Insolvency and Bankruptcy

Code,2016

Dr. Pratima Narayan

Visiting Faculty – Law
We School
 Meanings
• Insolvency – a state in which financial
difficulties of a company or business is such
that it is unable to run the current business at
its pace – drop in sales, delay in payments,
reliance on credit
• Bankruptcy – Person is legally declared as
incapable of paying dues and obligations
Preamble
- To consolidate all laws pertaining to insolvency and debt recovery that had
been scattered into a number of legislations, into a single legislation, under a
unified Code
- Encompasses companies, partnership firms, individuals
- Consistent and coherent provisions for the stakeholders who have been
affected by business failure or inability to pay debt
- To attain swift and effective bankruptcy resolution

Section 238 – non-obstante clause (overriding effect)

 Application
• Company incorporated under Companies Act,
2013
• Any other company governed by a special Act,
except in so far as they are inconsistent with
the provisions of Special Acts
• LLP
• Such other body incorporated under any law
• Partnerships and individuals
 “Creditor”
• Person to whom debt is owed
• Includes
- Financial creditor - person to whom a financial debt is owned,
includes person to whom such debt is legally assigned or
transferred to
- Operational creditor - suppliers of good or services to any
company ,includes person to whom such debt is legally
assigned or transferred to
- Secured creditor
- Unsecured creditor
- Decree holder
 Persons not entitled to initiate corporate insolvency resolution
process

(a) a corporate debtor undergoing a corporate insolvency resolution process;

or
(b) a corporate debtor having completed corporate insolvency resolution
process twelve months preceding the date of making of the application;
(c) a corporate debtor or a financial creditor who has violated any of the terms
of resolution plan which was approved twelve months before the date of
making of an application under this Chapter; or
(d) a corporate debtor in respect of whom a liquidation order has been made.

Explanation: corporate debtor can initiate corporate insolvency resolution process against another corporate debtor
 Col. Vinod Awasthy v. AMR Infrastructure Ltd. (C.P. No. (IB)10(PB)/2017)

•  Whether a flat purchaser would fall within

the definition of an 'Operational Creditor’ ?
• held that the Petitioner had neither supplied
goods nor had rendered any services to
acquire the status of an 'Operational Creditor’.
• Hence not an operational creditor
 “Default”
• Section 3(13) - default is non-payment of debt
when whole or any part or installment of the
amount of debt has become due and payable
and not repaid by the debtor.
 Insolvency Resolution Process

• Corporate Debtors – CIRP – minimum default

– 1 cr and PIRP – minimum default – 10 L
 Corporate Debts – Two Stages
• Insolvency Resolution Process - financial
creditors assess whether the debtor's business
is viable to continue and options for its rescue
and revival; and
• Liquidation - if the insolvency resolution
process fails or financial creditors decide to
wind down and distribute the assets of the
debtor.
 Insolvency Resolution Process
• Financial Creditor or Operational Creditor may initiate IRP against corporate debtor at NCLT
• Defaulting corporate debtor, its shareholders or employees, may also initiate voluntary insolvency
Commencem proceedings
ent

• NCLT orders a moratorium on the debtor's operations for the period of the IRP
• Operates as a ‘Calm period' during which no judicial proceedings for recovery, enforcement of security
Moratorium interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor

• Appoints an insolvency professional or 'Resolution Professional' to administer the IRP

• UK insolvency laws - Resolution Professional to take over the management of the corporate
Appointment borrower – US bankruptcy code - management retains control while the bankruptcy
of Resolution professional only oversees the business 
Professional

• Resolution Professional identifies the financial creditors and constitutes a creditors committee. 
Creditor’s • Considers proposals for the revival of the debtor and must decide whether to proceed with a revival
Committee plan or liquidation within a period of 180 days, extendable by a one-time extension of up to 90 days 
and Revival
Plan
 Liquidation
(i) A 75% majority of the creditor's committee resolves to
liquidate the corporate debtor at any time during the
insolvency resolution process;
(ii) The creditor's committee does not approve a resolution
plan within 180 days (or within the extended 90 days);
(iii) The NCLT rejects the resolution plan submitted to it on
technical grounds; or
(iv) The debtor contravenes the agreed resolution plan and
an affected person makes an application to the NCLT to
liquidate the corporate debtor.
 Priority of Claims
Companies Act, 1956 IBC 2016
 Insolvency for Individuals/Partnership

• Two processes - automatic fresh start and

insolvency resolution
• Automatic fresh start process - eligible
debtors (basis gross income) can apply to the
Debt Recovery Tribunal (DRT) for discharge
from certain debts not exceeding a specified
threshold, allowing them to start afresh.
 Insolvency Resolution Process -
consists of preparation of a repayment
plan by the debtor, for approval of
creditors. If approved, the DRT passes
an order binding the debtor and
creditors to the repayment plan. If the
plan is rejected or fails, the debtor or
creditors may apply for a bankruptcy
order.
 Institutional Infrastructure
• Insolvency Regulator
- Insolvency and Bankruptcy Board of India
(Board)
- Role includes: (i) overseeing the functioning of
insolvency intermediaries i.e., insolvency
professionals, insolvency professional agencies
and information utilities; and (ii) regulating
the insolvency process.
 Institutional Infrastructure
• Insolvency Resolution Professionals
- Intermediaries who play a key role in the
efficient working of the bankruptcy process
- private professionals having minimum
standards of professional and ethical conduct
- In liquidation, the insolvency professional acts
as a liquidator and bankruptcy trustee.
 Institutional Infrastructure
• Information Utilities
- Collect, collate, authenticate and disseminate
financial information of debtors in centralised
electronic databases
- Such information would be available to
creditors, resolution professionals, liquidators
and other stakeholders in insolvency and
bankruptcy proceedings.
 Institutional Infrastructure

• Corporate Insolvency and Liquidation – NCLT –

NCLAT – Supreme Court
• Individuals and other persons - Debt Recovery
Tribunal (DRT) - Debt Recovery Appellate
Tribunal - Supreme Court.