Abstract
The Insolvency and Bankruptcy Code (IBC), 2016, was enacted to simplify existing laws and enable an efficient mechanism for recovering dues. The Code introduces a streamlined institutional framework and a two-step process for corporate insolvency. This article provides an overview of the IBC, its application, institutional structure, features, and detailed insights into the insolvency resolution process.
Introduction
The primary objective of the Insolvency and Bankruptcy Code, 2016, is to unify and simplify the existing legal framework related to Insolvency and Bankruptcy. By replacing the cumbersome and complex processes, the Code aims to establish a faster and more efficient mechanism for recovering dues from both corporate and non-corporate debtors. Although there have been challenges in effectively implementing the Code during the first two years since its introduction, the judiciary’s constructive interpretation and amendments to the Code have addressed many of these issues. The Insolvency and Bankruptcy Board of India (IBBI), responsible for overseeing the IBC, has played a commendable role in raising awareness and regulating the domain. Throughout this period, several significant court judgments, including landmark cases, have prioritized the spirit of the Code over procedural requirements, contributing to its successful implementation.
The Code’s key strength lies in its well-structured institutional framework, which includes the Insolvency and Bankruptcy Board of India (IBBI) as the regulator, insolvency professionals, information utilities, and adjudicatory bodies such as the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). This comprehensive setup aims to promote corporate governance and facilitate timely and formal resolution of insolvency cases.
The major features of the Code consist of a two-step process for corporate debtors facing insolvency with a minimum default amount of Rs. 1,00,00,000. These two processes are as follows:
a) Insolvency Resolution Process (Sections 6 to 32 of the Code): This process involves active participation from creditors, who play a crucial role in assessing and determining the feasibility of continuing the debtor’s business. They evaluate various options for the company’s revival and take necessary measures accordingly.
b) Liquidation (Sections 33-54 of the Code): If revival attempts fail or are deemed unviable, creditors can opt for winding up the company. During the liquidation process, the debtor’s assets are distributed among the creditors in accordance with the Code’s provisions.
Applicability
The Insolvency and Bankruptcy Code provides a framework for initiating an insolvency resolution process when a debtor is unable to pay its debts[1]. Under the Code, creditors are categorized into Operational Creditors[2] and Financial Creditors[3]. Financial Creditors are those with a purely financial relationship with the debtor, having provided money against the consideration of time value (e.g., lenders). Recent reforms have addressed concerns related to homebuyers by treating them as Financial Creditors[4].
If the status of an applicant is unclear regarding whether they are a financial or operational creditor, there could be uncertainty about their priority in receiving dues during insolvency proceedings.
On the other hand, an Operational Creditor is one who has supplied goods or services to the debtor, including employees, and even central or state governments.
In addition to creditors initiating the process, a debtor company[5] may also resort to the Code to seek revival or liquidation. When a company is unable to repay its creditors, it can opt for a voluntary insolvency resolution process, allowing the company itself to approach the National Company Law Tribunal (NCLT) to pursue revival or liquidation.
Institutional Framework
Under the Insolvency and Bankruptcy Code, the Insolvency and Bankruptcy Board of India (IBBI) is responsible for regulating insolvency professionals, insolvency professional agencies, and information utilities established under the Code. The composition of the Board includes representatives from the Reserve Bank of India, as well as the Ministries of Finance, Corporate Affairs, and Law.
The key components overseen by the IBBI are as follows:
1. Insolvency Professionals: A specialized group of licensed professionals is envisioned to be created. These professionals will play a crucial role in managing the resolution process, handling the debtor’s assets, and providing essential information to creditors to aid them in making informed decisions.
2. Insolvency Professional Agencies: Insolvency professionals will be affiliated with registered insolvency professional agencies. These agencies are responsible for conducting examinations to certify insolvency professionals and enforcing a code of conduct to ensure their performance meets the required standards[6].
3. Information Utilities: Creditors are required to report financial information related to the debts owed to them by the debtor. This information includes comprehensive records of debt, liabilities, and defaults.
Through these mechanisms, the IBBI aims to streamline and facilitate the insolvency resolution process, ensuring transparency, efficiency, and adherence to set standards.
Features of IBC
- Exclusive Jurisdiction of Adjudicating Authority: The Adjudicating Authority, which comprises the National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT), will have sole jurisdiction in all matters related to insolvency. No other Civil Court, Tribunal, or Authority can issue rulings regarding actions taken by the Adjudicating Authority in insolvency cases.
- Appointment of Registered IPs: During the insolvency process, the board of directors of the debtor company is suspended, and a resolution professional approved by the creditors is appointed to manage the company’s affairs as a going concern.
- Committee of Creditors: A committee of creditors is constituted to work closely with the appointed Insolvency Professional. This committee plays a significant role in decision-making throughout the insolvency resolution process.
- Time-bound Resolution Process: The entire insolvency resolution process must be completed within a specified time frame of 180 days (which can be extended to 270 days in certain cases). This ensures that the process is conducted promptly and efficiently.
- Duties and Functions of Insolvency Professional (IP): The Insolvency Professional has specific responsibilities, including exercising reasonable care and diligence while performing their duties. They must also adhere to all the requirements and terms specified in the relevant bye-laws. The IP is obligated to provide records of all proceedings before the Adjudicating Authority to both the Insolvency and Bankruptcy Board of India (IBBI) and the insolvency professional agency to which they belong. The IP’s functions are subject to conditions and guidelines set forth in the relevant regulations.
Framework of the Code
The National Company Law Tribunal (NCLT) is the sole Adjudicatory Authority responsible for handling all corporate insolvency proceedings under the Insolvency and Bankruptcy Code. No other court or tribunal has the power to grant a stay against actions initiated before the NCLT. Appeals against NCLT orders are directed to the National Company Law Appellate Tribunal (NCLAT), and any further appeals from NCLAT orders are heard by the Supreme Court of India. The Code explicitly removes the jurisdiction of civil courts concerning matters governed by the Code.
The provisions of the Insolvency and Bankruptcy Code apply to various entities, including companies incorporated under the Companies Act, 2013, or any previous company law. Additionally, it applies to companies governed by special Acts, as long as the provisions are not inconsistent with those of the special Act. The Code also encompasses Limited Liability Partnerships[7] incorporated under the Limited Liability Partnership Act, 2008, and other bodies incorporated under any law. Furthermore, partnership firms and individuals are also covered by the Code, in relation to their insolvency, liquidation, voluntary liquidation, or bankruptcy, as the case may be.
Insolvency Resolution Process
1. Initiation by Financial Creditor
A Financial Creditor, either independently or jointly with other financial creditors or a person authorized by the Central Government, can initiate the Insolvency Resolution Process by filing an application before the National Company Law Tribunal (NCLT) when a default occurs. Interestingly, under the Code, the process for a Financial Creditor to seek resolution does not necessitate serving a notice to the debtor. However, the Supreme Court, in the case of Innoventive Industries v ICICI Bank Ltd.,[8] ruled that a notice must be served on the debtor, providing them with the right to be heard.
Within fourteen days of filing the application, the NCLT is required to verify the existence of the debt and the default. Based on this assessment, the NCLT may either admit or reject the application, and the relevant consequences under the Code would follow accordingly. If the application is incomplete or has any defects, it may be rejected.
The Bankruptcy Code does not specify the level of evidence required for the NCLT to establish the default concerning a debtor’s debt. Nor does it provide clear guidelines on the nature of satisfaction required by the NCLT in verifying the existence of a default. However, the Supreme Court, in the Innoventive Industries v ICICI Bank Ltd.[9] case, clarified that the NCLT’s role is limited to ascertaining the existence of the outstanding debt and default and does not extend to examining its extent or composition.
Based on past experiences, it is evident that the NCLT tends to admit applications that comply with the provisions of the Bankruptcy Code, although it retains the discretion to consider other factors if necessary.
2. Initiation by an Operational Creditor
The Bankruptcy Code outlines a two-step process for initiating insolvency proceedings by an Operational Creditor. When a default occurs, the Operational Creditor must first demand payment of the unpaid debt from the Corporate Debtor. Upon receiving the Demand, the Corporate Debtor has a period of 10 days to either dispute the debt’s existence or make the payment.
If the Corporate Debtor fails to respond to the Demand or does not make the payment, the Operational Creditor can then file an application before the National Company Law Tribunal (NCLT) to initiate the Insolvency Resolution Process. However, the presence of a dispute between the parties can act as a barrier to such an application. The term “dispute” encompasses various scenarios, such as a suit or arbitration proceedings related to (a) the amount of debt; (b) the quality of goods or services provided; or (c) a breach of a representation or warranty.
3. Initiation by a Corporate Debtor
If the corporate debtor defaults on its obligations, the corporate applicant has the right to file an application to initiate insolvency proceedings. Along with the application, the corporate applicant must provide relevant information concerning the books of account and the proposed Resolution Professional who will oversee the process.
Moreover, before commencing the insolvency process, the corporate debtor’s shareholders are required to pass a special resolution. In the case of a Limited Liability Partnership (LLP), at least three-fourths of the total number of partners must approve the resolution to initiate the insolvency resolution process. This approval is a crucial step in the commencement of the insolvency proceedings.
Corporate Insolvency Resolution Process (CIRP)
After the Corporate Insolvency Resolution Process (CIRP) is initiated under Sections 7, 8, 9, or 10 of the Insolvency and Bankruptcy Code of 2016, the Adjudicating Authority (NCLT) takes further action.
Section 12(1) of the Insolvency Code mandates that the CIRP should be completed within 180 days from the NCLT’s application to initiate the process. However, if the application is made by the resolution professional, this time period can be extended with NCLT’s approval.
An extension beyond the initial 180 days can be granted only upon obtaining a resolution passed by a vote of at least 66% of the voting shares of the Committee of Creditors in a meeting. Once such approval is obtained, the application to the Adjudicating Authority must be made by the resolution professional.
Upon receiving this application, the Adjudicating Authority can grant only one extension, which cannot exceed 90 days.[10] The CIRP must be completed within 330 days from the insolvency commencement date, considering any extensions granted under the Code and the duration spent in legal proceedings related to the resolution process of the corporate debtor.
1. Filing an Application with NCLT:
When a company fails to make payments, creditors have the right to file a Corporate Insolvency Resolution Process (CIRP) petition before the National Company Law Tribunal (NCLT). The NCLT is the competent authority for adjudicating cases involving corporate debtors. The petition’s merits are evaluated, and the NCLT determines if it has jurisdiction over the matter. If the petition does not meet the required criteria, the NCLT can reject it.
2. Application for Interim Resolution Process:
A resolution professional, nominated by the Committee of Creditors (CoC), is appointed temporarily by the NCLT. In the second stage, the interim resolution professional (IRP) must decide whether to complete the remaining insolvency process or ensure that the corporate debtor’s activities continue.
3. Moratorium:
Upon approval of the petition by the Tribunal, the moratorium period comes into effect. During this period, financial creditors are prohibited from receiving any payments from the corporate debtor’s account.
The Tribunal imposes the following restrictions during the moratorium period:
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- New lawsuits cannot be initiated, and existing lawsuits cannot be continued against the corporate debtor, specifically in relation to financial debt.
- The corporate debtor is safeguarded from being dispossessed or ousted from any operational, financial, legal, or managerial responsibilities.
- Any subsequent foreclosure or debt collection actions against the corporate debtor under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) of 2002 are not permitted.
- The corporate debtor’s property under the SARFAESI Act of 2002 cannot be disposed of or foreclosed.
The moratorium remains in effect until the completion of the Corporate Insolvency Resolution Process (CIRP). It can last for a maximum of 180 days, with the possibility of a 90-day extension in exceptional circumstances. During this period, the corporate debtor’s financial affairs are protected, allowing for a structured resolution process to take place.
4. Collation and Analysis of Facts:
The IRP assesses the claims made by the petitioner, and if needed, holds a meeting with the petitioner to gain clarity. Within 30 days of the CIRP’s initiation, the IRP forms a Committee of Creditors (CoC). The CoC then selects a resolution professional (RP), either a temporary one or a replacement for the IRP, within seven days of its formation.
5. Verification and Analysis of Claims:
The IRP verifies and classifies the creditors’ claims after summoning them. Within 30 days of being accepted into the CIRP, a CoC, comprising all financial creditors, is constituted.
6. Resolution Plan:
The CoC publicly announces insolvency and invites resolution plans from interested parties. After reviewing the suggested plans, the CoC selects the proposal with over 75% support and submits it to the NCLT.
7. Decision:
The NCLT authorizes the resolution plan, making it legally binding on the corporate debtor and all parties involved. If the NCLT does not approve the plan or if the CoC fails to present a resolution plan within the given period, the NCLT may order the liquidation of the corporate debtor.
Conclusion
The Insolvency and Bankruptcy Code (IBC) is a crucial legislation for the implementation of insolvency regulations in the country. Being a relatively new law, it is continually evolving, making it essential to closely study its amendments and court judgments to comprehend its intricacies. The Corporate Insolvency Resolution Process (CIRP) provided by the IBC serves the dual purpose of facilitating creditors’ debt recovery while safeguarding the best interests of the company.
Regarding the initiation of the CIRP process, the Code specifies three categories of individuals who can commence the process under the relevant sections. Although the IBC has some limitations and challenges in meeting its obligations, these issues are being addressed through legal proceedings and adjudications. The Code is also providing comprehensive insolvency and bankruptcy solutions for both creditors and businesses.
One notable aspect of the IBC is that it allows the interim insolvency professional to take control of the company’s administration without necessarily considering whether the debtor is better equipped to manage it. Furthermore, under the existing IBC framework, there may be certain hurdles or disincentives for initiating the resolution process. These aspects are subject to ongoing evaluations and discussions to improve the effectiveness and efficiency of the insolvency resolution mechanism.
[1] http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/A-Primer-on-the-Insolvency-and-Bankruptcy-Code.pdf
[2] Section 5 (20) of the Insolvency and Bankruptcy Act, 2016.
[3] Section 5 (7) of the Insolvency and Bankruptcy Act, 2016.
[4] https://www.bqprime.com/insolvency/homebuyers-as-financial-creditors-an-inelegant-solution
[5] Section 5 (5) of the Insolvency and Bankruptcy Act, 2016.
[6] https://prsindia.org/theprsblog/the-insolvency-and-bankruptcy-code-all-you-need-to-know
[7] Limited Liability Partnership Act, 2008
[8] (2018) 1 SCC 407
[9] Ibid.
[10] https://blog.ipleaders.in/analysis-extension-moratorium-period-time-limit-under-section-12-ibc/
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