Introduction  

Insolvency and Bankruptcy Code, 2016 provides legal framework for insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of these persons and balance the interests of all the stakeholders.

Before this Code, there was no single law dealing with insolvency and bankruptcy in India.  Liquidation of Companies is handled by the High Courts; Individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. The other laws which deal with issues include Sick Industrial Companies (Special Provisions) Act (SICA), 1985; Recovery of Debt Due to Banks and Financial Institution Acts, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 and Companies Act, 2013. The Code consolidates these insolvency laws to bring them under one umbrella.

Some of the important Definitions in the Code

Section 3(7) defines “corporate person” means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub- section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.

Section 3(10) defines “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder.

Section 5(8) defines “financial debt” as – “a debt along with interest, if any, which is disbursed against the consideration for time value of money. Thus, All lenders who have extended any kind of loans, guarantees or financial credit are covered within its ambit. 

Section 5(7) defines “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Section (21) defines “operational debt” means 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. 

Snapshot of Insolvency and Bankruptcy Code 2016

  • The Code provides time bound insolvency resolution process i.e 180 days after the process is initiated, plus a 90 day extension for resolving insolvency.
  • The Code also provides for FAST TRACK INSOLVENCY RESOLUTION PROCESS — 90 days after the process is initiated, plus a 45 day extension for resolving insolvency in fast track mode.
  • The adjudicating authority under the IBC is “National Company Law Tribunal (NCLT)” for Corporate Debtors (Companies & LLPs) and the “Debt Recovery Tribunal (DRT)” for individuals and partnership firms.
  • No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which NCLT, NCLAT, DRT and DRAT has jurisdiction under this Code.
  • IBC 2016 provides for two categories of Creditors: financial creditors and operational creditors. The Code provides different process for recovery of debts by these creditors from the debtors.
  • The IBC 2016 deals separately for Corporate Insolvency (Part II of the Code) and Individual and Partnership Bankruptcy (Part III of the Code);

Who can initiate CIRP?

The following may initiate CIRP, where any corporate debtor commits a default,

  • a financial creditor,
  • an operational creditor or
  • the corporate debtor itself

Financial Creditors V.S Operational Creditors

Section 7 of IBC provides that a financial creditor can directly approach NCLT and the only condition that needs to be satisfied is that the creditor must show that the corporate debtor has defaulted in the payment of a due debt.

On the other hand, Section 8 of IBC lays down that for an operational creditor to succeed in initiating the resolution process, it must satisfy the adjudicating authority by demonstrating that:

1. It has served a demand notice to the corporate debtor stating that the debtor has committed a default in debt; and

2. No dispute exists between the parties in relation to the payment of debt.

The Hon’ble Supreme Court in Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd while interpreting the term ‘dispute’ as defined under Section 5(6) and appearing in Section 8(2) held that, the adjudicating authority is only required to see if there is a bona fide dispute in existence and it is not allowed to examine the merits such dispute.

Therefore, if a debt is not admitted by the a corporate debtor and is disputed within the meaning of Section 5(6) or Section 8(2), it is a sufficient ground to reject the insolvency application made by an operational creditor. On the other hand, a financial creditor is allowed to initiate the resolution process even in case the debt is disputed by the corporate debtor.

Moratorium Period

During the moratorium period, the resolution professional is required to constitute a committee of creditors (excluding the related parties) which would include both financial creditors and operational creditors. The main purpose of the committee is to create a resolution plan within the stipulated time frame, in order to revive the corporate debtor.

Committee of Creditors – (Monopoly of Financial Creditors???)  

Section 21(2) provides that the committee of creditors shall consist solely of financial creditors. The Code also lays down that each creditor shall vote in accordance with voting share assigned and the resolution plan can be implemented only if it has been approved by 75% of creditors.

Further, Section 24(3)(c) provides that only operational creditors having aggregate dues of at least 10% of the total debt shall be given the notice of the meeting. It is to be noted that, an operational creditor (irrespective of the claim size) is not allowed to be a member of the committee. Thus, IBC limits the right of an operational creditor to only attending the meeting of CoC subject to the abovementioned threshold.

Therefore, the Insolvency and Bankruptcy Code effectively confers only three rights on an operational creditor:

  • To initiate insolvency resolution process.
  • To receive notice of meeting of committee of creditors.
  • To attend the meeting of committee of creditors.

It is to be noted that a resolution plan can be proposed by any category of creditors. However, it must be stressed that the same needs to be approved by the committee which is controlled by financial creditors. Therefore, unlike financial creditors, the rights conferred on the operational creditors are subject to certain conditions which resultantly gives more weightage to the concerns of financial creditors by giving them total monopoly over the entire resolution process.

What is Resolution Plan?

As per Section 30, the Insolvency Resolution Professional (IRP) within the prescribed time, required to submit his Resolution Plan to Adjudicating Authority (NCLT) prepared by him on the basis of information memorandum.

The Resolution Plan should provide for:

(i) Payment of insolvency resolution costs;

(ii) Repayment of the debts to operational creditors;

(iii) Management of affairs of the Company after approval of the resolution plan;

(iv) Implementation and supervision of the resolution plan;

(v) Does not contravene provisions of the law for the time being in force; and

(vi) Conforms to such other requirement as may be specified by the Board.

Who shall pay costs of the Interim Resolution Professional (IRP)?

The person filing an application for initiating the CIRP shall pay the expenses incurred by the interim resolution professional including the costs of engaging any professional advisors and any other costs arising out of and in connection with discharging his functions under the Code, the Rules and the Regulations.

What is procedure of valuation of property under IBC 2016?

The liquidator is required to obtain the valuation of the property of the corporate debtor done as

(a) A going concern value of the corporate debtor or its parts; and

(b) Individual value of assets, from at least 2 registered valuers appointed in accordance with the Companies Act, 2013 or Rules made there under.

The registered valuers so employed shall determine the valuation as per internationally accepted methodology that is fair, realistic, and calculated on an arm’s length basis. The liquidator should take the average of the two values submitted to arrive at the liquidation value.

Rank of dues payable in case of liquidation?

Section 53 provides the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely :—

(a) Insolvency resolution process costs and the liquidation costs;

(b) The following debts which shall rank equally between and among the following:—

  • Workmen’s dues for the period of 24 months; and
  • Debts owed to a secured creditor;

(c) Wages and any unpaid dues owed to employees other than workmen for the period of 12 months;

(d) Financial debts owed to unsecured creditors;

(e) following dues shall rank equally between and among the following:—

  • any amount due to the Central Government and the State Government;
  • debts owed to a secured creditor;

(f) any remaining debts and dues;

(g) Preference shareholders, if any; and

(h) Equity shareholders or partners, as the case may be.

The Insolvency and Bankruptcy Code, 2016 (IBC) which has replaced the earlier ‘debtor in possession’ insolvency regime with a more expedient ‘creditor in control’ regime.

Author Bio

Qualification: CS
Company: DVG & Associates
Location: Mumbai, Maharashtra, IN
Member Since: 02 Feb 2018 | Total Posts: 21
Mr. Dhaval Gusani is a Practicing Company Secretary and Corporate Law Professional from Mumbai. He is young, energetic and research enthusiastic about various nuances of Corporate laws, startups, GST etc. He is actively writing articles and taking sessions on various topics of corporate world. He ca View Full Profile

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4 responses to “Critical issues in Insolvency and Bankruptcy Code, 2016”

  1. ANIL G. BHOSEKAR says:

    Sir ,
    Your article is very nice and explains the essential features of the Code.
    However , I would be grateful if you state what precautions Auditor of the Company should take while preparing his Report ? Is there any format of Report prescribed ?

  2. Vaibhav Mago says:

    Nice article Mr. Dharali.

  3. MCT says:

    For Company & LLP,we can iniate the insolvency proceedings @ NCLT & against propreitor or partnership firm @ DRT -How can we file for the debts in respect of a Govt of India undertaking ?.

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