UNIVERSITY OF PETROLEUM & ENERGY STUDIES

BA - LLB (Hons.), CRIMINAL LAW

BATCH -II

Semester VI

Academic Year: 2020-21

Session: January - May

COMPANY LAW ASSIGNMENT

Under the Supervision of: Ms. PRIYANKA CHOUDHARY

TOPIC: INSOLVENCY RESOLUTION PROCESS AND

LIQUIDATION UNDER IBC

Submitted by: SRUSHTI SINGH THAKUR – 93

SAP Id. – 500061225

INTRODUCTION:
The words “Insolvency” and “Bankruptcy” are generally used interchangeably in common
parlance but there is a marked distinction between the two. Insolvency and bankruptcy are not
synonymous.
The term “insolvency” notes the state of one whose assets are insufficient to pay his debts; or his
general inability to pay his debts. The term “insolvency” is used in a restricted sense to express
the inability of a party to pay his debts as they become due in the ordinary course of business.
The word “bankruptcy” the condition of insolvency. It is a legal status of a person or an entity
who cannot repay debts to creditors. The bankruptcy process begins with filing of a petition in a
court or before an appropriate authority designated for this purpose. The debtor’s assets are then
evaluated and used to pay the creditors in accordance with law.
Therefore, while insolvency is the inability of debtors to repay their debts, the bankruptcy, on the
other hand, is a formal declaration of insolvency in accordance with law of the land. Insolvency
describes a situation where the debtor is unable to meet his/her obligations and bankruptcy
occurs when a court determines insolvency, and gives legal orders for it to be resolved. Thus
insolvency is a state and bankruptcy is the conclusion.
The term insolvency is used for individuals as well as organizations/corporates. If insolvency is
not resolved, it leads to bankruptcy in case of individuals and liquidation in case of corporates.

NEED FOR AN INSOLVENCY LAW:

Before the enactment of the Insolvency and Bankruptcy Code, there was no single law in the
country to deal with insolvency and bankruptcy. There were multiple overlapping laws and
adjudicating forums dealing with financial failure and insolvency of companies and individuals
in India. The framework for insolvency and bankruptcy was inadequate, ineffective and resulted
in undue delays in resolution. The legal and institutional framework did not aid lenders in
effective and timely recovery or restructuring of defaulted assets and causes undue strain on the
Indian credit system.
Prior to the enactment of the Insolvency and Bankruptcy Code, the provisions relating to
insolvency and bankruptcy for companies were made in the Sick Industrial Companies (Special
Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993,
the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 and the Companies Act, 2013. These statutes provided for creation of multiple for a
such as Board of Industrial and Financial Reconstruction (BIFR), Debt
Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective
Appellate Tribunals. Liquidation of companies was handled by the High Courts. Individual
bankruptcy and insolvency was dealt with under the Presidency Towns Insolvency Act, 1909,
and the Provincial Insolvency Act, 1920.
The liquidation of companies was handled under various laws and different authorities such as
High Court, NCLT (National Company Law Tribunal) and Debt Recovery Tribunal had
overlapping jurisdiction, which was adversely affecting the debt recovery process.
The objective of the Insolvency and Bankruptcy Code is to consolidate and amend the laws
relating to reorganization and insolvency resolution of corporate persons, partnership firms and
individuals in a time bound manner. An effective legal framework for timely resolution of
insolvency and bankruptcy will not only encourage entrepreneurship but will also improve Ease
of Doing Business, and facilitate more investments leading to higher economic growth and
development.

INSOLVENCY AND BANKRUPTCY CODE, 2016:

The Insolvency and Bankruptcy Code Bill was drafted by a specially constituted “Bankruptcy
Law Reforms Committee” (BLRC) under the Ministry of Finance. The Insolvency and
Bankruptcy Code was introduced in the Lok Sabha on 21 December 2015 and was subsequently
referred to a Joint Committee of Parliament. The Committee submitted its recommendations and
the modified Code was passed by Lok Sabha on 5 May 2016. Rajya Sabha passed the Code on
11 May 2016 and it received the presidential assent on 28 May 2016.
The objects clause of the Insolvency and Bankruptcy Code lays down the following key
objectives:
 To consolidate and amend the laws relating to reorganization and insolvency resolution of
corporate persons, partnership firms and individuals.
 To provide for a time bound insolvency resolution mechanism.
 To ensure maximization of value of assets.
 To promote entrepreneurship.
 To increase availability of credit.
 To balance the interests of all the stakeholders including alteration in the order of priority
of payment of Government dues.
 To establish an Insolvency and Bankruptcy Board of India as a regulatory body.
 To provide procedure for connected and incidental matters.
CORPORATE INSOLVENCY RESOLUTION:
Part II of the Insolvency and Bankruptcy Code, 2016 deals with the insolvency resolution and
liquidation for corporate persons. Section 4 of the Insolvency and Bankruptcy Code, 2016
provides that Part II of the Code shall apply to matters relating to the insolvency and liquidation
of corporate debtors where the minimum amount of the default is one lakh rupees. The proviso to
section 4 empowers the Central Government to specify, by notification, the minimum amount of
default of higher value but it shall not be more than one crore rupees.
Part II of the Insolvency and Bankruptcy Code, 2016 lays down the following two independent
stages:
 Corporate Insolvency Resolution Process [Sections 4 and 6 to 32]
 Liquidation [Sections 33 to 54 and Section 59]
Chapter II of Part II deals with corporate insolvency resolution process while Chapter III
together with Chapter V of Part II govern the liquidation process for corporate persons.
Section 6 of the Insolvency and Bankruptcy Code, 2016 provides that where any corporate
debtor commits a default, a financial creditor, an operational creditor or the corporate debtor
itself may initiate corporate insolvency resolution process in respect of such corporate debtor in
the manner as provided under Chapter II of Part II of the Code.
 Institution of corporate insolvency resolution process by financial creditor:
Section 7 of the Insolvency and Bankruptcy Code, 2016 lays down the procedure for the
initiation of the corporate insolvency resolution process by a financial creditor or two or
more financial creditors jointly.
 Institution of corporate insolvency resolution process by Operational creditor:
Section 8 the Insolvency and Bankruptcy Code, 2016 lays down the procedure for the
initiation of the corporate insolvency resolution process by an operational creditor. The
procedure for insolvency resolution by operational creditor laid down in section 8 differs
from the procedure applicable to financial creditors under section 7 of the Code.
 Insolvency Resolution by the Corporate Debtor:
As per provisions contained in Chapter- II of the Code, where a corporate debtor has
defaulted on the payment of dues to a financial or operational creditor, the corporate
debtor or any applicant (i.e. the financial or operational creditor) can file the application
for the initiation of insolvency resolution process along with the books of accounts and
other financial documents of the business. Furthermore, as per Section 10 (3) (b) the
 corporate debtor shall also file the name of the proposed resolution professional along
with the application.
THE CORPORATE INSOLVENCY RESOLUTION PROCESS (“CIRP”):
During this process, the financial creditors investigate the corporate debtor to determine whether
it is viable to continue its business. The creditors also come up with a plan to restructure the
corporate debtor. The various steps involved in a CIRP are:
 Application to the NCLT: The creditor will need to file an application with the NCLT for
initiating insolvency resolution proceedings. The NCLT shall be required to either accept or
reject the application within 14 days of filing the application.
 Initiation of the insolvency process and suspension of management: Once the application
has been accepted by the NCLT, the management of the debtor is suspended and the
intermediate authority, appointed by the NCLT and referred to as the ‘interim insolvency
resolution professional’ takes over the management of the corporate debtor. Further, as soon
the application for CIRP is admitted by the NCLT, a moratorium takes effect on the
corporate debtor, which prohibits the continuation or initiation of any legal proceedings
against the debtor, the transfer of its assets, or the enforcement of any security interest.
 Appointment of the committee of creditors: The interim resolution professional
investigates the claims made by the creditors and constitutes the committee of creditors
within 30 days of the NCLT admitting the application for CIRP.
 Appointment of the resolution process: The committee of creditors then appoints an
independent person as the resolution professional, referred to as the Insolvency Resolution
Professional (“IRP”) to take over the management of the corporate debtor for the remainder
of the CIRP.
 Approval of the resolution plan: Within 180 days of the initiation of the CIRP, the IRP is
required to draw up a resolution plan for the revival of the corporate debtor. Such a plan
needs to be approved by creditors holding at least 75% of the debt of the corporate debtor.

TIME LIMIT FOR COMPLETION OF INVOLVEMENT RESOLUTION PROCESS:

Section 12(1) lays down that subject to sub-section (2), the corporate insolvency resolution
process shall be completed within a period of one hundred and eighty days from the date of
admission of the application to initiate such process.
Extension of time.– Section 12(2) provides that the resolution professional shall file an
application to the NCLT to extend the period of the corporate insolvency resolution process
beyond one hundred and eighty days, if he is instructed to do so by a resolution passed at a
meeting of the committee of creditors by a vote of sixty-six per cent of the voting shares.

INITIATION OF LIQUIDATION PROCESS:

In the event that the CIRP fails, the financial creditors have the option to wind up the corporate
debtor and liquidate and distribute its assets in the order of liquidation preference prescribed
under the IBC.
Sections 33 to 54 in Chapter III of Part II of the Insolvency and Bankruptcy Code, 2016 lays
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.
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 who has not defaulted on
any debt due to any person.

WHEN LIQUIDATION CAN BE ORDERED:

Section 33 provides for the liquidation of the corporate debtor in following four scenarios:
1. Where the Adjudicating Authority does not receive a resolution plan:
If the Adjudicating Authority, before the expiry of the insolvency resolution process period
or the maximum period permitted for completion of the corporate insolvency resolution
process under section 12 or the fast track corporate insolvency resolution process under
section 56, as the case may be, does not receive a resolution plan under sub-section (6) of
section 30, it shall pass an order requiring the corporate debtor to be liquidated in the manner
as laid down in Chapter III of Part II of the Code.
2. Where the Adjudicating Authority rejects the resolution plan:
If the Adjudicating Authority rejects the resolution plan under section 31 for the non-
compliance of the requirements specified therein, it shall pass an order requiring the
corporate debtor to be liquidated in the manner as laid down in Chapter III of Part II of the
Code.
3. Where, at any time before confirmation of resolution plan, the committee of creditors
resolve to liquidate corporate debtor:
 Where the resolution professional, at any time during the corporate insolvency resolution
process but before confirmation of resolution plan, intimates the Adjudicating Authority of
the decision of the committee of creditors approved by not less than sixty-six percent of the
voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a
liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section
(1).
4. Where the corporate debtor violates the terms of the resolution plan:
Where the resolution plan approved by the Adjudicating Authority is contravened by the
concerned corporate debtor, any person other than the corporate debtor, whose interests are
prejudicially affected by such contravention, may make an application to the Adjudicating
Authority for a liquidation order as referred to in sub-clauses (i), (ii), (iii) of clause (b) sub-
section (1).

APPOINTMENT OF LIQUIDATOR AND FEE TO BE PAID:

Section 34 of the Code provides for the appointment of liquidator and the fees to be paid to him.
According to section 5(18) of the Code,”liquidator” means insolvency professional appointed as
a liquidator in accordance with the provisions of Chapter III or Chapter V of this Part, as the case
may be.

DISTRIBUTION OF ASSETS:
Section 53 deals with distribution of assets in liquidation. The Insolvency and Bankruptcy Code,
2016 makes significant changes in the priority of claims for distribution of liquidation proceeds.
In case of liquidation, the assets will be distributed in the following order, in case of liquidation:
(i) fees of insolvency professional and costs related to the resolution process, (ii) workmen’s
dues for the preceding 24 months and secured creditors, (iii) employee wages, (iv) unsecured
creditors, (v) government dues and remaining secured creditors (any remaining debt if they
enforce their collateral), (vi) any remaining debt, and (vii) shareholders.

VOLUNTARY LIQUIDATION PROCEEDING:

According to sub-section (1) of section 59, 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. Thus, in order to initiate voluntary
liquidation proceedings under Chapter V of Part II of the Code, a corporate person who intends
to liquidate itself voluntarily, must have not committed any default.
Sub-section (2) of section 59 provides that the voluntary liquidation of a corporate person under
sub-section (1) shall meet such conditions and procedural requirements as may be specified by
the Insolvency and Bankruptcy Board of India.

CONCLUSION:
The legal and institutional machinery for dealing with debt default has not been in line with
global standards. The recovery action by creditors, either through the Contract Act or through
special laws such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, has not had desired outcomes. Similarly, action through the Sick Industrial
Companies (Special Provisions) Act, 1985 and the winding up provisions of the Companies Act,
1956 have neither been able to aid recovery for lenders nor aid restructuring of firms. Laws
dealing with individual insolvency, the Presidential Towns insolvency Act, 1909 and the
Provincial Insolvency Act. 1920, are almost a century old. This has hampered the confidence of
the lender. When lenders are unconfident, debt access for borrowers is diminished. This reflects
in the state of the credit markets in India. Secured credit by banks is the largest component of the
credit market in India. The corporate bond market is yet to develop. In this backdrop Parliament
enacted Insolvency and Bankruptcy Code, 2016.
The objective of the Insolvency and Bankruptcy Code, 2016 is to promote entrepreneurship,
availability of credit, and balance the interests of all stakeholders by consolidating and amending
the laws relating to reorganization and insolvency resolution of corporate persons, partnership
firms and individuals in a time bound manner and for maximization of value of assets of such
persons and matters connected therewith or incidental thereto.
BIBLIOGRAPHY:
 https://gamechangerlaw.com/ibc-2016-overview-of-the-insolvency-and-bankruptcy-
code-2016/
 https://www.icsi.edu/media/webmodules/Insolvency%20law%20and%20practice.pdf
 https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf