Insolvency and Bankruptcy Code (smart notes with procedure and judgments)

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. It was introduced amidst various other reforms introduced by the Government, with focused emphasis on the Ease of Doing Business in India. Ease of Doing Business not only means speedy and easy entry, and ease of carrying out operation of businesses; it also covers in its ambit, the ease of exit.

The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016 and by Rajya Sabha on 11 May 2016. The Code received the assent of the President of India on 28 May 2016. Certain provisions of the Act have come into force from 5 August and 19 August 2016. The Code has been amended several times till June, 2020. The bankruptcy Code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. It was done to consolidate all the existing laws related to insolvency in India and to simplify the process of insolvency resolution.

This Code applies to a company registered under the Companies Act 1956, a Limited liability partnership, Partnership firms and Individuals. Under the Insolvency and Bankruptcy Code, any financial creditor or an operational creditor can initiate corporate insolvency process against a corporate debtor when the corporate debtor commits a default in repayment of debts. Default involves non repayment of debt when it has become due and payable.

Hence, when any financial or operational creditor is not honoured duly, he can initiate the insolvency proceedings against the corporate debtor.

It is imperative to point out that the IBC is silent on the time period within which a petition for insolvency resolution is required to be filed. Some landmark cases in the Supreme Court related to IBC will also be examined and hence will facilitate in giving us a clear overview of whether or not the enactment has in anyway been detrimental to the well being of the corporate dealing or if it has indeed been a game changer and has eased the burden as well as quickened the pace of disposing off the cases and whether due to the power shift, it has given an equal authority to the creditor to file for liquidation if he has been a defaulter

Need of Insolvency & Bankruptcy Code
There was no single law dealing with insolvency and bankruptcy in India. The liquidation of companies and individuals were handled under various Acts (around 12 in number).

As per the World Bank data, it takes an average 4.3 years to wind up a company in India. It is easier to start a business than to exit it. The new Insolvency and Bankruptcy Code seeks to cut it to 1 year.

The new Code seeks to help banks and other creditors from recovering their loans from the bankrupt companies in a timely and efficient way.

Aims & Objective of IBC
The Code applies to companies, partnerships and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtors assets and must take decisions to resolve insolvency within a 180-day period. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency. Under IBC debtor and creditor both can start recovery proceedings against each other.

Insolvency is the inability of a person or companies to pay their bills as and when they becomes due and payable. It is a situation where individuals or companies are unable to repay

their outstanding debt. If insolvency cannot be resolved, assets of the debtor may be sold to raise money, and repay the outstanding debt.

The term Insolvency is a state whereas Bankruptcy is the effect of that act. In legal terms, insolvency is a state where the liabilities of an individual or an organization exceeds its assets and that entity is unable to raise enough cash to meet its obligations or debts as they become due for payment. When an individual is unable to pay off his liabilities and debts then he generally files for bankruptcy. Here the entity asks for help from government to pay off his debts to his creditors.

The main reasons behind insolvency are primarily poor management and financial constraints.

  1. Bad debt- obviously money owned by customers
  2. Management- failure to acquire adequate skills, imprudent accounting, lack of information system
  3. Finance- loss of long term finance, over gearing or lack of cash flow
  4. Other- for examples excessive overheads etc.

When an individual is unable to pay off his liabilities and debts then he generally files for bankruptcy. Here is asks for help from government to pay off his debts to his creditors. Bankruptcy could of two types, namely, reorganization bankruptcy and liquidation bankruptcy. Usually people tend to restructure the repayment plans to pay them easily under reorganization bankruptcy. And under liquidation bankruptcy, the debtor tends to sell of certain of their assets to pay off their debts for their creditors.

The Blacks Law Dictionary defines the work Bankrupt as the state or condition of a person who is unable to pay its debt as they are or has become, due. The condition of one whose circumstances are such that he is entitled to take the benefit of the federal bankruptcy laws. The term includes a person against whom an involuntary petition has been filed, or who has filed a voluntary petition.

Under bankruptcy law, the condition of a person or firm that is unable to pay debts as they fall due, or in the usual course of trade or business and financial condition such that businesses or persons debts are greater than aggregate of such debtors property at a fair value.

Default
Default means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. In IBC, default means failure to pay whole or any part or installment of amount of debt or interest due of minimum Rs.1 Crore. Default amount under section 4 of IBC was Rs.1 Lakh, but after central govt. notification dated 24.03.2020, minimum default amount raised to Rs.1 Crore.

Financial Creditor, Operational Creditor & Corporate Debtor
It means any person to whom a financial debt and operational debt respectively, is owed and includes a person to whom such debt has been legally transferred or assigned to. By amendment in IBC, Homebuyers Recognized as Financial Creditors giving them due to representation in the Committee of Creditors (CoC). Thus, now home buyers will be an integral part of the decision making process.

The Code differentiates between both, financial creditors are those whose relationship with the entity is a pure financial contract, such as loan or debt security and therefore is debt, along with interest, if any, which is disbursed against the consideration for the time value of money, whereas Operational creditors are those whose liabilities from the entity comes from a transaction on operations. Operational Creditors includes government & employees or workmen. A corporate debtor is the Corporate Person who owes a debt to any person.

  1. Corporate Debtor, or
  2. A Member or the partner of the corporate debtor who is authorized to make an application for the CIRP under the constitutional documents of the corporate debtor, or
  3. An individual who is in-charge of managing the operations and resources of the corporate debtor, or
  4. A person who has control and supervision over the financial affairs of the corporate debtor;

There voting share shall be determined on the basis of the financial debt owed to them. Otherwise provided in the code, all the decisions of the committee of creditors shall be taken by a vote of not less than 51%. It shall require a resolution professional to furnish any financial information in relation to the corporate debtor during the resolution process.

Moratorium
The term Moratorium is nowhere defined in the Code, however, the term in basic parlance means, a stopping of activity for an agreed amount of time. Under the Code, Moratorium is actually described as a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor.

The Adjudicating Authority [National Company Law Tribunal], whilst admitting a petition against the Corporate Debtor is required to declare the moratorium period as described under Section 14 of the Code.

The main purpose of declaring the moratorium period is to keep the Corporate Debtors assets intact during the CIRP, which otherwise may be attached by any competent court of law during the pendency of proceedings against the Corporate Debtor. In other words, the moratorium ensures that the time-bound completion of the CIRP and also that the corporate debtor may continue as a going concern.

Apart from staying the pending proceedings, the moratorium also casts a bar upon the directors of the company, who cannot use or take the amount available on the date of declaration of the moratorium in the company. If the moratorium period is not declared, the insolvency process will be frustrated which in turn will fail the objective of the Code.

Punishment - Under Section 74 of the IBC, officials of the corporate debtor who violate provisions of moratorium can be imprisoned for a minimum of three years, which may be extended up to five years. Such officials will also be fined a minimum of Rs 100,000 but not more than Rs 300,000. Officials of creditors who knowingly and willfully authorize or permit such contravention can be jailed for a minimum of one year, with a maximum tenure of five years. Such officials will also be fined a minimum of Rs 100,000, with the maximum penalty of up to Rs 10 million.

Further, the Honble National Company Law Appellate Tribunal, vide its recent judgment has also held that in case any Director withdraws money from the account of the company during the moratorium period, he will be held liable for the criminal offences of misappropriation and breach of trust.

Resolution Applicant
As per the Code, a Resolution Professional has to appoint a Resolution Applicant who in-turn is required to prepare different resolution plans for different stakeholders in corporate insolvency resolution process. The code defines the resolution applicant under section 5(25) as a person who submits a resolution plan to insolvency professional. A resolution plan specifies the details of how the debt of a defaulting debtor can be restructured.

Corporate Insolvency Resolution Process (CIRP)
The creditors committee will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtors assets go into liquidation.

Insolvency Professional Agencies
Insolvency Professional Agencies (IPAs) are enrolling insolvency professionals as members. These agencies conduct an examination and certify these insolvency professionals as well as defines their code of conduct for their duties and performance.

  1. ICSI Insolvency professional Agency
  2. Indian Institute of Insolvency Professionals of ICAI
  3. Insolvency professional Agency of Institute of cost Accountants of India
  1. NCLT/ DRT;
  2. the NCLAT/ DRAT
  3. the Supreme Court.

Any person aggrieved by its order can prefer an appeal to the National Company Law Appellate Tribunal (NCLAT) within 30 days of the NCLT order, which in turn can be appealed to the Supreme Court within 45 days of NCLAT order on questions of law arising out of such order. If both the Appellate courts are satisfied about the sufficient cause they may extend the time for appeal by 15 days. No civil court shall have jurisdiction over the matters of NCLT.

  1. Financial/ Operational Creditors
  2. Corporate Debtor
  3. Corporate Applicant
  4. An Employee: A person who was / is working in a Company / LLP may file a petition if his dues are 1,00,00,000 or more.
  5. Service Provider: Any service provider who has given the services and raised the Invoice but unable to recover the dues may file a petition if his dues are 1,00,00,000 or more. (After central govt. notification dated 24.03.2020)
  6. Goods Provider: Any Goods Provider who has delivered the goods and raised the Invoice but unable to recover the dues may file a petition if his dues are 1,00,00,000 or more. (After central govt. notification dated 24.03.2020)
  1. Arnav who is service provider from Jaipur has given the services to ABC Private Limited Jaipur branch office and the company is registered in Gurgaon. Total Dues are 15,00,00,000.
    - Mr. Arnav needs to file petition before NCLT Chandigarh Bench (Because Company is Registered in Gurgaon and connected NCLT bench is in Chandigarh for the state of Haryana)
  2. Ankur who is resident of Delhi, South Ex and working in a Company XYZ Private Limited as a manger in Lucknow. Company is registered in Delhi. Total Salary due is 8,00,00,000.
    - Ankur needs to file petition before NCLT New Delhi bench (because Company is Registered in Delhi and connected NCLT bench is in Delhi).

However, when introduced, the Code did not explicitly provide for applicability of limitation law for matters under the Code- hence the anomaly.

The issue of applicability of the Limitation Act to proceedings under the IBC emerged as a moot point. The same was initially dealt with by the National Company Law Appellate Tribunal (NCLAT) in Speculum Plast Private Limited Vs. PTC Techno Private Limited and in Neelkanth Township and Construction Pvt. Ltd. Vs. Urban Infrastructure Trustees Ltd wherein it was held that the Limitation Act will not be applicable to proceedings under the IBC.

However, this position left litigants with many unanswered queries. Furthermore, having realized the ambiguity with respect to the applicability of the Limitation Act upon proceedings under the IBC, the Parliament inserted section 238A to the IBC through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 that took effect on 6th June 2018. This states that the provisions of the Limitation Act will apply to proceedings under the IBC.

238A. Limitation:
The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or Appeals before the Adjudicating Authority, the National Company aw Appellate Tribunal, the Debt Recovery Appellate Tribunal, as the case may be.

Furthermore, the Supreme Court in of B.K. Educational Services Private Limited Vs. Parag Gupta and Associates clarified the applicability of the Limitation Act and held:
27…It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. The right to sue, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.

Conflict between Supreme Court & NCLAT
The Supreme Court in Gaurav Hargovindbhai Dave Vs. Asset Reconstruction Company (India) Ltd., September 2019 held that the proceedings under section 7 of the IBC are an application and not suits; thus they would fall within the residuary Article 137 of the Limitation Act and the right to apply will arise from the date of default.

It was again reiterated by the Supreme Court in Jignesh Shah Vs. Union of India, September 2019that the right to

apply under the IBC will be from date of default and not from the date of enactment of the IBC, i.e., 1st December 2016.

While the abovementioned judgments were pronounced by the Supreme Court on 18th September 2019 and 25th September 2019 respectively, the NCLAT has once again stoked uncertainty by passing a judgment on 26th September 2019, whereby in B. Prashanth Hegde Vs. SBI, 26th September 2019it applied article 137 and held that the right to apply under section 7 of IBC will accrue on 1st December 2016, i.e., when IBC was enacted. The NCLAT also held that since the banks have initiated proceedings under provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act), the period of limitation will also be governed by articles 61 and 62 of the Limitation Act.

However, this reasoning of the NCLAT is contrary to the observation of the Supreme Court in Jignesh Shah, wherein the Court stated that only the date of default will be relevant for the purpose of winding up proceedings (and, by extension, to IBC applications). Having noticed the divergent view of the NCLAT, the Supreme Court in Sagar Sharma Vs. Phoenix ARC Pvt. Ltd., 30th September 2019 has made it loud and clear that the judgment passed by the Supreme Court should be taken in letter as well as spirit and hence NCLAT cannot, time and again, apply Article 62 to the applications made under the IBC.

However, even after such remarks from the Supreme Court, as recently as on 3rd December 2019, the NCLAT in Sesh Nath Singh Vs. Baidyabati Sheoraphuli Cooperative Bank Ltd held that time spent in proceedings under the SARFAESI Act can be condoned by the virtue of section 14 of the Limitation Act for the purpose of filing an application under the IBC.

It is pertinent to mention here that under section 14 only such time can be condoned that was spent in bona fide proceedings due to defect of jurisdiction. The NCLAT failed to notice that proceedings under the SARFAESI Act before the enactment of IBC are not without defect of jurisdiction and, therefore, the same cannot be used to condone the delay for filing a petition under IBC.

Conclusion
In view of the catena of judgments passed by the NCLAT and Supreme Court, it can be ascertained that Article 137 will apply to proceedings filed under the IBC. However, the only point that arises for the consideration is the interpretation of the term when the right to apply accrues, since the Supreme Court and NCLAT have adopted opposite views regarding the same.

However, the Supreme Court has affirmed that the right to apply accrues from the first date of default irrespective of the fact that the IBC was enacted in 2016. It is also pertinent to mention that the Supreme Court in the abovementioned judgments set aside the decision of the NCLAT on the applicability of Article 137 from the date of enactment of IBC, but yet the NCLAT is applying and referring to different provisions of Limitation Act such as section 14 and Article 61 to effectively bypass the ruling of the Supreme Court one way or another. Hence, it was substantiated in clear words that the Limitation Act, 1963 is applicable to the Insolvency and Bankruptcy Code, 2016.

  1. Person who can file an application under section 7-
    A financial creditor: either by itself or jointly with other financial creditors.
  2. Govt. notified person: Any other person on behalf of the financial creditor, as may be notified by the Central Government. Following persons has been notified who may file an application for initiating CIRP on behalf of the financial creditor:
    1. a guardian;
    2. an executor or administrator of an estate of a financial creditor;
    3. a trustee (including a debenture trustee); and
    4. a person duly authorised by the Board of Directors of a Company.

    Honble Supreme Court in the matter of Sunrise 14 A/S Denmark Vs. Ravi Mahajan 61(IBC) 01/2018 held that petition filed by an advocate would be maintainable. NCLAT in the matter of Palogix Infrastructure Private Limited Vs. ICICI Bank Limited held that a Power of Attorney holder cannot file any application u/s 7 or Sec. 9 or Sec. 10 of Code.

    Gujarat High Court in the matter of Essar Steel India Ltd. Vs. RBI held that RBI is authorised to direct any banking company to initiate insolvency resolution process.

    Even without resorting to CIRP against the Principal Borrower it is always open to the Financial Creditor to commence CIRP u/s 7 of the Code against the Guarantor Bijay Kumar Agarwal vs. State Bank of India and Anr. 149(IBC)114/2020-NCLAT but once CIRP initiated, for same set of claim & default application u/s 7 against the Principal Borrower is admitted, the application against the Corporate Guarantor is not maintainable M/s. SEW Infrastructure Ltd. Vs. M/s. Mahendra Investment Advisors Pvt. Ltd. 07(IBC)07/2020 -NCLAT

    II. Persons not entitled to make application-
    As per Sec. 11 of the Code, a Financial Creditors shall not entitle to make an application to initiate CIRP who has violated any of the terms of resolution plan which was approved 12 months before the date of making of an application.

    III. Minimum amount of default-
    A financial creditor can file application before NCLT against a corporate debtors where the minimum amount of the default is one lakh rupees.[Sec. 4].

    Note: Vide Notification No. S.O. 1205(E) dated 24.03.2020, the default limit has been increased to 1 crore rupees.

    IV. Application to be filed before NCLT-
    The application for initiation of the CIRP can be filed before NCLT bench in the jurisdiction of the Corporate Debtors registered office.

    Note: NCLT vide order dated 12.05.2020 directed to file default record from Information Utility along with the new petitions being filed under section 7 of Insolvency and Bankruptcy Code, 2016 positively. No new petition shall be entertained without record of default under section 7 of IBC, 2016.

    Further, the Authorized Representative/ Parties in the cased pending (as on 12.05.2020) for admission under aforesaid section of IBC also directed to file default record from Information Utility before next date of hearing.

    The Adjudicating Authority has no jurisdiction to direct the Corporate Debtor to deposit any amount to certain corpus or with regard to maintenance which may not be a subject matter of application under Section 7 NCLAT in Re Vipul Ltd Vs. M/s. Vipul Greens Residents Welfare Association.

    C. Acceptance or rejection of the application
    The Adjudicating Authority (NCLT) shall, within 14 days of the receipt of the application under Section 7, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.

    If the earlier application u/s 7 was dismissed for non-prosecution, it was always open to the Respondent to file fresh application u/s 7 vide Venus Sugar Ltd. Vs. SASF 02(IBC)02/2020 -NCLAT. If a debt amount is disputed & the amount is more than Rs. 1 Lakh, application u/s 7 is maintainable & exact amount of claim will be considered at the stage of the CIRP vide Mr. A. Maheshwaran Vs. Stressed Assets Stabilization Fund & Anr. - NCLAT

    1. Punishment for 3 to 5 years or a fine of Rupees 1 lakh to 1 Crore or both
      • officer of the Corporate Debtor within 12 months immediately preceding the insolvency commencement date or at any time after such date willfully, fraudulently, concealed any property or transferred/disposed of the property for a security interest in the non-ordinary course of business;
      • Where any officer of the Corporate Debtor on or after the date of insolvency commencement date, misconducts in the course of insolvency resolution process, like does not disclose information, deliver property, books of accounts, other information to resolution professional or falsifies the books of Corporate Debtor or for willful and material omissions from statements relating to affairs of Corporate Debtor or false representation to creditors;
      • Where Corporate Debtor willfully and knowingly provides false information in application made by the Corporate Debtor. But where any other person other than Corporate Debtor furnishes false information in the application made by Financial Creditors, shall only be punished with a fine and not imprisonment.
    2. Punishment for 1 to 5 years or a fine of Rupees 1 lakh to 1 Crore or both
      • Where any officer of the Corporate Debtor has transacted for defrauding creditors, like transfer of property in the form of gift/charge or other forms;
      • Where the Corporate Debtor or any of its official contravenes the moratorium or the resolution plan.
    3. Is there any imprisonment to debtor?
      • No. There are no prisons for debtors in India and any such imprisonment will be unconstitutional. However, you can go to prison if you commit any fraud relating to the debts you owe. For example, if you take a housing loan using fake papers or you take a business loan but transfer the amount to a friend showing fake expenses, you can be prosecuted against for fraud.

    In 2020, the parliament passed the Insolvency and Bankruptcy Code (Amendment) Act, 2020 [No. 1 of 2020] (Amendment Act) and it received Presidents assent on 13th March, 2020.

    As per Section 1 (2) of the Amendment Act, the amendments deemed to have come in force on 28th December, 2019. The Amendment Act has amended Sections 5, 7, 11, 14, 16, 21, 23, 29A, 32A, 227, 239 and 240 of the Code.

    The Amendment Act has endeavored to remove various bottlenecks and practical difficulties being faced while implementing the provisions of the Code and has also attempted to streamline the Corporate Insolvency Resolution Process (CIRP).

    The minimum threshold now introduced, shall result in making the remedy provided under the Code to a real estate allottee, completely toothless, in as much as a real estate allottee is a person, who invested his hard earned money in buying a property and shall now feel harassed to find out 99 more buyers or 10% of the total number of buyers, before he could approach the Court for redressal of his grievances.

    Ultimately, this ought to have been kept in mind by the legislature that real estate allottees were included in the definition of Financial Creditor after a huge number of defaults by real estate developers across the country. This legislation so brought was a welfare legislation, which has been diluted substantially to the grave prejudice of real estate allottees. As a matter of fact, the validity of this amendment was challenged before the Honble Supreme Court of India and the Honble Court has granted a status quo order in respect of pending matters. The final order is still awaited.

    To know previous amendments open this link - https://ibbi.gov.in/webfront/legal_framework.php

    Conclusion
    The IBC has taken its first steps to regularize the insolvency process in India. It has amended over 11 legislations in India, bringing about one of the most significant change to commercial laws in India in recent times. However, this nascent legislation has been ridden with controversies and speedy resolutions. It has also become a very important tool for banks to regularize multitudes of non-performing assets plaguing the countrys economy.

    Insolvency and Bankruptcy Code brought quite a few changes in the big business scenario in the country. Brought forward to reduce the time it takes to deal with the issue of bankruptcy, the code has morphed into something that is driving this country towards a new age of economy. However, what this road of growth might lead to is yet to be seen. The best we can do is making sure that our finances are in order and we never go insolvent.

    With more than 11% of all loans in India being terms as bad loans, the IBC has become the need of the hour. The IBC has brought a plethora of changes to insolvency laws in India and aims to reduce the amount of bad loans that has saddled the economy over the last few years.

    We are beginning to see this through various companies successfully concluding their insolvency process. The first successful case of a CIRP was that of Bhushan Steel wherein TATA Steel agreed to purchase Bhushan Steel for Rupees Thirty-Two Thousand Five Hundred Crores.

    Law Article in India

    Please Drop Your Comments