INSOLVENCY AND BANKRUPTCY CODE, 2016

Notes on important Chapters

Part I - Preliminary

Provides for Short title, extent, commencement, application of the Code and Definitions of
terms used in the entire Code

Major terms used in the code and their implications – as under Section 3

i. Charge [Section 3(4)]

 Interest or lien created on the property or assets of any person or any of its
undertakings as security Interest or lien created on the property or assets of any
person or any of its undertakings as security
 Includes a mortgage
ii. Claim [Section 3(6)]
 A right to payment (fixed/disputed/secured/unsecured/legal/equitable/reduced to
judgement or not)A right to payment
(fixed/disputed/secured/unsecured/legal/equitable/reduced to judgement or not)
 Right to remedy for breach of contract if such breach gives rise to a right to
payment
iii. Corporate person [Section 3(7)]
 Company under the Companies Act 2013 LLP under the LLP Act 2008 any
person incorporated with limited Company under the Companies Act, 2013, LLP
under the LLP Act, 2008, any person incorporated with limited
 liability under any other law for the time being in force
 Excludes “financial service providers”
iv. Corporate debtor [Section 3(8)]
 Necessarily a corporate person who owes a debt to any person
v. Creditor [Section 3(10)]
 To whom a debt is owed
 Includes financial creditor, operational creditor, secured creditor, unsecured
creditor, decree-holder
vi. Default [Section 3(12)]

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  Non-payment of debt as and when become due and payable
 Is not repaid by the debtor/corporate debtor
vii. Residuary definitions [Section 3(37)]
As defined in these legislations
 The Indian contract Act, 1872
 The Indian Partnership Act, 1932
 The Securities Contract (Regulation) Act, 1956
 The Securities Exchange Board of India Act, 1992
 The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
 The Limited Liability Partnership Act, 2008
 The Companies Act, 2013

Part II
Insolvency Resolution and Liquidation for Corporate Persons

 Divided into 7 Chapters

 Covers Corporate Insolvency Resolution (CIR) Process, Liquidation Process, Fast
Track CIR, Voluntary Liquidation, AA, and Offences and Penalties

Chapters I – Preliminary

This chapter contains Section 4 and 5 which deals with the application of Insolvency
Resolution and Liquidation for Corporate Persons and necessary definitions for the said topic,
respectively.

Chapters II - Corporate Insolvency Resolution Process

Sections 6 and 10 of the IBC, 2016 provides a procedure whereby a corporate debtor can
commence-insolvency resolution process. Section 59 provides that a corporate debtor who
intends to liquidate itself voluntarily and has not committed any default, may initiate
voluntary liquidation proceedings.

It prescribes a Liquidation Process. Along with the Code, CIRP Regulations, 2016 and
Liquidation Regulations also prescribe a liquidation process by the creditor(s) in case the
resolution proceedings fail or the creditor(s) reach a decision to liquidate the corporate
debtor.

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Chapter II, Sections 7 and 8 of the IBC, 2016 provides a procedure whereby a creditor can
commence insolvency resolution proceedings. CIRP Regulations, 2016 also provide for the
Insolvency Resolution process for corporates.

Sections 17 - 25 of the IBC, 2016, the resolution professional manages the affairs of the
corporate debtor. All the business decisions which are beneficial for the debtor are taken by
the RP. Under Section 20 (2)(b) of the Code, the RP shall have the authority to amend or
modify the contracts or transactions which were entered before the commencement of
corporate insolvency resolution process.

Section 50(1), the resolution professional may make an application for avoidance of
extortionate credit transactions. Under Regulation 5 of Insolvency and Bankruptcy Board of
India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 also talks
about when a transaction can be considered extortionate under section 50.

Section 61 provides for appeal with NCLA T.

Chapters III - Liquidation Process

Sections 33 to 54 in Chapter III of Part II of the Insolvency and Bankruptcy Code, 2016 lay
down the law relating to liquidation process for corporate persons.

An attempt is first made to resolve the insolvency of corporate debtor through corporate
insolvency resolution process laid down in Chapter II of Part II of the Code. The provisions
relating to liquidation in Chapter III of Part II of the Code comes into effect if the attempts to
resolve corporate insolvency under Chapter II of the Code fail.

A corporate debtor may witness liquidation under the following four scenarios:

1. Where the Adjudicating Authority does not receive a resolution plan

2. Where the Adjudicating Authority rejects the resolution plan
3. Where, at any time before confirmation of resolution plan, the committee of creditors
resolve to liquidate corporate debtor
4. Where the corporate debtor violates the terms of the resolution plan

Likewise, various critical dimensions emerging out of the liquidation on or after failing of RP
have been captured in this study lesson. For instance, Bar to filing of suits and legal
proceedings; Appointment of Liquidator and Fee to be paid; Powers of Liquidator to Access
Information.

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Chapters IV - Fast Track Corporate Insolvency Resolution Process

Sections 55 to 58 under chapter IV of Part II (w.e.f. 14th June, 2017)

Applicable to the following categories of corporate debtors:

 a small company, or
 a start-up (other than the partnership firm), or
 an unlisted company with total assets, not exceeding Rs.1 crore.

Default completion time is 90 days from the insolvency commencement date as against 180
days in other cases.

 One-time extension of a maximum of 45 days permissible

 Necessity of extension to be determined by AA

Chapters V - Voluntary Liquidation of Corporate Persons

Section 59 in Chapter V of Part II of the Insolvency and Bankruptcy Code, 2016 provides for
the initiation of voluntary liquidation proceedings by a corporate debtor which has not
defaulted on any debt due to any person.

It is important to note that one may initiate voluntary liquidation proceedings, i.e. a corporate
person who intends to liquidate itself voluntarily and has not committed any default may
initiate voluntary liquidation proceedings under the provisions of Chapter V of Part II of the
Code.

In view of the above interesting fact, this study lesson made an endeavour to explore various
important angles, like, Procedural requirements; Conditions for voluntary liquidation
proceedings of corporate person registered as company; Requirement of notification etc

Chapters VI - Adjudicating Authority for Corporate Persons

National Company Law Tribunal having territorial jurisdiction over the place where the
registered office of the company is located

Appellate Authority is the National Company Law Appellate Tribunal - Appeal to be filed
within 30 days. Extension of maximum 15 days allowed provided there is ‘sufficient cause
‘Extension of maximum 15 days allowed, provided there is sufficient cause

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Appeal to Hon’ble Supreme Court - Against orders of NCLAT on a question of law. Within
45 days of receipt of NCLAT’s order Within 45 days of receipt of NCLAT’s order.
Jurisdiction of any Civil Court of authority barred

The Debt Recovery Tribunal having territorial jurisdiction over the place where the
individual debtor actually and voluntarily resides or carries on business or personally works
for gain

Appellate authority is the Debt Recovery Appellate Tribunal. Appeal to be filed within 30
days. Extension of maximum 15 days possible, provided there is ‘sufficient cause’.

Appeal to Supreme Court. Against an order of DRAT (on question of law), within 45 days
Extension, possible for further 15 days, in case there is ‘sufficient cause’. Jurisdiction of any
civil court or authority barred

Chapters VII - Offences and Penalties

Chapter VII provides for offences that otherwise adversely affect the corporate insolvency
resolution process (CIRP), when it is initiated against a CD. Sections 68 to 77 explicitly
layout punishments for certain actions like concealment of property of CD (section 68),
transactions defrauding creditors (section 69), for any misconduct in course of CIRP (section
70) as well as for falsification of books of CD (section 71). Nevertheless, any wilful and
material omission from statements related to affairs of CD (section 72) and false
representation to creditors (section 73) are also treated as offence sunder this Chapter.
Besides, a contravention of moratorium or the resolution plan would constitute an offence
(section 74) as in the case of furnishing false information in an application (section 75 and
77). Also, any non-disclosure of dispute or payment of debt by operational creditors (OC) is
also considered as an offence (section 76) under the Code. To strengthen the restraints
mentioned above, the Code provides for punishment with fine (section 235A) if any
contravention escapes the clutches of express provisions for penalty/punishment. Such
offences mentioned under this Code are to be tried by a Special Court (section 236),
notwithstanding anything in the Code of Criminal Procedure, 1973, established under
Chapter XXVIII of the Companies Act, 2013 (the Act of 2013).

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 Part III
Insolvency Resolution and Liquidation for Individuals and Partnership
Firms

 This Part too, is divided into 7 Chapters

 Covers Fresh Start Process, Insolvency Resolution, Bankruptcy Order, Administration
and distribution of the bankruptcy estate, AA, and Offences and Penalties

Chapters I – Preliminary

This chapter contains Section 78 and 79 which deals with the application of Insolvency
Resolution and Liquidation for Individuals and Partnership Firms and the necessary
definitions for the said topic, respectively.

Chapters IV - Bankruptcy Order for Individuals and Partnership Firms

The provisions relating to the insolvency and bankruptcy of individual and partnership are
enshrined in part III of the Code. On reading part III of the Code we shall witness the
provisions targeting bankruptcy order for individual and partnership firms outlined in Chapter
IV.

On interpretation of the chapter IV of Part III of the Code we are of the view that “all
creditors taking part in the bankruptcy process would have to donate their respective security
interest that is in possession of each of them towards the bankruptcy estate that is created for
all the creditors. Once bankruptcy order is passed, the created bankruptcy estate shall be
divided in the prescribed order as mentioned in the relevant Section.” By this action the
process tends to cover more creditors in an effective and synchronized manner.

The application for bankruptcy can be made only in the below-mentioned scenarios:

 On rejection of application for initiating the insolvency resolution process.

 Where the proposed repayment plan is rejected by the adjudicating authority.
 In the scenario where repayment plan as approved could not be implemented in its
entirety due to which it ended prematurely.

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Chapters VI - Adjudicating Authority for Individuals and Partnership Firms

DRT – The adjudicating authority for Individuals and partnership firms as mentioned above
shall be the DRT having territorial jurisdiction over the place where the individual debtor
actually or voluntarily resides or carries on business or personally works for gain.

DRAT – Once the application under IBC is admitted by the DRT against the individual or
partnership firm then any person aggrieved by the order of DRT may prefer an appeal before
the DRAT. Every appeal shall be filed before DRAT within thirty days. An appeal can be
filed beyond thirty days if DRAT is satisfied that there was a sufficient cause for not being
able to file within the thirty days duration but then within fifteen days period after thirty days
only.

Supreme Court – If a person is not satisfied and is aggrieved by the order of DRAT then in
such a case he can file an appeal to the Supreme Court. The application to be filed shall be
based only on the question of law that arouse out of the order only. The application before the
Supreme Court shall be filed within forty-five days from the date of receipt of order of
DRAT. However, the Supreme Court may allow extension beyond forty-five days if it is
satisfied that person was prevented by sufficient clause. The extension allowed shall be only
fifteen days beyond the forty-five days duration.

The Time limit for disposal of the Appeal – The application shall be disposed off by DRT or
DRAT within the period specified in the Code. However, if the application is not disposed off
within the prescribed time limit, then the DRT or DRAT shall record the reason for delay in
writing. The Chairperson of DRAT shall take the reason for a delay into consideration and
thereafter if required may extend the period prescribed in the act by another period not
exceeding ten days.

Chapters VII - Offences and Penalties

This chapter elaborates on the penalties on; false information by creditor; deliberate
contravention of the provisions of this part; for false information, concealment, etc. by
bankruptcy.

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 Part IV
Regulation of Insolvency Professionals, Agencies and Information Utilities

 7 Chapters
 Deals with the institutional framework under the Code – calls for the establishment of
the Board, discusses its powers and functions
 Also covers IPs, IP Agencies, and Information Utilities
 Inspection and Investigation of IP Agency has also been dealt with

Chapters III - Insolvency Professional Agencies

The Code provides for Insolvency Professionals (IPs), a class of regulated but private
professionals having minimum standards of professional and ethical conduct, to act as
intermediary in the insolvency resolution process. Insolvency Professional Agencies are
designated to regulate Insolvency Professionals. These agencies conduct examinations to
enrol Insolvency Professionals and enforce a code of conduct for their functioning. Following
are the designated Insolvency Professional Agencies (IPAs) established under the Code:

 The Indian Institute of Insolvency Professionals of ICAI,

 ICSI Institute of Insolvency Professionals and
 Insolvency Professional Agency of Institute of Cost Accountants of India

To regulate the working of Insolvency Professional Agencies (IPAs), the Insolvency and
Bankruptcy Board of India (IBBI) has framed the following regulations in exercise of the
powers conferred by the Insolvency and Bankruptcy Code, 2016:

 The Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing
Board of Insolvency Professional Agencies) Regulations, 2016 and
 The Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies)
Regulations, 2016.

Chapters IV - Insolvency Professionals

The Code provides for Insolvency Professionals (IPs) to act as intermediary in the insolvency
resolution process. Insolvency professionals are a class of regulated but private professionals
having minimum standards of professional and ethical conduct. Section 3(19) of the Code
defines an “insolvency professional” as a person enrolled under section 206 with an

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insolvency professional agency as its member and registered with the Board as an insolvency
professional under section 207.

An insolvency professional plays a very important role under the Code. He acts as a
“resolution professional” in the corporate insolvency resolution process (specified in Part II
of the Code which deals with corporate persons) as well as Part III of the (which deals with
Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms) for conducting
the fresh start process or insolvency resolution process.

An insolvency professional also acts as a liquidator in accordance with the provisions of Part
II as well as a “bankruptcy trustee” for the estate of the bankrupt under section 125 in Part III
of the Code. They must be necessarily enrolled with an Insolvency Professional Agency.

Chapters VI - Inspection and Investigation

Sections 217 to 220

The IBBI announced the regulations in exercise of its powers conferred by sections 196, 217,
218, 219, 220 read with section 240 of the Insolvency and Bankruptcy Code, 2016.

These regulations provide the power to conduct inspections of records of service provider,
procedure of inspection, investigation of a service provider, procedure for conducting the
investigation, submission of an interim and final investigation report, issuance of a show-
cause notice and the requirements for a valid show-cause notice.

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 Part V – Miscellaneous
 Calls for repeal of certain enactments and savings
 Requires amendments in certain enactments
 Contains transitional provisions
 Empowers the Central Governments to make Rules, and empowers the
 Board to make Regulations.

Notification dated 28/3/2020 for increasing threshold of default under section 4 of IBC,
2016

On 24-3-2020, the threshold for initiation of Corporate Insolvency Resolution Process

(‘CIRP’) under the Insolvency and Bankruptcy Code (‘IBC’) against the erring companies
was increased from Rupees 1 lakh to Rupees 1 crore, vide MCA Notification No. S.O.1205
(E). The decision was made in view of the lockdown announced by the Prime Minister to
prevent the widespread of COVID-19. The announcement made in a press conference was
convened by the Union Finance Minister subsequent to which the notification was published
in the Official Gazette.

The increase in the trigger amount will supposedly benefit small companies and particularly
the MSMEs (medium, small and micro enterprises) which are struggling during this
lockdown period. This action will save a lot of businesses which are already facing a threat of
default and thus avoid large scale insolvencies. In addition to this announcement, the Finance
Ministry has also issued a statement that it might consider suspending Sections 7, 9 and 10 of
IBC, if the lockdown continues beyond 30-4-2020.

Even though the notification will be deemed to be prospective, there still remains scope for
interpretation of the notification, and thus a subsequent scope for judicial interference.
Further, the notification was a subordinate or delegated legislation, and not a legislative
amendment of the IBC itself, thereby increasing scope for judicial interference especially in
regard to its applicability.

Therefore, in the midst of a public health and economic crisis, a lopsided approach to amend
the IBC is not the most ideal and pragmatic way forward, which in turn will severely affect
various stakeholders throughout the country. The system of checks and balances has to be
utilised in a balanced manner with the primary objective of accelerating economic growth
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rather than suspending its growth by doubting the constitutional efficacy of the Insolvency
and Bankruptcy Code at the threshold itself.

Landmark Judgments
Chitra Sharma and Ors. vs. Union of India and Ors.1

Bench: Dipak Misra, C.J.I; A.M. Khanwilkar, J.; D.Y. Chandrachud, J.

Facts: Present case arose from IDBI Bank Vs Jaypee Infratech Ltd and was part of the said
case wherein the Supreme Court vide its order dated 04.09.2017 has stayed the order passed
by the National Company Law Tribunal, Allahabad. Learned Attorney General for India
appearing for respondent submitted that the order passed by this Court (SC) on 04.09.2017
needs to be vacated or modified because the consequence of the stay would be that the
Management of respondent Jaypee Infratech Ltd. would stand restored. This was not a
consequence intended by this Court. It is urged by him that if the erstwhile Management of
the said company continues, it will affect the rights of the creditors and the consumers as
well.

Issue: Should the Corporate Insolvency Resolution Process be initiated against the
Respondent in the present case in light of protecting the interests of the homebuyers?

Laws Involved:

i. Section 7 of Insolvency and Bankruptcy Code, 2016

ii. Section 21of Insolvency and Bankruptcy Code, 2016
iii. Section 29A of Insolvency and Bankruptcy Code, 2016

Ratio:

i. The Supreme Court in its judgement passed certain significant directions, in effect re-
commencing the CIRP. In order to do justice to the interests of all the concerned
stakeholders in the CIRP of JIL, and to prevent it from going into liquidation, the
Supreme Court directed that the initial period of 180 days be revived with effect from
August 09, 2018 (extendable by a further period of 90 days under the provisions of
IBC, if required), and a new CoC be constituted in accordance with the amended

1
(2017) 143 SCL 680 (SC)

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 provisions of the IBC to enforce the statutory status of the homebuyers as financial
creditors.
ii. The Supreme Court has also directed that the IRP would have the option of inviting
fresh bids so that there is a wider field of choice provided to the CoC, and in this
entire process JIL and JAL along with their promoters would remain ineligible to
participate in the CIRP in light of the bar under Section 29A of the IBC. The Court
also acceded to the request of the RBI to initiate CIRP against JAL in order to address
the financial distress of JAL. The money deposited by the JAL is to be transferred to
NCLT to take an appropriate decision with regard to the same.

Macquarie Bank Limited vs. Shilpi Cable Technologies

Bench: Macquarie Bank Limited vs. Shilpi Cable Technologies

Facts: The Corporate Debtor/Respondent (Uttam Galva Metallics) defaulted in the payment
to the Operational Creditor/Appellant (Macquarie Bank) amounting to USD 6,321,337
equivalent to Rs. 43,11,15,190. Although repeated reminders as to the payment of the debt
via emails were made, but such communications could not influence the Debtor to make the
payment, pursuant to which a Statutory Notice was sent by the Appellant under Section 433
and 434 of the Companies Act. The reply to such notice denied the existence of any such
outstanding debt on the part of the Respondent. After, the Insolvency and Bankruptcy Code
was enacted in 2016, the Appellant furnished a Demand Notice to the Corporate Debtor
under Section 8 of the Code. The Respondent replied to the notice saying that there existed
no outstanding default on its part and simultaneously, also questioned the validity of the
Purchase Agreement. The Appellants approached the National Company Law Tribunal and
applied for the initiation of the Corporate Insolvency Resolution Process

Issue:

i. Whether, in relation to an operational debt, the provision contained in Section 9(3)(c)

of the Code is mandatory?
ii. Whether a demand notice of an unpaid operational debt can be issued by a lawyer on
behalf of the operational creditor?

Laws Involved:

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 i. Section 8 of Insolvency and Bankruptcy Code, 2016
ii. Section 9 of Insolvency and Bankruptcy Code, 2016
iii. Section 238 of Insolvency and Bankruptcy Code, 2016

Ratio:

i. The Hon'ble Supreme Court observed that a creative interpretation of Section 9(3)(c)
is necessary in the present case as the literal interpretation would be unreasonable and
would create hardships for Appellants and other foreign banks in the future. Also, the
requirement of certificate as a document is not necessary for substantiating the
existence of default as it can be proved by other documents as well. Also, in such
cases where such certificates are impossible to furnish, serious inconvenience will be
caused to the innocent persons like Appellant when such requirements are not even
necessary to further the object of the Act.
ii. Section 8 of the Code speaks of an operational creditor delivering a demand notice. It
is clear that had the legislature wished to restrict such demand notice being sent by the
operational creditor himself, the expression used would perhaps have been “issued”
and not “delivered”. Delivery, therefore, would postulate that such notice could be
made by an authorized agent. In fact, in Forms 3 and 5 of the Adjudicating Authority
Rules, it is clear that this is the understanding of the draftsman of the Adjudicatory
Authority Rules, because the signature of the person “authorized to act” on behalf of
the operational creditor must be appended to both the demand notice as well as the
application under Section 9 of the Code
iii. The non-obstante clause contained in Section 238 of the Code will not override the
Advocates Act as there is no inconsistency between Section 9, read with the
Adjudicating Authority Rules and Forms referred to hereinabove, and the Advocates
Act

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P.X.Xavier & K.Joseph V. In The Matter Of Excel Glasses Ltd.

Facts: the Liquidator published the notice in a news newspaper and some of the employees
noticed it and responded to that. The last date given for the application was on 20.11.2019.
But unfortunately, the 2nd applicant herein filed his application on 22.11.2019 (Annexure 1).
The liquidator in view defect notice to all other employees except these 2 applicants
(Annexure A2). Hence the applicant contacted the liquidator and he informed that the said e-
mail and application has to be resubmitted again. Accordingly, these 2 applicants re-
submitted that e-mail again. As all other employees re submitted the application and other
details afresh, the 2nd applicant herein also filed a fresh application and other details
(Annexure A3). The liquidator is not considering the application of the 2nd applicant along
with other employees.

Laws Involved: Section 42 of Insolvency and Bankruptcy Code, 2016

Ratio: Because the liquidation proceedings are yet to be finalized in the present case, no
prejudice will be caused if the claim of the applicant is adjudicated and admitted. The delay
in submission of the claim by the Applicant deserves condonation. Hence. I condone the
delay of two days m the submission of the claim, in accordance with the provisions of the
Code. The Ld. Liquidator is directed to consider the claim of applicants herein Mr. P.X
Xavier and Mr. K. Joseph (Employees of Excel Glassware) and admit the same after
determining its veracity.

Sanjay Kumar Ruia v. Catholic Syrian Bank Ltd. & Anr2

Bench: Justice S. J. Mukhopadhaya & Justice Bansi Lal Bhat

Issue:

i. Whether in a ‘Corporate Insolvency Resolution Process’ triggered under Sections

7 or 9 or 10 of the ‘I&B Code’, the Adjudicating Authority has power to convert
the ‘Corporate Insolvency Resolution Process’ as a ‘Fast Track Corporate
Insolvency Resolution Process’ under Section 55 of the ‘I&B Code’?
ii. Whether ‘Committee of Creditors’ had jurisdiction to replace the ‘Resolution
Professional’ after completion of 270 days? and;

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MA 204/2019 in C.P.(IB)-1268/MB/2017

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 iii. Whether Adjudicating Authority is empowered to decide the resolution cost,
including the resolution fee payable to the ‘Resolution Professional’?

Laws Involved: Section 55, 7, 9, 30, 31 of Insolvency and Bankruptcy Code, 2016

Ratio: Adjudicating Authority has no jurisdiction to convert ‘Corporate Insolvency

Resolution Process’ under Sections 7, 9 or 10 of the ‘I&B Code’ as ‘Fast Track Corporate
Insolvency Resolution Process’ proceeding under Section 55 of ‘I&B Code’ and therefore,
we are of the view that the Adjudicating Authority was duty bound to pass order under
Section 31 in absence of the ‘Resolution Plan’.

Tkj Marketing Group Pvt. Ltd., In Re

Bench: Shri R.Varadharajan

Facts/ issue: In the instant case, even though the petition has been filed under Section 59 of
IBC, 2016 by the Liquidator, the said Liquidator is not registered with IBBI as a Resolution
Professional and hence it is a moot point whether he is entitled to move this petition before
this Tribunal, named as the Adjudicating Authority for CIRP.

Laws Involved: Section 59 of Insolvency and Bankruptcy Code, 2016

Ratio: The Central Government has contemplated a like situation as the one in hand and
passed the Removal of Difficulties Order in exercise of powers conferred by sub-section (i)
of Section 470 of the Companies Act, 201 3 and hence this Petition is required to be
proceeded with as per the procedure prescribed under Companies Act, 1956 relating to
Voluntary Liquidation and not under the provisions of Section 59 of IBC ,2016 and in the
circumstances the petitioner is sent back to the Registry maintainable under the provision s of
IBC,201 6 and have of NCLT for being returned to petitioner as not recourse to the
provisions of Companies Act, 1956.

M/s. Starlog Enterprises Ltd. Vs. ICICI Bank Ltd.3

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C.P. No. 12/I&B/NCLT/MAH/2017

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Bench: Sudhansu Jyoti Mukhopadhaya, J.

Facts: Applicant having failed to realise the outstanding dues filed an application under
section 7 of the Code before the Adjudicating Authority/NCLT. The applicant filed proof for
service of notice to the corporate debtor. The NCLT satisfied that there was a default on the
part of corporate debtor and passed an ex-parte order admitting the application filed under
section 7 of the Code declaring moratorium.

Laws Involved: Section 61 read with Sections 7, 9 & 75 of the Insolvency and Bankruptcy
Code, 2016

Ratio:

i. It is clear that before admitting an application under Section 9 of the Code it is

mandatory duty of the 'adjudicating authority' to issue notice. In the present case
admittedly no notice was issued by the 'adjudicating authority' to the corporate debtor,
before admitting the application filed under Section 9 of the Code. For the said reason
the judgement order cannot be upheld having passed in violation of principle of
natural justice.
ii. In effect the appointment of Interim Resolution Professional, order declaring
moratorium, freezing of account and all other order passed by 'adjudicating authority'
pursuant to impugned order and action taken by the Interim Resolution Professional,
including the advertisement published in the newspaper calling for applications are
declared illegal.
iii. The Tribunal imposed a penalty of Rs. 50,000/- on Respondent/Financial Creditor

Radha Exports (India) Pvt. Limited (S) v. K.P. Jayaram And Another4

Bench: Arun Mishra, Indira Banerjee, JJ.

Facts:

i. On the incorporation of the Appellant Company, the Respondent No. 2, Mrs. Radha
Gauri became a board member of the appellant company and requested the company
to convert a substantial amount of outstanding loan as share application money for
issuance of shares in the company.

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Civil Appeal No. 7474 of 2019

16
 ii. The Appellant Company, on request of the Respondent, adjusted the said loan amount
to issue shares in the name of the Respondent Mrs. Radha Gauri.
iii. Later the Respondent, Mrs. Radha Gauri resigned from the board of the Appellant
Company and requested the company to treat her share application money.
iv. However, much later, the Respondents called upon the Appellant Company by
sending a legal notice to repay the alleged outstanding loans to the Respondents.
v. The Appellant Company denied the said claims by the Respondents. Therefore, the
Respondents filed a petition under Section 9 of IBC to initiate the Corporate
Insolvency Resolution Process in the NCLT claiming to be an operational creditor of
the Appellant Company and re-filed later under Section 7 of IBC as a financial
creditor of the Appellant Company.

Issue:

i. Whether the winding up application filed the Respondents based on disputed debt
barred by the Limitation Act?
ii. Can personal loan to Promoter or a Director of a company trigger the Corporate
Resolution Process under the IBC?
iii. Can payment received for shares, duly issued be a debt under IBC?

Laws Involved: Section 62 & 7 of Insolvency and Bankruptcy Code, 2016

Ratio:

i. The applicant invoking the Corporate Insolvency Resolution Process has to prima
facie show the existence of a legally recoverable debt in his favour. In other words,
the respondent had to show that the debt is not barred by limitation, which they failed
to do.
ii. With regards to the second Issue, the Hon’ble Supreme Court observed that when the
Respondent resigned from the Board of the Appellant Company, she had requested
the Appellant Company to treat the share application money as share application
money to another person and to issue shares for aforesaid value to him. The amount
was to be treated as a personal loan from the Respondent to the said person. The
Court held that a personal loan to a Promoter or a Director of a company cannot
trigger the Corporate Resolution Process under the IBC.

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 iii. With regards to the third issue, the Hon’ble Supreme Court further agreed with NCLT
in that even otherwise, the application under Section 7 of the Insolvency and
Bankruptcy Code was not maintainable as there was no financial debt in existence.

State Bank of India v. Ramakrishnan and Ors5

Bench: R.F. Nariman, J.

Facts: Mr. V Ramakrishna, the managing director of the company signed a personal
guarantee in favor of State Bank of India. As the company did not pay its debts, the assets of
the company were classified as non-performing assets on July 26, 2015. The bank initiated
proceedings under The Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002 ("SARFAESI Act") and issued notice under
section 13(2) of the SARFESI Act, demanding the outstanding amount from the company and
the personal guarantor. As the outstanding amount was not paid within statutory period of 60
days, the Bank issued a possession notice on November 18, 2016, thereby, taking symbolic
possession of the secured assets of the company.

Issue: Whether the period of moratorium under section 14 of Insolvency and Bankruptcy
Code is applicable to Personal Guarantor?

Laws Involved: section 96, 101 and 14 of Insolvency and Bankruptcy Code, 2016.

Ratio:

i. The Apex Court then proceeded to make observations on relevant sections. Section 14
of the Code authorizes adjudicating authority to pass an order of moratorium during
which there is prohibition on institution of suits or continuation of pending suits
against corporate debtor, transfer of property of corporate debtor or any action to
foreclose or enforce any security interest. Section 96 and 101 of the Code provide for
separate provision for moratorium for personal guarantor, however, these provisions
have not been brought into force. In light of this, the Apex Court opined that section
14 of the Code cannot apply to personal guarantor.
ii. Hence, as the provisions of section 96 and 101 have not been brought into force, the
personal guarantor is not entitled to moratorium period under the Insolvency and
Bankruptcy Code.
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Civil Appeal No. 3595 and 4553 of 2018

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