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Insolvency and Bankruptcy Code 2016

The document discusses India's Insolvency and Bankruptcy Code of 2016. It provides definitions of insolvency and bankruptcy, as well as outlines the objectives and key aspects of the Code. The Code establishes a time-bound insolvency resolution process for companies and individuals. It also creates new regulatory bodies like the Insolvency and Bankruptcy Board of India. The priority of claims in liquidation proceedings is detailed. Additionally, judicial decisions regarding the status of homebuyers as creditors under the Code are summarized.

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Tanima Sood
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421 views

Insolvency and Bankruptcy Code 2016

The document discusses India's Insolvency and Bankruptcy Code of 2016. It provides definitions of insolvency and bankruptcy, as well as outlines the objectives and key aspects of the Code. The Code establishes a time-bound insolvency resolution process for companies and individuals. It also creates new regulatory bodies like the Insolvency and Bankruptcy Board of India. The priority of claims in liquidation proceedings is detailed. Additionally, judicial decisions regarding the status of homebuyers as creditors under the Code are summarized.

Uploaded by

Tanima Sood
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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INSOLVENCY AND BANKRUPTCY CODE 2016

Insolvency - When an individual or a business entity is unable to meet its


outstanding debts to the investors, creditors or lenders that person or business entity
is termed as insolvent and this whole state is called insolvency. Insolvency can also
take place when the liabilities/debts of the company surpass the assets/income of the
company. A person is declared insolvent when any creditor, lender or investor
submits an application with respect to the same.

Bankruptcy is a situation when the court of law has declared the insolvency of a
person or entity and passed orders for its resolution, i.e. the property of the bankrupt
is disposed off, so as to pay creditors.

Object of the Act:

1. The code envisages a new regulator – The Insolvency and Bankruptcy Board
of India.
2. The Code creates time bound processes for insolvency resolution of
companies and individuals.
3. It consolidates provisions of all existing legislative framework.

Key Highlights:

1. Corporate Debtors: Two-Stage Process

To initiate an insolvency process for corporate debtors, the default should


be at least Rs. 1 lakh. The Code proposes two independent stages:
a. Insolvency Resolution Process, during which financial creditors assess
whether the debtor's business is viable to continue and the options for its rescue and
revival; and
b. Liquidation, if the insolvency resolution process fails or financial creditors
decide to wind down and distribute the assets of the debtor.

Liquidation
A corporate debtor may be put into liquidation in the following scenarios:
(i) A 75% majority of the creditor's committee resolves to liquidate the corporate
debtor at any time during the insolvency resolution process;
(ii) The creditor's committee does not approve a resolution plan within 180 days
(or within the extended 90 days);
(iii) The NCLT rejects the resolution plan submitted to it on technical grounds; or
(iv) The debtor contravenes the agreed resolution plan and an affected person
makes an application to the NCLT to liquidate the corporate debtor.
2. Priority of Claims

The priority of payment in liquidation shall be as follows;


1. Insolvency related costs and the liquation cost.
2. The secured creditors and workmen dues upto 24 months (rank equally).
3. Outstanding salaries of other employees and dues upto 12 months.
4. Dues of unsecured creditors.
5. Government dues upto 2 years and Unpaid amount of secured creditors
6. Remainder of debts and dues.
7. To Preference shareholders.
8. To equity shareholders.
3. Insolvency Resolution Process for Individuals/Unlimited Partnerships

The Code envisages two distinct processes


A) Automatic Fresh Start Process: eligible debtors can apply to the Debt
Recovery Tribunal for discharge from certain debts not exceeding a specified
threshold, allowing them to start afresh.
B) Insolvency Resolution Process: consists of preparation of a repayment plan
by the debtor, for approval of creditors. If approved, the DRT passes an order
binding the debtor and creditors to the repayment plan. If the plan is rejected
or fails, the debtor or creditors may apply for a bankruptcy order.

4. Institutional Infrastructure

The code provides for the following institutions to regulate the insolvency and
bankruptcy proceedings:
a) Insolvency and Bankruptcy Board of India
b) Insolvency Professional
c) Insolvency Professional Agency
d) Information Utilities
e) Adjudicating Authority

Impact of Insolvency and Bankruptcy Code on Home Buyers:


Under Chapter II of The Code, 2016 only the financial creditor, the operational
creditor and the corporate debtor can initiate corporate insolvency resolution
process. It remains unclear under the statute as also in the light of various judicial
pronouncements whether the homebuyers would come under any of the above
categories.
Nikhil Mehta vs. AMR Infrastructures (2017)
The applicants had approached the NCLT under section 7 claiming to be financial
creditor. Respondent undertook to pay assured returns to the applicant which it failed
to do so. The NCLT observed that the "Assured returns" associated to the delivery
of possession had nothing to do with the requirement of sub-section (8) of Section 5
as it was the time value of money which was missing from the transaction at hand
and as such the applicants did not satisfy the definition of "financial creditors" within
the meaning of The Code and hence cannot initiate insolvency resolution process.
In an appeal preferred against the aforesaid order, the NCLAT observed that the
'Corporate Debtor' treated the appellants as 'investors' and borrowed the amount
pursuant to sale purchase agreement for their commercial purpose treating at par
with 'loan' in their return. Thereby, the amount invested by appellants came within
the meaning of 'Financial Debt', as defined in Section 5(8) (f) of The Code.
Pawan Dubey & Ors. Vs. J.B.K. Developers (2017)
The question before the NCLT was whether the applicants could be treated as
operational creditors within the meaning of Section 9 of The Code. It observed that
it is not possible to construe section 9 read with section 5(20) & (21) so widely to
include within its scope even the cases where dues are on account of advance made
to purchase the flat or a commercial site from a construction company like the
Respondent when the Petitioner has remedy available under the Consumer
Protection Act.
In an appeal preferred against the earlier order in the matter of Pawan Dubey20 the
NCLAT held that the appellants were merely allottees of the flats and thus did not
come within the meaning of operational creditors within the meaning of The Code.
Rubina Chadha vs A.M.R. Infrastructures Ltd. (2017)
NCLAT held that the appellants herein, whether they are 'Financial Creditor' or
'Operational Creditor' or 'Secured Creditor' or 'Unsecured Creditor', as claim to be
creditors are now entitled to file their respective claims before the 'Interim
Resolution Professional and their claims are to be considered in accordance with the
provisions of The Code."

AMENDMENT
The Insolvency & Bankruptcy Board of India by notification dated 16.08.2017
brought forth an amendment to the regulations by bringing in FORM F for
submission claims by creditors other than financial creditors and operational
creditors the insolvency professional.

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