtor is a corporation, partnership, or
municipality. Even so, the standard insolvency test by which an entity’s “fair value” is measured
is the sum of its assets and liabilities. A common method to calculate the fair value of assets and
liabilities is to determine what price, in cash, a hypothetical willing buyer would pay, and a
hypothetical willing seller would accept in a sale of the property in a reasonable amount of time.
This method is termed the fair market value valuation. The Second Circuit noted in In re Roblin
Indus. Inc., “[f]air value, in the context of a going concern [i.e., assuming the firm will continue
in operation and generate cash flow from its business], is determined by the fair market price of
the debtor’s assets that could be obtained if sold in a prudent manner within a reasonable period
of time to pay the debtor’s debts.” When a firm is valued as a going concern, the market value
typically includes “intangibles such as relationships with customers and suppliers, and the name,
profile, and reputation of the business.”
Cash Flow Insolvency
“Cash flow” insolvency is also known as equitable insolvency or the “ability to pay” test. An
Ohio court stated in Cellar Lumber Co. v. Holley that cash flow insolvency is “the inability to
pay debts as they become due in the ordinary course of business.” It is a “broader concept [than
balance sheet solvency], originating with merchants or traders.” Under the Uniform Fraudulent
Conveyance Act (§ 6), cash flow insolvency is determined by asking whether the debtor “intends
or believes that he will incur debts beyond his ability to pay as they mature.” While
the UCC includes in its definition of “insolvent” “being unable to pay debts as they become
due.” By its nature, cash flow insolvency is a forward-looking test. A firm must prove that it is
capable of paying both current and prospective debt obligations. A test that considers only the
firm’s historical ability to pay its debts would be wholly ineffective in deterring activities that
destroy credit. Moreover, firms may be balance-sheet insolvent but liquid enough to pay
creditors. In Angelo, Gordon & Co. L.P. v. Allied Riser Commc’ns Corp., for example, the
debtor corporation, while balance-sheet insolvent, had liquidated all its assets and had enough
cash to pay its currently maturing obligations. Furthermore, a firm’s ability to pay is not
equivalent to a firm’s expected cash flow, or the total of its possible cash flows measured by
their probabilities. To the contrary. A firm may have large expected cash flow but a very small
likelihood of repaying its bills. Here’s an example. Suppose Firm A has a prospective debt
payment of $1,000 but no current ability to pay the debt. However, Firm A has a 25% chance of
receiving $10,000 before the maturity date but a 75% chance of receiving $0. Accordingly, there
is a 75% chance that Firm A will not pay its debt when it matures because there is a 75% chance
that Firm A will have $0 when the debt is due. But there is a 25% chance that Firm A will pay its
$1,000 debt. Should this occur, and Firm A pays its $1000 debt with its $10,000 expected
payment, the expected cash flow is $2,500 because 25% of 10,000 plus 75% of $0 equals $2,500.
This example shows that a firm’s expected cash flow can be higher than its debt despite a very
high probability that it will be unable to pay its debt when it comes due.
Insolvency According to the Uniform Commercial Code
The Uniform Commercial Code also defines insolvency. § 1-201(23) of the UCC incorporates
not only the Bankruptcy Code’s test but also two “equity tests” of insolvency. A “person”––
which “includes an individual or organization,” under § 1-201(30)––can be insolvent when: one
“has either ceased to pay his debts in the ordinary course of business or cannot pay his debts as
they become due or is insolvent within the meaning of federal bankruptcy law.” The
UCC’s Official Comment 23 to § 1-201 observes that these three definitions of insolvency “are
expressly set up as alternative tests and must be approached from a commercial standpoint.”

IN UNITED KINGDOM (UK):

United Kingdom insolvency law regulates companies in the United Kingdom which are unable
to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the
term insolvency is generally used for companies formed under the Companies Act
2006. Insolvency means being unable to pay debts.[2] Since the Cork Report of 1982,[3] the
modern policy of UK insolvency law has been to attempt to rescue a company that is in
difficulty, to minimize losses and fairly distribute the burdens between the community,
employees, creditors and other stakeholders that result from enterprise failure. If a company
cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according
to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules
1986 (SI 1986/1925, replaced in England and Wales from 6 April 2017 by the Insolvency Rules
(England and Wales) 2016 (SI 2016/1024) – see below), the Company Directors Disqualification
Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case
law. Numerous other Acts, statutory instruments and cases relating
to labour, banking, property and conflicts of laws also shape the subject. UK law grants the
greatest protection to banks or other parties that contract for a security interest. If a security is
"fixed" over a particular asset, this gives priority in being paid over other creditors, including
employees and most small businesses that have traded with the insolvent company. A "floating
charge", which is not permitted in many countries and remains controversial in the UK, can
sweep up all future assets, but the holder is subordinated in statute to a limited sum of
employees' wage and pension claims, and around 20 per cent for other unsecured
creditors. Security interests have to be publicly registered, on the theory that transparency will
assist commercial creditors in understanding a company's financial position before they contract.
However the law still allows "title retention clauses" and "Quistclose trusts" which function just
like security but do not have to be registered. Secured creditors generally dominate insolvency
procedures, because a floating charge holder can select the administrator of its choice. In law,
administrators are meant to prioritise rescuing a company, and owe a duty to all creditors. [4] In
practice, these duties are seldom found to be broken, and the most typical outcome is that an
insolvent company's assets are sold as a going concern to a new buyer, which can often include
the former management: but free from creditors' claims and potentially with many job losses.
Other possible procedures include a "voluntary arrangement", if three-quarters of creditors can
voluntarily agree to give the company a debt haircut, receivership in a limited number of
enterprise types, and liquidation where a company's assets are finally sold off. Enforcement rates
by insolvency practitioners remain low, but in theory an administrator or liquidator can apply
for transactions at an undervalue to be cancelled, or unfair preferences to some creditors be
revoked. Directors can be sued for breach of duty, or disqualified, including negligently trading a
company when it could not have avoided insolvency. [5] Insolvency law's basic principles still
remain significantly contested, and its rules show a compromise of conflicting views.

Insolvent Countries:
Like companies and individuals, countries may suffer from financial distress and fail to repay
their debts. When a country is a debtor, insolvency occurs when the country defaults on its
sovereign debt or fails to pay interest on its treasury obligations, regardless of the country’s
ability to pay. Countries like Argentina, Greece, and Lebanon have recently defaulted on their
debt payments and faced an insolvency crisis. However, when a sovereign becomes insolvent,
the legal recourse for debtors and creditors alike is significantly different. Because of sovereign
immunity, there is no legally and politically recognized process for restructuring the debt of
bankrupt sovereigns. Alexander Hamilton's statement in Federalist 81 remains true today–“[t]he
contracts between a nation and individuals are only binding on the conscience of the sovereign,
and have no pretensions to a compulsive force. They confer no right of action, independent of the
sovereign will.” As sovereigns, governments control their own affairs and thus cannot be
obligated to pay back their debt. In turn, creditors lack a well-defined claim on the sovereign’s
assets. Insolvent governments, nonetheless, are heavily incentivized to repay their debt
obligations. For a country that fails to pay its debts will likewise struggle to borrow money in the
future; it’s access to credit markets will be severely limited by wary investors.

CHAPTER III
 SCOPE OF STUDY IN INDIA

IN INDIA:

IBC is the second most crucial reform in the legal setting of India. It is because IBC is not only
making India emphatically powerful in the field of the legal environment but also provides a new
identification and recognition at the global platform economically. The Insolvency and
Bankruptcy Code, 2016 is the bankruptcy law of India which seeks to consolidate the existing
framework by creating a single law for insolvency and bankruptcy. The paper studies distinguish
features and the legal framework of the code. The study is descriptive in nature. In line with that,
the paper also presents the impact of Insolvency and Bankruptcy code on macro environment of
India.

INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016

a. Background:
In India, the legal and institutional machinery for dealing with debt defaults has not yet been in
line with global standards. The recovery action of the creditors, either through the Contract Act
or through the special laws such as the Recovery of Debts due to Banks and Financial
Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, has not been able to get the desired outcomes.
Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 and the
winding up provisions of the Companies Act, 1956/Companies Act, 2013 have neither been
able to aid the recovery for lenders nor aided in the restructuring of firms. Laws dealing with
individual insolvency, Presidential Towns Insolvency Act, 1909 and the Provincial Insolvency
Act, 1920 are almost a century old. This has hampered the confidence of the lenders over the
period of time. The ‘Insolvency and Bankruptcy Code, 2016’is considered the biggest economic
reform next to GST. The Insolvency and Bankruptcy Code 2016 is landmark legislation
consolidating the regulatory framework governing the restructuring and liquidation of persons
(including incorporated and unincorporated entities). The objective of the new law is to promote
entrepreneurship, availability of credit, and to balance the interests of all stakeholders by
consolidating and amending the laws relating to reorganization and insolvency resolution of
corporate persons, partnership firms and individuals in a time-bound manner and for
maximization of value of assets of such persons and matters connected therewith or incidental
thereto. It aims to consolidate the laws relating to insolvency of companies and limited liability
entities (including limited liability partnerships and other entities with limited liability),
unlimited liability partnerships and individuals, presently contained ina number of legislation,
into a single legislation. Such consolidation will provide for greater clarity in the law and
facilitate the application of consistent and coherent provisions to different stakeholders affected
by the business failure or inability to pay the debt.

b. Earlier Insolvency and Bankruptcy Regimes in India:

 Individual Insolvency: This has always been regulated and administered through the
Presidency Towns Insolvency Act, 1909 (for residents of Mumbai, Kolkata and Chennai)
and Provincial Insolvency Act, 1920 (for other residents) which are century old
legislation and have now outlived their utility.

 Corporate and Firm Insolvency: In India till now has always been regulated and
administered by multiple and sometimes overlapping laws which are shown as follows :

 Distinguish Features of the Code: There are the following key features of the code
Comprehensive Law: Insolvency code is a comprehensive law which envisages and
regulates the process of insolvency and bankruptcy of all persons including corporate,
partnership, LLP’s and individuals. No multiplicity of law: The code has withered away
from the multiple laws covering the recovery of debt and insolvency and liquidation
process and present singular platform for all the relief’s relating to recovery of debts and
insolvency. Low time resolution: The code provides a low time resolution and defines
fixed time frames for insolvency resolution of companies and individuals. The process is
mandated to be completed within 180 days, extendable to a maximum of 90 days.
Further, for a speedier process, there is a provision for fast track resolution of corporate
insolvency within 90 days. If insolvency cannot be resolved, the assets of the borrowers
may be sold to repay the creditors. One window clearance: It has been drafted to provide
one window clearance to the applicant whereby he gets the appropriate relief at the same
authority unlike the earlier position of law where in case the company is not able to
revive the procedure for winding up and liquidation has to be initiated under separate law
governed by separate authorities. Clarity in the process: The code provides for a clear-cut
process with respect to the insolvency and bankruptcy. The structure of the code is very
specific and 180 days is mandated for the complete insolvency resolution process. One
chain authority: There is one chain of authority under the code. It does not even allow the
civil courts to interfere with the application pending before the adjudicating authority,
thereby reducing the multiplicity of litigation. The National Company Law Tribunal
(NCLT) will adjudicate the insolvency resolution for companies and the Debt Recovery
Tribunal (DRT) will adjudicate the insolvency resolution for individuals. Priority to the
interest of workmen and employees: The code also protects the interest of workman and
employees. It excludes dues payable to workmen under the provident fund, pension fund
and gratuity fund from the debtor’s assets during liquidation. New regulatory authority: It
provides for constitution of a new regulatory authority “insolvency and bankruptcy board
of India” to regulate professionals, agencies and information utilities engaged in the
resolution of insolvencies of companies, partnership firms and individuals. The board has
already been established and has started functioning. Promote entrepreneurial activity:
The code promotes entrepreneurial activity in India because of its revival mechanism and
fast resolution process. V. REGULATORY FRAMEWORK OF INSOLVENCY AND
BANKRUPTCY CODE, 2016 Insolvency and Bankruptcy Code, 2016 is expected to
play a vital role in the economic system of the country. The law is to cover insolvencies
of “corporate persons” (covering companies, limited liability partnerships, and all other
entities having limited liability), as also individuals, firms etc. While the law is
admittedly a code for insolvent companies, it covers liquidation of solvent companies as
well, and thereby, serves as a complete code on liquidation of companies. The Code has
been divided into five parts comprising 255 sections and 11 schedules (Shown in figure
1). The code provides for the establishment of a regulator who will oversee these entities
and perform legislative, executives and quasi-judicial functions with respect to the
insolvency professionals, insolvency professional agencies and information utilities. ▪
CORPORATE INSOLVENCY RESOLUTION PROCESS Corporate insolvency
resolution is a process during which financial creditors assess whether the debtor’s
business is viable to continue and the options for its rescue and revival. If an insolvency
resolution fails or financial creditors decide that the business of debtor cannot be carried
on profitably and it should be wound up. The debtor will be undergoing liquidation
process and the assets of the debtor are realized and distributed by the liquidator. The
insolvency resolution process provides a collective mechanism for lenders to deal with
the overall distressed position of the corporate debtor. This is a significant departure from
the existing legal framework under which the primary onus to initiate a reorganization
process lies with the debtor and lenders may pursue distinct actions for recovery, security
enforcement and debt restructuring. In order to above these facts the regulations
regarding “The Corporate Insolvency Resolution Process “are as follows: i. The corporate
insolvency resolution process may be initiated on application to NCLT: ✓ By a financial
creditor, either by itself or jointly with another financial creditor, meaning a creditor for
the financial facility (which is a broadly worded expression including financial lease and
hire purchase transactions, which are treated as financial transactions under applicable
accounting standards). ✓ By an operational creditor, meaning a creditor other than a
financial creditor or a person whom an operational debt. ✓ By the corporate debtor
himself, that is the company itself. ii. The occurrence of Default: Default means non-
payment of debt when whole or any part of the installment has become due and not
repaid by the debtor. The minimum amount of default by the debtor is Rs 1 lakh. iii.
Roadmap after Admission of Application: The insolvency resolution process, after an
application has been admitted by the adjudicating authority will entail the following
steps- • Declaration a moratorium period-This will prohibit actions such as, institution of
suits, continuation of pending suits/ proceedings against the corporate debtor including
execution of any judgment, decree or order; disposal/encumbering of corporate debtor’s
assets or rights/interests therein; any action to foreclose, recover or enforce any security
interest created by the corporate debtor, etc. One of the most important features of
bankruptcy law is the grant of the moratorium during which creditor action will remain
stayed, while the bankruptcy court takes a view on the possibility of rehabilitation. In the
chapter on Sick Companies under the Companies Act 2013, there is no provision for an
automatic moratorium – it merely empowers the NCLT to grant a moratorium up to 120
days. The Code talks about a mandatory moratorium – thereby, it serves almost like the
automatic moratorium under global bankruptcy laws. The moratorium will continue
throughout the completion of the resolution process – which is 180 days as mentioned
above. However, if in the meantime, the creditors’ committee resolves to approve
liquidation of the entity, then the moratorium will cease to have an effect. Explicitly, the
moratorium before liquidation applies to the enforcement of security interests under the
SARFAESI Act as well. A moratorium also applies when an order for liquidation has
been passed by the adjudicating authority. • Appointment of an Interim IP- Issuance of
the public announcement of the initiation of insolvency resolution process and call for the
submission of claims. Interim IP inter alia takes over the management and powers of the
board of directors of the corporate debtor, and collects all information relating to assets,
finances and operations of the corporate debtor for determining its financial position;
collates all claims submitted by the creditors and constitutes a Committee of Creditors
("COC"). The Committee of Creditors thereafter either resolves to appoint the interim IP
as the IP or replaces the interim IP by appointing a new IP, in accordance with the
prescribed procedure. This IP shall be appointed as the liquidator for the process. The IP
will then take over the management and assets of the corporate debtor, and can exercise
the wide powers granted to it, in the manner prescribed under the Code. It will prepare an
information memorandum in relation to the corporate debtor, on the basis of which the
resolution applicant will prepare a resolution plan. IP will scrutinize the resolution plan
and present it to the Committee of Creditors. The Committee of Creditors approved plan
will be submitted to the adjudicating authority, for its acceptance, and it is only when the
adjudicating authority, gives it a final nod that the resolution plan becomes binding upon
all the stakeholders and the insolvency resolution process of the corporate debtor is
initiated. In case the adjudicating authority rejects the plan, the liquidation process of the
corporate debtor will commence. • Timeline for the process: As per the figure 2,
Resolution Professional is appointed, after the Admission of an application by the
adjudicating authority, to conduct the entire corporate insolvency resolution process and
manage the corporate debtor during the period. Resolution Professional shall prepare
information memorandum for the purpose of enabling resolution applicant to prepare a
resolution plan. A resolution applicant means any person who submits a resolution plan
to the resolution professional and upon receipt of resolution plans, Resolution
Professional shall place it before the creditors’ committee for its approval. © IJEDR 2019
| Volume 7, Issue 3 | ISSN: 2321-9939 IJEDR1903007 International Journal of
Engineering Development and Research (www.ijedr.org) 31 Once a resolution is passed,
the creditors’ committee has to decide on the restructuring process that could either be a
revised repayment plan for the company, or liquidation of the assets of the company. If
no decision is made during the resolution process, the debtor’s assets will be liquidated to
repay the debt. The resolution plan will be sent to NCLT for final approval and
implemented once approved. ▪ CORPORATE LIQUIDATION PROCESS Diagrammatic
representation under figure 3 depicts the Corporate Liquidation Procedure which
commences with the appointment of a Liquidator. The process starts with winding up
order involving the realization of the assets and distribution of proceeds among creditors
and other stakeholders. As mentioned in figure, according to Section 14 of IBC no suit
can be instituted against the Corporate Debtor. Based on the priority a security creditor
may receive proceeds from the sale of assets by enforcing with the secured assets as per
applicable laws. Claims of the creditor will be considered subordinate to the unsecured
creditors to the extent of the deficit. All the distribution shall be done in the manner laid
down in the Code. Once all the assets of the Corporate Debtor are liquidated the NCLT
passes an order to finally liquefy the corporate debtor. VI. IMPACT OF IBC ON
MACRO ENVIRONMENT OF INDIA: Insolvency and Bankruptcy Code was primarily
introduced with the aim to mitigate the losses of NPAs borne by the Indian Banking
System. Though it is highly doubtful that it can bring back the amount already stuck in
stressed assets in the form of NPAs but it can, to a large extent help to avoid the overall
crisis. Apart from its legal impact, IBC has also played a great role in macroeconomic
objectives providing India a strong stand in the global platform. Following mentioned are
some of the broader impacts of The Insolvency and Bankruptcy Code (IBC) of India,
2016:
Management of NPA’s- Indian Banking Structure is currently dealing with the chronic
problem of rising NPAs and its management has been one of the key focus areas for the
banks ever since. In such a case, the introduction of Insolvency and Bankruptcy Code can
prove to be a major milestone in reducing NPA stress building up on the Indian Banking
System. According to the Corporate Affairs Secretary Injeti Srinivas, Insolvency and
Bankruptcy Code Economic Effects Management of NPA’s Increase in FDI and FIIs
Increase in M & A Deals Improved ‘Ease of Doing Business’ Ranking Development of
Credit Market of India Reduction of Crony Capitalism in India Non-Economic Effects
Easy Exit and Reduced Duration of Liquidation Cross-Border Insolvency Right to
Foreign Operational Creditors Relation with Trading Blocks © IJEDR 2019 | Volume 7,
Issue 3 | ISSN: 2321-9939 IJEDR1903007 International Journal of Engineering
Development and Research (www.ijedr.org) 32 (IBC) has, directly and indirectly, helped
resolve stressed assets worth Rs 3 lakh crore and disposed of about 50 per cent (4,400 to
be exact) of the 9,000-odd cases that it received in the last two years, including those
transferred from the Board for Industrial and Financial Reconstruction (BIFR). • Increase
in FDI- As per the following table, it is shown that after the enactment of the code the
FDI has substantially increased in amount. In 2012-13 the FDI of India was 34298 US$
Million and just after enactment of the code it rose to 61463 US$ Million in 2017-18
which is growing by approximately 80%. Year Total FDI Flows (Amount US$ Million)
% Growth over the previous year (in US$ terms) Investment by FII’s (Amount US$
Million) 2012-13 34,298 (-) 26% 27,582 2013-14 36,046 (+) 5% 5,009 2014-15 45,148
(+) 25% 40,923 2015-16 55,559 (+) 23% (-) 4,016 2016-17 60,220 (+) 8% 7,735 2017-18
61,963 (+) 3% 22,165 Source: RBI’s Bulletin August 2018 dt.10.08.2018 (Table No. 34 –
FOREIGN INVESTMENT INFLOWS) There are so many reasons behind this growth
but one of the components is IBC because the Code provides the very clear-cut process
with reference to Insolvency and Bankruptcy and priority to the employees, workmen and
creditors is also provide a strong legal frame to the India. • Increase in M & A Deals-
Mergers and Acquisition (M&A) activity in the country has increased exponentially and
deals worth $14.3 billion have been completed in the past two years, Mint has reported.
Insolvency and Bankruptcy of India (IBC) have been credited for this flurry in mergers
and acquisitions. IBC has driven massive M&A momentum in the country, led by deals
involving Bhushan Steels ($7.4 billion), Reliance Communications($3.7 billion), Fortis
Healthcare ($1.2 billion), India’s Insolvency and Bankruptcy Code (IBC) has accelerated
activity in distressed merger and acquisitions (M&As) in India with the transaction
involving Indian companies reaching $104.5 billion in 2018. • Improved ‘Ease of Doing
Business’ Ranking-In addition to the introduction and implementation of Goods and
Services Tax, which is considered as one of the biggest economic reforms in the country,
Insolvency and Bankruptcy Code is next in line. These have greatly influenced India’s
“World Bank’s Ease of Doing Business (EODB)” that moved up 23 notches in last two
years and now ranks 77 among 190 global economies. The World Bank has also listed
India among the “top 10 improvers” for the second time in a row. It occupies the fifth
spot, while China is at third. • Development of Credit Market of India- The code
established an Information Utilities (IUs). It is a Centralized repository of financial and
credit information of borrowers; would validate the information and claims of creditor’s
vis-à-vis borrowers, as needed. Thus, through the establishment of IUs credit market of
India developed and works more effectively. • Reduction of Crony Capitalism in India-
Quoting Amitabh Kant, the CEO of NitiAayog “IBC will ensure that the world of crony
capitalism comes to an end. Earlier, you could borrow and not repay. Now if you don’t
pay, you lose your business.” (htt1) Crony Capitalism can be defined as an economy in
which businesses thrive on the return of money accumulated through an affiliation
between business houses and political class and not due to risk-taking. With stricter laws
post introduction of IBC, it has become exceptionally difficult for promoters, shady or
otherwise, to regain control of their companies after their firm goes into bankruptcy and
also to over-leverage their balance sheet. The new states to either perform or perish. •
Easy Exit and Reduced Duration of Liquidation-As per statistics provided by World
Bank, in comparison to other progressive nations it takes much longer time in India to
resolve Insolvency issues (An average of four years). With the introduction of Insolvency
and Bankruptcy Code, it has become easier for companies to make an easy exit or
liquidate (180+90 days resolve-or-liquidate measure) their business which was not the
case earlier in the Indian Corporate Structure (on an average of 3-4 years).This would be
beneficial in attracting foreign investors to set in their business in India. It would also
lead to an increase in innovation in India. • Cross-Border Insolvency-Cross-Border Issues
deals with Indian firms having claims over default committing global firms, or vice-
versa. Given the complex nature of the issue the IBC has been trying to blend in some of
the best efforts taken for Cross-Border Insolvency in the world but these are not adequate
to effectively deal with the default cases. But in such a scenario where domestic
insolvency laws have seen recently reformed daylight, it is prudent to take one step at a
time. A draft bill is in progress and hopefully, it will soon be enacted after due diligence.
• Right to the Operational Creditors- In previous, no law prevented the operational
creditors but under the code, there is a provision that the operational creditors (domestic
as well as international) have been right to file suit against the default. Thus, the code
provides right to the foreign creditors which will enhance the economic transactions of
India and others. • Relation with Trading Blocs- If the legal environment of any country
is strong, well structured and suitable for other countries then its relation with trading
blocs such as SAARC, ASEAN, EU, NAFTA, etc will be fruitful. It is because IBC is the
code which has fulfilled all the above stated criteria, therefore, we can say that it will
enhance the relations of India with the trading blocs. © IJEDR 2019 | Volume 7, Issue 3 |
ISSN: 2321-9939 IJEDR1903007 International Journal of Engineering Development and
Research (www.ijedr.org) 33 VII. CONCLUSION 2016 has definitely been the year of
reforms (GST & IBC). India has been plagued with mounting NPAs [10.25 lakh crores
INR (approximately 150 billion US$) as on 31 March 2018 ] since quite a few time, and
from the above study, it is concluded that the IBC Code 2016 has established a
framework for time-bound resolution for delinquent debts with the objective of
improving the ease of doing business in India. As per M.S. Sahoo, Chairperson
Insolvency and Bankruptcy Board of India (IBBI) that around 40 corporate debtors cases
have been taken under the IBC terms and the creditors have got over 50,000 crores i.e.
the average realization has been over 50% till date. This shows the benefit of having this
code. By the end of January 2018, it was reported that at least 2,434 fresh cases have
been filed before the National Company Law Tribunal (NCLT) till 30 November 2017
and at least 2,304 cases seeking the winding-up of companies have been transferred from
various high courts. This again is delaying the overall resolution process. Cross-border
insolvency and non-recognition of Indian laws in overseas jurisdictions, and vice-versa,
has created certain challenges. The process is unclear for such dealings. Few analysts
have argued that IBC has excessive government interference due to its role in the
appointment, termination and inspection of professionals. It is observed that till today,
there is a lack of infrastructure to deal with high value and a large number of insolvency
cases. Apart from the above-mentioned challenges, the IBC Code has helped in
improving the global rank of India in the ease of doing business. For the first time, India
has a rank within the top 100 in the world. This jump is because of economic reforms
like; IBC and GST. Due to this development, we can also expect a growth in FDI and
GDP in the country. It has also given an immense thrust to M&A drive in India. The
success of ‘Make in India’ campaign will only be possible if an environment is created in
India where the failures of entrepreneurs and financiers are handled and treated
cautiously on time. The smooth functioning of a credit market in an economy will ensure
that all the stakeholders are collectively contributing to the success of the entrepreneurial
growth of a country.IBC Code is one step in this direction. The paper delves into the
various perspectives of the IBC code and highlights its major issues and its impact on the
Indian Economy both on the domestic and global front. IBC has been undoubtedly
landmark legislation and still evolving so that it can meet with several unforeseen
challenges

IN TELANGANA:

HYDERABAD: As many as 63 companies from Telangana have declared insolvency

during the course of the Covid-19 pandemic.
The cases have been filed with the National Company Law Tribunal (NCLT) under the
Insolvency and Bankruptcy Code and are in the process of adjudication.
However, at the same time, 803 new companies have also been registered in Telangana in
June alone. Experts said that while the pandemic affected medium and small-scale
industries, it did not deter new companies.
In reply to a query by Telangana Congress president and Malkajgiri MP A Revanth
Reddy in Lok Sabha, Union minister of state for corporate affairs Rao Inderjit Singh
informed that initiation of corporate insolvency resolution process Insolvency and
Bankruptcy Code, 2016 was suspended by Insolvency and Bankruptcy Code (Second
Amendment) Act, 2020 for defaults arising on or after March 25, 2020 till March 24,
2021. “The defaults arising during the said suspension will remain non est for the purpose
of initiation of corporate insolvency resolution process under the Code. Around 63
companies having registered office in State of Telangana were admitted into CIRP from
Jan, 2020 to June 2021,” Rao Inderjit Singh state in his reply.
According to the Registrar of Companies (RoC) data, as many as 77,476 companies are
currently active in Telangana while 2,006 companies are under strike off and 264 are
under liquidation. According to RoC data, as many as 77,476 companies are currently
ACTIVE IN Telangana while 2006 companies are under strike off and 264 under
liqudation ..

CHAPTER IV
 OBJECTIVES OF THE STUDY

PROTECTION OF CREDITORS:
Balancing Interests of Stakeholders The preamble to the Insolvency and Bankruptcy Code, 2016
(Code) reads: “An Act to consolidate and amend the laws relating to reorganisation and
insolvency resolution of corporate persons, partnership firms and individuals in a time bound
manner for maximisation of value of assets of such persons, to promote entrepreneurship,
availability of credit and balance the interests of all the stakeholders including alteration in the
order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy
Board of India, and for matters connected therewith or incidental thereto.”

Difference B/W Financial Creditor and Operational Creditor under IBC, 2016

Currently, applications to begin a corporate bankruptcy resolution procedure must first persuade
the Tribunal that the petitioner is a “Financial Creditor” or an “Operational Creditor” under
the Insolvency and Bankruptcy Code, 2016. A financial creditor and an operational creditor are
two essential components of the insolvency procedure under the IBC, 2016.

The Code 2016 distinguishes between financial and operational creditors. Financial creditors are
those who have a strictly financial contract with the company, such as a loan or debt security.
Operational creditors are those that owe the firm money as a result of a business transaction.
The IBC, which had been much anticipated, received the President’s approval on May 28, 2016.
Section 3 (10) of the Code defines the term “creditor” as “any person to whom a debt is due,
including a financial creditor, an operational creditor, a secured creditor, an unprotected creditor,
and a statutory instrument;”

What Is Financial Creditor

“A person who owes a financial obligation, including anybody to whom such debt has been
legitimately assigned or transferred,” according to Section 5(7) of the Insolvency and
Bankruptcy Code.

The debt owing to a person must meet the definition of a “Financial Debt” as defined by Section
5(8) of the IBC to establish if that person is a financial creditor.

A “Financial Debt” is defined as follows in section 5(8) of the IBC: – “A debt that is disbursed in
consideration for the time value of money, including any interest, and includes:-

1. Money that has been borrowed and will be returned with interest;
2. Any amount raised by the acceptance of a credit card or its dematerialized equivalent;
3. Any money raised through a note purchase facility or by the issuing of bonds, notes,
debentures, loan stock, or other similar instruments;
4. The total amount of any liability deriving from a lease or hire purchase arrangement
categorised as a finance or capital lease under The Indian Accounting Standards or other
accounting standards as stated;
5. Other than non-recourse receivables sold, a receivable sold or reduced
6. Any amount raised by any other transaction, including any forward sale/purchase
agreement, with the commercial impact of borrowing;
7. Any counter-indemnity obligation created by a bank or financial institution’s guarantee,
indemnity, bond, recorded letter of credit, or other instruments;
8. The amount of any obligations arising from any of the guarantees or indemnities for any
of the items listed in subclauses (a) through (h).”

What is Operational Creditor

“Anybody who owes an operational obligation, including anyone to whom such liability has
been legally assigned or transferred,” according to section 5(20) of the IBC.

The debt owing to a person must fulfil the definition of an operational debt as defined in Section
5(21) of the Insolvency and Bankruptcy Code to determine if that person is an operational
creditor.
 “Operational Debt” is defined as “a claim for the delivery of goods or services, as well as
employment, or a debt for the repayment of dues originating under any legislation presently in
existence and payable to the Central Government, any State, or any regional government” under
Section 5(21) of the IBC.

Significant differences between financial Creditor and Operational Creditor

 Someone who owes a financial debt is referred to as a financial creditor, but someone
who owes an operational debt is referred to as an operational creditor.
 Debt to financial creditors refers to a debt that is distributed against the consideration for
the time value of money, whereas debt to operational creditors refers to a demand for the supply
of products and services in exchange for the repayment of government dues.
 In the event of a default, a financial creditor may collectively or separately with other
lenders file an application for the onset of arbitration proceedings against a corporate debtor
before an adjudicating officer, while an operational creditor may deliver a demand notice of
unpaid operational debtor copy for invoice requesting payment of the amount involved in the
default. The operational creditor may submit an application at a later date.
 A financial creditor may include the name of a suggested resolution professional in the
application for an interim resolution professional appointment, but an operational creditor must
recommend a resolution professional for an interim resolution professional appointment.
 Only financial creditors and corporate debt creditors will be represented on the creditor’s
committee. Members of the creditor’s committee will not be operational creditors. The
operational creditors do not have a vote at the meetings of the committee of creditors.

Let us briefly describe the key differences between Financial creditors and Operational
Creditors.

Financial Creditor Are Prioritised

Financial creditors are given higher priority since they are members of the creditor’s committee
and have voting power, whereas operational creditors are not members of the creditor’s
committee. The underlying issue is that some categories of operational creditors are subjected to
discrimination since the statute’s provisions protect the rights and interests of Financial
Creditors. This is reinforced by the fact that when the application is submitted by operational
creditors, the respective class has no authority to make any proposals during the creditor’s
meeting held.
Should operational creditors be treated the same as financial creditors?

In its report dated November 4, 2015, the Bankruptcy Law Review Committee stated that OCs
will not risk their dues in exchange for the potentially bright future of the corporate debtor and
concluded that the CoC should consist only of financial creditors to carry out the insolvency
resolution process more effectively. The theory underlying this viewpoint was that operational
creditors would be more interested in the liquidation of the corporate debtor rather than the
resurrection of the firm, which would eventually contradict the primary goal of the IBC.

Insolvency law in the United States distinguishes between secured and unsecured creditors. Both
groups of creditors, however, have the opportunity to vote on or reject any plan that reduces their
claims. Under Chapter 11 of the United States Bankruptcy Code, an unsecured creditors
committee is created to guarantee that the rights of such creditors are fairly represented.

Excluding operational creditors from the IBC Committee of Creditors and stripping them of
decision-making rights is thus not only contrary to existing bankruptcy rules, but also irrational.

In the recent past, a relatively high number of judicial decisions on the status of operational
creditors have been made public. The Supreme Court decided in the case of Swiss Ribbons Pvt.
Ltd. and Others v. Union of India that intelligible differentia came into play while differentiating
between operational creditors and financial creditors. As a result, this is not discriminatory as
defined by Article 14 of the Indian Constitution. The categorization is warranted since the sorts
of loans given by these two categories of creditors differ. It was also indicated in this decision
that a loan from a financial creditor is to contain a bigger amount of money and a defined
payback plan, which caused them to become involved in the reconstruction of the
aforementioned loan.

In the case of Akshay Jhunjhunwala and others v. Union of India, through the Ministry of
Corporate Affairs and others, this difference was also upheld. The Supreme Court ruled that the
separation created between financial creditors and operational creditors did not violate any
constitutional requirement. Equitable treatment of operating creditors was favoured above
equitable treatment in the case of Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh and
others.

Some rulings, such as the Binani Industries Ltd. v. Bank of Baroda case, demonstrated
inconsistency with the preceding cases and stated their claims for fair treatment for all creditors.
This was a one-of-a-kind ruling that outlined the operational creditor’s interests but omitted to
name the operational creditor in the CoC. Some of the decisions in this ruling were based on the
Essar Steel Case.
 Hon’ble NCLT on the Status of Operational Creditor

According to the Bankruptcy Law Reforms Committee in Paragraph 5.2.1 of its final report, a
financial creditor is a person whose connection with the entity is entirely connected to financial
transactions, such as a loan or debt security. An operational creditor, on the other hand, is an
individual whose liabilities to the company take the form of future payments in exchange for
already delivered items or services.

The IBC also provides for circumstances in which a creditor has participated in both a financial
and an operational transaction with the firm, according to the research. In such cases, the creditor
may be divided into two categories: financial creditors for the amount of the financial debt and
operational creditors for the amount of the operational debt.

The National Company Law Tribunal decided in the matter of Col. Vinod Awasthy vs. AMR
Infrastructure Limited (C.P. No. (IB) 10 (PB)/2017) that operational creditors are those whose
obligation from the firm comes from a transaction on operations. As a result, an operational
creditor is a wholesale supplier of replacement parts whose spark plugs are kept in stock by auto
mechanics and who is paid only when the spark plugs are sold.

Similarly, the lessor from whom the firm leases space is an operational creditor to whom the
company pays monthly rent throughout the duration of a three-year lease arrangement. The
Hon’ble Tribunal further decided that the Petitioner had not supplied any goods or rendered any
services in order to be classified as an ‘Operational Creditor.’

As a result of the above, it is obvious that Tribunals are unwilling to entertain petitions from
anybody who does not fulfil the IBC’s standards for financial and operational creditors. This
need must be satisfied in order to initiate business insolvency proceedings under the IBC. The
NCLT has made it feasible to severely enforce the new insolvency and bankruptcy legislation.

Conclusion

Efficaciously introduce a corporate insolvency resolution process against a debtor, it is necessary

to prove that the creditor falls within the scope and extent of the definitions of ‘Financial
Creditor’ as defined in Section 5(7) of the IBC or ‘Operational Creditor’ as defined in Section
5(20) of the IBC. As per the case study, the Tribunals are strict in their interpretation of the
phrase “Operational Creditor” under the IBC, refusing to accept petitions when the petitioners do
not technically fall within the scope of the IBC and have alternative valid remedies available.