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THE INSOLVENCY & BANKRUPTCY CODE, 2016 AND
ITS TEETHING PROBLEMS
Jasper Vkas George*

The present article is an attempt to look into the new insolvency

regime, which is created with the purpose of strictly regulating
insolvency in India, as the earlier laws, such as SICA, which
was confined to industrialcompanies, were unable to control the
same. The consolidation of the entire insolvency regime under the
one Code is a daunting task, because, on the one hand, the Code
has to provide effective and quick measures to check Corporate
Insolvency in particularalong with other types ofInsolvency and
on the other handhave to maintain the balance between the rights
of the corporatedebtors and of the creditors.

The Sick Industrial Companies (Special Provisions) Act 1985 was unable to
check the time specific insolvency of the corporate entities, and therefore, to check
the same and to consolidate all sorts of insolvency related matters, the Insolvency
and Bankruptcy Code, 2016 (The Code) was brought into effect from 1siDecember
2016, which though deals with various aspects of insolvencies and recoveries, has
a significantly special focus on all sorts of corporate insolvencies. It is indeed a
historic development for a country like India, which has for the first time, post-
independence, seen a historic move wherein all the issues of financial distress are
brought under the same roof and are to be captured through a single Code.' The
Code is out to provide quick insolvency resolutions so that the economy should
grow rapidly and public funds are not blocked and keep circulating in order to
promote more business. The very objective of the enactment of the Code is very
sound, but time will only tell whether the Code is actually going to deliver towards
its objective or not.

* Assistant Professor, National Law University, Delhi.

1 The Insolvency & Bankruptcy Code, 2016.
2017 The Insolvency & Bankruptcy Code, 2016And Its Teething Problems 129

I. INSTITUTIONAL SETUP: NCLT AS THE ADJUDICATING AUTHORITY FOR

CORPORATE ENTITIES AND NCLAT AS ITS APPELLATE TRIBUNAL

The present Code is a paradigm shift from 'Debtor in possession' to a 'Creditor in

control'. 2 Earlier, the insolvency proceedings of the corporate in specified industrial
activities governed by first schedule to Industrial Development and Regulation Act,
1951 were taken care by the specialised authority, having experience to tackle the
issues of insolvency, such as the Board for Industrial and Financial Reconstruction
(BIFR) and the appellate authority for Industrial and Financial Reconstruction
(AAIFR), which has been replaced by more general adjudicating authority, National
Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal
(NCLAT). The adjudicating authority under the Code viz. the NCLT3 las been set
up all over the country and has been given mandatory timelines to satisfy itself
regarding the existence of default of minimum rupees one lakh' and either admit
the petition under the Code if it is in consonance with the provisions of the Code
and default is evident from the material on record or reject it on the ground of any
deficiency as per the provisions of the Code and/or if no default is made out from
the material on record. The National Company Law Appellate Tribunal (NCLAT) at
New Delhi is the appellate body to hear appeals against the orders passed by NCLTs
situated all over the country.

II. TIME IS THE ESSENCE OF THE CODE

To make sure that the settlement of disputes will not take longer time than
necessary and is not based on unnecessary considerations, the Code has been
formulated to resolve insolvency issues in short time span having lightning speed.
The Code is actually giving shivers to the corporate since in case of any debt due
resulting from supply of goods/services, mere issuance of a simple demand notice
from the operational creditor to the operational debtor along with the copy of the
invoice demanding payment of the amount under the Code triggers the provisions
of the Code.6 This demand notice just cannot be ignored and an appropriate dispute
raised/pending before the receipt of the demand notice has to be pointed out
within 10 days of the receipt in order to render the insolvency proceedings as non-
maintainable.' The Code does not entail any roving enquiry into the disputed claims
2 The appointment of Insolvency profession in a time bound manner is a new provision towards
'creditor in control' regime.
3 The Insolvency & Bankruptcy Code, 2016, s. 60.
4 The Insolvency & Bankruptcy Code, 2016, s. 4.
5 Section 5 (20) of the Code defines "operational creditor" as a "person to whom an operational debt
is owed and includes any person to whom such debt has been legally assigned or transferred". And
operation debt according to section 5(21) of the Code 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"
6 The Insolvency & Bankruptcy Code, 2016, s. 8(1).
7 The Insolvency & Bankruptcy Code, 2016, s. 8(2).
130 JournalofNational Law University Delhi VOL 4(1)

of the parties. NCLT is only required to satisfy the existence of default of minimum
rupees one lakh and if the petition is admitted under section 78, 99 or 1010 of the
Code, then adjudicating authority under section 13 of Code, orders appointment of
an Interim Resolution Professional" (IRP) in the manner as is laid down in section
16 of the Code, who takes over the management and control of the company while
the board of any Corporate Debtor company stands suspended. 2

Moreover, in the case of grant of financial assistance, in order to claim the debt
due, the requirement of such a Demand Notice has not even been culled out under
the Code. The only pre-requisite in such a case is that the default is to be proved
from the material on record on the date the petition is so filed and the petition if
admitted leads to loss of management and control of the company which then vests
with the IRP. The Code also illustrates the filing of an insolvency petition by the
corporate entity itself.13

III. GUILLOTINE OF LIQUIDATION IF RESOLUTION OF DEBT IS NOT

POSSIBLE

The Code also enshrines a moratorium period after the admission of the petition
in which the corporate entity is protected from all sorts of coercive actions in order
to ensure that the entity undergoing the corporate insolvency resolution process
remains safeguarded from any other coercive action."

The Code as it has been drawn aims at immediate resolution of debts and intends
to break the shackles of delay and non-payments on one or the other pretext by
the corporate and where there is a serious financial distress, the intent to handover
the management to the Insolvency Professionals and from there to the guillotine of
liquidation if resolution of debt is not possible." It is to be remembered here that
the IRP is appointed by the adjudicating authority within the mandatory period of
fourteen days from the insolvency commencement date.1 6 And, the maximum term
of the IRP shall not exceed thirty days from the date of his appointment 7 . The IRP

8 Initiation of corporate insolvency resolution process by financial creditor either by itself or jointly
with other financial creditors by filing an application for initiating corporate insolvency resolution
process against a corporate debtor before the adjudicating authority when a default has occurred.
9 Application for initiation of corporate insolvency resolution process by an operational creditor after
the expiry of the period of ten days from the date of delivery of the notice or invoice demanding
payment under sub-section (1) of section 8 of the Code.
10 Initiation of corporate insolvency resolution process by corporate applicant by filing an application
before the Adjudication Authority, where a corporate debtor has committed a default.
11 According to Section 5 (27) of the Code, IRP means "an insolvency professional appointed to
conduct the corporate insolvency resolution process".
12 The Insolvency & Bankruptcy Code, 2016, s. 17(b).
13 The Insolvency & Bankruptcy Code, 2016, s. 95(1).
14 The Insolvency & Bankruptcy Code, 2016, s. 14.
15 The Insolvency & Bankruptcy Code, 2016, s. 33.
16 The Insolvency & Bankruptcy Code, 2016, s. 16(1).
17 The Insolvency & Bankruptcy Code, 2016, s. 16(2).
2017 The Insolvency & Bankruptcy Code, 2016And Its Teething Problems 131

is duty bound to constitute a committee of creditors, after collation of all claims

received against the corporate debtor and determination of the financial position
of the corporate debtor.'" IRP is further duty bound to call the first meeting of the
committee of creditors within seven days of the constitution of the committee of
creditors under section 21 of the Code." The committee in the first meeting itself,
with a majority vote of not less than 75 percent may either carry on with the IRP
as Resolution Professional (RP) or may appoint a new Resolution Professional. 20
The time frame provided for each and every action proves the intent and motive of
the legislature as well as reflects the objective of the Code too, which is to provide
liquidity in the corporate system by unlocking the unproductive assets to the extent
possible. The detailed provisions on various types of Insolvency related offences
and their punishments 21, both in the nature of fine and imprisonment proves that the
legislature is taking an opportunity to check all sort of loopholes. The fine in many
cases ranges from rupees one lakh to one crore also, depending upon the severity
of the offence. Indeed, to a lot many, it is a policy of carrot and stick but it has its
positives as also negative implications.

For instance, if there is a company, which is facing the rough weather due to
international or domestic market compulsions, non-payment of the amounts leads
to a situation of appointment of the Resolution Professional and suspension of
the existing management with a threat that if in next 6-9 months the resolution or
settlement is not possible, the company may face liquidation. This leads to a situation
of lack of lucrativeness in future to act as an entrepreneur and take on huge liabilities
and risks including a threat to lose all personal belongings, since historically in India,
the bankers take personal guarantees in addition to the collaterals. The application
of provisions of the Code on situations like above may create an environment of a
threat to the entrepreneurs. The present insolvency regime it seems is the strictest of
all. It carries with it the elements of threat and deterrence. The corporate entities will
constantly be at vigil both from the debtors as well as competitors since default to the
tune of rupees one lakh is sufficient to trigger the insolvency mechanism provided
under the Code. An investable threat is from the workers too because they also have
the power to file an application under the Code subject to minimum qualification of
rupees one lakh as debt. Whenever the corporate entity needs funds it is only after
keeping in mind the risk attached to the business, and they accordingly take a loan
from the creditors. But, the present provisions may deter them from taking the loans

18 The Insolvency & Bankruptcy Code, 2016, s. 21.

19 The Insolvency & Bankruptcy Code, 2016, s. 22(1).
20 The Insolvency & Bankruptcy Code, 2016, s. 22(2).
21 Chapter VII deals with various types of offences such as, under section 68 of the Code, punishment
is provided for the concealment of property by any of the officer of the corporate debtor. Section
69 of the Code provides punishment for the transactions defrauding creditors. Similarly, section
70 and 71 of the Code provides punishment for the misconduct in course of corporate insolvency
resolution process and punishment for the falsification of books of corporate debtor. Section 72 of
the Code provides punishment for wilful and material omissions from statements relating to affairs
of corporate debtor and, section 73 of the Code provides punishment for false representations to
creditors.
132 JournalofNational Law University Delhi VOL 4(1)

from the creditors, as it may lead them to handover their control and management
to the IRPs.

IV. CHANCES OF MISUSE OF THE CODE BY COMPETITORS

The Code has provided detailed provisions in regard to misuse of the Code
particularly in regard to the furnishing of false information at various stages of the
insolvency mechanism. 22 But because the Code has created somehow a very harsh
law, and there are so many easy ways available to the competitors to start frivolous
insolvency proceedings against the competitive corporate entities on the frivolous
grounds and cause reputation loss to them. But as they say 'The law may be harsh but
it is still the law', as expressed in the legal maxim dura lex sed lex. Loss of control
over the management of company and appointment of insolvency professional may
be detrimental to the growth of the corporate entity. The corporate entities take years
to grow and nurture corporate discipline in themselves, and suddenly handing over
of the management in the hands of the IRPs may cause serious loss to the reputation
and working and structuring of the entity, which may, in the long run, be detrimental
to them.

V. CONSEQUENCES OF FOLLOWING OF TIMELINES STRICTLY

The procedures are made out to effectuate the substantive objective of the
Code. But under the Code the overemphasis on timelines may affect the insolvency
proceedings to the extent that it may either overlook the objective of the Code or
vitiate the actual purpose of the Code. It is already being seen that some Adjudicating
Authorities viz. NCLT are breaching the given timelines for admitting/rejecting any
matter for recovery. The breach of timelines leads to the adjudicating authority
becoming functus officio as NCLT loses its jurisdiction over the matter. Though
there is a provision of withdrawing a petition but there is a greater possibility that
having become functus officio, the non-paying debtor may take a plea to the effect
that once a petition abates, it cannot be re-filed and the matter of recovery gets
stranded in these legal lacunae. It is very necessary that either legislature may clarify
or the apex court should decide whether the time frame provided for the purposes of
adjudicating insolvency proceedings are in the nature of 'shall' or 'may'.

Interestingly, the trend in this regard to compliance with provisions of IBC

Code shows that the NCLTs are strictly following the provisions in letter and spirit.
In Smart Timing Steel Ltd. vs. National Steel and Agro Industries Ltd.23 NCLT
Mumbai Bench, while adjudicating the insolvency petition filed under section 9 of

22 Section 75 of the Code provides punishment for false information furnished in application filed
under section 7 of the Code. Section 77 of the Code provides punishment for providing false
information in application made by corporate debtor. Section 184 the Code provides punishment
for false information, etc., by creditor in insolvency resolution process. Section 186 of the Code
provides punishment for false information, concealment, etc., by bankrupt, etc.
23 C.P. No.06/01 & BP/NCLT/MAH/2017 decided on 30.01.2017 by the Mumbai NCLT.
2017 The Insolvency & Bankruptcy Code, 2016And Its Teething Problems 133

the Code, held that the compliance of section 9 is mandatory. Whereas, in JK Jute
Mills Company Ltd.24 NCLAT has held that period of 14 days as stipulated in section
9 is directory in nature and can be extended by giving reasons in writing.

Then indeed there is a problem to the effect that if the matter is once admitted
and IRP is appointed, the clock cannot be set back and the Corporate Debtor can
only be either getting its resolution process determined or in the alternate, it may
face liquidation as per the Code. As such, there is an apprehension that because of
existing timelines, even a genuinely revivable company cannot explore its resolution
and successful exit despite having a clear roadmap for which it needs a comfortable
timeline. There are other crucial issues also, such as loss of government revenue and
employment opportunities in case of non-compliance of the provisions of the Code.

Now, in all the situations as discussed above, the most important aspect is the
creation of a situation of genuine vulnerability for the promoters and their corporate
entities while creating an element of uncertainty for others. It also leads to long-
term ramifications in which people will face the scare in setting up or running the
establishments. Certainly, in creating such law, the aim has not been to create the
elements of a threat but quick corporate insolvency resolutions so that the public
funds are not blocked and keep circulating in order to promote more business. But
the only difficulty is in the practical applicability and the quidpro effect of such a
Code.

VI. CHALLENGES BEFORE THE CODE 2016

The present Code is different from previous Acts, because, they were more or
less adversarial in nature, whereas, the nomenclature of the present Code is Code
and not Act, and therefore, it comprehensively covers the procedure. To initiate
actions under sections 7, 9 and 10 of the Code, instead of pleadings, forms are
provided for the purposes of furnishing the column-wise information only. Time
is changing, and therefore, the process of adjudication too, especially in cases of
insolvency, which affects the financial health of the economy. The Code is in its
formative days only, and therefore, it is essential to not let it lose its objective. The
time will tell the success of the Code, but, there are certain questions, which need
timely answers for the effective implementation of the Code.

VII. CONCLUSION
However, since the era of corporate insolvency resolution has just begun,
hopefully these all may be the teething problems of the Code and situations might
change as the Corporates adapt themselves to the Code and ensure that no default
takes place in order to prevent the effective management and control of the Company
slipping away from their hands.

24 Case no. 9 of 2017, decided on 01.05.2017 by NCLAT.

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