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The insolvency resolution process in India has in the past involved the simultaneous operation of several statutory instruments. These include the Sick Industrial Companies Act, 1985, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, and the Companies Act, 2013.1 Broadly, these statutes provided for a disparate process of debt restructuring, and asset seizure and realization in order to facilitate the satisfaction of outstanding debts.2 As is evident, a plethora of legislation dealing with insolvency and liquidation led to immense confusion in the legal system, and there was a grave necessity to overhaul the insolvency regime. All of these multiple legal avenues, and a hamstrung court system led to India witnessing a huge piling up of non-performing assets, and creditors waiting for years at end to recover their money. The Bankruptcy Code is an effort at a comprehensive reform of the fragmented regime of corporate insolvency framework, in order to allow credit to flow more freely in India and instilling faith in investors for speedy disposal of their claims. The Code consolidates existing laws relating to insolvency of corporate entities and individuals into a single legislation. The Code has unified the law relating to enforcement of statutory rights of creditors and streamlined the manner in which a debtor company can be revived to sustain its debt without extinguishing the rights of creditors.

♦ Applicability

The Code provides creditors with a mechanism to initiate an insolvency resolution process in the event a debtor is unable to pay its debts. The Code makes a distinction between Operational Creditors and Financial Creditors. A Financial Creditor is onewhose relationship with the debtor is a pure financial contract, where an amount has been provided to the debtor against the consideration of time value of money (“Financial Creditor”). Recent reforms have sought to address the concerns of homebuyers by treating them as ‘financial creditors’ for the purposes of the Code. By a recently promulgated ordinance, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“the Ordinance”), the amount raised from allottees under a real estate project (a buyer of an under-construction residential or commercial property) is to be treated as a ‘financial debt’ as such amount has the commercial effect of a borrowing.3 The Ordinance does not clarify whether allottees are secured or unsecured financial creditors. Such classification will be subject to the agreement entered into between the homebuyers and the corporate debtor. In the absence of allottees having a clear status, there may be uncertainty about their priority when receiving dues from the insolvency proceedings. An Operational Creditor is a creditor who has provided goods or services to the debtor, including employees, central or state governments (“Operational Creditor”).

A debtor company may also, by itself, take recourse to the Code if it wants to avail of the mechanism of revival or liquidation. In the event of inability to pay creditors, a company may choose to go for voluntary insolvency resolution process – a measure by which the company can itself approach the NCLT for the purpose of revival or liquidation.


The Code was enacted in 2016 following decades of recommendations suggesting improvements to the previous insolvency regime, which was fragmented, fraught with delays and resulted in poor recoveries for creditors. The scheme of the Code marked a sea change from the previous regime. In respect of corporate entities, the Code introduced a creditor-in-control regime (with a focus on empowering financial creditors), a time-bound resolution process and reduced scope for judicial intervention, and established institutions such as the Insolvency and Bankruptcy Board of India, insolvency professionals and information utilities.

Since the implementation of this new regime, the constitutional validity of various provisions of the Code has been challenged before various High Courts, and the Supreme Court.

One ground on which the validity of the Code was challenged was that the process for initiation of the corporate insolvency resolution process was not consistent with the principles of natural justice. In Sree Metaliks Ltd. v. Union of India, the constitutionality of section 7 was challenged on the ground that the provision does not provide the corporate debtor an opportunity to be heard before an application to initiate an insolvency resolution process against it is admitted. The petitioner argued that since the provisions of the Code are silent on the right of the corporate debtor to be heard, the right to hearing should be read into the provision. The Court relied on section 424 of the Companies Act, 2013, to hold that even though the Code is silent on the right of hearing of the corporate debtor, “where a statute is silent on the right of hearing and it does not in express terms, oust the principles of natural justice, the same can and should be read into in.” Accordingly, the Court held that the Adjudicating Authority is obliged to give reasonable opportunity to be heard to the corporate debtor.

The Calcutta High Court also delved into the question of constitutionality of certain provisions of the Code. In Akshay Jhunjhunwala and Anr. v. Union of India, the validity of sections 7, 8 and 9 was challenged. It was argued that the differentiation made between the operational and financial creditors by these provisions does not have a rational or intelligible basis and is therefore, liable to be struck down. The Calcutta High Court relied on the Report of the Bankruptcy Law Reforms Committee, wherein the Committee had opined that “members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. Typically, operational creditors are neither able to decide on mattersre garding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity… for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors.” Given this, the Court held that “the Bankruptcy Committee gives a rationale to the financial creditors being treated in a particular way vis-à-vis an operational creditor in an insolvency proceeding with regard to a company. The rationale is a plausible view taken for an expeditious resolution of an insolvency issue of a company. Courts are not required to adjudge a legislation on the basis of possible misuse or the crudities or in equalities that may be perceived to be embedded in a legislation.

The rationale of giving a particular treatment to a financial creditor in the process of insolvency of a company under the Code of 2016 cannot be said to offend any provisions of the Constitution of India.”

In Shivam Water Treaters Pvt. Limited v. Union of India, the Supreme Court requested the Gujarat High Court to refrain from entering the debate relating to the “validity of the Insolvency and Bankruptcy Code, 2016 or the constitutional validity of the National Company Law Tribunal.” However, it did not bar the petitioners from challenging the same before the Supreme Court under Article 32.

Thereafter, the constitutional validity of various provisions of the Code was challenged before the Supreme Court. In its judgment in Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court held that the judiciary should exercise restraint while examining the constitutional validity of economic legislation since “in complex economic matters every decision is necessarily empiric and it is based on experimentation or what one may call trial and error method and therefore, its validity cannot be tested on any rigid prior considerations or on the application of any straitjacket formula.” In this background, the Court upheld the constitutional validity of all the provisions challenged before it.

A large number of the challenges before the Court were against the provisions that treated financial creditor sand operational creditors distinctly. First, the Court observed the distinction between financial debt and operational debt in the following terms “a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an‘operational debt’ would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority.” It further relied on the Final Report of the Bankruptcy Law Reform Committee, the Notes on Clause 8 of the Insolvency and Bankruptcy Bill, 2015 and the Report of the Insolvency Law Committee, to broadly lay down the distinctions between financial and operational creditors as “most financial creditors, particularly banks and financial institutions,are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like.” The Court also distinguished between the nature of agreements entered into with financial creditors and operational creditors, where the former generally lends for working capital or on a term loan and involves a larger quantum of money as compared to the latter where the agreement mostly relates to the supply of goods and services. Therefore, the Court held that the distinction between the two is based on intelligible differentia with a rational nexus to the objectives that the Code seeks to achieve. Secondly, the Court highlighted that the most significant difference between financial and operational creditors is that “financial creditors are, from the very beginning, involved with assessing the viability ofthe corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor‘s business when there is financial stress, which are things operational creditors do not and cannot do.”

This was relied on, along with the legislative and case law developments that guarantee fair and equitable treatment to operational creditors, to hold that the provisions giving only financial creditors the right to vote as part of the committee of creditors are valid.

Thirdly, the Court also analysed if the difference in the process fort riggering the corporate insolvency resolution process by operational creditors and financial creditors was arbitrary. The Court held that since financial creditors have to prove that there is “default” on the basis of solid documentation, or information in an information utility that is easily verifiable, it was justifiable that they were not required to provide a demand notice to the corporate debtor. This is contrary to the requirement imposed onan operational creditor to provide a demand notice to the corporate debtor, who only “claims a right to payment ofa liability or obligation in respect of a debt which may be due”. Finally, the validity of section 53 of the Code was challenged on the grounds that it was discriminatory towards operational creditors. The Court held that given the relative importance of the two types of debts, particularly the importance of repayment of financial debts for promoting capital availability in the economy, a legitimate interest was being protected by section 53 of the Code.

Various challenges were also raised against the validity of section 29A. The validity of this section was challenged on the grounds that first, it had retrospective application. The Court held that since a resolution applicant does not have a vested right in being considered as such in the resolution process, the section cannot be held to be retrospective. Secondly, it was argued that section 29A(c) holds unequals as equals by treating promoters who did not act with malfeasance on par with those who had. The Court held that section 29A was intended to apply to persons other than criminals or those who had been malfeasant, and this was justified by the legislative purpose of the section. Thirdly, it was argued that placing a bar on persons disqualified under section 29A from purchasing any assets of the corporate debtor in liquidation as well would be contrary to the purpose of maximizing the value of the assets of the corporate debtor. This contention was rejected on the ground that the legislative purpose would continue to apply even in liquidation. Fourthly, it was argued that the period of one year prescribed in section 29A for the disqualification to apply was arbitrary and without basis.

The Court held that it was legislative policy that a person who is unable to service its own debt beyond the grace period of one year, is unfit to be eligible to become a resolution applicant, and “this policy cannot be found fault with. Neither can the period of one year be found fault with, as this is a policy matter decided by the RBI and which emerges from its Master Circular, as during this period, an NPA is classified as a substandard asset.” Fifthly, it was argued that the disqualification of relatives of persons who are disqualified in section 29A was arbitrary. The Court held that “The expression “related party”, therefore, and “relative” contained in the definition Sections must be read no scitur a sociis with the categories of persons mentioned in Explanation I, and so read, would include only persons who are connected with the business activity of the resolution applicant.” Finally, it was argued that the exemption of MSMEs from section 29A was arbitrary. The Court held that it was not arbitrary since “the rationale for excluding such industries from the eligibility criteria laid down in Section 29A(c) and 29A(h) is because qua such industries, other resolution applicants may not be forthcoming, which then will inevitably lead not to resolution, but to liquidation.”

The Court also examined the validity of section 12A that was challenged as being violative of Article 14, largely since the withdrawal of a petition under section 12A requires the approval of ninety per cent of the Committee of Creditors. The Court emphasized that an insolvency proceeding is a proceeding in rem and not a lis between parties.

Consequently, and as also explained in the report of the Insolvency Law Committee “all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditor sought, ideally, to be entered into.

This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement.” Further, if the committee of creditors arbitrarily rejects an application for withdrawal, their decision can be set aside by the Adjudicating Authority or the Appellate Authority. Given this, the court also upheld the validity of this provision.

Provisions of the Code were also challenged on the grounds that the information stored in private information utilities should not be the conclusive evidence of default, and that these utilities are not governed by proper norms. The Court took note of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations,2017 and held that “the aforesaid Regulations also make it clear that apart from the stringent requirements as to registration of such utility, the moment information of default is received, such information has to be communicated to all parties and sureties to the debt. Apart from this, the utility is to expeditiously undertake the process of authentication and verification of information, which will include authentication and verification from the debtor who has defaulted.This being the case, coupled with the fact that such evidence, as has been conceded by the learned Attorney General, isonly prima facie evidence of default, which is rebuttable by the corporate debtor, makes it clear that the challenge based
on this ground must also fail.”

It was also argued that by giving adjudicatory powers to a non-judicial authority, that is, the resolution professional, the Code violates the basic aspects of dispensation of justice and access to justice. This contentionwas also rejected by the Court on the grounds that “the resolution professional is really a facilitator of the resolutionprocess, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority.”

The Court also dealt with challenges to the appointment of members of the National Company Law Tribunal

(“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) which are the Adjudicating Authority and Appellate Authority for corporate debtors, respectively, under the Code, the location and number benches of the NCLAT and the Ministry which would exercise administrative control over the NCLT and NCLAT. Whilethe Supreme Court passed directions regarding the administrative control over the NCLT and the establishment of circuit benches of the NCLAT, it upheld the validity of the NCLT and NCLAT.


The Code was enacted with a view to consolidate the fragmented laws pertaining to insolvency. The purpose of consolidating various insolvency laws is to reduce the uncertainty that arises from the application of multiple laws administered by different authorities, and the consequent delay and reduction in value.

To enable this consolidation, the Code repeals and modifies provisions of various laws that are directly in conflict with it. However, the scheme of various laws enacted by Parliament as well as by State Legislatures may still be found to be inconsistent with other laws. Given this, it is relevant to explore the manner in which such inconsistency will be dealt with.


An inconsistency between different legislations is dealt with in different ways based on the type of legislation in question.An inconsistency between a State Law and a Central Law is dealt with pursuant to the principles in Article 254 of the Constitution which provides that:

“(1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law,shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void.

(2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent Listcontains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that State:

Provided that nothing in this clause shall prevent Parliament from enacting at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the Legislature of the State.”

Given that, Entry 9 of List III of the Seventh Schedule to the Constitution of India provides that both the Parliament and State Legislatures have legislative competence over “bankruptcy and insolvency”, a possibility of inconsistency between such legislations arises.

Where an issue of repugnancy between the Maharashtra Relief Undertakings (Special Provisions) Act, 1958,which is a state law, and the Code arose, the Supreme Court in its judgement of Innoventive Industries v. ICICI Bank laid down key principles to evaluate repugnancy of a state law with a union law.

Specifically, the Court laid down that first, the doctrine of pith and substance should be applied to determine if a Parliamentary law and State law both refer to the Concurrent List. Only if both fall within this list, the principles of repugnancy under Article 254 will be applicable. Secondly, every effort should be made to reconcile the competing statutes to avoid repugnancy. Thirdly, repugnancy must exist in fact and not depend upon a mere possibility. Fourthly, repugnancy must be clear and typically of a nature to bring both statutes in direct conflict with each other, such that it wouldbe impossible to obey one without disobeying the other. Fifthly, if Parliamentary law is intended to be acomplete, exhaustive or exclusive code on a matter, State law may be inoperative even if there is no direct conflict. This may be the case where application of the State law hinders or obstructs the scheme of the Parliamentary law. Sixthly, a conflict may also arise where both Parliamentary and State law seek to exercise powers over the same subject matter even if there is no direct conflict. Here the doctrine of implied repeal would be applied such that “if the subject matter of the State legislation or part thereof is identical with that of the Parliamentary legislation, so that they cannot both stand together, then the State legislation will be said to be repugnant to the Parliamentary legislation. However, if the State legislation or part thereof deals not with the matters which formed the subject matter of Parliamentary legislation but with other and distinct matters though of a cognate and allied nature, there is no repugnancy.”

Applying these principles to the facts of the case at hand, the Court held that the Maharashtra Relief

Undertakings (Special Provisions) Act, 1958 was repugnant to the Code since a consolidating and amending act like the Code “forms a code complete in itself and is exhaustive of the matters dealt with therein” and “In the present case it is clear, therefore, that unless the Maharashtra Act is out of the way, the Parliamentary enactment will be hindered and obstructed in such a manner that it will not be possible to go ahead with the insolvency resolution process outlined in the Code.” Further the Court also referenced section 238 of the Code and held that “It is clear that the later non-obstante clause of the Parliamentary enactment will also prevail over the limited non- obstante clause contained in Section 4 of the Maharashtra Act.”

The principles of this case would be instructive for other cases where there is inconsistency between a state legislation and the Code as well.


The question of inconsistencies of other legislation with the Code is to be evaluated on a case-by-case basis, keeping in mind the provisions of the legislations. Given that the Code is a special law that is intended to be a complete code dealing with insolvency and bankruptcy, and has an overriding provision, it is likely that the provisions of the Code will prevail over previously enacted inconsistent State law.


I. Initiation by Financial Creditor

A Financial Creditor may by itself or jointly with other financial creditors or any other person on behalf of the financial creditor, as may be notified by the Central Government, seek to initiate Insolvency Resolution Process by filing an application before the NCLT, once a default has occurred.Interestingly, under the Code, the adjudication process in respect of a Financial Creditor does not require a notice to be served on the debtor. However, the Supreme Court has in its judgement of Innoventive Industries v IDBI Bank made it mandatory for a notice to be served on the debtor, as well as to provide the debtor with the right to be heard.The Code provides that within fourteen days of an application having been filed, NCLT shall ascertain the existence of the debt and default and either admit or reject the application, after which consequences under the Code would follow. Where the application itself is incomplete or suffers from other defects, the application may be rejected.

The Bankruptcy Code does not mention the degree of proof required for the NCLT to ‘ascertain’ default in respect of a debt owed by a debtor. Neither does the Bankruptcy Code provide an indication of the nature of satisfaction that is required by the NCLT with respect to existence of a default. However, the Supreme Court in Innoventive Industries v IDBI Bank has stated that the NCLT has to only ascertain the existence of anoutstanding debt in respect of which there has been a default and not deliberate into its extent or composition. From the experience so far, it can be noted that the NCLT would generally admit an application if it is compliant with the provisions of the Bankruptcy Code, despite having the discretion to entertain other considerations.

II. Initiation by an Operational Creditor

The Bankruptcy Code envisages a two-step process for the initiation of insolvency proceedings by an Operational Creditor. An Operational Creditor would upon the occurrence of a default have to demand payment of the unpaid debt (“Demand”). The Corporate Debtor may within 10 days of receipt of the Demand either Dispute the debt (as described below) or pay the unpaid debt. In the event the corporate debtor does not reply or repay the debt, an application could be filed by the Operational Creditor before the NCLT to initiate Insolvency Resolution Process. However, the existence of a dispute can act as a barrier to such application.
The term “dispute” includes a suit or arbitration proceedings relating to:

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty.

The extent as to which situation would qualify as a dispute has been discussed in detail below.

The Supreme Court in the case of K. Kishan v. Vijay Nirman Company Pvt. Ltd., clarified that operational creditors cannot use IBC either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. It held that filing a Section 34 petition under Arbitration and Conciliation Act, 1996 (“Arbitration Act”) against an arbitral award shows a pre-existing dispute that concludes its first stage in the form of an award, and continues thereafter, till final adjudicatory process under Sections 34 and 37 of the Arbitration Act has taken place. Therefore, IBC proceedings cannot be initiated till all available statutory appeal mechanisms have been exhausted by the parties.

III. Initiation by a Corporate Applicant

In case of default by the corporate debtor, the corporate applicant may file an application for initiation of insolvency proceedings. The applicant must furnish information relating to the books of account and the RP to be appointed. Additionally, a special resolution must be passed by the shareholders of the corporate debtor or a resolution by at least three-fourth of the total number of partners must be passed approving the filing of the insolvency resolution application.

IV. Scope of “dispute” under the Bankruptcy Code

After many conflicting decisions, the Supreme Court in Mobilox v Kirusafinally settled the issue regarding the interpretation of the term ‘dispute in existence’ under the Code. This provided much-needed relief and clarity to corporate debtors who may have a genuine dispute regarding the debt under consideration, but may not have yet initiated legal proceedings.

The Court acknowledged the fact that situations may exist where a debtor company may have a dispute qua an operational creditor, which it may have chosen not to escalate to a court/arbitral tribunal. The essential elements of a dispute have been crystallized as below:

The term “dispute” must be interpreted in a wide an inclusive manner to mean any proceeding which had been initiated by the debtor before any competent court of law or authority;

The dispute should be in respect of

(a) existence of the amount of debt; or

(b) quality of goods and services; or

(c) breach of representation and warranty;

The dispute should be raised prior to the issuance of a demand notice by the Operational Creditor;

The debtor would have to particularize and prove the dispute in respect of the existence of the “debt” and the “default”

The dispute cannot be a mala fide, moonshine defense raised to defeat the insolvency proceedings.

Therefore, the NCLT would have to prima facie verify the existence of the pending dispute and not judge the adequacy of the same. A recent amendment in law has incorporated this position of the Supreme Court. The Ordinance lays down that the corporate debtor shall bring to the notice of the operational creditor, existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings, i.e. the word “and” has been replaced by “or”.The amendment liberalizes the interpretation of the word “dispute”. Hence, the existence of dispute need not be in the form of pendency of suit or arbitration proceedings only.

V. Insolvency Resolution Process

Upon admission of the application preferred by a Financial Creditor/Operational Creditor, a moratorium is declared on the continuation and initiation of all legal proceedings against the debtor and an interim resolution professional (“IRP”) is appointed by the NCLT within fourteen days from the insolvency commencement date. The moratorium continues to be in operation till the completion of the Insolvency Resolution Process which is required to be completed within 180 days of the application being admitted (extendable by a maximum period of 90 days in case of delay).

During the continuation of the moratorium the debtor is not permitted to alienate, encumber or sell any asset with the approval of the Committee of Creditors (“COC”). Once an IRP is appointed, the board of directors is suspended and management vests with the IRP. IRP’s are required to conduct the insolvency resolution process, take over the assets and management of a company, assist creditors in collecting information and manage the Insolvency Resolution Process. The term of the IRP is to continue until an RP is appointed under Section 22.

The first step for the IRP is to determine the actual financial position of the debtor by collecting information on assets, finances and operations. Information that may be obtained at this stage include data relating to operations, payments, list of assets and liabilities. The IRP would also have to receive and collate claims submitted by creditors.

In order to have a more workable valuation of stressed assets and bring in transparency in the bidding process, IBBI recently amended its regulations with respect to the Corporate Insolvency Resolution Process. So far, the regulations only required determination of the liquidation value of the insolvent company. This was financially detrimental for the insolvent company, since wide dissemination of liquidation value caused resolution applicants to submit bids which tended to linger near the liquidation value mark which was significantly lower than the market value. As per the amended regulations, a fair value, along with the liquidation value, has to be determined. The amended regulations defines ‘fair value’ to mean the realisable value of assets of the insolvent company, if they were to be sold between a willing buyer and seller as on the date on which insolvency application has been admitted, on an arm’s length basis, after proper marketing. Earlier, the creditors only had the minimalistic liquidation value serving as the benchmark for valuation of an insolvent company before commencing the resolution process. The amended regulations seek to ensure a maximisation of the value of the assets so that the insolvent company fetches an economically sustainable amount for its creditors.

The amended regulations also require the RP to provide an evaluation matrix to prospective applicants before they submit their resolution plans.

The evaluation matrix refers to a set of parameters and the manner in which these parameters are to be applied while considering a resolution plan. While the amended regulations do not indicate what these parameters could be, they have to be approved by the committee of creditors and may be amended and communicated within the prescribed timelines. The committee of creditors evaluates various resolution plans submitted for an insolvent company and, based on their evaluation, determine the appropriate resolution plan. This should ensure that the bid evaluation process is more transparent and provides a layer of procedural fairness to any challenge to the process by unsuccessful bidders. Additionally, there has been an important amendment to the Code, allowing withdrawal of applications admitted for insolvency resolution subject to an approval of 90% of the voting share of the CoC. This comes as a relief after the judgment of the Supreme Court in the case of Lokhandwala Kataria Construction Pvt Ltd. V. Nisus Finance and Investment Managers LLP, wherein it was observed that the power to allow withdrawal after admission of an application seeking initiation of insolvency was not permitted under the Code.

VI. Committee of Creditors

The RP appointed by the NCLT would constitute a committee of creditors comprising of all the Financial Creditors of the corporate debtor (“Committee of Creditors”). This would incentivize a creditor to favour a collective approach towards insolvency resolution rather than proceeding individually.

A decision of the Committee of Creditors would require to be approved by a minimum of 51% of voting share of the Financial Creditors. For certain key decisions of the Committee of Creditors, including:

(i) appointment of the resolution professional,

(ii) approval of the resolution plan, and

(iii) increasing the time limit for the insolvency resolution process, the voting threshold is fixed at 66%.
In contrast to the state of affairs under SICA where the consent of every institutional creditor was required to give effect to a scheme, the Code embraces a more practical approach by reducing the threshold.

To ensure that there are no conflicts of interest, a related party of the Corporate Debtor to whom a financial debt is owed is not given any representation, participation or voting rights in the Committee of Creditors. The Code at this stage of the Insolvency Resolution Process, provides preferential treatment to Financial Creditors since Operational Creditors do not have the right to be a part of the Committee of Creditors. In case Financial Debts as well as Operational Debts are owed to a person, such person would constitute a Financial Creditor to the extent of the Financial Debt owed. Similarly, if the right to recover an Operational Debt is transferred or assigned to a Financial Creditor, such transferee or assignee would be an Operational Creditor to the extent of such debt.In case of consortium based lending, every Financial Creditor is eligible to be a part Committee of Creditors. The voting is such a situation would be based share of the financial debts owed to such Financial Creditors. Similarly, in case a trustee has been appointed under a consortium/syndicated lending agreement- the lenders may elect to be represented by a trustee or may represent themselves. The Committee of Creditors may also replace the Resolution Professional at any point of time.During the pendency of the CIRP, the RP would have to seek prior approval of the Committee of Creditors by convening a meeting prior to taking actions such as raising any interim finance, creation of any security interest, debiting any amounts, amendment of rights creditors etc.

VII. Information Memorandum

The RP is also mandated to prepare an information memorandum that would assist in the formulation of a resolution plan. The Board will determine the information to be specified in the resolution plan.

VIII. Resolution Plan

A primary objective of the enactment of the Code is to aid a debtor in resolving an insolvency situation without approaching liquidation, by finalizing an insolvency resolution plan (“Resolution Plan”). In an ideal scenario, a properly structured Resolution Plan would provide a strategy for repayment of the debts of the debtor after an evaluation of the debtor’s worth, while allowing for the survival of the debtor as a going concern.

Specifically, the Resolution Plan must provide for repayment of the debt of operational creditors in a manner such that it shall not be lesser than the amounts that would be due should the debtor be liquidated. Additionally, it should identify the manner of repayment of insolvency resolution costs, the implementation and supervision of the strategy, and should be in compliance with the law. If the terms (including the terms of repayment) under the Resolution Plan are approved by the committee of creditors,and subsequently by the NCLT, the Resolution Plan would be implemented, and the debtor may emerge from the debt crisis with a fresh chance for business and lessened liabilities.

Initially, under the Code, the Resolution Plan could be presented before the committee of creditors by any person, without any restrictions or stipulations on eligibility (“Resolution Applicant”), based on the information available in the information memorandum. However, an amendment to the Code in December 2017 (vide the Insolvency and Bankruptcy Code (Amendment) Act, 2017), put in place certain eligibility criteria to be satisfied for a person to qualify as a Resolution Applicant. Specifically, the amendment introduced Section 29A of the Code, whereby certain categories of persons were ineligible to submit a Resolution Plan. While these included objective categories such as undischarged insolvents, wilful defaulters, persons convicted of offences, etc., it also extended to persons who controlled an account classified as non-performing assets, persons who were promoters of a corporate debtor in which a preferential or fraudulent transaction has taken place, persons who have executed an enforceable guarantee in favour of a creditor of the debtor, etc. The width and subjectivity in the criteria led to widespread debates on who could be an eligible Resolution Applicant, subsequently landing several debtors and bidders in litigation to determine the bidders’ eligibility and delaying the insolvency resolution. In the process, the ultimate objective of speedy resolution / restructuring of insolvent companies to ensure maximization of returns for creditors and survival of the business of the debtors was obstructed.Considering the possible adverse impact of the eligibility criteria, the legislature introduced an Amendment in 2018, further amending Section 29A in an attempt to bring about clarity in the confusion. For instance, the erstwhile Section 29A made ineligible those persons who were ‘connected persons’ to applicants who failed to satisfy the eligibility criteria prescribed therein, consequently including banks and financial institutions within its ambit.

The Amendment has tried to provide a wide and all-encompassing definition of financial institutions who are provided crucial exemptions for compliance with these eligibility norms.

In a similar fashion, exemptions have been provided to companies who acquire stressed assets under the Bankruptcy Code, to further participate in future bidding processes without being struck down by the restrictions for holding non-performing assets. Also, financial institutions have been exempted from being treated as a related party on account of holding equity in the corporate debtor undergoing insolvency if the equity has been obtained through conversion of a debt instrument. Guarantors would only be ineligible where the guarantee furnished by them is invoked and remains unpaid; holders of non-performing assets may submit Resolution Plans after making all payments in relation to such NPA prior to such submission. A detailed analysis of the amendments introduced to Section 29A can be found in Annexure A.

Once a person meets all the eligibility criteria and submits a Resolution Plan, in the event the same is not approved by the committee of creditors or by the NCLT, the NCLT may direct the debtor to be liquidated. A debtor may even be directed to liquidation if the Resolution Plan is implemented irregularly, upon receipt of a compliant from a person affected by such irregular implementation.
However, we had a situation, where resolution applicants were not abiding by the terms of implementation of a resolution plan which had been approved by the NCLT. There was no provision in the Code acting as a tangible financial deterrent. Therefore, the CIRP Regulations were amended to state that the request inviting resolution plans would require a resolution applicant to provide a performance security in case its resolution plan is approved by the CoC. Thereafter, if the same resolution plan is approved by the NCLT but the applicant either doesn’t implement the plan or contributes towards the failure of the implementation of that plan, then the said performance security shall stand forfeited.The amendment also stated that the creditor, who is aggrieved by non-implementation of a resolution plan approved by the NCLT, can apply to the NCLT for appropriate directions. One of the most significant consequences of a resolution applicant not complying with the terms of an approved resolution plan is the untimely demise of a corporate debtor. More often than not, the entire period available to complete the CIR Process is exhausted by the time the NCLT approves a resolution plan.

Therefore, if the resolution applicant fails to implement the resolution plan, then there would be no time to consider any other plans and the corporate debtor would be forced to be liquidated. This would be an unfair situation for the corporate debtor as well as stakeholders involved in the process. Now with the introduction of this amendment, the CoC can explore the possibility of approaching the NCLT and seeking a further extension for the CIR Process or an exclusion of the period spent in negotiating with the unwilling resolution applicant.



A key element of a modern corporate insolvency resolution processes is the provision of ‘breathing space’ to a debtor to enable assessment of its viability and sale of its assets or restructuring of its debts.In this period,therefore, the aim is to help businesses continue trading while a resolution that maximizes value for all creditors is reached.To enable this, it is key that critical suppliers, without the supply of whose goods and services the debtor cannot function, continue their supplies without interruption. Thus, for the orderly completion of the insolvency resolution process, insolvency laws may have some provisions that enable the continuation of the supply of such goods and services. There is a need to examine how the continuation of such supplies is enabled under the Code.


Insolvency proceedings under the Code typically involve two kinds of critical supplies, (a) non-input ‘essential goods and services’ covered by section 14(2) and (b) other critical supplies. Supply of essential goods and services, as defined in the Regulations, is mandated under section 14(2) of the Code. Supply of critical supplies other than those covered under the definition of ‘essential goods and services’, is not mandated but has to be negotiated and secured by the resolution professional.

(a) Essential goods and services covered by section 14(2)

Section 14(2) of the Code states that when an order initiating the corporate insolvency resolution process is passed, the “The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.” The term “essential goods and services” has beendefined by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)Regulations, 2016 to mean electricity, water, telecommunication services and information technology servicesto the extent these are not a direct input to the output produced or supplied by the corporate debtor. Toillustrate, the Regulations specify that “water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes, and not for generation of hydro-electricity.” In other words, supplies constituting input for a finished product or services are not mandated. Thus, during the moratorium, section 14 of the Code (read with the Regulations) mandates the uninterrupted supply of only those specified goods and services which do not constitute a direct input for a finished product or service.The Mumbai Bench of the NCLT in ICICI Bank v. Innoventive Industries,explained this position as follows

“Byreading this Regulation, it appears that electricity, water and telecommunication services and Information Technologyservice are to be considered as essential as long as these services are not a requirement to the output produced orsupplied by the Corporate Debtor. Under this regulation, an illustration also been given saying that water is to beconsidered as essential service as long as it is used for drinking purpose and sanitization purpose but not for generating electricity.

Whenever any illustration is given, it will be given to have an understanding about the provision of law. If supply of water for drinking and sanitization purpose is an essential service, the supply of electricity is also deemed to be limited for lighting purpose and other domestic purposes, which are in modern days considered asessential service. If the same electricity is used as input for manufacturing purpose making huge bill of lakhs of rupees to get output from that industry, then to our understanding, supply of electricity is used as input for manufacturing purpose to get output from the factory and it obviously to make profits. Essential service is a service for survival of human kind, but not for making business and earn profits without making payment to the services used. When company is using it for making profit, then the company owes to make payment to the services/goods utilized in manufacturing purpose.”However, in the case of Canara Bank v. Deccan Chronicle,supplies of critical input goods and services was also mandated. “Section 14(2) of the IBC, 2016 already exempted supply of essential goods and services to the Corporate Debtor and in addition the Learned Counsels for the Respondent submitted that goods/services viz., Water, Electricity,Printing Ink, Printing Plates, Printing Blanker, Solvents etc. will also come under the purview of exemption and thus prayed to exempt above goods/services from moratorium. We are convinced with the prayer of the Respondent that the above goods and services would come under exemption under this Section… and these essential goods or services to Corporate Debtor shall not be terminated or suspended and interrupted during the moratorium period”.

This created some ambiguity on the position of law. However, the NCLAT has specifically opined that “From subsection(2) of Section 14 of the ‘I&B Code’, it is also clear that essential goods or services, including electricity, water,telecommunication services and information technology services, if they are not a direct input to the output produced or supplied by the ‘Corporate Debtor’, cannot be terminated or suspended or interrupted during the ‘Moratorium’ period.”Given that the supplies of such essential goods and services is mandated by the Code, the amounts due to such suppliers is given priority since these have been designated as insolvency resolution process costs,which are tobe paid in priority to other debts of the corporate debtor.However, there was lack of clarity on whether payments need to be made for the supply of these goods and services during the moratorium period.In Innoventive Industries Ltd. v. Maharashtra State Electricity Distribution Company Ltd., the NCLAT passed an order requiring “the (Interim) Resolution Professional (IRP) to pay the charges due to respondent towards consumption of electricity since the date of moratorium…the IRP on behalf of the ‘Corporate Debtor’ will also pay month to monthcharges towards consumption of electricity failing which it will be open to the respondent – Maharashtra State Electricity Distribution Company Limited to take appropriate steps.”

In Dakshin Gujarat VIJ Company Limited v. ABG Shipyard Limited,the NCLAT explained its reasoning for requiring payments for supply of essential goods and services during the moratorium period. They opined that “from the provisions of ‘I&B Code’ and Regulations, we find that no prohibition has been made or bar imposed towards payment of current charges of essential services. Such payment is not covered by the order of ‘Moratorium’. Regulation 31 cannot override the substantive provisions of Section 14; therefore, if any cost is incurred towards supply of the essential services during the period of ‘Moratorium’, it may be accounted towards ‘Insolvency Resolution Process Costs’,but law does not stipulate that the suppliers of essential goods including, the electricity or water to be supplied free of cost, till completion of the period of ‘Moratorium’. Payment if made towards essential goods to ensure that the Company remains on-going as made in the present case for the month of December, 2017, such amount can be accounted towards’Insolvency Resolution Process Costs’, but it does not mean that supply of essential goods such as electricity to be supplied free of cost and the ‘Corporate Debtor’ is not liable to pay the amount till the completion of the period of‘Moratorium’.”

The NCLAT also noted that “if the ‘Corporate Debtor’ has no fund even to pay for supply of essential goods and services, in such case, the ‘Resolution Professional’ cannot keep the Company on-going just to put additional cost towards supply of electricity, water etc. In case the ‘Corporate Debtor’ (Company) is non-functional due to paucity of fund, and has become sick the question of keeping it on going does not arise”.

While the NCLAT has allowed payments to be made to suppliers during the process, it has not passed orders specifically allowing suppliers of essential goods and services to recover dues remaining unpaid prior to the commencement of the insolvency resolution process while the moratorium was in place. Instead they have held that it would be open for the supplier to submit a claim for payment of their dues before the resolution professional.

(b) Other critical supplies

In so far as critical supplies other than those defined as ‘essential goods and services’ are concerned,the supplies are to be procured by mutual agreement between the insolvency professional and the supplier,sometimes with approval of the committee of creditors. This is facilitated by the provisions of the Code which enable the functioning of the debtor as a going concern. Specifically, the Code requires that the interim resolution professional and resolution professional make every endeavour to run the corporate debtor as a going concern, and take all actions as are necessary to keep the corporate debtor as a going concern.Like ‘essential goods and services’, the payment for other critical supplies will form part of cost of the insolvency resolution process and such suppliers have priority over other creditors under the resolution plan.However, despite this, some critical suppliers might be reluctant to supply during the insolvency resolution process. Recognizing this, the Insolvency Law Committee advocated for expanding the scope of mandatory essential supplies covered under section 14(2). To that end, the Committee recommended that a proviso to section 14(2) may be added “which states that for continuation of supply of essential goods or services other than as specified by IBBI, the IRP/ RP shall make an application to the NCLT and the NCLT will make a decision in this respect based on the facts and circumstances of each case”.However, this suggestion was not adopted as an amendment to the Code.


The Code enables the continuation of critical supplies to businesses during the insolvency resolution process. It enables the resolution professional to negotiate for the continuation of other critical supplies during the corporate resolution process and mandates the supply of the enumerated ‘essential goods and services’.Payments for such supplies have priority of payment over other claims in the resolution plan. Further, the NCLAT has in many cases ordered that ‘essential goods and services’ be paid for during the insolvency resolution process.



The Preamble to the Code specifically states that the Code has been enacted to maximise value in the interests of all the stakeholders, and not for some stakeholders at the expense of the others. Thus, the insolvency regimeis designed to reduce the possibility of allowing some stakeholders to benefit at the expense of the others.This design choice becomes especially relevant in respect of the related parties of the corporate debtor. If the serelated parties are given the power to control the decisions regarding its insolvency resolution, they may choose to do so in a manner that would unfairly benefit the corporate debtor. In other words, there is a concern that related party creditors would not be able to act independently. At the same time, classes of creditors must be excluded only to the extent that the exclusion would preserve the value of the assets, or distribute the value fairly. Else it may result in an unwarranted deprivation of rights of creditors and in a chilling effect on the distressed asset resolution. Accordingly, any restrictions must be tailored narrowly and must not be over broad.The Code excludes those financial creditors who are related parties of the corporate debtor from participating in the committee of creditors. However, where related parties assign their debts, the status of such assignments needs to be explored.


The Proviso to section 21(2) of the Code excludes a financial creditor who is a ‘related party’ to the corporate debtor from having “any right of representation, participation or voting in a meeting of the committee of creditors”. An exception to this rule exists in the event that a “financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.”

Section 5(24) of the Code provides an extensive definition of a related party. For example, a related party is onewho is a director or partner of the corporate debtor or a relative of its director or partner, is a key managerial personnel of the corporate debtor or a relative its key managerial personnel, a person on whose advice,directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act, etc.Although the Code prohibits related parties from taking an active part in the functioning of a committee of creditors, there is lack of clarity on the position of unrelated third parties to whom debts of related parties have been assigned. The Code is silent on the status of an assignee within a committee of creditors. Regulation 28 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)Regulations, 2016 only stipulates that in the event of assignment of debt due to one creditor to any other person, during the insolvency resolution process “both parties shall provide the interim resolution professional or theresolution professional, as the case may be, the terms of such assignment or transfer and the identity of the assignee or transferee.”

This gap was brought to the spotlight in Edelweiss Asset Reconstruction Company Limited v. Synergy Dooray Automotive Limited.This case related to the assignment of debt from one financial creditor, which was a related party by virtue of it being a sister concern of Synergy Dooray, to a third-party, effectively providing it witha place within the committee of creditors. It was contested by Edelweiss that this assignment wascarried out with the ulterior motive of reducing the voting rights of other creditors, by making the assignee eligible to take part in resolutions discussed in the committee of creditors. The Hyderabad Bench of the NCLT, while observing that the assignment of debt, in this case, could only be considered to be similar to tax planning, held that since there was no relationship between the financial creditor and its third-party assignee, within the meaning of the term“related party”, the assignee could participate in the committee of creditors.

In the matter of Fortune Pharma Private Limited,two related party financial creditors after filing applications for the institution of a corporate insolvency resolution process but before its admission carried out similar assignments of their debts to an unrelated third party. In this case, one member of the NCLT held that “a disqualification as existed at the time of initiation of the corporate insolvency resolution process by virtue of being a related party cannot get washed away just because an assignment is made with the sole objective of reducing the voting power of the existing corporate creditors.” To determine this, the NCLT may consider if the transaction has been done ‘bona fide’ for a legitimate business interest. However, the other member of the NCLT, in a concurring order held that given that an assignment only transfers the rights of the assignor and the assignee would have nobetter rights than the rights of the assignor. If the assignee was given any further rights, it would disadvantage other creditors. Consequently, “if the ‘assignor’ is a related party then the assignee shall also be treated in the same status as ‘related party’ vis-à-vis to the impugned debt.”

This matter was laid to rest by the NCLAT, which accepted this reasoning and held that “undisputedly, the assignment is the transfer of one’s right to recover the debt of another person as a contractual right. Rights of an‘assignee’ are no better than those of the ‘assignor’. It can be, therefore, held that ‘assignor’ assigns its debt in favour of the ‘assignee’ and ‘assignee’ steps in the shoes of the ‘assignor’. The ‘assignee’ thereby takes over the right as it actually did and also takes over all the disadvantages by virtue of such assignment…What cannot be achieved directly by Mr. Sudhakar Mulay, he did it indirectly assigning his debt in favour of the 1st appellant. Mr.Sudhakar Mulay being the‘related party’, with the assignment of ‘debt’, the disadvantage also goes to the 1st appellant.”


The assignment of related party debts results in the assignee having the same rights and disabilities as those ofthe related party assignor.



The primary goal of insolvency law is to maximize the value of the assets of a debtor in the interests of all stakeholders. Value-maximisation is often a function of time, as the value may tend to erode with lapse of time.To address this, the process of negotiation between various creditors and stakeholders has to be designed in a manner that reduces the time taken for insolvency resolution.
One design choice that is made to reduce time taken, is to reduce the number of stakeholders that are given control of the negotiating process in insolvency resolution. However, where some stakeholders are not given control in the insolvency resolution process, there is a concern that their pre-insolvency rights may be displacedby those stakeholders who have been given control. Such a concern becomes particularly potent where the stakeholders who have not been given control are vulnerable classes such as home buyers.
Accordingly, it is relevant to analyse how the position of home buyers is dealt with under the Code.


Section 5 of the Code defines the terms ‘financial debt’ and ‘operational debt’. These cover different types of claims against the corporate debtor, however, there may be classes of other claimants who are neither financialn or operational creditors. Initially, when claims in respect of pre-payments made by home buyers were brought to fore, the NCLT held that homebuyers were neither financial creditors nor operational creditors.However,in cases where home buyers were guaranteed assured returns, they were held to be financial creditors. Given that in most cases, home buyers were not considered either financial creditors or operational creditors, they could not initiate the corporate insolvency resolution process or participate in the committee of creditors.

Further, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)Regulations, 2016 initially only provided a procedure for filing of claims by operational and financial creditors. Assuch homebuyers faced procedural difficulties in filing of claims. Once the concerns regarding inclusion of homebuyers were brought to fore, the Insolvency and Bankruptcy Board of India amended the Regulations to allow “other creditors” to also file their claims with the insolvency resolution process.They were however not allowed to initiate the insolvency resolution process or vote as members of the committee of creditors. As such,broader concerns regarding safeguarding of interests of home buyers remained unaddressed.In Chitra Sharma v. Union of India, the Supreme Court required that the interests of the home buyers be safeguarded by the insolvency resolution professional and passed orders allowing representatives espousing the cause of homebuyers to participate in the meetings of the committee of creditors.Similarly, the Supreme Court in Bikram Chatterji v. Union of India passed orders regarding the construction of homes and also required undertakings to be furnished to protect the interests of homebuyers.

Given this background, the Insolvency Law Committee opined that “On a review of various financial terms of agreements between home buyers and builders and the manner of utilisation of the disbursements made by home buyers to the builders,

it is evident that the agreement is for disbursement of money by the home buyer for the delivery of a building to be constructed in the future. The disbursement of money is made in relation to a future asset, and the contracts usually span a period of 4-5 years or more…the amounts so raised are used as a means of financing the realestate project, and are thus in effect a tool for raising finance, and on failure of the project, money is repaid based on time value of money.”Accordingly, they recommended that home buyers should be included as financial creditors.

Based on these recommendations, The Insolvency and Bankruptcy Code, (Second Amendment ) Act, 2018 amended the definition of financial debt to reflect that an amount raised from an “allottee” under a real estate project would be deemed to be an amount having the commercial effect of a borrowing, squarely bringing homebuyers within the statutory purview of the term “financial creditor” under the Code.Thus, homebuyersare now voting members of the committee of creditors.

Following this, the NCLAT has observed, “normally, an ‘allottee’ of Real Estate comes within the meaning of ‘Financial Creditor’ but if such an ‘allottee’ does not pay the full amount, cannot allege default on the part of the ‘Corporate Debtor’.If the ‘Corporate Debtor’ does not complete the work within time and the ‘allottee’ is agreed to pay the total amount orhas paid the total amount then only the ‘allottee’ can allege default. Similarly, if ‘allottee’ finds that completion has not been made by the ‘Corporate Debtor’ within time and if request to return the amount disbursed to the ‘Corporate Debtor’, on failure to refund the amount the allottee can claim the default on the part of the ‘Corporate Debtor’.”

However, it is significant to note that merely being a homebuyer would not automatically bring the homebuyer within the purview of the term ‘financial creditor’. There has to be an actual debt that is owed to such homebuyer, payable by the infrastructure/ builder company for the purposes of the Code. In the matter of Ajay Walia v. M/s. Sun world Residency Private Limited,the homebuyer had entered into an apartment purchase agreement with the builder, as well as a supplementary agreement, which gave the homebuyer an option to cancel the purchase of the apartment within twenty four months from the date of disbursement of the home loan by the bank. The homebuyer, the bank and the builder also entered into a tripartite agreement by virtue of which the builder was supposed to pay the EMIs to the bank for the first twenty three months from the date of disbursement of such loans. However, such payment was not to be construed as reducing the liability of the homebuyer in any manner. The tripartite agreement further provided that in the event of occurrence of default under the agreement, which would result in the cancellation of allotment as a consequence, and/or for anyreason whatsoever if the allotment is cancelled, any amount payable to the borrower in the event would be paidto the bank instead, and would be construed as a valid discharge of the builder’s liabilities towards the homebuyer. When the homebuyer had cancelled the booking, and later on, the builder defaulted in payment of EMIs, the homebuyer approached the NCLT for initiating the corporate insolvency resolution process againstthe builder company. Here, the NCLT observed that since the homebuyer had subrogated all its rights in favourof the bank, he could not be treated as financial creditor.


Given that home buyers were not given rights to initiate the insolvency resolution process or participate in theprocess as members of the committee of creditors, there was a concern that their interests would not beadequately safeguarded. Accordingly, ad hoc safeguards were imposed by the courts in different rulings. Tosettle this issue, home buyers have now been deemed to be financial creditors by amendment to the Code, andare members of the committee of creditors.



A formal insolvency process should clearly delineate the status of different stakeholders in the process, to enable certainty and the orderly conduct of proceedings. The status of different stakeholders is ascertained with reference to their pre-insolvency entitlements and the achievement of policy objectives of the insolvency legislation.

An important set of stakeholders in the insolvency of an entity is governmental authorities, such as tax
authorities, and regulators with whom the entity interacts on an ongoing basis. Given this, it is relevant to explore the status of the statutory dues both under the corporate insolvency resolution process and the liquidation process under the Code.


In the corporate insolvency resolution process

In respect of the corporate insolvency resolution process, section 5(21) of the Code defines the term operational debt as “a claim in respect of the provision 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.” While the definition of operational debt includes dues arising and payable to government, there was a lack of clarity on whether this would include statutory dues.In this regard, the Calcutta High Court in Akshay Jhunjhunwala v. Union of India,held that the term operational debt “would also include a claim of a statutory authority on account of money receivable pursuant to an imposition by astatute.”This position was reiterated by the NCLAT in DG of Income Tax v. Synergies Dooray Automotive Ltd.wherein the bench opined that “If the Company (‘Corporate Debtor’) is operational and remains a going concern, only in such case, the statutory liability, such as payment of Income Tax, Value Added Tax etc., will arise. As the ‘Income Tax’,‘Value Added Tax’ and other statutory dues arising out of the existing law, arises when the Company is operational, we hold such statutory dues has direct nexus with operation of the Company. For the said reason also, we hold that allstatutory dues including ‘Income Tax’, ‘Value Added Tax’ etc. come within the meaning of ‘Operational Debt’.”A related issue also arose during the deliberations of the Insolvency Law Committee which considered whetherregulatory dues should be included in the definition of operational creditors. Keeping in mind the wide powers of Regulators to recover dues and penalties owed to them, the Committee observed that “regulatory dues were intentionally not included in the definition of operational debt. It was discussed that if any claim or obligation arises pursuant to non-payment by a corporate debtor in lieu of any goods or services provided by a regulatory body, it may be interpreted as ‘operational debt’ on a case to case basis.”Consequently, they recommended that the term‘regulatory dues’ need not be added to the definition of operational debt.

Despite this, since statutory and regulatory dues are also backed by law, this issue may need further clarity fromthe Supreme Court for this position to become less contested in practice.

In Liquidation

Section 53 of the Code provides a statutory ‘waterfall’ for distributions to be made after realization of assets of the corporate debtor. In this regard, “any amount due to the Central Government and State Government, including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date” has been listed as item (e) of section 53(1) after process costs, dues to workmen and employees, etc. Essentially, crown debt has now been subordinated to unsecured financial creditors among others. This is a significant change in comparison to the previous regime, in which Government dues were given preferential status over all payments other than those owed to workmen and secured creditors.This change in policy was recommended by the Bankruptcy Law Reforms Committee which recognized that “the dues payable to the Crown are unlikely to be significant when compared to total government receipts, whereas the impact of non- payment on private commercial creditors is likely to be substantial and may even lead to their insolvency.”This was recommended with the objective that subordinating Government dues in this manner will “increase the availability of finance, reduce the cost of capital, promote entrepreneurship payment and lead to faster economic growth. The government also will be the beneficiary of this process as economic growth will increase revenues. Further, efficiency enhancement and consequent greater value capture through the proposed insolvency regime will bring in additional gains to both the economy and the exchequer.”While analyzing the position of the Income Tax department vis-à-vis a company in liquidation whose properties had been attached under the Income Tax Act, 1961, the Telangana and Andhra Pradesh High Court held thatpassing an order of attachment does not create property rights in the attached property. Consequently, “In the context of liquidation of an assessee company under the provisions of the Code, the Income-tax Department, not being asecured creditor, must necessarily take recourse to distribution of the liquidation assets as per Section 53 of the Code.Section 53(1) provides the order of priority for such distribution and any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State in respect of the whole or any part of the period of two years preceding the liquidation commencement date comes fifth in the order of priority under Clause (e) thereof… It is therefore clear that tax dues,being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of Section 53(1)(e) of the Code. If the Legislature, in its wisdom, assigned the fifth position in the order of priority to such dues, it is not for this Court to delve into or belittle the rationale underlying the same.”Therefore, even where statutory authorities passorders for the attachment of properties, the dues to them would not constitute secured debts, and would fall within the scope of section 53(1)(e).


Statutory dues are dues owed to the Government. These dues are operational debts, and the statutory creditors would be operational creditors. In liquidation, these dues would fall within section 53(1)(e), and distributions to be made to them would rank equal to debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.



Insolvency is premised on insufficiency of funds. When a company is insolvent, it is likely that all stake holders may not be able to receive the amounts due to them from the company in full. In this scenario, an insolvency regime provides a system of priorities in consonance with which distribution is made to creditors. This system of priorities interacts with the pre-insolvency entitlements of the stakeholders of a corporate debtor. To the extent insolvency law respects the pre-insolvency entitlements of parties, it enables parties to be able to structure their transactions so as to receive priority in insolvency, which is likely to lower costs of finance, and it creates the right incentives for parties to trigger insolvency processes, instead of promoting or discouraging the use of the processes based on a relative improvement or deterioration of entitlement in insolvency.On the other hand,where pre-insolvency entitlements are respected indiscriminately, they may be abused to the detriment of non-adjusting creditors.While the Code provides a clear system of priorities in liquidation,it is relevant to ascertain the system of priorities under the corporate insolvency resolution process of the Code.


Section 30(2) of the Code provides the minimum contents of a resolution plan. A resolution plan must provide for“the payment of insolvency resolution process costs in a manner specified by the Board in priority to the payment of other debts of the corporate debtor” and the payment of the minimum liquidation value due to operational creditors. Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2018 also provides that the “amount due to the operational creditors under are solution plan shall be given priority in payment over financial creditors” and that a resolution plan “shall include astatement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor”.

Originally, the Regulations also provided for the payment of liquidation value to dissenting financial creditors.However, based on the observations of the NCLAT in Central Bank of India v. RP of Sirpur Paper Mills Ltd. that “The right to dissent has been provided under sub-section (4) of Section 30 of the Insolvency and Bankruptcy Code, 2016 (for short ‘I&B Code’); a creditor who has dissented cannot be unsuited on the ground that he has dissented and eligible only for liquidation value. The question of grant of liquidation value to any of the Creditor does not arise cannot be applied at the stage of ‘Corporate Insolvency Resolution Process’ while submitting the Resolution Plan, as Section 53 is applicable only at the stage of Liquidation”and that Insolvency and Bankruptcy Board of India would not have the power to require the payment of liquidation value to dissenting creditors, the Regulations were amended to delete this requirement.

Therefore, the provisions of the law do not explicitly provide a detailed list of priority of payments in there solution plan, and it has been concluded that the priorities under section 53 would not apply to a resolution plan.

However, these priorities may be relied on to calculate the liquidation value, which must be paid at a minimum to the operational creditors.Consequently, priority is determined on a case-by-case basis as per the terms of the resolution plan that is approved by the committee of creditors. However, the committee of creditors do not have unfettered discretion to approve any resolution plan. The NCLAT in Rajputana Properties v. Ultratech Cement Ltd. has held that

“ i. The liabilities of all creditors who are not part of ‘Committee of Creditors’ must also be met in the resolution.

ii. The ‘Financial Creditors can modify the terms of existing liabilities, while other creditors cannot take risk of postponing
payment for better future prospectus. That is, ‘Financial Creditors’ can take haircut and can take their dues in future,
while ‘Operational Creditors’ need to be paid immediately.

iii. A creditor cannot maximise his own interests in view of moratorium.’

iv. If one type of credit is given preferential treatment, the other type of credit will disappear from market. This will be
against the objective of promoting availability of credit.

v. The ‘I&B Code’ aims to balance the interests of all stakeholders and does not maximise value for ‘Financial Creditors’.

vi. Therefore, the dues of creditors of ‘Operational Creditors’ must get at least similar treatment as compared to the due of ‘Financial Creditors’.”

Further, the NCLAT has also held that the treatment of similarly situated financial creditors cannot be different.These principles encapsulate the principle of ‘fair and equitable’ dealing. This judgment of theNCLAT has been upheld by the Supreme Court,and in other cases, the Supreme Court has gone on to hold that “46. The NCLAT has, while looking into viability and feasibility of resolution plans that are approved by the committee of creditors, always gone into whether operational creditors are given roughly the same treatment as financial creditors,and if they are not, such plans are either rejected or modified so that the operational creditors‘ rights are safeguarded. It may be seen that a resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than liquidation value… [This] further strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors‘rights, together with priority in payment over financial creditors.”The exact scope of the application of this principle is still evolving, and there needs to be more clarity on the manner in which fair and equitable dealing within a resolution plan would interact with pre-insolvency entitlements, especially of secured creditors. This was in issue in Employees of Jyoti Structures Limited v. DBS BankLtd.In this case, DBS bank had first charge over the assets of the corporate debtor, such that the liquidation value of the assets was three times the debt owed to it. However, the resolution plan did not distinguish between the first charge holder and the second charge holder, and DBS bank was required to take a haircut per the terms of the resolution plan. The NCLAT held that DBS’s objections to the resolution plan “cannot be accepted as at the‘Resolution Process’, ‘Financial Creditor’ claims are decided as per provision of the ‘I&B Code’. All the ‘Financial Creditors’are treated to be similar, if similarly situated.” Therefore, the manner in which a resolution plan should deal fairly with first charge holders is still unclear.


The priority of payments to be made pursuant to a resolution plan is not fixed. However, a resolution plan mustbalance the interests of all stakeholders. In doing this, the plan must deal with all creditors in a fair and equitablemanner, including those creditors who do not have the right to vote on the resolution plan since they are notfinancial creditors. The plan must also not discriminate against equally situated creditors.


The criterion for invoking Fast Track Resolution depends on the corporate debtor’s assets, income andnature of creditors or quantum of debt. The standards/ thresholds for invoking Fast Track Resolution have been provided in the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017. The Regulations cover the process from initiation of insolvency till the approval of resolution by the NCLT, which concludes the process. The entire process is completed within 90 days. However, the NCLT may, if satisfied, extend the period of 90 days by another 45 days. A creditor or a debtor may file an application, along with the proof of existence of default, to the NCLT for initiating Fast Track Resolution. After the application is admitted and the RP is appointed, if the IRP is of the opinion, based on the records of debtor, that the Fast Track Resolution is not applicable to the debtor, he shall file an application to the NCLT to convert the fast track process into a normal Insolvency Resolution Process.

The Ministry of Corporate Affairs has notified the sections 55 to 58 of the Bankruptcy Code pertaining to the Fast Track Process and that the Fast Track Process shall apply to the following categories of debtors:

a. a small company, as defined under clause (85) of section 2 of the Companies Act, 2013; or

b. a startup (other than the partnership firm), as defined in the notification dated May 23, 2017 of the Ministry of Commerce and Industry; or

c. an unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding Rs.1 crore.


Under the Code, the liquidator shall create an estate, i.e. a corpus, of all assets of the corporate debtor which can be utilized and distributed subsequent to liquidation. The liquidator is then required to receive or collect all claims from the creditors within a period of thirty days from the date of commencement of the liquidation process. Pursuant to a recent amendment, the liquidator has been empowered to adopt a new methodology for the realisation of assets, namely, “to sell the corporate debtor as a going concern.” Subject to verification, the liquidator may admit or reject claims and such a decision can be appealed by creditors. The Code also mandates that the liquidator carry out effective valuation of all claims and assets, and states that such valuation be carried out as per parameters laid down by the Insolvency Board. If the creditors committee does not get a resolution plan approved, then liquidation of the company’s assets will have to be undertaken in order to satisfying outstanding debts. The Code establishes an ordered of priority among creditors, which will determine the sequence in which outstanding debts will be repaid:

First, the dues towards the insolvency professional including fees and other costs incurred in the insolvency resolution process;

Second, secured creditors who chose to not enforce the security they hold and the dues owed to workmen;

Third, employee wages;

Fourth, unsecured creditors;

Fifth, dues owed to the government and residual debts to creditors even after the enforcement of security;

Sixthly, any other outstanding debt;

Finally, shareholders, with preference shareholders’ rights taking precedence.

Once the creditors committee chooses to liquidate the company’s assets, there are two paths available to the secured creditor – they may choose to opt out of the resolution process and enforce their security to recover debts owed to them; or they may participate in the resolution process, thereby giving up all rights over the collateral. The latter option will prioritise the secured creditor ahead of all except the dues owed to workmen. Another unique feature of the Code is the low priority accorded to government dues, unlike the Companies Act, 2013 where they are paid alongside employees and unsecured financial creditors. Now, they are paid after secured creditors, unsecured creditors, employees, and workmen. This undoubtedly signals the business-first principle that is guiding the Code, where the government is viewed only as a facilitator and regulator, and not an active participant in the affairs of commercial entities. This is a positive step, as government agencies have unrivalled resources at their disposal to collect their dues, and do not need to burden the insolvency resolution process, especially in its early stages. After an order for liquidation has been passed, suits/ legal proceeding cannot be instituted by/ against the corporate debtor. For the purpose of liquidation, the liquidator ordinarily sells the assets of a corporate debtor by way of an auction. However, such sale may be by way of a private sale, in cases where

(i) the asset is perishable;

(ii) the asset is capable of deterioration of value if not sold immediately;

(iii) the asset is sold at a higher price than the reserve price of a failed auction as well as;

(iv) when prior permission of the Adjudicating Authority for a private sale has been obtained.

Additionally, private sale of assets to a related party of the corporate debtor, a related party of the liquidator or any professional appointed by him may not be permitted unless a prior permission is taken by the Adjudicating Authority. Furthermore, the liquidator has the liberty to stop the sale if he has reason to believe that there is collusion between the buyers; or the corporate debtor’s related party and the buyer; or the creditor and the buyer.


The Code also provides for voluntary winding up by a corporate person who has not committed any default, provided certain conditions as laid down in the Code are fulfilled. The RP must verify claims raised by stakeholders against the corporate person and wind up the affairs of the corporate company within one year from the date of commencement of the voluntary liquidation.

After the sale of the assets of the debtor, the Liquidator would make an application to the NCLT for its dissolution. The NCLT would then make an order for dissolution of the debtor and an order of the same would be communicated to the authority with which the corporate debtor is registered.


The Code also provides for resolution of liabilities on individuals. Some of these liabilities have been set out below:

i. In case the operations of the debtor have been carried on with intent to defraud creditors, persons who were knowingly parties to the same shall be liable to make contributions to the assets of the corporate debtor.

ii. Where the director/ partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of insolvency resolution process, the directors/ partners of the corporate debtor shall be liable to make such contribution to the assets.

iii. In case an Officer has made or caused to be made any gift/ transfer of/ charge on the property of the corporate debtor, the Officer may be liable to be punished with imprisonment for a term not be less than one year and with fine which shall not be less than one lakh rupees but which may extend to one crore rupees.


It is evident that the Indian government is leaving no stone un turned in its aim to improve the Ease of Doing Business in India. The legislature, RBI, SEBI, and the judiciary have presented a unified front, unprecedented in India so far. Any apparent loopholes are being plugged at the earliest and the law is evolving rapidly. It comes as no surprise, then, that as in 2021, India had already secured its position in the top 3 developing countries for retail investment worldwide and that insolvency resolution in India has become a more streamlined, consolidated and expeditious affair.

What needs to be seen is whether these measures can successfully be used to reduce the burden of stressed assets on the banking system and whether India can come on par with other developed nations in respect of insolvency resolution.

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May 2024