IBC 2016

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Vasuki K. N.
Advocate
B.E., LL.B., MBL(NLSIU)
CC on IPR(Arizona State Law University)
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 The Insolvency and Bankruptcy Code 2016

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• Consolidate and amend law - Code

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• Time bound disposal
• Bring the assets back to market

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• Promote entrepreneurship
• Alteration in the order of priority of payment
• Regulatory Body
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 Insolvency and Bankruptcy

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Debtor is unable to pay dues/Default
/Illiquidity

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Insolvency

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 What Constitutes Default?

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Section 3(12)

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Non payment of debt

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When whole or any part or instalment of the amount of debt
Has become due and payable
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By the corporate debtor/debtor
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Corporate Insolvency Resolution Process (CIRP)

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Financial

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Section 7
Creditors

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Operational
Section 6 Section 9
Creditors
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Debtor
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 Financial Creditor Section 5(7) & 5(8)

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‘Time Value of Money’

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Nikhil Mehta v AMR Infrastructure (NCLAT 2007)
 Operational Creditor Section 5 (20) &(21)

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Goods

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Services
Operational
Debt
Employment
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Government
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 Admission of Application

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NCLT

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Moratorium Interim Corporate
Insolvency Resolution
( Section 14) Professional
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 Moratorium (Section 14)

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180 days which may extend further 90 days, total 270 days (9 Months)

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No new suit; pending suits will also stop

No execution of any order or decree

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Supply of essential goods or services

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 Corporate Insolvency Resolution Professional

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Collect all claims and determine the financial position of the

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debtor
Constitute Committee of Creditors (CoC)
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 Committee of Creditors (CoC)

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Section 21- Shall consist of Financial Creditors

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• 21 (6A) Where a financial debt— (a) is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for
all the financial creditors, such trustee or agent shall act on behalf of such financial creditors;

• (b) is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under clause (a) or subsection (6), the interim resolution professional shall make an
application to the Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency professional, other than the interim resolution professional, to act

• as their authorised representative who shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors;

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• (8) Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent of voting share of the financial creditors:

• Jaiprakash Associates Case and Amrapali case

• Bhushan Steel Case; Tata Steel was the H1 Resolution Applicant whose bid was accepted

This body will take all the decisions by a vote of not less than sixty-six
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(Sec 30-4) per cent of voting share of the financial creditors
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 Withdrawal of application

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12A. Withdrawal of application admitted under section 7, 9 or 10.
– The Adjudicating Authority may allow the withdrawal of
application admitted under section 7 or section 9 or section 10, on

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an application made by the applicant with the approval of ninety
per cent voting share of the committee of creditors, in such
manner as may be prescribed.]
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Before this Section was inserted, Supreme Court, under Article 142, was passing orders allowing withdrawal of applications after creditors‘ applications had
been admitted by the NCLT or the NCLAT.
This high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an
omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial
creditors, have to grant their approval to an individual withdrawal or settlement
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Under Section 60 of the Code, the committee of creditors do not have the last word on the subject. If the committee of creditors arbitrarily rejects a just
settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code.
 Constitutional Validity of IBC

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Swiss Ribbons Pvt. Ltd. & Anr. Vs Union of India & Ors. constitutional

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validity of various provisions of IBC were upheld[Financial
Creditors/Operational Creditors not equal-Art. 14]; Pvt Information
Utilities under Sec 210 – in the nature of preliminary decree without

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hearing; Sec 12A withdrawal with 90% - unbridled powers to CoC to
reject legitimate settlements; Sec 29A-blanket ban on participation of
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all promoters of corporate debtors, without any mechanism to weed
out those who are unscrupulous and have brought the company to the
ground, as against persons who are efficient managers; blanket ban on
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all related parties to be Resolution Applicants
 Constitutional Validity of IBC

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R.K. Garg v. Union of India, (1981) 4 SCC 675 has held: 3 Ferguson v.

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Skrupa, 372 U.S. 726, 728-733 (1962). 29 ―8. Another rule of equal
importance is that laws relating to economic activities should be
viewed with greater latitude than laws touching civil rights such as

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freedom of speech, religion etc. It has been said by no less a person
than Holmes, J., that the legislature should be allowed some play in
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the joints, because it has to deal with complex problems which do not
admit of solution through any doctrinaire or strait-jacket formula and
this is particularly true in case of legislation dealing with economic
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matters [referring to the importance given to decisions of CoC]
 Liquidation Section 53 (Waterfall)

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• Costs of IPR and Liquidation
• Workmen’s dues and debts due to a secured creditor who has relinquished security
interest

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Distribution
• Wages and dues of employees other than workmen

• Financial debts owed to unsecured creditors

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Of

• Dues to the Government, and dues owed to a secured creditor who has realized
security interest but the proceeds are insufficient to meet the debts

Assets
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• Residuary Debts and dues
• Preference shareholders, if any
• Equity shareholders and partners, as the case may be
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 THE RAISON D’ÊTRE FOR IBC
• There is no single law in India that deals with insolvency and bankruptcy.

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• Earlier Sick Industrial Companies (Special Provisions) Act, 1985, (BIFR)
• Recovery of Debts Due to Banks and Financial Institutions Act, 1993, (DRT)

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• Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 and the

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• Companies Act, 2013. (NCLT)
• and their respective Appellate Tribunals.
• Liquidation of companies was handled by the High Courts.
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Individual bankruptcy and insolvency is dealt with under the Presidency
Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 and is
dealt with by the Courts. The existing framework for insolvency and
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bankruptcy is inadequate, ineffective and results in undue delays in
resolution, therefore, the proposed legislation.
 Purpose of Resolution Process under IBC 2016
• Some business plans will always go wrong, risk taking is the wellspring of

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economic growth
• Merely because of business failure, default cannot be equated to

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malfeasance
• Resolution process enables assessment of viability of the enterprise at a
very early stage

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• Such an assessment is a matter of business that can only be negotiated
through an agreement between creditors who are financiers willing to
bear the loss in the insolvency process
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• Control of a company is not a divine right; it must transfer to a more
efficient management at the instance of the creditors
• However, this process may come through at a price
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• This is called as haircut !
 Resolution Process
• Fair Value: On the insolvency commencement date agreed between a willing buyer and a

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willing seller in an arms-length transaction
• Liquidation Value: On the insolvency commencement date as estimated by a Registered
Valuer

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• Evaluation Matrix: Parameters to be applied for consideration of the Resolution Plan
• Resolution Applicant: The person who offers the Resolution Plan
• Resolution Plan (Contents of the Resolution Plan given by the Resolution Applicant):

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• terms of the plan and its schedule of implementation
• management and control of the CD during its term
• adequate means of supervision, and its implementation submitted to the IP
• statement as to how the interests of each of the creditor is dealt with
• Approval of the Resolution Plan: IRP submits the plan to COC with his analysis (for
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compliance to the code) and information of any:
• Preferential transaction
• Undervalued transaction
• Extortionate transaction
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• Fraudulent transaction
 Application of Sec29A (c) to keep away defaulters

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A person is a defaulter when an instalment and/or interest on the
principal remains overdue for more than three months, after which,

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its account is declared NPA. During the period of one year
thereafter, since it is now classified as a substandard asset, this
grace period is given to such person to pay off the debt. During this

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grace period, it is clear that such person can bid along with other
resolution applicants to manage the corporate debtor. What is
important to bear in mind is also the fact that, prior to this one
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year-three-month period, banks and financial institutions do not
declare the accounts of corporate debtors to be NPAs
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 Non Application of Sec 29A (c &h) to MSME

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240A. Application of this Code to micro, small and medium
enterprises. – [29A. Persons not eligible to be resolution applicant – Related Parties]

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(1) Notwithstanding anything to the contrary contained in this
Code, the provisions of clauses (c) – [ArcelorMittal is a connected person in Uttam Galwa; NuMetal in which RevantRuia is a

and (h) of section 29A shall not apply to the

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shareholder both submitted Res. Plans for Essar Steel] [Guarantor]

resolution applicant in respect of corporate insolvency resolution

process of any micro, small and medium enterprises.
(2) Subject to sub-section (1), the Central Government may, in the
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public interest, by notification, direct that any of the provisions of
this Code shall—
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(a) not apply to micro, small and medium enterprises; or
(b) apply to micro, small and medium enterprises, with such
modifications as may be specified in the notification
 Case Law – 1,2

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• What is not a Resolution Process

• In the matter of Prowess International Pvt. Ltd. Vs. Parker Hannifin India Pvt. Ltd.,

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the NCLAT reiterated:

• “It is made clear that Insolvency Resolution Process is not a recovery proceeding

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to recover the dues of the creditors.”

• In the matter of Innoventive Industries Ltd. Vs. ICICI Bank & Anr. Civil Appeal

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Nos.8337-8338 of 2017 SC held

“Entrenched managements are no longer allowed to continue in management if

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they cannot pay their debts”. [Led to its liquidation and confirmed by SC [K Sashidhar v Ind. Overseas Bank]
 Case Law – 3

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Synergies Dooray Resolution Plan (First Resolution Plan)
Dues to Before After Resolution Remarks
Resolution Amount finally

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Amount Claimed Paid (Rs. crore)
/ Due (Rs. crore)

Financial 972.15 54.69 Payments to be

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Creditors made in
Operational 00.23 00.01 staggered
Creditors manner over
Government and 03.89 03.89 time.
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Statutory Dues

Total 976.27 58.59 Against Liquidation

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Value of Rs. 8.17 crore
 Case Law – 3 (Contd.)
• The corporate debtor (Synergies Dooray Automotive Limited) had a

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negative net worth at the end of March, 2004 and consequently was
declared a sick company by the BIFR on 14th February 2007.

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• With coming into force of the SICA (Repeal) Act, 2003, the proceeding
before the BIFR got abated in November, 2016.
• The corporate debtor applied for insolvency resolution under the Code.

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The application was admitted on 23rd January, 2017.
• At the time of admission, it had total assets of Rs. 11.95 crore in books
and liquidation value of Rs. 8.17 crore. It received three resolution plans.
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• The Committee of Creditors approved the resolution plan with 90.16%
voting share while the rest abstained from voting. The plan was approved
by NCLT, Hyderabad Bench on 2nd August, 2017. This was the first
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resolution plan approved under the Code.
 Case Law – 4 (Jaypee Infratech Ltd)
• IDBI Bank filed an application for insolvency before the NCLT, Allahabad underlying default of Rs.

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526.11 crore.
• The corporate debtor is in the business of construction of homes. It accepted money in instalments for
delivery of homes from 35,000 buyers, though the timeline for delivery of many homes is over.

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• The law was yet to be settled as to whether home buyers are financial creditors, operational creditors
or any other creditor, claimant or stakeholder, and how their interests would be dealt with, in a
resolution plan. This created some unrest among home buyers and resulted in a few PILs before the
Apex Court.
• Apex Court directed that two senior counsels shall participate in the meetings of the CoC to espouse

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the cause of the home buyers. It further directed Jaiprakash Associates Limited, the holding company
of the corporate debtor, to deposit a sum of Rs. 2,000 crore before the Apex Court on or before 27th
October, 2017.
• Thereafter, the CoC met on 19th September, 2017. In pursuance of the order of the NCLT, dated 1st
September, 2017, a representative of IBBI attended the said meeting to take care of the interests of the
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depositors/FD holders.
• On 22.11.2017, Jaiprakash Associates Limited (JAL) submitted to the Apex Court that the company is
ready with 275 crores. The Apex Court appreciating the grievance and the concern of the home buyers
directed as follows:- (a) A Demand Draft of Rs.275 crores be before the Registry of the Apex Court. (b) A
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sum of Rs.150 crores be deposited by 13.12.2017. (c) A further sum of Rs.125 crores be deposited by
31.12.2017. Direction for deposit of Rs.2,000 crores shall remain as it is. The only indulgence is to pay
the same in instalments.
 Case Law – 5
• In another interesting case before NCLT Bengaluru, a Corporate Debtor instituted

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Voluntary liquidation under Section 10 of the IBC Code.
• The Trade Unions of the Corporate Debtor sought the permission of NCLT to be

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impleaded in the Insolvency Proceedings as necessary parties. The NCLT dismissed
their application and directing them to place their demands for arrears before the IRP.
• The main demand from the Union was for pay and other consequential compensation

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such as Bonus, PF and ESI for the period of one year when the Corporate Debtor had
stopped production after his application to close down the unit under Section 25
(O)(1) of the Industrial Disputes Act was turned down by the Government.
• The IRP in his Asset Memorandum to the NCLT has rejected the claim of the Unions.
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• The Unions have now approached the NCLT under Section 42 of the IBC against the
decision of the liquidator rejecting the claims.
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• Issues involved: Rights of workers under ID Act read with the definition of ‘Claim’
under Sec 3(6) of IBC Code (right to remedy for breach of contract under any law for the time being in force….).
 Case Law – 6
• Constitutional Validity of the IBC Code:

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• SHIVAM WATER TREATERS PVT. LTD. V/s UNION OF INDIA SECRETARY TO
GOVT. MINISTRY OF CORPORATE AFFAIRS & ORS.

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• The Apex Court asked the High Court not to enter into the debate
pertaining to the validity of the Insolvency and Bankruptcy Code, 2016 or

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the constitutional validity of the National Company Law Tribunal.
• The present order however, does not debar the petitioner to challenge
the validity of composition of the National Company Law Tribunal and the
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validity or the constitutionality of the Insolvency and Bankruptcy Code,
2016 before this Court under Article 32 of the Constitution.
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 Insolvency Professional

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• Attempt to create a new Profession and a new set of Professionals
• Self-Regulation v Independent Statutory Regulation

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• Insolvency Entities (85 at present)
• Insolvency Agencies (3 at present) – Similar to ICAI, BCI and MCI but
without powers of self-regulation

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• Advantages:
• Tight control over Insolvency Professionals (Debt-4.16Cr; Fee charged:14 Cr. Suspended for 1 year)
• Fidelity of the Profession maintained without being tainted by lure of
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• Authenticity of their actions means lesser likelihood of mala-fide
• Attracting talent and Enables quick disposal of cases.
• No. of Insolvency Professionals registered so far: 1672 as on
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06.03.2018, 2357 as on 24.01.2019
 Who can be an Insolvency Professional

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• Must have passed the Limited Insolvency Examination, and has
fifteen years of experience in management, after he received a
Bachelor’s degree from a university established or recognized by law.

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• Must have passed the Limited Insolvency Examination and has ten
years of experience as -
• (i) a Chartered Accountant enrolled as a member of the Institute of

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Chartered Accountants of India.
• (ii) a Company Secretary enrolled as a member of the Institute of
Company Secretaries of India.
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• (iii) a Cost Accountant enrolled as a member of the Institute of Cost
Accountants of India, or
• (iv) an Advocate enrolled with a Bar Council.
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 Role of an Insolvency Professional

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Alter Ego of the Adjudicator as far as collecting, collating, documenting
and authenticating the evidence such as assets, claims is concerned
Convener of the Committee of Creditors

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Replaces the BOD of the Company and actually runs the company during
the insolvency period

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Power to appoint advisors, evaluators etc.
Hand over the reigns to the successor if the resolution is successful
Act as a liquidator in case of liquidation order
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In other words, he will have his hands full for the period of insolvency –
right from the day he is appointed as IRP until the CIRP comes to an end
or the Liquidation process comes to an end
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 Information Utility

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Insolvency Resolution Process under IBC mandates resolution within
180 days extendable by another 90 days
IBC attempts to solve an issue that has defied solution for past 40 years

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in a matter of 270 days
SICA, 1985

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RDDBFI Act, 1993, Creation of Debt Recovery Tribunals
SARFAESI Act, 2002
IBC, 2016
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Speed is of essence
We have seen the price paid in delaying resolution – assets have been
wasted, allowed to rot and not to speak of asset stripping.
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 Information Utility

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Identifying and addressing the sources of delay
Ascertainment of facts – 90%, Application of Law – 10%

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IU record to be conclusive
When record is stored in an IU, it should meet the standard for
conclusive evidence. (Section 31 of the Indian Evidence Act states that admission

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of fact might not be conclusive proof of a fact but previous admission will act as an
estoppel on such admission. Estoppel is defined in Section 115 of the Indian Evidence
Act: When one person has, by his declaration, act or omission, intentionally caused or
permitted another person to believe a thing to be true and to act upon such belief,
neither he nor his representative shall be allowed, in any suit or proceeding between
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himself and such person or his representative, to deny the truth of that thing.)
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 Information Utility

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• As per Section 3(9)(c) and Section 214(e) of the IBC, all information
stored in the IUs will have to be authenticated and verified by all
“concerned parties”.

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• To work around such situations, the IBC has redefined “concerned
parties” in this case to include a bank which maintains the account in
which the repayment amount has to be deposited by the debtor.

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• Any information related to existence of credit will be authenticated
by both the debtor and the creditor before it is finally stored with the
IUs.
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• In the light of the above principles of Indian Evidence Act, given that
all the information in an IU has to be verified by all concerned parties,
the creditor and the debtor will be estopped from disputing any of
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this information.
 Information Utility

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• In the case of default, the debtor may not authenticate the fact that a
default has been committed. But his bank will be able to authenticate
whether there has been default or not, by providing the account

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statement of the repayment account.
• This prevents the debtor from holding the process hostage, while
preserving the evidentiary value of records in the IU.

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• In case of not registering information in the IU, the creditor cannot
take advantage of the fast and easy processes enabled by the IU
mechanism.
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• National E-Governance Services Limited
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 Purpose of Resolution Process
• Take care of concerns of Financial Creditors

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• Take care of concerns of Operational Creditors
• How to take care of concerns of other creditors such as consumers and

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home buyers
• How to take care of concerns of other creditors such as workmen when

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their demands are being agitated in the Industrial Courts
• Is the IBC a Silver Bullet that can solve an issue that has defied solution
for 40 years..?
• Is IBC a like brand new Ferrari that is designed to take on all kinds of
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terrains but fitted with an…..
• Old Ambassador Engine..!!!
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• We are yet to hear the last word on it…
 Four Large Accounts

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 CIRPs Yielding Resolution

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