Insolvency and

Bankruptcy
Code, 2016
BY
ABHISHEK TRIPATHI
&
AVANTIKA SHUKLA
 OVERVIEW
 The Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”) was passed in May 2016 to
replace the existing legal regime for insolvency and bankruptcy.
 The Code aims at bringing accountability for borrowers by empowering creditors to initiate
insolvency resolution process and handing over the management in independent professional
hands.
 A number of rules and regulations have been notified to create the institutions and professionals
necessary for the insolvency and bankruptcy process.
 Since enactment of the Code, a large number of proceedings have been initiated, and a few have
even exited the process.
 Code differs from previous similar attempts, in as much as it attempts to enforce stricter timelines
for various procedures.
 The courts, particularly NCLT/ NCLAT and the Supreme Court have helped by disposing off
appeals in a relatively time bound manner.
 The Government too has responded by modifying the Code where its implementation has faced
difficulties.
OBJECTIVES OF THE CODE
 AMENDING AND CONSOLIDATING THE LAWS RELATING TO
INSOLVENCY AND BANKRUPTCY
 MAXIMIZATION OF VALUE
 TIME-BOUND RESOLUTION
 PROMOTING ENTREPRENEURSHIP AND AVAILABILITY OF
CREDIT
 CREATING A MORE EQUITABLE WATERFALL MECHANISM, IN
PARTICULAR, BY ALTERING THE PRIORITY OF PAYMENT OF
GOVERNMENT DUES
 IMPACT ON OTHER STATUTES

 Presidency Town Insolvency Act, 1909; and

 Provisional Insolvency Act, 1920
Acts repealed

 Sick Industrial Companies (Special Provisions) Repeal Act, 2003;

 Recovery of Debts Due to banks and financial institutions Act, 1993;
 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002;
Acts amended  Companies Act, 2013;
 Indian Partnership Act, 1932;
 Income Tax Act, 1961;
 APPLICABILITY

Limited Liability
Partnerships

Corporate Partnerships
Entities
CODE (provisions not yet notified)

Individuals
(provisions not yet notified)
 STRUCTURE OF THE CODE

Part I Part II Part III Part IV Part V

• Preliminary • Insolvency & • Insolvency • Regulation of • Miscellaneous
(Applicability & Liquidation for Resolution & Insolvency
Definitions) Corporate Bankruptcy for Professionals,
Persons Individuals and Agencies &
Partnerships Information Schedules
Firms Utilities (Amends
other statues)
 INSOLVENCY RESOLUTION SYSTEM

Adjudicating Authority
Information
Utilities
IBBI

Insolvency National
Company Law Debt Recovery
Professionals Tribunal
(NCLT)
Tribunal (DRT)

Insolvency
Utilities Individuals/
Corporate
Partnership
Entities/ LLPs
Firms
 SOME IMPORTANT DEFINITIONS
“claim” means – (a) a right to payment, whether
or not such right is reduced to judgment, fixed,
disputed, undisputed, legal, equitable, secured, or
unsecured; (b) right to remedy for breach of
contract under any law for the time being in force,
if such breach gives rise to a right to payment,
whether or not such right is reduced to judgment,
fixed, matured, unmatured, disputed, undisputed,
secured or unsecured;
“debt” means a liability or obligation in respect of
a claim which is due from any person and
includes a financial debt and operational debt.
“corporate applicant” means – (a) corporate debtor; or
(b) a member or partner of the corporate debtor who is
authorised to make an application for the corporate
insolvency resolution process under the constitutional
document of the corporate debtor; or (c) an individual
who is in charge of managing the operations and
resources of the corporate debtor; or (d) a person who
has the control, and supervision over the financial affairs
of the corporate debtor.
“default” means non-payment of debt when whole or
any part or instalment of the amount of debt has become
due and payable and is not paid by the debtor or the
corporate debtor, as the case may be.
 SOME IMPORTANT DEFINITIONS
“operational creditor” means a person to whom
an operational debt is owed and includes any
person to whom such debt has been legally
assigned or transferred.
“financial creditor” means any person to whom
a financial debt is owed and includes a person
to whom such debt has been legally assigned or
transferred to.
“dispute” includes a suit or arbitration
proceedings relating to– (a) the existence or the
amount of debt; (b) the quality of goods or
service; or (c) the breach of a representation or
warranty;
“operational debt” means a claim in respect of the
provision of goods or services including
employment or a debt in respect of the payment
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;
 SOME IMPORTANT DEFINITIONS
financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and
includes –
a) money borrowed against the payment of interest;
b) any amount raised by acceptance under any acceptance credit facility or its de-materialised 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) receivables sold or discounted other than any receivables 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 a borrowing;
g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price
and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into
account;
h) 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;
i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to
(h) of this clause;
For real estate projects:
(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial
effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d)
and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016)
 WHO CAN INITIATE THE PROCESS?

Financial Creditor Operational Creditor Corporate Applicant

 Filing an application on occurrence Deliver demand notice in Form 3 to  Filing an application on

of default in Form No. 1. the corporate debtor on occurrence of occurrence of default in
 Based on information from IU, default Form No. 6
financial creditors may file
application
Adequate Not adequate Along with application, to
reply reply furnish record of default and
to propose name of IRP
Along with application, to furnish
record of default and to propose name
of Insolvency Resolution Professional Settlement Filing of
(“IRP”) application in
Form No. 4
Dispute
 CORPORATE INSOLVENCY RESOLUTION
PROCESS

Default of at least INR 100,000

Application to NCLT

NCLT shall within 14 days of receipt of the application, by order

Admit the Reject the

application if or application if
it is complete it incomplete

The Insolvency Process will start from the

NCLT shall before rejecting an application give a
date of admission of the application by the
notice to the applicant to rectify the defects within
NCLT. Date of admission of the application is
7 days of receipt of such notice.
called “Insolvency Commencement Date”.
 CIRP PROCESS
Admission of insolvency petition by NCLT

The moratorium period will be Appointment of IRP within 14

active for the period for which days from the Insolvency Making Public
the insolvency resolution Commencement Date for a period Announcement
process is active. of 30 days.

Moratorium prohibits: After appointment, IRP takes over corporate debtor’s Management,
constitutes a Committee of Creditors (“COC”) comprising of unrelated
 Institution/continuation financial creditors of the corporate debtor.
of suit or proceedings;
 Transfer of assets At the first meeting of the COC within 07 days of its constitution
 foreclosure, recovery or
enforcement under
SARFAESI; and Resolve to appoint Replace the IRP by
 Recovery of assets IRP as Resolution or another Resolution
Professional. Professional.
 Resolution Professional prepares Information Memorandum (“IM”)

Resolution Applicant(s), on the basis of IM, submit resolution plan(s) to Resolution

Professional for examination & further approval of COC

Resolution plan Resolution plan

or
approved by COC rejected by COC

NCLT NCLT Commencement

approves or rejects of Liquidation
plan plan Process

The Insolvency Process shall be completed within a period of 180 days from the Insolvency Commencement Date. A single extension of
90 days can also be granted by NCLT if a resolution in respect of extension has been approved by at least 66% of the voting shares of
the Committee of Creditors.
 HOW TO SUBMIT CLAIMS?
Submission of Claim: On or before the last date mentioned in the Public Announcement
or
On or before the 90th day of the Insolvency Commencement Date

Operational creditor (other than workman or Financial creditor (other than a financial creditor
employee of the corporate debtor), shall submit belonging to a class of creditors), shall submit claim
claim with proof by post or by electronic mean with proof, shall submit claim with proof by post or
in Form B. by electronic mean in Form C.

Workman or an employee of the corporate debtor shall

Creditor in a class shall submit claim with submit claim with proof in person, by post or by
proof in electronic form in Form CA. electronic means in Form D.

A person claiming to be a creditor, other than those

covered above, shall submit its claim with proof in
person, by post or by electronic means in Form F.
INELIGIBLE PERSONS FOR RESOLUTION PLAN

a) an undischarged insolvent;
b) a willful defaulter;
c) a borrower whose account has been identified as a non-performing asset for over a year and who has not repaid the
amount before submitting a plan (Exempted in the case of MSME);
d) a person convicted of an offence punishable with two or more years of imprisonment;
e) a person disqualified as a director under the Companies Act, 2013;
f) a person prohibited from trading in securities;
g) a person who is the promoter or in the management of a company which has indulged in undervalued, preferential, or
fraudulent transactions;
h) a person who has given guarantee on a liability of the defaulting company undergoing resolution or liquidation, and has
not honored the guarantee (Exempted in the case of MSME);
i) a person who is subject to any of the above disabilities in any jurisdiction outside India; or
j) a person who has a connected person disqualified in any manner above.
 ROLE OF RESOLUTION PROFESSIONAL
 Managing the affairs of the corporate debtor as a going concern & discharging duties under
Section 25 of the Code.
 Constituting the COC, convening and conducting COC meetings.
 Conducting of the Corporate Insolvency Resolution Process.
 Preparation of the IM.
 Submission of resolution plan to the NCLT/ DRT, as approved by the COC.
 Verification and determination of the claims of stakeholders.
 Examining and filing for avoidance of transactions that are preferential, undervalued,
fraudulent to creditors and extortionate.
 Conducting the liquidation process if the resolution plan is rejected or fails after approval.
 PREFERENTIAL / UNDERVALUED TRANSACTIONS
• Preferential and undervalued transactions of the CD, entered into by the CD in the one year
preceding the insolvency commencement date (two years for related party transactions) can be
avoided.
• A corporate debtor shall be deemed to have given a preference, if–
a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a
creditor or a surety or a guarantor for or on account of an antecedent financial debt or
operational debt or other liabilities owed by the corporate debtor; and
b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a
beneficial position than it would have been in the event of a distribution of assets.
• A transaction shall be considered undervalued where the corporate debtor makes a gift to a person or
enters into a transaction with a person which involves the transfer of one or more assets by the
corporate debtor for a consideration the value of which is significantly less than the value of the
consideration provided by the corporate debtor and such transaction has not taken place in the
ordinary course of business.

The Code also introduces the concept of extortionate credit transactions, which can be set side upon an
application of the liquidator or the resolution professional.
 LIQUIDATION PROCESS

Liquidation order will be passed if:

 CIRP ends Appointment of Formation of
 Plan not submitted to NCLT liquidator liquidation estate
 Plan not approved
 Decided by CoC
 Plan not properly implemented

Payment
Dissolution of
waterfall for
Reporting corporate
distribution of
• Preliminary report – within 75 debtor
assets
days from the date of the order
• Progress report – within 15 days
after end of every calendar
quarter
• Final report- as part of the Verification
Consolidation of /admission/reje
application for the dissolution of claims ction of claims
the corporate debtor to the NCLT
 WATERFALL MECHANISM

Insolvency resolution process and Equity shareholders or partners as the

liquidation cost case may be

Secured creditor and Workmen dues (up

to 24 months), prior to liquidation Preference Shareholders, if any
commencement date

Other employee dues (upto 12 months)

Any remaining debt and dues
prior to liquidation commencement date

Government dues (up to 2 years) and

Financial debts of unsecured creditors
unpaid secured creditors
APPEALS & APPELLATE AUTHORITY
National Company Law Tribunal

Civil court not

National Company Law Appellate Tribunal
(within 30 days or 30 + 15 days ) to have
jurisdiction

Supreme Court
(within 45 days or 45 + 15 days )
 KEY JUDGMENTS
Dispute
Supreme Court in Mobilox Innovations Private Limited v
Kirusa Software Private Limited (Civil Appeal Nos. 9405
of 2017) has finally settled the widely debated question of
what constitutes “existence of a dispute” in the context of
applications filed by operational creditors for initiation of
corporate insolvency resolution process (CIRP) of corporate
debtors under IBC. SC held that:
 the word “and” occurring in Section 8(2)(a) of the IBC
must be read as “or.”;
 dispute must be “pre-existing”;
 while determining existence of a dispute all that the
NCLT is to see plausible contention which requires
further investigation and that the “dispute” is not a
patently feeble legal argument or an assertion of fact
unsupported by evidence.
NCLAT in the case of Sudhi Sachdev v. APPL
Industries Limited (Company Appeal (AT)
(Insolvency) No. 623 of 2018) held that the pendency of
the case under Section 138/441 of Negotiable Instruments
Act, 1881 actually amounts to admission of debt and not
an existence of dispute.
Application by an Operational Creditor
NCLAT in the case of Rajesh Arora v. Sanjay Kumar
Jaiswal, (Company Appeal (AT) (Insolvency) No. 634
of 2018 held that admission of application under Section
9 of the IBC without any notice to the corporate debtor
is in contravention of rules of natural justice and set
aside the order passed by the NCLT, New Delhi.
 KEY JUDGMENTS
Personal Guarantor

NCLAT in the case of Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd. & Ors., Company Appeal (AT) (Insolvency) No.
164 of 2018 held that the shareholders and promoters are not the creditors and thereby the resolution plan cannot balance
the maximization of the value of the assets of the corporate debtor at par with the financial creditors or operational
creditors or secured creditors or unsecured creditors. 

Timelines under IBC

Supreme Court in the case of State Bank of India v. V
Ramakrishnan & Anr. (Civil Appeal Nos. 3595 of 2018)
held that a plain reading of Section 14 leads to the
conclusion that the moratorium referred to in Section 14 can
have no manner of application to personal guarantors of a
corporate debtor and accordingly moratorium under Section
14 does not apply with respect to personal gurantees.
Supreme Court in the case of Surendra
Trading Company v. Juggilal Kamlapat Jute
Mills Company Limited and others (Civil
Appeal No. 8400 of 2017) held that timelines
for adjudication under IBC are directory.
 Validity of Insolvency and Bankruptcy Code, 2016

Supreme Court in the case of Swiss Ribbons Private Limited v. Union of India & Ors. upheld the
validity of IBC in its entirety.

Key Implications:

 Classification between financial creditor and operational creditor neither discriminatory nor
arbitrary nor violative of Article 14 of the Constitution of India

 Section 12A of IBC constitutionally valid

 Evidence provided by private information utilities: only prima facie evidence of default

 Resolution Professional has no adjudicatory power

 Constitutionality validity of Section 29A of IBC

 Section 53 of IBC not violative of Article 14 of the Constitution of India

 
 KEY JUDGMENTS
Ground for extending the CIRP Timeline

Some grounds recognized by the Supreme Court and NCLAT are as follows:
 
 If the corporate insolvency resolution process is stayed by ‘a court of law or the Adjudicating Authority or the
Appellate Tribunal or the Hon’ble Supreme Court.
 If no ‘Resolution Professional’ is functioning for one or other reason during the corporate insolvency resolution
process, such as removal.
 The period between the date of order of admission/moratorium is passed and the actual date on which the
‘Resolution Professional’ takes charge for completing the corporate insolvency resolution process.
 On hearing a case, if order is reserved by the Adjudicating Authority or the Appellate Tribunal or the Hon’ble
Supreme Court and finally pass order enabling the ‘Resolution Professional’ to complete the corporate
insolvency resolution process.
 If the CIRP is set aside by the Appellate Tribunal or order of the Appellate Tribunal is reversed by the Hon’ble
Supreme Court and CIRP is restored.
 Any other circumstances which justifies exclusion of certain period.
THANK YOU
For further queries, please contact,

Sarthak Advocates & Solicitors

S-134, Lower Ground Floor, Greater Kailash-II, New Delhi
 Landline: +91-11-41715540
Email: abhishek.tripathi@sarthaklaw.com