Prof.

Harsh Kachalia’s
* Overview of Insolvency and Bankruptcy Code, 2016
I) Introduction:-
- It is not an Act, passed in the Parliament but is an Arrangement made to bring various
laws under one roof.
- Insolvency:- means not being able to pay the debts i.e. a Self-Declaration.
- Bankruptcy:- means being Legally declare that a person is unable to pay its Debts.
- Financial Creditors – To give money to somebody on credit.
E.g. Loan, Debn holders, Factor etc.
- Operational Creditors:- Giving Goods to Somebody on credit
E.g. Raw Material Supplier.

→ Structure of the Code :

Part I – (Sec 1-3) – Preliminary
Part II- (Sec 4-77)- Insolvency Resolution and Liquidation for Corporates
Part III- (Sec 78-187) – Insolvency resolution and Bankruptcy for Partnership Firms and
Individuals
Part IV – (Sec 188-223) – IPA’s and IU’s
Part V – (Sec 224-255) – Miscellaneous Provisions

→ Extent of Applicability of the code :

• Whole of India
• Part III = NA to J&K

→ Insolvency Bankruptcy Board of India [IBBI]:-

- A Regulatory Authority that has the power to Notify various sections on various dates in
order to Regulate the Insolvency & Bankruptcy law in India

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IBBI

Insolvency Professional Information utility (I.U.) Adjudicating Authority

Agency (IPA)  [A.A.]
[E.g. ICAI] Together / collect and [It includes Appellate
 Disseminate* all the Info. Tribunal]
It is Body of Insolvency Regarding Defaults by
Professionals [IP] anybody.
NCLT / DRT/**
NCLAT DRAT
 
Co./LLP Individual
P. Firm

* Disseminate = To spread the word.

** DRT = Debt Recovery Tribunal

* Insolvency Professionals:-
1. To Play a Role of Resolution Professionals.
2. To Play as liquidators.
3. To Act as the Directors of the Company in liquidation & Discharge the Role of Directors
in such Co.

→ Composition of the Board

(a) 1 Chairperson;
(b) 3 members from amongst the officers of the CG not below the rank of Joint Secretary or
equivalent, one each to represent the Ministry of Finance, the Ministry of Corporate Affairs
and Ministry of Law, ex-officio;
(c) 1 member to be nominated by the RBI, ex officio ;
(d) 5 other members to be nominated by the CG, of whom at least three shall be the whole-time
members

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→ Purpose Behind IBC, 2016:-
Indian Cricket Board Play at Church Temple Mosque
I- To Establish IBBI As a Regulatory Body for Insolvency & Bankruptcy Law.
C- To Consolidate & Amend Other Laws Relating to Re-organisation & Insolvency Resolution
of corporate Persons, Partnership Firms & Individuals etc.
B- To Balance Interest of Stakeholders including any Alteration in the order of priority of
Payment of unsecured creditors over & above Govt. dues.
P- To Promote Entrepreneurship.
C- To Increase Availability of credit.
T- Fixed a Time Period for the Execution of Law [180 days + 90 days]
M- Maximize the Value of Assets.

* Distinguish Features of the Board:- NEW COOL

C – 1) Comprehensive Law
- Regulates the Process of Insolvency for the persons including corporates, individual, LLP’s
etc.

O – 2) One window clearance & clarity in Process

- No more overlapping laws.
- Shift of Control from the SH’s & Promoters to the Creditors.

L – 3) Low Time Resolution

- Maximum 180 days + Maximum 90 days
- Introduction of Fast Track Corporate Insolvency Process [90 days]
- Thereafter, Sell the Assets of the Borrowers to Repay the Creditors.

O – 4) One Chain of Authority

- NCLT → Co. / LLP
- DRT → Individuals / P. firms
- Civil courts = Not allowed.
N – 5) New Regulatory Authority
- Establishment of IBBI.

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E – 6) Establishment of Information Utilities
- In order to Identify Defaulters & to Disseminate the Information about the same.

W - 7) Withering away the Multiplicity of Laws

- Provide a single platform for all the Recovery will have to amend in terms of IBC.
- IBC will have an overriding effect on all the laws.

→ Applicability of the Code : (Sec 2)

The provisions of this Code shall apply to—
(a) any company incorporated under the Companies Act, 2013 or under any previous company law;
(b) any other company governed by any special Act for the time being in force, except in so far
as the said provisions are inconsistent with the provisions of such special Act;
(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act,
2008;
(d) such other body incorporated under any law for the time being in force, as the Central
Government may, by notification, specify in this behalf; and
(e) Personal guarantors to corporate debtors; (e) partnership firms and individuals, in relation
to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be
(f) partnership firms or proprietorship firms; and
(g) individuals, other than persons referred to in clause (e)
Exception : Code is NA to Banks , Insurance Co. , PFI

* Sec. 53:- Priority for Distribution under IBC

[The sequence of Pyt. as per the water-fall model]
- The Repyt. of creditors after liquidation shall be done in the following steps:
(1) the insolvency resolution process costs and the liquidation costs paid in full;
(2) the following debts which shall rank equally between and among the following :—
(i) workmen's dues for the period of 24 months preceding the liquidation commencement date;
and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished his
security;
(3) wages and any unpaid dues owed to employees other than workmen for the period of 12
months preceding the liquidation commencement date;
(4) financial debts owed to unsecured creditors;
(5) the following dues shall rank equally between and among the following:—

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(i) any amount due to the CG / SG
(ii) debts owed to a secured creditor for any amount unpaid with interest;
(6) any remaining debts and dues;

II) → Corporate Insolvancy Resolution Process:- (CIRP)

- A financial creditor, may Assess the Debtor’s Business & if satisfied that the liability
Exceeds the Asset & the same cannot be Resolved, he may order the winding up of Debtor’s
Business i.e. for Realisation of Debtor’s Assets & Distribution by the liquidator.

→ Process Flow
Default Committed

Application with the Adjudicating Authority (NCLT)

Formation of Committee of Creditors (CoC)

As per the order of NCLT within 30 days

Confirmation by CoC Appointment.

Preparation of Information memorandum by Resolution Professionals

Resolution Plan shall be proposed by Creditors within 180 days.

Is the Plan approved by CoC with 66% Majority?

Yes No
 
Such Resolution Plan shall be approved by Liquidation
A.A.

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* Applicability of Part-II (CIRP) on Commitment of Default
- Default Committed & Amount of Default is ≮ 1,00,000
[CG may specify a Higher Amt. But ≯ 1 Cr.]

- Sec. 6:- Persons who may Initiate the CIRP

a. Financial Creditor (Sec. 7)
b. Operational Creditor (Sec. 8 & 9)
c. Corporate Debtor etc. (Sec. 10)

A) Sec-7:- Financial Creditor

1. File an Application to the Adjudicating Authority either by himself or jointly with
another FC.
2. Furnish Information:
a. Record of Default [Proof]
b. Name of Resolution Professional Proposed to act as an Interim Resolution
Professional (IRP)
3. Time period for determination of Default – 14 days.
- Default can be determined from:-
a. Records of Default from I.U.
b. On the basis of any other Evidence as Produced by financial Creditors.

4. Order

Default occurred Default Not Occurred

 
Accept the Application (if there is No Reject the Application
Disciplinary Proceedings Pending against such +
proposed IRP) Provide OOBH & Maximum 7 days for
Rectifying the Application if Required.

5. Commencement of CIRP = From the Date of Application.

6. Communication of the order by Adjudicating Authority to the financial Creditor &
Corporate Debtor shall be done.

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B) Sec. 8 & 9:- Operational Creditor (O.C.)
→ Sec. 8:-
- Serve a Demand Notice or Invoice copy to the Corporate Debtor (C.D.)
- On receipt of Notice / Invoice by C.D.,

Such Debtors shall within 10 days:

Accept the Pending Payment & Record the Reject the Notice by attaching the copy of
Existence of any dispute / suit etc. Pending. Payment already made by such Debtor.

→ Sec.9:- Application for Initiation of CIRP by O.C.

1. Filling of an application by O.C. to A.A. (after Expiry of 10 days)
2. Provide documents / Information by O.C.:
a. Demand Notice
b. Copy of Invoice
c. Affidavit Confirming the Pendency of the Payment.
d. Copy of any record with IU confirming that no payment is done by CD (If any)
e. Others.
3. O.C. may Proposed on I.R.P.
4. Order of A.A. within 14 days:

Accept the application Reject the Application

 
Commencement of CIRP A.A. may provide 7 days for Rectifying
application

c) Corporate Debtor: Sec.10

- File Application for CIRP after committing any Default.
- Furnish All the necessary Information & Propose the Name of an IRP.
- Order of A.A. → Same as Sec. 9

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* Sec. 11:- Persons Not Entitled to Make Application:-
- A corporate (C.D.) Debtor already under a CIRP.
- A C.D. who has completed 12 M preceding the date of application
- Financial creditor or C.D. who has violated any Terms of Resolution Plan.
- A C.D. whose liquidation order has been Passed.

* Sec.12:- Time Limit for Completion of CIRP

- Maximum 180 days + Extention 90 days
- If Plan approved by atleast 66% vote of CoC.

* Sec. 12A : Withdrawal of application admitted u/s 7/9/10 :

AA may allow to withdraw the applications on an application made by the applicant with approval
of 90% of voting share of CoC.

* Sec. 13 & 14 Public Announcement & Declaration of Moratorium Period:

1) Sec. 14:- Moratorium Period
- It is like a cooling period on the company for 180 days immediately after commencement
of CIRP.
- During this Moratorium period, there is a Prohibition on:
a. Starting Institution / Continuation of any suits
b. Transferring / Encumbring (Restricting Free Movement), Alien Ating (Transferring
Ownership) or Disposing any Assets
c. Any Action to forceful closure forclose, Recover or Enforce any security interest created
by Corporate Debtor SARFAESI Act, 2002

→ Exception:-
- There is no Prohibition on the following:-
a. Transactions Notified by CG, if any
b. Supply of goods / services to C.D.
c. A surety in a contract of Guarantee to a CD
→ Effectiveness:-
- Moratorium period shall be effective from commencement of CIRP upto completion of
CIRP.
- But if Before 180 days, the CIRP plan is approved or liquidation is ordered then Moratorium
Period shall cease to Exist.

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2) Sec. 13:- Public Announcement

- It shall be made by the IRP Immediately* after his appointment.
* Immediately means within 3 working days.

* Sec.15 Public Announcement must include the following:

1. Name / Address of corporate Debtor under CIRP.
2. Last date of submission of claim.
3. Penalties for false & misleading claims
4. Details of IRP
5. Date of which CIRP Ends.

* Sec. 16 Appointment, Tenure & Power of IRP

- The A.A. shall appoint I.R.P. within 14 days of CIRP commencement.
- If any Name is proposed then such person shall be appointed.
- If No name is proposed the A.A. may make a Reference to the Board (IBBI) to appoint the
IRP.
- Any such person may be appointed as IRP if there is no disciplinary Proceeding pending
against such person.

→ Term of IRP = not more than 30 days. Until the date of appointment of RP u/s 22
→ Key Role of IRP:
- Issue Public Notice
- Constitute CoC.
- Conduct 1st meeting of the CoC.
- Resolution Process.

→ Powers of IRP :- (Sec 17)

- Manage the affairs of the Co.
- Exercise the Powers of BOD / Partners.
- Officers / Managers must Report to IRP.
- Instructions to financial Institutions by IRP.

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→ Duties of IRP :- (Sec 18)
- Collect information about the CD
- Verify the claims of Creditors
- Constitute CoC
- Monitor Assets of CD and manage its operations
- Submit all information to IU
- Take control of all assets of CD
- Perform any other duties specified by IBBI

* Sec.21:- Constitute A CoC

- IRP shall after the collection of claims constitute a CoC.
- CoC shall comprises of financial creditors only If the company has Financial Crs.
- If one person is a financial as well as operational creditor then such person shall be Treated
as a F.C. and included in CoC to the Extent of his Proportionate Voting Shares of financial
debt owned by him.
- (IBBI) Board may specify the manner for determining the voting share.
- All the Decisions of CoC shall be taken by a vote of ≮ 51% of the Voting Share
- CoC has the Right to Require any financial Info. from IRP / RP & it is the Responsibility of
such R.P. to make such Info. available to F.C. within 7 days.
- The R.P. shall conduct / Arrange the 1st meeting of CoC within 7 days of its constitution.

Where the corporate debtor has no financial debt or where all financial creditors are related
parties of the corporate debtor, the committee shall be formed comprising of following
members:-
(a) 18 largest operational creditors by value.
(b) 1 representative elected by all workmen
(c) 1 representative elected by all employees.

Where the number of operational creditors is less than 18, the committee shall include all such
operational creditors

Quorum for the Meeting

1) Atleast 33% of the voting rights are present either in person or by video/audio means.
2) If the requisite quorum for committee of creditors is not fulfilled the meeting cannot be
held and the meeting shall automatically stand adjourned at the same time and place on the next
day.

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3) The adjourned meeting shall quorate with the members of the committee attending the
meeting.

* Sec.24:- Meeting of CoC

1. Physical / Electronic
2. The Members of this meeting shall be:
- Members of CoC (F.C.)
- Members of Suspended BOD.
- Operational creditor or its Assignee if the Amt. of their Debts is ≮ 10% of Their
Total Debts.
3. Right to Vote:-
Only with the Members of CoC, and if the BOD or operational creditors are absent, it shall
not invalidate the meeting.

* Sec. 22:- Appointment of R.P.

- IRP = Constitute CoC
- IRP = Conduct 1st Meeting of CoC
- CoC = Resolve to Appoint IRP as RP (subject to written consent of IRP).
OR
- Resolve to appoint some other person as R.P. (subject to written consent of Proposed RP)
By
Atleast 66% Voting share.

* Sec.23:- Functions of R.P.

- R.P. shall conduct CIRP & Manage the operation of C.D.
- R.P. shall Exercise the Powers of IRP.
- R.P. shall collect all the Info, Records, documents of C.D. from IRP.
- R.P. shall take over the Business / Mgt. of C.D. & operate it as a going concern as per the
Directions of CoC even after resolution plan is submitted, until the order of AA.
- i.e. Shift of Control from Debtors mgt. to the Creditors with the help of R.P. as their
Agent.

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* Sec. 27:- Replacement of R.P. by CoC
- If CoC Requires, it may by 66% vote replace R.P., by proposing a Name to A.A. & the A.A.
shall be require to forward such proposed Name to the Board (IBBI) & if there is no
Disciplinary Proceeding pending against such person then he will be appointed but unless he
is appointed, the earlier R.P. shall continue in the office.

* Section 25A- Rights and duties of authorised representative of financial

creditors.
(1) They shall have the right to participate and vote in meetings of the committee of creditors
on behalf of the financial creditor (Physically/ electronically)
(2) He shall circulate the agenda and minutes of the meeting of the committee of creditors to
the financial creditor he represents.
(3) He shall not act against the interest of the FC / FC’s that he represents
(4) He shall file with the CoC any instructions received from the FC for voting in accordance
therewith.

Section 29A. A person shall not be eligible to submit a resolution plan, if such person, or
any other person acting jointly or in concert with such person—
(a) is an undischarged insolvent;
(b) is a willful defaulter in accordance with the guidelines of the Reserve Bank of India
issued under the Banking Regulation Act, 1949;
(c) Classified as non-performing asset and at least a period of 1 year has lapsed from
the date of such classification till the date of commencement of the CIRP of the CD
Provided that the person shall be eligible to submit a resolution plan if such person
makes payment of all overdue amounts with interest thereon and charges relating to
non-performing asset accounts before submission of resolution plan;
Exception – NA where applicant is a financial entity and is not a RP to the CD
(d) has been convicted for any offence punishable with imprisonment for two years or
more under the 12th Schedule of this Act or for 7 years or more under any law for the
time being in force.
Exception – NA to a person after expiry of 2years after his release.
(e) is disqualified to act as a director under the Companies Act, 2013;
(f) is prohibited by the Securities and Exchange Board of India from trading in
securities or accessing the securities markets;

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(g) has been a promoter or in the management or control of a corporate debtor in which
a preferential transaction, undervalued transaction, extortionate credit transaction
or fraudulent transaction has taken place and in respect of which an order has been
made by the Adjudicating Authority under this Code;
Exception – NA is such transaction has taken place prior to the acquisition by the of CD
by resolution applicant and such applicant was not involved in such transaction .

Sec 31 : Approval of the resolution plan

Only if satisfied that the RP has provisions for effective implementation of plan and after
verifying whether it meets with the CoC requirement , AA shall approve the RP and it shall be a
binding on all the parties.

Moratorium shall cease to exist thereafter and the resolution applicant shall obtain all the
necessary approvals required under any law within 1 year from the date of date of approval by
AA or such other period as may be prescribed , whichever is later.

However, the plan is for a combination u/s 5 of Competition Act, 2002, approval of CCI shall
also be obtained.

FAST TRACK INSOLVENCY RESOLUTION FOR CORPORATE PERSONS

A fast track insolvency resolution, as the name suggests, is a process wherein the insolvency
resolution process shall be completed in an expeditious manner i.e., with 90 + 45 days from the
insolvency commencement date.
The provisions of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process
for Corporate Persons) Regulations, 2016 shall, mutatis mutandis, apply to the conduct of a fast
track corporate insolvency resolution process.

Who may apply?

An application under this category can be made by any corporate debtor falling under any of the
below mentioned category:-
a. A Small Co.
b. A Startup (Other than Partnership Firm) (a co. whose T/o in the 7 years since
incorporation has not exceeded Rs. 25/100 Crores in any year)
c. An unlisted Co. whose total assets does not exceed Rs.1 Cr.as per immediately preceding
FY

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(III) Liquidation Process:-
- C.D. = Committed default = IBC Attracted

First try to Resolve through CIRP

But Liquidation is triggered if :
a. No Plan is Presented.
b. 66% of CoC Resolves to liquidate.
c. CoC fails to approve the plan within 180 + 90 days.
d. NCLT rejects the Plan because the Debtor contravenes any condition or on technical
grounds.

→ Appointment of Liquidator:-
- Unless Replaced by A.A., the R.P. shall act as O.L. (subject to his consent in writing)
- All the powers of Director / Kmp shall now become the powers of O.L.

→ Replacement of R.P.
- CoC may resolve by 66% voting that RP shall be replaced
- If the plan submitted by R.P. is Rejected by A.A. or
- the Board (IBBI) Recommend the Replacement then R.P.
- RP Fails to give his consent in Writing

I.P. → Insolvency Professional.

- The Board shall propose the Name of New RP (Now known as I.P.) within 10 days and the
A.A. shall appoint such I.P. as O.L. (subject to his consent in writing)
- Such O.L. shall charge the Fees in Proportion to the liquidation Estate as may be proposed
by Board (IBBI)

* Sec.35:- Powers & Duties of Liquidator (Key : - E S P N V I P O)

E- Evaluate Assets & Property
S- Sale movable / Immovable Property etc (sell to any person except those ineligible to act as
resolution applicant u/s 29A)
P- Measures to Protect & Preserve the Assets & Property.
N- To Draw, Accept & Endorse any Negotiable Instrument.
V- Verify the claims of creditors

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I- Institute or defend any Suit.
P- To obtain professional Assistance.
O- Perform other functions as may be specified by Board (IBBI).

* Sec.37:- Power of Liquidator to Access Information.

- The O.L. shall have the Access to the Info. system for Identifying Proof of claims,
liquidation Estate etc.
- The CoC may require the O.L. to give financial Info. & O.L. shall provide the same to CoC
within 7 days.

* Sec. 36 Liquidation Estate

- It means an Estate / Group of all the Assets of C.D.
- It shall include all the assets of C.D. whether in his possession or not.
But
It shall not include the Assets which are held by the Corporate Debtor in the trust of the
third party or Assets of the Subsidiaries of such C.D.

* Sec.38 Consolidation of Claims

- Collection of claims by liquidator within 30 days of liquidation commencement.
- Submission of claim by All creditors.
- Verification of Supportive Documents.

- Alteration of the Claims by Creditor is allowed within 14 days of its submission.

- Liquidator shall verify all the claims u/s 39
And
Liquidator may determine as to Admitting or Rejecting the claims made above by the
Creditors as per Sec. 40
And
Also the liquidator shall determine the valuation of such claims as per Sec. 41
And
In case of Rejection / Acceptance, the creditor may also file an Appeal to A.A. Against the
liquidator.
→ Note:-
- The secured creditors shall be paid by Releasing the Security and in case of any Shortfall
he shall be paid by liquidator under waterfall Approach u/s 53.

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* Dissolution of C.D.
- Where all the Assets are liquidated the liquidator shall make an application to A.A. for
Dissolution
And
The A.A. shall pass an order and the C.D. shall stand dissolved from the Date of such Order.

SECTION 59 : VOLUNTARY LIQUIDATION OF CORPORATE PERSONS

(1) A corporate person who intends to liquidate itself voluntarily and has not committed any
default may initiate voluntary liquidation proceedings
(2) The voluntary liquidation of a corporate person shall meet such conditions and procedural
requirements as may be specified by the Board (IBBI).
(3) Conditions of initiation of voluntary liquidation proceedings:

Voluntary liquidation proceedings of a corporate person registered as a company shall meet the
following conditions, namely:—

(a) a declaration from majority of the directors of the company verified by an affidavit stating
that—
(i) they have made a full inquiry into the affairs of the company and they have formed
an opinion that either the company has no debt or that it will be able to pay its debts in full
from the proceeds of assets to be sold in the voluntary liquidation; and
(ii) the company is not being liquidated to defraud any person;

(b) the declaration given above shall be accompanied with the following documents,
namely:—
(i) audited financial statements and record of business operations of the company for
the previous two years or for the period since its incorporation, whichever is later;
(ii) a report of the valuation of the assets of the company, if any prepared by a
registered valuer;

(c) within 4 weeks of a declaration, there shall be—

(i) an SR in GM requiring the company to be liquidated voluntarily and appointing an insolvency
professional to act as the liquidator; or
(ii) a resolution of the members of the company in a general meeting requiring the
company to be liquidated voluntarily as a result of expiry of the period of its duration, if any,
fixed by its articles, or

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(iii) on the occurrence of any event in respect of which the articles provide that the
company shall be dissolved, as the case may be and appointing an insolvency professional to act
as the liquidator:
Provided that if the company owes any debt to any person, than the creditors representing two
thirds in value of the debt of the company shall approve the resolution above within 7 days of
such resolution.
(4) Notification to Registrar of company and the Board: The Company shall notify the

Registrar of Companies and the Board about the resolution to liquidate the company within 7
days of such resolution or the subsequent approval by the creditors, as the case may be.

(5) Commencement of liquidation proceeding: The voluntary liquidation proceedings in

respect of a company shall be deemed to have commenced from the date of passing of the
resolution.

(6) Application of provisions of this Code: The provisions of sections 35 to 53 of Chapter III
and Chapter VII shall apply to voluntary liquidation proceedings for corporate persons with
such modifications as may be necessary.

(7) Application to adjudicating authority on complete wound up of the corporate person:

Where the affairs of the corporate person have been completely wound up, and its assets
completely liquidated, the liquidator shall make an application to the Adjudicating Authority for
the dissolution of such corporate person.

(8) Passing of an order of dissolution: The Adjudicating Authority shall on an application filed by
the liquidator, pass an order that the corporate debtor shall be dissolved from the date of that
order and the corporate debtor shall be dissolved accordingly.

(9) Forward of copy of order: A copy of an order shall within fourteen days from the date of
such order, be forwarded to the authority with which the corporate person is registered.

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