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BENEFITS OF IBC
The IBC successfully remedies several shortcomings of the earlier insolvency resolution
process, such as:
Contrast this with the situation before, when the debtor continued to have control on
business activities and assets, which enabled them to drag his feet, cause a delay by
litigating endlessly, while fraudulently disposing off assets to defraud creditors,
employees, government, etc.
Relief for bona fide debtors: Prior to the IBC, the liabilities that remained unpaid
after proceedings continued to haunt the debtors for the rest of their lives. However,
resolution through the Code guarantees final settlement of all liabilities, thus freeing
the bona fide debtors from debt traps and government liabilities
The Insolvency resolution process would typically start in case of a corporate debtor on
occurrence of a default (where the amount of defaults is at least Rs. 1 lakh). So, whenever
there is a default by a corporate debtor the Code provides a right to the creditor to make an
application to the Adjudicating Authority (viz. the National Company Law Tribunal having
territorial jurisdiction over the place where the registered office of the corporate debtor is
located) for initiating the corporate insolvency resolution process.
For this purpose, the Code categorizes the creditors in 2 different categories –
Financial creditors; and
Operational creditors.
The Code also lays down a process by which the corporate firms in financial distress can
himself seek a resolution or an exit on the occurrence of a default. Explicably the plea for
initiating insolvency can be submitted by the
the financial creditor;
the operational creditor and
the corporate debtor himself.
It is prima-facie that IBC is a comprehensive legislation with a speedy and specific procedure
for dealing with the issue of insolvency. The Corporate Insolvency Resolution Process can be
initiated under Sec 7 or Sec 9 of the code and it stipulates a time bound process for the
proceedings. The time-bound nature of IBC is a very beneficial situation as the resources of
the Companies are placed at the right place in time, whether it is by payment to creditors or
by winding up. The Company does not keep running in losses for endless time period causing
a setback to the economy in whole and affecting the creditors individually. It is very well
hoped for that the implementation of the Code be as effective as expected and live up to its
legislative intent.
When a firm defaults on its debt, its control will shift to a committee of creditors.
The committee will have 180 days to evaluate the proposals from various interested
parties on how to either revive the company or enable liquidation.
The code has provisions for the creation of ‘Insolvency Professionals’ who would
handle the commercial aspects of the resolution process.
Insolvency professional agencies will train and regulate these professionals.
The Debt Recovery Tribunal act as adjudicating authorities for individuals and
unlimited partnership firms, and National Company Law Tribunal would deal with
companies and limited liability entities.
Insolvency and Bankruptcy Board of India will be the overall regulator.
ROLE OF INFORMATION UTILITES
An Information Utility is a professional organization (which is registered with IBBI under Section
210 of IBC, 2016) that will collect financial information, get the same authenticated by other
parties connected to the debt, store the same and provide access to the Resolution Professionals,
Creditors and other stake holders in the Insolvency Resolution Process, so that all stake holders
can make decisions based on the same information.
It basically stores all the 6-credit information of Corporates /entities/ persons. The Certificate &
data furnished by IUs are accepted by NCLT/DRTs as legal evidence. This IU set-up is expected
to contribute significantly for reduction of NPAs in banking sector, as the code aims to
resolve the insolvencies in a time bound manner. The information utilities shall act as a
regulated information agency which shall accept, electronically record, get authentication,
maintain and provide access to financial information to the persons as may be specified in the
Act, e.g., creditors, Adjudicating Authority and other persons having interest in the information.
The ambitious time-limit prescribed for concluding CIRP is based on the assumption that
information relevant for the process will be easily accessible to the parties involved viz. creditors,
adjudicating authorities, insolvency resolution professionals, etc. This assumption appears to be
based on the confidence of the framers of the law in the idea of IUs envisaged under IBC. As the
timelines specified by IBC are strict, they can be met only if the IUs stand ready to provide all
relevant information quickly.
FUNCTIONS
As per Section 213 of IBC, IUs shall provide services which include core services to any person,
if such person complies with the terms and conditions of the IU Regulations. Furthermore, as per
Section 3(9) of IBC, “core services” means services rendered by an information utility for:
a) Accepting electronic submission of financial information.
b) Safe and accurate recording of financial information.
c) Authenticating and verifying the financial information submitted by a person.
d) Providing access to information stored with the information utility to persons as may be
specified.
Section 214 of the IBC elaborates the functions to be performed by IUs for the purpose of
providing core services. The major obligations of IUs as per Section 214 can be summarised as
follows:
1) Acceptance of financial information in electronic form from persons who are under
obligation to submit the same under IBC and also from other persons who intend to submit
the same. This acceptance is to be in such form and manner as specified under the IU
Regulations.
2) Authentication of the financial information so received by all the parties concerned.
3) Storage of the financial information received as aforesaid in a universally accessible
format after the same is duly authenticated by all the parties concerned.
4) Providing the financial information stored by it as aforesaid to any person who intend to
access such information in such manner as may be specified by the IU Regulations.
5) Publication of such statistical information as may be specified by the IU Regulations.
While performing aforesaid obligations, IUs are required to meet such minimum service quality
standards as may be specified by IBBI and they are also required to ensure systems to facilitate
inter-operability with other IUs. As per Section 215 of IBC, while it is mandatory for the
financial creditors to submit financial information and information relating to assets in relation
to which any security interest has been created; submission of information is optional for the
operational creditors. Insolvency professionals also may submit reports, registers and minutes in
respect of any insolvency resolution, liquidation or bankruptcy proceedings to an IU for storage.
National e-Governance Services Ltd (NeSL) is India’s first and only information utility (IU) for
bankruptcy cases. It is owned by State Bank of India and Life Insurance Corporation Ltd.
The IBBI overseas aspects such as registration and cancellation of these entities, their
shareholding and governance among others. Recently, IBBI eased norms for information utilities,
allowing Indian firms listed on stock exchanges to hold 100% in such firms. It also allowed
individuals to hold 51% in the utility for a period of three years.
In Swiss Ribbons Pvt. Ltd. v. Union of India, one of the arguments in the matter was that IBC
provides for private information utilities not only to collect financial data, but also to check
whether a default has occurred or not. It was also argued that certification of debt/default by IUs
is in the nature of a preliminary decree issued without any hearing and without any process of
adjudication. On this ground along with others, the constitutional validity of IBC was challenged
in this matter. It was observed that the record of default with IU is only a prima facie evidence of
default, it is not conclusive, which is rebuttable by the corporate debtor.
An Insolvency Professional is one who is registered with the IBBI. They are enrolled with an
Insolvency Agency and they are involved in the dissolution process of an insolvent individual,
companies, LLPs or partnerships. These professionals are authorized to act on behalf of such
insolvent individual, companies etc. During the bankruptcy situation, the insolvency professionals
play a vital role in liquidating the entity’s assets and other settlement processes.
The primary function of an Insolvency Professional is to assess the financial position of the
company, partnership, LLPs, individual etc. and to ensure smooth process of its dissolution. These
professionals, in certain possible cases look for opportunities to rescue businesses.
Section 17 of the Code, 2016 provides for vesting of the management of the affairs of the
corporate debtor in the hands of interim resolution professional.
AGENCIES
Any agency registered with the IBBI under Section 201 of the Code, 2016 is referred to as an
insolvency professional agency. The key function of these agencies is to regulate the activities of
insolvency professionals and to ensure their development in the industry. These professional
members are required to comply with the terms and conditions as specified in the byelaws of the
insolvency agency code. IBBI exercises control over Insolvency professional agency and its
professionals with respect to the complaints made under section 217 of Insolvency Code.
The functions of Insolvency Professional Agency are specified under section 204 of the Code
and such are as follows:
1) Granting Membership: Insolvency professional agency has the primary function of
granting membership to insolvency professionals.
2) Framing Standard of Professional Conduct and Ethics: These agencies frame the
standard of professional conduct and ethics to the members enrolled under them.
3) Protect Rights, Privileges and Interests: They protect the rights and privileges of
the members and safeguard their interests.
4) Grievances: They also enquire the member’s grievances and take steps to resolve
those.
5) Performance Monitoring: The agency continuously monitors the member’s
performance and they can suspend/cancel the membership wherever and whenever
required.
GOVERNANCE PRIOR TO THE ENACTMENT OF THE IBC
The Sick Industrial Companies (Special provisions) Act, 1985 defined the concept of the ‘sick
company’ and a ‘potentially sick company’. The provisions under the Act defined the company as
sick when there was a complete net worth erosion. The Act defined the sick company as any
company that existed for at least five years and the accumulated losses exceeded or equalled net
worth of any financial year.
The quasi-judicial bodies under the SICA were the Board for Industrial And Financial
Reconstruction and the Appellate Authority for Industrial and Financial Reconstruction as defined
under Section 3(b) and 3(a) of The Sick Industrial Companies (Special provisions) Act,
1985. Section 15 of the SICA provided for reference to the Board for Industrial and Financial
Reconstruction, had the company become a sick industrial company within sixty days from the date
of finalisation of the duly audited accounts of the company. The SICA failed due to its backward
approach in dealing with the bankruptcy issues. There was a balance sheet approach to detect a sick
unit rather than the prospective cash flow approach. It took a fairly long time for the net worth to
erode, and the grave liquidity issues were never addressed.
The companies second Amendment Act, 2002 bought about amendments which directed to replace
BIFR and AAIFR with NCLT and the NCLAT as the adjudicating authorities. Section 424A and
424L were introduced in the Indian Companies Act, 1956 to deal with revival, however they were
never enforced.
The sick Industrial Companies (Special provisions) Repeal Act of 2003, dissolved the appellate
authority and the Board established under The Sick Industrial Companies (Special provisions) Act,
1985 i.e The BIFR and the AAIFR. However due to the delay in the constitution of the NCLT,
SICA repeal Act was never notified.
4. The Recovery of Debts due to Banks and Financial Institutions Act, 1993(“RDDBFI
Act”)
Under this Act, the Tiwari Committee constituted with the objective of solving the problem of
recovery by the Banks and the Financial Institutions, proposed establishment of the specialized
Tribunals, called the Debt Recovery Tribunals and the Debt Recovery Appellate Tribunals who
would assist in unlocking the huge amount of public money and to move towards proper utilization
of the funds for the development of the country.
The provisions of this Act did not apply to those Banks and Financial Institutions where the amount
due is less than ten lakh rupees. Section 2(g) of the RDDBFI Act, 1993 defined debt which includes
any amount claimed by the Bank and the Financial Institution during the course of any business
activity whether secured or unsecured, assigned or payable under any decree or order. The
RDDBFI Act, 1993 under section 19(19) also gave power to the Tribunals to issue certificate of
recovery against the company registered under the Companies Act, 1956, to the recovery officers
specially designated under this Act. The various modes of recovery as governed by Section 25 of
the Act include:
The Securitization and Reconstruction of Financial Assets and enforcement of the Security Interest
Act, 2002 was established with the purpose of the enforcement of the security interest created in
favour of only the secured creditor, in accordance with the provisions of the Act. Section 13 of the
SARFAESI Act, 2002 deals with the enforcement of Security Interest by the secured creditor after
giving due notice to the parties for the discharge of their liabilities within sixty days of the date of
notice failing which the secured creditor can take actions as stipulated under Section 13(4) of the
Act. These include:
The major drawback of the SARFAESI Act, 2002 was there were no rights available to the
unsecured creditors under this legal regime.
6. The CDR and SDR mechanisms
The corporate debt restructuring mechanism was first issued in 2001 for implementation by the
banks. The CDR mechanism was only limited to the banks and the financial institutions that had an
aggregate exposure not exceeding 10 crore rupees. The mechanism was a non-statutory voluntary
system or agreement entered between the creditors and borrowers for restructuring of the debt.
Strategic Debt restructuring was announced by the RBI on June 8, 2015 and the main objective of
the scheme was the change in the management of the company to deal with the stressed assets. The
number of cases that were resolved by such schemes turned out to be few in number and the
desired results could not be achieved.
The insolvency and the bankruptcy code enacted in May, 2016 was a more holistic approach to
dealing with the stressed assets. The code is a unified force that clubs the relevant provisions on all
the laws that deal with the bankruptcy. The code is more creditor friendly, while it seeks to promote
the interests of all the stakeholders of the corporate debtor. It has been designed in such a way that
it unites the provisions of the SARFAESI, The RDDBFI, the Code of the Civil Procedure etc
FUNCTIONS OF RESOLUTION PROFESSIONALS (INCLUDING INTERIM)
The role of an Interim Resolution Professional or a Resolution Professional, as the case may
be, has been specified under the Code read with the Insolvency and Bankruptcy Board of
India (Insolvency Resolution for Corporate Persons) Regulations, 2016 (hereinafter referred
to as the CIRP Regulations) and also under the Insolvency and Bankruptcy Board of India
(Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017
(hereinafter referred to as Fast Track Regulations)
Public Announcement
As per Section 15 read with Regulation 6 of the CIRP Regulations, the Interim Resolution
Professional is required to issue a public announcement in specified Form A not later than 3
days from the date of her appointment as an interim resolution professional, containing the
following information:
a) Name and address of the corporate debtor under the corporate insolvency resolution
process;
b) Name of the authority with which the corporate debtor is incorporated or registered;
c) The last date for submission of claims as specified
d) Details of the interim resolution professional who shall be vested with the
management of the corporate debtor and be responsible for receiving claims;
e) Penalties for false or misleading claims; and
f) The date on which the corporate insolvency resolution process shall close, which shall
be the one hundred and eightieth day from the date of the admission of the application
under sections 7, 9 or section 10, as the case may be.
PA to be published in one English and one regional language newspaper with wide
circulation at the location of the registered office and principal office, if any, of the corporate
debtor and any other location where in the opinion of the interim resolution professional, the
corporate debtor conducts material business operations; be hosted on the website, if any, of
the corporate debtor; and be hosted on the website, if any, designated by the Board for the
purpose.
PA to also provide the last date for submission of proofs of claim, which shall be fourteen
days (ten days specified for fast track process) from the date of appointment of the interim
resolution professional. The applicant shall bear the expenses of the PA which may be
reimbursed by the committee to the extent it ratifies them. The expenses on the PA shall not
form part of the insolvency resolution process costs.
In terms of the provisions of Section 17 of the Code, from the date of appointment of the
interim resolution professional: -
a) The management of the affairs of the corporate debtor shall vest in the interim
resolution professional;
b) The powers of the board of directors or the partners of the corporate debtor, as the
case may be, shall stand suspended and be exercised by the interim resolution
professional;
c) The officers and managers of the corporate debtor shall report to the interim
resolution professional and provide access to such documents and records of the
corporate debtor as may be required by the interim resolution professional;
d) The financial institutions maintaining accounts of the corporate debtor shall act on the
instructions of the interim resolution professional in relation to such accounts and
furnish all information relating to the corporate debtor available with them to the
interim resolution professional.
In terms of the provisions of Section 18 of the Code, the interim resolution professional shall
perform the following duties
Collect all information relating to the assets, finances and operations of the corporate
debtor for determining the financial position of the corporate debtor, including
information relating to—
o business operations for the previous two years;
o financial and operational payments for the previous two years; o list of assets
and liabilities as on the initiation date; and
o such other matters as may be specified;
receive and collate all the claims submitted by creditors to him, pursuant to the public
announcement made under sections 13 and 15;
constitute a committee of creditors;
monitor the assets of the corporate debtor and manage its operations until a resolution
professional is appointed by the committee of creditors;
file information collected with the information utility, if necessary; and
take control and custody of any asset over which the corporate debtor has ownership
rights as recorded in the balance sheet of the corporate debtor, or with information
utility or the depository of securities or any other registry that records the ownership
of assets including—
o assets over which the corporate debtor has ownership rights which may be
located in a foreign country;
o assets that may or may not be in possession of the corporate debtor; o tangible
assets, whether movable or immovable;
o intangible assets including intellectual property;
securities including shares held in any subsidiary of the corporate
debtor, financial instruments, insurance policies;
o assets subject to the determination of ownership by a court or authority; • to
perform such other duties as may be specified by the Board.
Substantiation of claims
In terms of Regulation 10 of the CIRP Regulations, the interim resolution professional or the
resolution professional, as the case may be, may call for such other evidence or clarification
as she deems fit from a creditor for substantiating the whole or part of its claim.
Verification of claims
In terms of Regulation 13 of the CIRP Regulations, the interim resolution professional or the
resolution professional, as the case may be, shall verify every claim, as on the insolvency
commencement date, within seven days from the last date of the receipt of the claims, and
thereupon maintain a list of creditors containing names of creditors along with the amount
claimed by them, the amount of their claims admitted and the security interest, if any, in
respect of such claims, and update it.
Determination of amount of claim
In terms of Regulation 14 of the CIRP Regulations, where the amount claimed by a creditor
is not precise or cannot be determined due to any contingency or other reason, the interim
resolution professional or the resolution professional, as the case may be, shall make the best
estimate of the amount of the claim based on the information available with him.
In Velamur Varadan Anand v. Union Bank of India & Another the question before the
NCLAT was as to how the period of 180 days is to be counted for corporate insolvency
resolution process ("CIRP") i.e. from the date of admission, as per the provisions of the Code
or from the date of knowledge of the Resolution Professional? Further if there is a gap
between knowledge of RP and the actual date of admission, then how such period is to be
treated? Whether such period should be excluded for the purpose of counting the period of
180 days or additional time is to be allowed beyond 180 days for completing the Resolution
Process? In this case, the application was admitted on 16th August, 2017 and on receipt of
intimation the IRP took charge on 14th September, 2017 (i.e. after 30 days of admission).
Given the circumstances of the case, the NCLAT excluded the aforesaid period of 30 days for
the purpose of counting the period of CIRP and thereby allowed the 'Resolution Professional'
to complete the CIRP by 15th June 2018.
COMMITTEE OF CREDITORS: POWERS AND DUTIES
DEFINITIONS OF CREDITORS
A creditor is any person to whom a debt is owed. A debt is a liability or obligation in respect
of a claim, due from any person. An essential part of the term claim is a right to payment, or a
right to remedy for breach of contract, which gives rise to a right to payment. To be
considered a creditor of the corporate debtor, therefore, a right to payment is essential.
Someone seeking a remedy of specific performance, injunction, or any other remedy, which
does not give rise to a payment, would not be considered a creditor. In other words, a creditor
is any person who has a claim over another person (debtor) in terms of a right to receive
payment.
1. Secured Creditor – is a creditor who has security interest created in his/its favour.
Security interest is a right, title or interest or a claim in a property which is created in
favour of or for the benefit of the creditor. The creditor’s interest is intended to be
secured by creation of such interest, right, title or claim in the property mortgaged,
hypothecated, charged or assigned, or otherwise alienated, with an intention to secure
the performance of the obligations by the borrower/debtor. Provided, however, such
interest does not include performance guarantee.
2. Unsecured Creditors – unlike secured creditor an unsecured creditor does not have
right, interest or any benefit created in his favour in the property of the debtor, by
which the property can be taken hold of. They do not have the cushion of the
rights/title/interest in any property or collateral security in lieu of the debt owed to
them. Creditors for unsecured loans with zero interest rates viz zero-coupon bonds are
also unsecured creditors.
1. FINANCIAL CREDITOR
A financial creditor is defined under Section 5(7) of the IBC to mean "a person to
whom a financial debt is owed and includes a person to whom such debt has been
legally assigned or transferred".
In order to ascertain whether a person is a financial creditor, the debt owed to such a
person must fall within the ambit a 'Financial Debt' as under Section 5(8) of the IBC,
which means:
"a debt along with interest, if any, which is disbursed against the consideration for
time value of money and includes-
a) Money borrowed against payment of interest;
b) Any amount raised by acceptance under any acceptance credit facility or its de-
materialized equivalent;
c) Any amount raised pursuant to any note purchase facility or the issue of bonds, notes,
debentures, loan stock or any similar instrument;
d) The amount of any liability in respect of any lease or hire purchase contract which is
deemed as a finance or capital lease under the Indian Accounting Standards or such
other accounting standards as may be prescribed;
e) Receivable sold or discounted other than any receivable sold on non-recourse basis;
f) Any amount raised under any other transaction, including, any forward sale or
purchase agreement, having the commercial effect of borrowing;
g) Any counter-indemnity obligation in respect of a guarantee, indemnity, bond,
documentary letter of credit or any other instrument issued by a bank or financial
institution;
h) The amount of any liability in respect of any of the guarantee or indemnity for any of
the items referred to in sub-clauses (a) to (h) of this clause"
2. OPERATIONAL CREDITOR
An operational creditor is defined under Section 5(20) of the IBC to mean "any person to
whom an operational debt is owed and includes any person to whom such debt has been
legally assigned or transferred."
In order to ascertain whether a person would fall within the definition of an operational
creditor, the debt owed to such a person must fall within the definition of an operational debt
as defined under Section 5(21) of the IBC, which means: "a claim in respect of the provisions
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".
Distinction between a financial creditor and operational creditor has been drawn by the
Bankruptcy Law Reforms Committee in para 5.2.1 of its final report. It states:
"Here, the Code differentiates between financial creditors and operational creditors. Financial
creditors are those whose relationship with the entity is a pure financial contract, such as a
loan or debt security. Operational creditors are those whose liabilities from the entity comes
from a transaction on operations...The Code also provides for cases where a creditor has both
a solely financial transaction as well as an operational transaction with the entity. In such a
case, the creditor can be considered a financial creditor to the extent of the financial debt and
an operational creditor to the extent of the operational debt."
It is clearly evident that the law makers have chalked out distinct definitions of 'financial
creditor' and 'operational creditor' and that they are not to be interpreted as inclusive or
exclusive of each other.
In Col. Vinod Awasthy v. AMR Infrastructure Limited, the Hon'ble Tribunal while
dismissing the Petition instituted under Section 9 of the Insolvency and Bankruptcy Code,
2016 (IBC) at the admission stage itself, decided the issue of whether a flat purchaser would
fall within the definition of an 'Operational Creditor' as defined under Section 5(20) of the
IBC to whom an 'Operational Debt' as defined under Section 5(21) of the IBC is owed.
The Hon'ble Tribunal observed that the framers of the IBC had not intended to include within
the expression of an 'operation debt' a debt other than a financial debt. Therefore, an
operational debt would be confined only to four categories as specified in Section 5(21) of
the IBC like goods, services, employment and Government dues. The Tribunal held that the
debt owed to the Petitioner (a flat purchaser in this case) had not arisen from any goods,
services, employment or dues which were payable under any statute to the Centre / State
Government or local bodies. Rather, the refund sought to be recovered by the Petitioner was
associated with the possession of immovable property.
The Hon'ble Tribunal held that the Petitioner had neither supplied goods nor had rendered
any services to acquire the status of an 'Operational Creditor'.
It was further held that it was not possible to construe Section 9 read with Section 5(20) and
Section 5(21) of the IBC so widely to include within its scope, cases where dues were on
account of advance made to purchase a flat or a commercial site from a construction
company like the Respondent especially when the Petitioner had other remedies available
under the Consumer Protection Act and the General Law of the land.
The operational creditors are still on a backfoot compared to the financial creditors. This is
because being categorised as an operational creditor does not guarantee any recovery.
However, these creditors are still better placed than others, such as the involuntary creditors
who will not even have a chance to recover anything unless prescribed by the IBC itself.
Moreover, after the recent judgement of the Hon’ble Supreme Court in Vidarbha Industries
Power Limited v. Axis Bank Limited, a distinction has been created between accepting the
claims of financial creditors and operational creditors. It has been held that the acceptance of
claims of the financial creditors is discretionary while for the operational creditors, it is
mandatory.
This may seem to contradict the debt and default model that the IBC works on, that is,
if it is proved that there was a debt and that was defaulted upon, then the creditors can
make an application to the Adjudicating Authority. The discretion is not boundless and
is limited, since the facts of the case do not allow its application in all cases. But it
definitely has stirred up a controversy because, on the face of it, this puts a dent in the
position of the financial creditors. The same has been true for the homebuyers being
categorised as financial creditors—this was because the allottees were a vulnerable class
and were supposed to be given the most protected status under the IBC.
In Jaipur Trade Expocentre Private Limited v. M/s Metro Jet Airways Training Private
Limited, the full bench National Company Law Appellate Tribunal [NCLAT] has held that
license fee should be considered as operational debt. By pronouncing this judgement, the
NCLAT overruled its judgement in M Ravindranath Reddy v. G Kishan. The license
agreement in Jaipur Trade Expocentre Private Limited was entered into by the parties
to run an educational institution. According to NCLAT, the Adjudicating Authority
erred in holding that the services under Section 5(21) would not include a license fee
agreement of such nature.
Before this, in another case, Promila Taneja vs. Surendri Design Pvt. Ltd., the NCLAT
held that the definition of services under the Consumer Protection Act and Goods and
Services Act cannot be imported for the purposes of the classification of a debt under IBC.
This judgement was distinguished from and not adopted in the Jaipur Trade Expocentre case.
Moreover, the judgement in the Promila Taneja case has been appealed before the Supreme
Court and is currently pending over there.
The essential point of classification of debt and consequently the creditors is the order of
priorities and strength of the creditors in meetings and otherwise.
In case, the CoC has failed to arrive at a resolution of the corporate debtor, the Adjudicating
Authority will pass an order for the liquidation and the liquidator would be appointed. In the
event of the liquation, the code has provided two options for the secured creditor i.e.:
a) The secured creditor may relinquish his security interest in the secured asset and
receive the proceeds from the liquidation estate under the waterfall mechanism.
b) The secured creditor may realise the security interest as provided in section 52 of the
Code.
If the secured creditors relinquish their security interest under section 52(1)(a), they are
placed 2nd under the waterfall mechanism right after the payment of insolvency resolution
process costs and the liquidation costs. They are placed at par with “workmen’s dues for 24
months preceding the liquidation commencement date” under section 53 of IBC. Upon
relinquishment of the security interest by the secured creditors, the secured assets become
part of liquidation estate of the corporate debtor and the liquidator can sell such assets under
regulation 32 of Insolvency and Bankruptcy Board of India (Liquidation Process)
Regulations, 2016.
And, if the secured creditors decide to realize their interest in the secured assets of the
corporate debtor, such assets do not become part of the liquidation estate of corporate debtor.
The secured creditors may enforce and realize their secured interest and apply the proceeds to
recover their debt. However, in such case the secured creditors cannot sell or transfer the
secured asset to any person, who is not eligible under the Code to submit a resolution plan for
the insolvency resolution of the corporate debtor in terms of the recently introduced
Regulation 37(8) of the Insolvency and Bankruptcy Board of India (Liquidation Process)
Regulations, 2016. The purpose of this amendment is to prevent the back-door entry of the
otherwise ineligible resolution applicants into the management of the corporate debtor.
When the proceeds from the realization of the secured interest are not adequate to repay the
debt owed to the secured creditors, the unpaid portion of the secured debt would be paid out
of the liquidation estate at 5th position in the order of priority under S-53 of IBC after the
payment to unsecured creditors. However, if the secured creditors have realized their security
interest and proceeds are in excess of the debt due to the secured creditors, the secured
creditors shall account to the liquidator any surplus funds received from the enforcement of
such secured assets under section 52(9) of the Code.
The NCLAT recently in the matter of Mr. Srikanth Dwarakanath vs Bharat Heavy
Electricals Limited [2020], NCLAT had allowed the appeal filed by Mr. Srikanth
Dwarakanath, liquidator of Surana Powers Limited (SPL) against the impugned order passed
by NCLT, Chennai and held that BHEL (one of the secured creditors) does not have the right
to realize its security interest as the same would be detrimental to the liquidation process and
the interest of the remaining ten secured creditors of Surana Powers Limited. BHEL had
claimed exclusive rights over the secured assets of Surana Powers Limited through an
arbitration award in its favour.
When more than one secured creditor having security interest over the same secured
assets
The NCLAT in the matter of JM Financial Asset Reconstruction Company Limited vs
Finquest Financial Solutions Pvt. Ltd (2019) had held that if one or more secured creditors
have opted to realize their security interest against the same very asset in terms of section
52(1)(b), the liquidator will act in terms of section 52(3) and find out as to who has the
1st charge on the secured assets from the records maintained by the information utility or in
any other manner as may be specified by the Board and pass an appropriate order.
1) Secured creditors shall be entitled to participate and vote in the meetings of the creditors.
2) A secured creditor participating in the meetings of the creditors and voting in relation to
the repayment plan shall forfeit his right to enforce the security during the period of the
repayment plan in accordance with the terms of the repayment plan.
3) Where a secured creditor does not forfeit his right to enforce security, he shall submit an
affidavit to the resolution professional at the meeting of the creditors stating—
a. that the right to vote exercised by the secured creditor is only in respect of the
unsecured part of the debt; and
b. the estimated value of the unsecured part of the debt.
4) In case a secured creditor participates in the voting on the repayment plan by submitting
an affidavit under sub-section (3) , the secured and unsecured parts of the debt shall be
treated as separate debts.
5) The concurrence of the secured creditor shall be obtained if he does not participate in the
voting on repayment plan but provision of the repayment plan affects his right to enforce
security.
The main aims of law of insolvency is to assist both the debtor and the creditor in the
management and disposition of the debtor’s assets. After enforcement of Insolvency Code,
numerous insolvency petitions against companies have been admitted, few of these
companies may also have assets in other jurisdictions, and one of the crucial questions that
arises is the treatment of such assets. This is the main area of cross-border insolvency laws.
If the company is ordered to be liquidated under the Insolvency and Bankruptcy Code, 2016
due to the failure to arrive at a resolution plan by COC, and few of the assets of the company
under liquidation are located in other jurisdiction, the disposition of the foreign assets of a
company in this case would be a tedious task. In this situation, the Code is sadly inadequate
for addressing the disposition of the foreign assets of a company
Letter of request to a country outside India in certain cases – Section 235 of IBC Code
If in the course of insolvency resolution process, or liquidation or bankruptcy proceedings,
the resolution professional, liquidator or bankruptcy trustee, is of the opinion that assets of
the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are
situated in a country outside India with which reciprocal arrangements have been made under
section 234, he may make an application to the Adjudicating Authority that evidence or
action relating to such assets is required in connection with such process or proceeding.
The Adjudicating Authority on receipt of an application and, on being satisfied that evidence
or action relating to assets is required in connection with insolvency resolution process or
liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority
of such country competent to deal with such request.
The code did not name the mechanisms for Indian court to seek or give assistance from or to
a foreign court or insolvency professional. It did not make the provisions on recognition of
foreign insolvency proceedings. It did not make the provisions on dealing with concurrent
insolvency proceedings. It is silent on the provisions on whether foreign insolvency
representatives can gain access to Indian insolvency proceedings.
The Hon’ble Apex Court in the case of Pioneer Urban Land and Infrastructure Limited &
Anr. Vs. Union of India & Ors. upheld the validity of the clarification that ‘Homebuyers’
were ‘financial creditors’ observing that delay in completion of flats/ apartments had
become a common phenomenon and that amounts raised from home buyers contributes
significantly to the financing of the construction of such flats/ apartments.
In a recent judgement of Amit Katyal V. Meera Ahuja1, the Hon’ble Apex Court, observing that
object and purpose of the IBC is not to kill the company and stop/stall the project, but to ensure
that the business of the company runs as a going concern, allowed the original applicants (three
home buyers) to withdraw the CIRP proceedings on account of having reached a settlement with
1
2022 SCC OnLine SC 257
the Corporate Debtor, as the same would be in the larger interest of the home buyers who had been
waiting for the possession for more than eight years.
MSME
Micro, Small and Medium Enterprises (MSME's) are small sized business units defined as
per the terms of their investment. Section 7 of the Micro, Small & Medium Enterprises
Development (MSMED) Act, 2006 (hereinafter referred to as 'Act') classifies MSME's into
two classes, namely, manufacturing and service.
MSMEs form the foundation of the Indian economy, and are key providers of employment,
production, economic growth, entrepreneurship and financial inclusion. As per the report of
the World Bank on the Treatment of MSME Insolvency, it suggested that the approach to
provide relief to MSME's is to exempt or relax certain provisions from the regular insolvency
process.
As per the Corporate Insolvency Resolution Process, the MSME suppliers are categorized as
'operational creditors'.
a. to exempt MSMEs from application of Section 29A of the Code, since usually only
promoters of an MSME are likely to be interested in acquiring it.
b. to empower the Central Government to exempt or vary application of provisions of
the Code by way of a notification for a certain class or classes of companies,
including for MSMEs as defined in Section 7 of the Act.
c. to provide relief to MSMEs from the provision of the Code by inserting Section 240A
in the Code, which specifically exempts resolution applicants for MSMEs that are
undergoing CIRP from all eligibility criteria stated in Section 29A except the
requirement that they should not be classified as willful defaulters.
d. Further, to clarify that provisions of the Code shall apply to MSMEs in such modified
form as the Central Government may notify in terms of Section 240A of the Code.
e. Additionally, a provision may be inserted to enable the Government to, by way of a
notification, exempt or modify application of certain provisions of the Code to
MSMEs as defined in the Act.
Additionally, even the Hon'ble Supreme Court of India in Swiss Ribbons Pvt. Ltd. vs.
Union of India and Ors. (2019) while recognizing the importance of adding MSME friendly
provisions in the Code, found no fault in the exemption of MSME under Section 29A of the
Code. The Court further perceived the business of an MSME to attract interest from a
promoter of an MSME and may not be of interest to other resolution applicants. Therefore, if
MSME's aren't exempted, then other resolution applicants may not come forward and it
would lead to a liquidation of the MSME instead of resolution.
WATERFALL MECHANISM
At the time of Insolvency proceedings, the Inter-se ranking amongst creditors plays an
important role as it dictates the arrangement and determines the priority in which the financial
offerings by the resolution applicant shall be distributed to the secured creditors. The status of
determining the priority was the different pre-IBC regimes and post IBC regimes.
Pre-IBC Regime:
The Supreme Court of India in the case of ICICI Bank v. Sidco Leathers Ltd. and Others
addressed the issue of priority under Sections 529 and 529A of the Companies Act, 1956,
which govern the ranking of creditors’ claims in a company in liquidation similar to what is
given under section 53(1) (b) of the code. The Supreme Court noted that there was a lack of
legislative clarity on this issue and that if the legislature had intended to reduce a right as
important as the right of priority, it would have done so explicitly in the legislation.
The waterfall mechanism is a legal device that provides the payment of debts in order of
priority, but with several exceptions and qualifications. These commonly include the ability
of a creditor to arrange with a debtor to receive payments in a different order than the priority
set out in the Act
A waterfall mechanism is a tool used in the event of a liquidation. A secured creditor will be
able to receive 100%, after which unsecured creditors will be proportionally paid out
according to their claims.
PRIORITY IN DEBTS OVERRIDING PREFERENTIAL PAYMENTS UNDER
COMPANIES ACT, 2013 – AMENDED BY IBC
Section 326 of Companies Act, 2013 has been amended and dues of workmen and the
secured creditor is in priority to all other dues. Earlier, the dues of secured creditor were to
rank side by side in terms of proviso to sub-Section 1 of Section 325. Now the secured
creditor who has realized a secured asset is also entitled to priority towards the balance of his
dues.
The distribution and preferential payment under Companies Act and IBC are different, and
Section 326 shall not be applicable in the event of liquidation under IBC.
The Code provides for priorities [waterfall] wherein the proceeds from the realization of
assets of the entity are to be distributed to its creditors in case of liquidation. The priority as
envisaged in Section 53 is as follows:
If a corporate debtor is being liquidated, a creditor cannot claim superiority over other
secured creditors in the same band and that everyone must receive their fair share by
following the waterfall mechanism of liquidation. As the name suggests, the waterfall
mechanism under Insolvency and Bankruptcy Code gives priority to secured financial
creditors over unsecured financial creditors. The operational creditors fall under the heading
of “remaining debts and dues,” whereas the financial creditors have been expressly enrolled
under Section 53. The mechanism says that if a company is being liquidated, these secured
financial creditors must be first paid the full extent of their admitted claim before any sale
proceedings are distributed to any other unsecured creditor.
Under Section 53 of the IBC, which deals with the waterfall mechanism, the topmost priority,
however, is given to costs related to the liquidation process and dues of workmen of the
corporate debtor. The dues of the workmen include all their salaries, provident, pension,
retirement, and gratuity fund, as well as any other funds maintained for the welfare of the
workmen.
The Appellate in the case of Technology Development Board v. Anil Goel, Liquidator of
Gujarat Oleo Chem Limited (GOCL) & Ors made it specifically held that: “Whether the
Secured Creditor holds a first charge or second charge is material only if the Secured Creditor
elects to realize its security interest.” “However, once a Secured Creditor opts to relinquish its
security interest, the distribution of assets would be governed by Section 53(1)(b)(ii), which
states that – all Secured Creditors who have renounced security interests rank equally.”
Following that, in the case of Swiss Ribbons Pvt. Ltd. v. Union of India, the constitutional
validity of Section 53 of the IBC was challenged before the Hon’ble Apex Court. The
Hon’ble court concluded that the priority sequence enumerated under Section 53 has to be
followed only during the corporate debtor liquidation, not during CIRP approval.
Furthermore, because financial creditors and operational creditors do not have the same
relationship with the corporate debtor, the Hon’ble Court stated that financial creditors are
given priority over operational creditors
Further, the Court held that in the case of an application by a Financial Creditor who might
even initiate proceedings in a representative capacity on behalf of all financial creditors, the
Adjudicating Authority might examine the expedience of initiation of CIRP, taking into
account all relevant facts and circumstances, including the overall financial health and
viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit
the application of a Financial Creditor. Even though Section 7(5)(a) of the IBC may confer
discretionary power on the Adjudicating Authority, such discretionary power cannot be
exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of
discretion in a particular manner, discretion would have to be exercised in that manner.
Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit
an application under Section 7 of the IBC and initiate CIRP on satisfaction of the existence of
a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless
there are good reasons not to admit the petition.
The Hon’ble Supreme Court while upholding the view expressed in its earlier judgment in the
matter titled ‘Alok Kaushik v. Bhuvaneshwari Ramanathan and Others’, has elaborated
upon the manner in which the NCLT may exercise its jurisdiction under Section 60 (5)(c) of
the Insolvency and Bankruptcy Code when dealing with the aspect of the agreed fee payable
to a Resolution Professional by the Committee of Creditors.
It was submitted on behalf of the Appellant that he had gone by the book, and claimed only
the agreed fee, which is very reasonable in the circumstances. It was therefore sought that the
orders passed by the Adjudicating Authority and the impugned order passed by the Appellate
Authority, which were bereft of reasoning and analysis and disregarded what had been agreed
to between the parties, be set aside.
The counsel for the Respondent bank, i.e., the Bank of India on the other hand principally
argued that the Appellant’s contention was that the NCLT and NCLAT cannot look into the
aspect of fee and expenses payable to the Resolution Professional since the same are
commercial decisions, which is an untenable contention in view of the judgment passed by
the Hon’ble Supreme Court in the Alok case. The Respondent could not however deny that
they had agreed to the fee quoted by the Appellant; and the amount that he was claiming was
correctly computed.
Agreeing with the contentions advanced on the part of the Appellant, and noticing that the
order passed by the NCLT Mumbai bench in the Miscellaneous Application filed by the
Appellant before it, as well as the impugned order dated 30th July, 2020, were in fact ad hoc
orders that had failed to take note of and discuss and /or analyze the fee and expenses agreed
as payable to the Resolution Professional by the Committee of Creditors (which comprised
only of the Bank of India), the Hon’ble Supreme Court was pleased to set aside the orders
passed by the NCLT and the NCLAT.
In the matter of Surana Power Ltd v BHEL, the NCLAT, while setting aside the order of the
NCLT ruled out that the liquidation process of corporate under the Insolvency and
Bankruptcy Code, 2016 is given supremacy over the arbitration awards.
Facts: an application was filed under section 9 of IBC for initiation of corporate insolvency
resolution process in respect of SPL. Since no resolution plan was approved, the liquidation
of the corporate debtor was initiated. At the time of liquidation, BHEL commenced
arbitration proceedings and was awarded a lien over the assets of SPL, thereby making it a
secured creditor. However, these assets were already hypothecated to other secured creditors
and, thus, BHEL did not have an exclusive charge over them.
Issue: Whether the adjudicating authority has acted arbitrarily in favour of BHEL
Held: The Tribunal observed that BHEL does not have exclusive rights over the Secured
Assets on the ground that the arbitral award was untenable as it is the fundamental principle
of the company law that when liquidation process is initiated, the Liquidator becomes the
single body who construes the claims and the counter-claims of the Secured and Unsecured
Creditors.
Additionally, it was observed that it would be prejudicial to halt the liquidation process at the
instance of a single Secured Creditor having a share of 26.24% in the Secured Assets. This
step would be detrimental to the interest of the 10 Secured Creditors and the liquidation
process. As per Section 13(9) of the SARFAESI Act, 2002, BHEL would have enjoyed the
right over the assets only if it had the requisite 60% share in the Secured Assets of the
Corporate Debtor. Therefore, the NCLAT held that the liquidation supersedes the arbitral
award.
When the liquidation embarks on, everyone has to move in the queue as per the waterfall
mechanism laid down in Section 53 of the Code, 2016 which gives the priority list of the
creditors to whom payment is to be made. It is evident from Surana Power Ltd v BHEL that
a creditor cannot gain supremacy over other Secured Creditors, they all will be adjudicated
on the same footing and get the fair share by following the waterfall mechanism of
liquidation.
State Tax Officer V. Rainbow Papers Ltd.
In the aforementioned judgement, the Hon’ble SC laid down the paramount importance of
considering the pending dues of the statutory authorities towards unpaid taxes prior to the
acceptance of a resolution plan by the adjudicating authority. The Court categorically stated
that any resolution plan which ignores the debts which are payable to the Government is
liable to be rejected.
On the question of whether Section 48 of the Gujarat Value Added Tax Act, 2013 would be
inconsistent with Section 53 of the Code or not, the Hon'ble Supreme Court held that GVAT
was neither inconsistent nor contrary to IBC, and that if any debt owed to the Government is
being excluded from the resolution plan, then such a resolution plan "cannot be said to be in
conformity with the provisions of IBC", and the same ought to be rejected by the adjudicating
authority.
Section 48 of GVAT Act, 2003 creates first charge on the property of a dealer.
In light of the same, in Sales Tax Officer v. Rainbow Papers Limited, it was argued that the
charge so created on the assets of the Corporate Debtor qualifies as ‘Security Interest’ under
the Code and the Tax Department was, therefore a ‘Secured Creditor’ for the purpose of
Section 53 of the Code (order of priority of creditors for distribution of proceeds of
liquidation assets).
The appellant challenged the rejection of the claim on the ground that it was belated. The
Court accepted the argument of the State and held that State was a ‘Secured Creditor’. It also
ruled that the timeline prescribed under the Code for the various stages of the proceeding
under it is directory and not mandatory, and the State’s claim for statutory dues could not
have been ignored on account of delay.
The Court proceeded to expound on the treatment of debts owed to the state government and
public authorities. It observed “if the resolution plan ignores the statutory demands payable to
any state government or a legal authority. Altogether, the adjudicating authority is bound to
reject the plan”.
The Court further noted that “if a company is unable to pay its debts, which should include its
statutory dues to the government and/or authorities and there is no plan which contemplates
dissipation of those debts in a phased manner, uniform proportional reduction, the company
would necessarily have to be liquidated and its assets sold and distributed in the manner
stipulated in section 53 of IBC”.
The NCLAT in the case Reliance Commercial Finance Limited v Darode Jog Builder
Private Limited, the Principal Bench, while adjudicating the appeal, upheld the Adjudicating
Authority’s decision to not admit a petition under Section 7 of IBC, despite there being a
default and a debt.
It was recorded by the bench the Corporate Debtor an opportunity to pay/settle the full
amount of default despite the Financial Creditor’s unwillingness to enter settlement.
In the instant case the Appellant/Corporate Debtor was aggrieved from the Order passed by
the AA Mumbai where Section 7 petition filed by the Financial Creditor was listed. During
the hearing, the Appellant offered to settle the matter, however, the Financial Creditor was
unwilling to do the so. Pursuant to the same, the AA held that if Appellant does not deposit
the settlement amount offered within 45 days the Financial Creditor has right to restore the
proceedings under Section 7 of the IBC.
The issue that arose before the Tribunal was that since the Appellant was willing to settle the
matter and it was the Financial Creditor who was not willing to do the same, has the AA
erred in passing an order, where it has reserved the right of the Financial Creditor to restore
the Section 7 Petition if the amount offered is not deposited.
The Hon’ble NCLAT dismissed the Appeal relying upon “Vidarbha Industries Power
Limited Vs. Axis Bank Limited” passed by Hon’ble Apex Court where it was held that the
AA even after considering that there is a debt and default is required to apply its mind
including feasibility of the initiation of the CIRP. The NCLAT further held that there is no
error in the Order of the AA where such liberty is granted to the Financial Creditor.
SHORTCOMINGS AND FLAWS
It’s been 6 years since the Insolvency and Bankruptcy Code has been introduced, and in these
years, it has seen many ups and downs. The Code has been amended several times and there
are various judicial pronouncements interpreting the Code. The Supreme Court and the high
courts have pronounced landmark cases interpreting the clauses of the Code, questioning its
constitutional validity, and settling grey areas in the Code. It is a challenge to implement the
Insolvency and Bankruptcy Code effectively.
1) The code fails to provide adequate safeguards to protect the rights of the company
before handing over the management to the resolution professional.
2) The Code rides substantially on the unquestionable word of the creditors.
3) The Code fails to provide any opportunity to the corporate debtor to make a
representation at any stage of the resolution process.
4) The Code is also deficient in providing criteria for the qualification of the interim and
of the final insolvency resolution professionals.
5) Inexperienced Insolvency Professionals: It also leaves too much discretion in the
hands of the IP.
6) a resolution professional may not have experience in handling or managing a
company. Due to the lack of need for minimum experience in handling and managing
a company, one might question the ability of the resolution professional.
7) It allows for any person to access the information memorandum put together by the
insolvency professional without restricting competitors or imposing
any confidentiality obligations. This goes against the right to business.
8) The Code fails to define a resolution applicant. All such resolution plans are placed
before the financial creditors and is implemented by way of an order by the NCLT.
9) If the financial creditors fail to arrive at a consensus, the default plan is to liquidate
the company.
10) Overburdening of NCLTs: The proportion of NCLT benches to the high number of
cases are imbalanced and to add that the time limit of 330 days to complete CRIP is
proving to be very difficult. For companies having a large number of creditors, will
have hindrances in the smooth functioning of the creditor’s committee.
11) Threshold disadvantageous to OCs: During the Covid-19 period, the threshold for
applications under the Act was suddenly raised from Rs. 1 lakh to Rs. 1 crore. No
doubt, the threshold of Rs. 1 lakh had been too small, but the arbitrary jump to Rs. 1
crore was extreme. It leaves a large section of operational creditors in a lurch. Such a
jump may prove detrimental to the very purpose of the Code; instead, a gradational or
incremental jump in threshold is advised.
The code must be robust, decentralized, less costly, inclusive and speedy.
This would help businesses exit sooner and capital to be redeployed faster to
productive firms, thereby improving economic output and employment.
The code should encourage decentralization, reduce the role of courts or insolvency
professionals and allow for a greater role for a market-friendly approach.
VOLUNTARY LIQUIDATION
The provisions relating to voluntary liquidation or winding up were earlier governed by the
Companies Act 2013; however, vide an amendment in the IBC, the central government
notified that the process of voluntary liquidation shall be governed by the IBC under
Section 59 of the Code.
This provision of the code provides a unique opportunity to a solvent company, because
section 59 allows the companies to have an exit strategy even when they are solvent.
A corporate personality shall be considered as eligible for voluntary liquidation if the
following two conditions are satisfied as per Section 59:
a. The company has no outstanding debts or it promises to pay off its debts from
the sale of assets during liquidation;
b. The company is not being liquidated with an intention to defraud a person.
1. Section 59(2) requires the voluntary liquidation to be carried out in accordance with the VL
rules framed by the IBBI, following are the steps that need to be undertaken in voluntary
liquidation:
2. Board of Directors will hold a board meeting and approve the voluntary liquidation and also
issue a declaration of solvency.
3. A meeting of the shareholders shall be convened to approve the voluntary liquidation of the
company and appointment of an Insolvency Professional as a liquidator of the company.
4. If the company owes any debt to any person, creditors representing two-thirds in value of
the debt of the company shall approve the resolution passed by the shareholders within
seven days of such resolution.
5. Necessary filings will be done with the Registrar of Companies, Insolvency and Bankruptcy
Board of India and Income Tax authorities.
6. The liquidator will take over the charge of the company will proceed with further steps
including realization of assets of the company, settlement of outstanding dues and
distribution of proceeds to the stakeholders.
7. The liquidator shall give a public notice and invite claims from stakeholders.
8. . The liquidator shall endeavor to complete the liquidation process of the corporate person
within twelve months from the liquidation commencement date.
9. Where the affairs of the corporate person have been completely wound up, and its assets
completely liquidated, the liquidator shall make an application to the Adjudicating
Authority for the dissolution of such corporate person.
10. The Adjudicating Authority shall on an application filed by the liquidator, pass an order that
the corporate debtor shall be dissolved from the date of that order and the corporate debtor
shall be dissolved accordingly.
11. A copy of the order shall be forwarded to the authority with which the corporate person is
registered.
1. Apart from the basic rules that have been mentioned above, there are several regulations that
have to be taken into consideration, these regulations are framed by the IBB under the VL
regulations and rules and derive their authority from Section 59 of the Act.
2. In case there is any conflict of interest, the liquidator is obligated to step down as per
Regulation 6 (4) of the VL Regulations, this regulation requires the liquidator to step down
from acting as a liquidator in two cases –
If the insolvency professional entity of which he is director/ partner represents other
stakeholder in the same liquidation proceeding; or
Any other director/ partner of such insolvency professional entity represents any other
stakeholder in the same liquidation proceeding.
3. Chapter V of the VL Regulations provide for the manner of submission of claims by
creditors (including workmen and employees and secured creditors), determination of
amount of claims, foreign currency claims, mutual credits ad set-off, verification of claims,
etc.
4. Pursuant to regulation 8, a liquidator is required to prepare and submit viz., preliminary
report, annual status report, minutes of consultations with stakeholders and final report.
Consequences of shifting the voluntary liquidation scheme to the IBC Para 16 of the Eleventh
Schedule of the Code [pursuant to Clause 255] to the Code calls for omission of Sections 304
to 323 of the Companies Act, 2013 dealing with voluntary winding up provisions. Therefore,
the Companies Act, 2013 now have only one mode of winding up – winding up by the NCLT.
However, only the insolvency professionals have been allowed to act as liquidators in these
modes of winding up, whether by NCLT under the Companies Act, 2013 or winding up of
insolvent companies under the Code, or voluntary liquidation of corporate persons under the
Code.