Introduction to Insolvency and Bankruptcy Code, 2016

The Basic Idea of the proposed law is that when an enterprise ( Individual, Firm, or Corporate Person) defaults, the control shifts to Committee of Creditors. They have specified time limit to evaluate proposals for resuscitating (rehabilitating) the enterprise or take to liquidation.

Decisions are required to be taken in a time bound manner so that there are greater chances that the enterprise is saved as a going concern and productive resources of economy can be put to best use.

The main purpose of the law is to provide the following reliefs :

  • Speedy Debt Recovery process
  • Overhaul existing systems
  • Do away with existing tedious processes and multiple adjudicating authorities
  • Restructure Distresses Credit Markets

Initiation of a Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016:-

Corporate Insolvency Resolution Process can be commenced when an corporate debtor commits a default. –Section 4 (1) of Insolvency Code, 2016.

The Default should be minimum Rs. One Lakh. The amount can be increased by Central Government but shall not exceed Rs. One Crore.

  • Corporate Person :-

Corporate Person means company or LLP or other body corporate with Limited Liability. However, the code does not cover Banks, Financial Institutions, Insurance Company, Asset Reconstruction Company, Mutual Funds, Collective Investment Schemes or Pension Funds.

  • Debt :-

“Debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

“Financial Debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes –

a) Money borrowed against payment of interest.

b) Any amount raised by acceptance under any acceptance credit facility or demat equivalent

c) Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.

d) The amount of any liability in respect of any lease or hire purchase contract

e) Receivables sold or discounted other than any receivable on non-recourse basis

f) Any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.

g) Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price

h) Any counter indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by Bank or Financial Institution

i) The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in (a) to (h) above.

“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 Central Government, any state government or any local authority.

Who can Initiate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016:-

Where any corporate Debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under the Code.

  • Process of Initiation by Financial Creditor:-

A Financial Creditor can initiate action himself or jointly with other financial creditors against a corporate debtor when a default occurs. The Application should give details of record of default and name of resolution professional proposed to be appointed as interim resolution professional to Adjudication authority (NCLT).

Rejection of Application – Adjudicating authority may reject the application by issuing the order, if it is satisfied that: – (a) Default has not occurred (b) Application under sub-section (2) is incomplete or (c) any disciplinary proceeding is pending against the proposed resolution professional.

The Financial Creditor shall make an application by itself or jointly against a corporate debtor in Form 1 before NCLT as contained in Insolvency and Bankruptcy ( Application to Adjudicating Authority) Rules, 2016.

Copy of application shall be forwarded to registered office of corporate debtor by registered post or speed post.

  • Process of Initiation by Operational Creditor:-

Operational Creditor means creditor in respect of goods and services. Process of Insolvency resolution can be initiated by operational creditor on occurrence of default, by delivering demand notice or copy of an invoice demanding payment of the amount involved in default to the corporate debtor.

“Demand notice” means a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.

The Corporate Debtor is required to reply within 10 days of receipt of copy of Demand Notice. If has repaid the unpaid operational debt, he will inform details of payment. If there is existence of dispute, the same shall be informed and record of pendency of suit or arbitration proceedings, if any.

Since, the word used in definition of ‘dispute’ is ‘includes’, the dispute can be on any ground. It is not necessary that suit or arbitration proceeding should be pending.

However, if no reply is received from within ten days from date of delivery of demand notice or copy of invoice, operational creditor can file application before Adjudicating Authority (NCLT) for inititating a corporate insolvency resolution process. Copy of application shall be sent to corporate debtor.

The Application will be accepted by Adjudicating Authority if (a) it is complete, (b) unpaid operational debt has not been paid (c) demand notice was delivered (d) notice of dispute is not received from operational creditor and (e) no disciplinary proceedings is pending against the proposed resolution professional.

Thus, the Adjudicating Authority (NCLT) is not empowered to go into dispute i.e. whether dispute is genuine or bogus. The application will only be admitted if demand is undisputed or there is clear court order.

Other Machinery Provisions under Insolvency and Bankruptcy Code, 2016:-

After admission of application, further proceedings will before NCLT. A Committee of creditors is required to be constituted to oversee the Insolvency Resolution process. The Actual work will be done by “ Resolution Professional” under the supervision of Committee of Creditors and Adjudicating Authority. (NCLT) The process is required to be completed within 180 days from date of application by NCLT to initiate the corporate insolvency process.

There are separate procedures for Bankruptcy of Individuals and firms and their insolvency resolutions.

As you must be aware, we are registered Insolvency Professionals having expertise in this process. You can connect with us to know more about the procedures and for any assistance in this process as a corporate debtor or creditor.

Uday ShahCA Uday Vinodchandra Shah
Insolvency Resolution Professional
Contact No: 022- 25063075 / 9870308636
Email ID : [email protected]

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June 2021