By Group 6

Suraj Bhojannavar - 20182009

Amit Kabra - 20182021
Mayur Rathod - 20182037
Dhairya Soni - 20182052
Jignasha Jain - 20182160
Yash Didwania - 20182107
 The Insolvency and Bankruptcy Code 2016, is one of the major economic reform
Code initiated by the government in the year 2015.
 There were multiple overlapping laws and adjudicating forums dealing with
financial failure and insolvency of companies and individuals in India.
 The existing laws also were not aligned with the market realities, had several
problem and were inadequate.
 To facilitate easy and timebound closure of business in India and to overcome the
above challenges a strong bankruptcy law was required.
 The Insolvency and Bankruptcy Code, 2015 was introduced in the Lok Sabha on 21st
Dec,2015 and referred to the joint committee on the Insolvency and Bankruptcy
Code,2016
 Insolvency: In lucid language, if any person or entity is unable to payoff the
debts, it owes to its creditors, on time or as and when they became due and
payable, then such person or entity is regarded as “Insolvent”.
 Bankruptcy: Bankruptcy is a legal proceeding involving a person or business
i.e. unable to repay outstanding debts. The bankruptcy process begin with the
petition filed by the debtors or by creditors. All the debtor’s assets are
measured and evaluated, and then these assets may be used to repay a
portion of outstanding debt.
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 Comprehensive law
 Withering away of multiplicity of laws
 Low time resolution
 One window clearance
 Clarity in process
 One chain of authority
 Protect the interest of workmen and employees
 Establishment of Information Utilities
 Governance prior to the Enactment of the IBC
 Sick Industrial Companies (Special Provisions) Act, 1985

 The Recovery of Debts due to Banks and Financial Institutions Act, 1993(“RDDBFI Act”)

 The SARFAESI Act, 2002

 The Companies Act, 2013

 The framework of law which was in existences earlier had failed to resolve
insolvency situations:
Codification of all the laws that existed in form of the various statutes related to
insolvency - under one umbrella
To fix time periods for execution of the law in a time bond manner
To promote entrepreneurship
To increase availability of credit
To maximise the value of assets of interested person
Financial Failure: A persistent mismatch between payments by the enterprise and
receivables into the enterprise, even though the business model is generating revenue
Business failure: which is a breakdown in the business model of the enterprise, and is
unable to generate sufficient revenues to meet payments
Problem of multiplicity of laws related to insolvency in India
 IBBI
3 Members 5 Members of
1 Member Central
1 Chairman (not below the rank nominated by RBI Government (3
of Joint Secretary) ex officio member shall be
Whole Time
Member)
 Commitment of Default

Application of Formation of Committee

Application with AA
Interim Resolution of Creditors
Professional
Confirmed by COC
Applicant

Preparation of
Information
Resolution Plan Memorandum by RP
approved by AA
Plan Approved by Resolution Plan
COC With 66% proposed by Resolution
majority Professional
Liquidation
 Financial Creditors:
The financial creditors are basically entities (lenders like banks) that have
provided funds to the corporate. Their relationship with the entity is a pure
financial contract, such as a loan or debt security.
 Three important types of financial credit
Money borrowed against payment of interest
Any amount raised through the issue of bonds, notes, debentures, loan
stock or any similar instrument.
The Supreme Court in a remarkable verdict clarified that in the case of
housing projects, the homebuyers should be treated as financial creditors.
The implication is that their obligation will be serviced out first when
developers make default.
 Operational Creditor:
An operational creditor is defined under Section 5(20) of the IBC to mean
"any person to whom an operational debt is owed and includes any person
to whom such debt has been legally assigned or transferred".
In order to ascertain whether a person would fall within the definition of an
operational creditor, the debt owed to such a person must fall within the
definition of an operational debt as defined under Section 5(21) of the IBC.
 An operational debt is defined under section 5(21) of the IBC to
mean:
"a claim in respect of the provisions of goods or services including
employment or a debt in respect of the repayment of dues arising under any
law for the time being in force and payable to the Central Government, any
State Government or any local authority".
 Operational debt would be confined only to four categories as specified in
Section 5(21) of the IBC like goods, services, employment and Government
dues.
 Committee of Creditors is formed by the Interim Resolution Professional once the
Corporate Insolvency Resolution Process is initiated against a Corporate Debtor.
 Committee of Creditors (CoC) is a committee consisting of Financial Creditors of the
Corporate Debtor. This body forms the decision-making body in the Corporate
Insolvency Resolution Process (CIRP).
 As per section 18 of the IBC, 2016, it is the duty of the Interim Resolution Professional
(IRP) to constitute the Committee based on all the claims received against the Corporate
Debtor and determination of the financial position of the corporate debtor. It shall consist
of those financial creditors whose claims have been received within the stipulated time.
Section 24(6) of the Code provides that each Creditor shall vote in accordance with the
voting share assigned to it based on financial debts owed to such creditor.
 As per the IBC, only the Financial Creditors can be a part of the CoC. Operational creditors cannot
be a part of the CoC. However, Operational Creditors whose claims amount to ten percent of the
Total debt can be allowed to attend the meeting, however, they shall have no voting rights.
 The voting power of the CoC is based on the amount of admitted claim in that respect.
 A financial creditor shall be deemed to be the member of CoC from the date his claim is admitted
by the IRP.
 Inclusion of a Financial Creditor in CoC as a member subsequent to constitution of the CoC, shall
not affect any decision taken by the CoC prior to its inclusion.
 Directors of the Company cannot be a member of the CoC, however, they can be present without
having any voting rights.
 The related party shall not be representing the committee of creditors.
 Priority of Distribution: Section 53 of the Code has established an ordered
of priority among creditors, which will determine the sequence in which
outstanding debts will be repaid. This is:-
-IRP and liquidation costs
-Workmen’s dues (for 24 months), and secured dues, if the security has been
relinquished;
-Employees dues (for 12 months);
-Unsecured financial creditors;
-Government dues, and unpaid dues to secured creditor, if the security has
been realized;
-Remaining debts and dues (which include, unsecured operational debts);
-Preference shareholders;
-Equity shareholders.
 According to the circular, lenders had to classify a loan account as stressed if
there was even a day of default. The bankers had to mandatorily refer all
accounts with over Rs 2,000 crore loans to the National Company Law
Tribunal (NCLT) or the bankruptcy court if they failed to resolve the problem
within 180 days of default. Lenders, said the circular, had to file an insolvency
application under the Insolvency and Bankruptcy Code 2016 within 15 days of
the completion of the 180-day deadline.
 Mainly power sector, telecom, steel, infrastructure, sugar, etc
 If a borrower defaulting to any lender, all lenders to the borrower would put
in place a resolution plan (RP) within 30 days of such default. During this
Period, the lenders would decide on a resolution strategy which could also
include restructuring and change in ownership as well.
 In case an Resolution plan is implemented, the lenders would sign Inter
Creditor Agreement (ICA) during the Review Period. An agreement signed
by lenders representing 75 per cent by value of outstanding or 60 percent of
lenders by number would be binding on all lenders. The RP shall provide for
payment not less than liquidation value (estimated realizable value of the
assets) due to the lenders. For most large borrowers, the resolution plan will
have to be implemented within 180 days from the end of the Review Period.
 A pre-packaged bankruptcy is a plan for financial reorganization that a
company prepares in cooperation with its creditors that will take effect once
the company enters the CIRP.
 The idea behind a pre-packaged bankruptcy plan is to shorten and simplify
the bankruptcy process in order to save the company money in legal and
accounting fees, as well as the amount of time spent in bankruptcy protection.
 A proactive company in distress will notify its creditors that it wishes to
negotiate terms of bankruptcy before it files for protection in court.
 These creditors - lenders, inventory suppliers, service providers, etc. naturally
do not like the distressed situation of the company, but may prefer to work
with it to minimize time and expenses associated with bankruptcy
reorganizations.
 Essar Steel – Essar Steel India Ltd. Is fully integrated flat carbon steel
manufacturer – from iron ore to ready-to-market products – with a current
capacity of 10 million tonnes per annum (MTPA).
 Essar Steel started suffering poses post 2010.
 Around that time Essar Steel had borrowed crores of rupees.
 By 2015, the company was saddled with financial creditor dues exceeding Rs.
54 thousand crores.
 Banks went to NCLAT
 SBI AND Standard Chartered Bank filed petition against Essar Steel in National
Company Law Appellate Tribunal, Ahmedabad bench.
 NCLAT admits Essar Steel for insolvency proceedings under IBC.
 Satish Kumar Gupta appointed as Resolution Professional (RP).
 ArcelorMittal’s Bid
 Lakshmi Niwas Mittal is an Indian born steel magnate, based in United Kingdom.
 He is the chairman and CEO of ArcelorMittal, the world’s largest steelmaking
company.
 ArcelorMittal offered to buy Essar Steel and pay back its debt.
 NCLT approves ArcelorMittal’s Rs. 42,000 crores bid for Essar Steel.

 NCLT’s decision on money’s distribution

 Public-sector lenders are Essar Steel’s primary financial creditors. Vendors and
suppliers are the operational creditors, the most prominent ones being Dakshin
Gujarat, Gujarat Energy, Bharat Petroleum, Indian Oil, GAIL, ONGC and NTPC.
 A consortium of banks led by the SBI had moved the Supreme Court against a
NCLAT order in the case.
 The NCLAT had held that Essar Steel’s operational creditors be treated on par with
financial creditors when settling the claims.
 Where does the issue lie?
 Essar Steel’s Committee of Creditors (CoC) had sought the quashing of NCLAT’s
July 4 order that approved the 42,000-crore bid for the debt-laden firm by
ArcelorMittal.
 This was to be divided between the financial creditors who are owed Rs 30,030
crore and the operational creditors who are owed Rs 11,969 crore.
 Supreme Court’s Verdict
 The supremacy of financial creditors have been restored.
 NCLT’s formula of equal distribution amongst the financial and operational
creditors which violates the commercially accepted norms of lending now stands
overruled with this ruling.
 Banks are set to recover almost 92 percent of their claims against Essar Steel,
amounting to about 42,000 crores the single biggest recovery under IBC for banks
so far.
 Legalserviceindia.com
 Vinodkothari.com
 Law Handbook By Munish Bhandari
 Lexology.com
 Indianeconomy.net