Analysis of India's

insolvency and bankruptcy

laws

Company Law Presentation

By Rumla Khan
LLB 3-year, 5 semester
A8156121007
 INSOLVENCY AND BANKRUPTCY

 Insolvency
 Insolvency is a state where the liabilities of an individual or an organization exceeds its asset, and
that entity is unable to raise enough cash to meet its obligations or debts as they become due for
payment. Insolvency is the inability of a person or companies to pay their bills as and when they
becomes due and payable.
 Bankruptcy
 Bankruptcy is when a person or company is legally declared incapable of paying their due and
payable bills.
 The Blacks Law Dictionary defines the work Bankrupt as the state or condition of a person who
is unable to pay its debt as they are or has become, due. The condition of one whose
circumstances are such that he is entitled to take the benefit of the federal bankruptcy laws.
 The term includes a person against whom an involuntary petition has been filed, or who has
filed a voluntary petition.
THE INSOLVENCY AND BANKRUPTCY
CODE, 2016
• Insolvency and Bankruptcy Code, 2016 is considered as one of
the biggest insolvency reforms in the economic history of
India.
• Introduced to consolidate and amend all the existing
insolvency laws relating to reorganization and insolvency
resolution of corporate persons, partnership firms, and
individuals in a time-bound manner.
• The primary objective of the IBC is to simplifies and expedite
the insolvency and bankruptcy proceedings in India.
 BACKGROUND
 The era before IBC had various scattered laws relating to insolvency and bankruptcy
which caused inadequate and ineffective results with undue delays. For example,
• Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act SARFAESI,
• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) for
debt recovery by banks and financial institutions.
• Companies Act for liquidation and winding up of the company.
Ineffective implementation, conflict in one of these laws and the time-consuming procedure
in the laws, made the Bankruptcy Law Reform Committee BLFC to the enactment of
Insolvency and Bankruptcy Code on May 28, 2016.
 PROVISIONS
 Applicability of code- Applies to whole of India including J&K and Ladakh.
 Persons covered:
• Company
• An individual
• A Partnership
 (Although the part related to an individual and partnership firm is not yet enforced.)
 Corporate Insolvency Resolution Process (CIRP)- The process functions to resolve issues in
relation to the defaulting companies within a reasonable period thereby maintaining the company.
 Who can initiate the CIRP
 The initiation of the CIRP is when the default amount is more than one crore
rupees (10,000,000), earlier it was just one lakh rupees (1,00,000).
 CIRP may be initiated by either:
1. Financial creditor (FC) under Section 7.
2. An operational creditor (OC) under Section 9.
3. A corporate applicant of a corporate debtor under Section 10 of the Code.
 Consequences of initiation of CIRP
 There are generally two consequences that can follow the initiation of CIRP,
namely:
1. Revival of the corporate debtor, or
2. Liquidation.
CORPORATE INSOLVENCY RESOLUTION
PROCESS (CIRP)
After admission of
Filling of application with
application IRP appointed,
Commitment of default adjudicating authorities by
declaration of Moratorium, Formation of COC
(INR 1 CRORE/ above) financial creditor, operational
public announcement for
creditor, corporate debtor
calling of claims

Submission of resolution Preparation of information

Invitations of plans Appointment of RP
plans memorandum

Plan considered rejected if

plan considered approved if
rejected by coc and even if
Evaluation of plans by coc approved by both coc and liquidation
accepted by coc and rejected
adjudicating authorities
by Adjudicating authorities
 WHO ARE THE MAIN STAKEHOLDERS IN
IBC
There are Four Main Stakeholders:

Interim Resolution Professionals (IRP)/ Resolution Professionals (RP)- One of the primary players who play a
major role in CIRP is the Interim Resolution Professional (IRP), who constitutes a Committee of Creditors (COC). The COC
appoints or regularises a Resolution Professional by conducting a meeting as per Section 24 of IBC after that the Resolution
Professional should prepare an Information Memorandum

Committee of Creditors (COC)- decision making body, appoints resolution professionals. The Committee of Creditors
may approve a resolution plan by VOTING a minimum of 75% of the voting share of the Financial creditors. The Resolution
Professional should submit a resolution to the National Company Law Tribunal. The resolution plan is approved by a COC,
followed by which the National Company Law Tribunal gives the order to approve the plan should be binding on corporate
debtors and their employee, members, creditors, guarantors, and other stakeholders involved in that plan.

Resolution Applicant (RA)- means a person who presents a resolution Plan to the Resolution
Professional; however, a resolution applicant should fulfil the condition of Section 29A of IBC.
Resolution Applicant submits a resolution plan with an affidavit that he is not disqualified
under Section 29A.
 ADJUDICATING
AUTHORITIES

1. National Company Law Tribunal (NCLT) – The

adjudicating authority (AA), has jurisdiction over
companies, other limited liability entities.
2. Debt Recovery Tribunal (DRT) has jurisdiction over
individuals and partnership firms other than Limited
Liability Partnerships.
 Time-bound process- The IBC provides for a (usually 180 days, extendable by 90 days) for the resolution of insolvent entities. During this process, an

Insolvency Professional takes control of the debtor's assets and manages them. CIRP to be completed within 330 days (including extension and time in

legal proceedings).

 Moratorium: under section 14, when an insolvency resolution process is initiated, a moratorium is imposed on legal actions against the debtor, giving it

some breathing space to work on a resolution plan.

 Fast-Track Insolvency-A speedy process for corporate insolvency resolution has been designed. It is termed as fast track corporate insolvency resolution

process for small corporates.

 Applicability of the provisions - The provisions are applicable to –

 (a) small company under section 2(85) of Companies Act

 (b) a start-up (other than partnership firm) as defined by Ministry of Commerce and Industry

 (c) an unlisted company with total assets not exceeding Rs. one crore

 Time period for completion of fast-track process

 The fast-track corporate insolvency resolution process shall be completed within a period of 90 days from the insolvency commencement date. It can be

extended by Adjudicating Authority by further 45 days, if resolution passed at a meeting of the committee of creditors and supported by a vote of

seventy-five per cent of the voting shares - section 56(3) of Insolvency Code, 2016. Further extension is not allowable.
 THE INSOLVENCY AND
BANKRUPTCY BOARD OF • It is an apex body for promoting
INDIA (IBBI) transparency & governance in the
administration of the IBC
• It is involved in setting up the
infrastructure and accrediting
• IPAs (Insolvency Professionals
Agencies),
• Insolvency Professionals (IPs) &
• IUs (Information Utilities).
 RECOVERY OF DEBT DUE TO BANK AND
FINANCIAL INSTITUTIONS ACT (“RDDBFI”)1993

 INTRODUCTION - Indian banks and financial institutions had since long been suffering
to recover debts and enforce securities from the defaulters. As the procedure regarding
such recovery was erratic and extremely cumbersome, the Narasimham Committee of
1991 recommended the setting up of Special Tribunals like DRTs (Debt Recovery
Tribunals) and DRATs (Debt Recovery Appellate Tribunals), in order to streamline such
processes. The Committee's recommendation led to the enactment of Recovery of Debts
Due to Banks and Financial Institutions Act ("RDDBFI") 1993, from which DRTs and
DRATs derive their authority to adjudge on debt recovery matters. Since its inception, we
have 39 DRTs and 5 DRATs functioning in the country.
 OBJECTIVE - The primary objective of the RDDBFI Act is to facilitate the expeditious
recovery of non-performing assets (NPAs) by banks and financial institutions without the
need for prolonged legal proceedings.
 THE SECURITIZATION AND RECONSTRUCTION
OF FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST ACT 2002
 SARFAESI Act 2002, is an Indian regulation which was enforced in the year 2002 SARFAESI was
created to allow banks and financial institution to auction properties if the borrower failed to repay
the loans.
 Objective: The primary objective of the SARFAESI Act is to provide a legal framework for banks
and financial institutions to expedite the recovery of non-performing assets (NPAs) and reduce the
burden of bad loans.
 Applicability: The SARFAESI Act applies to secured creditors, typically banks and financial
institutions, and covers various types of security interests, including mortgages and hypothecation
of assets.
 Notice to Borrower: the secured creditor must serve a notice to the borrower, allowing them an
opportunity for repayment within 60 days (or 30 days for agricultural assets).
 METHODS OF RECOVERY OF NPA

The Act provide three

alternative method of 3. Enforcement of
recovery of Non- 1. Securitization 2. Asset Reconstruction security without
Performing Assets intervention of court
namely:-
SECURITIZATION

 Securitization is the process of issue of

marketable securities back by a pool of
existing assets such as auto or home loans.
After an asset is converted into the
marketable security, it is sold. Securitization
company are Reconstruction company can
raise funds from any of the Qualified-
Institutional Banker (QIB) by forming
scheme for acquiring financial assets.
ASSETS RECONSTRUCTION

 It refers to conversion of non-performing assets into

performing assets.
 Reconstruction of assets empowers the asset
reconstruction companies in India
 It can be performed by means of
 managing the borrower's business by acquiring it
 by selling a partial or whole of the business or
 by rescheduling of payments of debt payable by the
provision of the Act
ENFORCEMENT OF SECURITY INTEREST
As per the Act, the financial
institution are entitled to issue notice
to the defaulting loans takers as well
as guarantors, asking them to clear
the sum in arrears within 60 days
from the date of issuing the notice
under Insolvency and Bankruptcy
Board of India
If defaulter fail to act in
accordance with the notice,
the bank may take recourse
to one or more of the
following action without the
intervention of the court
• take possession of the security
• sale or lease the right over the
security
  Winding of a Company is the process whereby the life of a
companies ended, and its property is administered for the
benefit of its members and creators.
WINDING  An administrator called a liquidator is appointed he/she takes
control of the company collect its assets, pay its debts, and
UP OF THE finally distributed any surplus among the member in accordance
with their rights.
COMPANY  Mode of Winding up of a Company
• Compulsory Winding up, Under the Companies Act. 2013
(Winding up by tribunal)
• Voluntary Winding up, Under the Insolvency and Bankruptcy
Code 2016
MODE OF WINDING
UP OF COMPANY
 COMPULSORY WINDING UP OF A
COMPANY
 The winding up of a company by an order of the Tribunal is called the compulsory winding up.
 The tribunal will make order :
 1. Suo motu ("on its own motion")
 2. On an application of the company or any person specified in section 272 like
 Petition For Winding Up [Section 272]
 1. The company.
 2. Any creditor
 3. Any contributory or contributories.
 4. All or any of the aforesaid parties, together or separately.
 5. The Registrar
 6. Any person authorized by the Central government
 7. By the Central or State Government
GROUNDS FOR COMPULSORY WINDING
UP

Failure to file financial

Special Resolution by
Just and equitable statements or Annual Failure to registrar
members
returns with the

When company acted

against the interest of Fraudulent conduct of
Unable to pay its debts
Sovereignty Integrity of affairs
India
 VOLUNTARY WINDING UP UNDER
(INSOLVENCY AND BANKRUPTCY CODE, 2016)

 The Process of Voluntary Winding up of solvent company is now shifted from the Companies
Act, 2013 to Insolvency and Bankruptcy Code, 2016 w.ef. 1st April 2017. A company which
intends to liquidate voluntarily and has not committed any default and can pay off its debts
fully from proceeds of liquidation of its assets may initiate voluntary liquidation proceedings
under the provisions of Chapter V of the Insolvency and Bankruptcy Code 2016.
 Voluntary winding up means winding up by the members or creditors of a company without
interference of the court.
 RESOLUTIONS FOR WINDING OF A COMPANY
 The resolution may be of two types.
 a. Ordinary resolution
 b. Special resolution
WHETHER A BANK
CAN CONTIN UE THE
PROC EED INGS
UND ER THE
SARFAESI ACT
ON CE THE
CORPORATE
INSOLVENCY
RESOLUTION
PROC ESS
( CIR P) IS INITIATED
AND MORATORIUM
IS ORDER ED?
INDIAN OVERSEAS BANK V. M/S R.C.M
INFRASTRUCTURE LTD. AND ANR.
 Loan account of the CD was classified as NPA. The Appellant issued a Demand Notice under Section 13(2)
of the SARFAESI Act and thereafter, took symbolic possession of two secured assets mortgaged exclusively
with it.
 One of the said properties stood in the name of CD and other in name of Corporate Guarantor. E-auction was
issued by Appellant recover the public money availed by the CD.
 In meantime, CD filed petition u/s 10 of the Code before NCLT.
 Thereafter, sale was confirmed in favor of the successful auction purchaser in the public auction and 25% of
the bid amount.
 Subsequently, NCLT admitted the petition u/s 10 of Code, as a result of the said order CIRP of CD
commenced and moratorium u/s 14 of the code was notified.
 Appellant filed its claim in Claim Form-C with the IP. According to the Appellant, since the balance 75% of
the bid amount was not yet received on the said date, it was not excluded from the claim filed before the IRP.
 JUDGEMENT OF NCLAT

 Once CIRP is commenced, moratorium kicks in as per Section 14(1)(c) of the Code, and there is a complete
prohibition for any action to foreclose, recover or enforce any security interest created by the Corporate
Debtor in respect of its property.
 The words "including any action under the SARFAESI Act" are significant. The legislative intent is clear that
after the CIRP is initiated, all actions including any action under the SARFAESI Act to foreclose, recover or
enforce any security interest are prohibited.
 As per Section 238 of the Code, the provisions of the Code would prevail notwithstanding anything
inconsistent therewith contained in any other law for the time being in force.
 The Appellant Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was
initiated, and the moratorium was ordered.
 The Bank cannot continue the proceedings under the SARFAESI Act once the CIRP was initiated, and the
moratorium was ordered.