Insolvency and Bankruptcy Law at a

glance – Learning Capsule

Insolvency and Bankruptcy Code, 2016

Graphic Source- IBBI

~ Amit Pratap Singh

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 Table of Content
Sr. No. Topic Page No.

1. 3
IMPORTANT DATES AS TO THE LAW

2. WHAT CAN A SOUND BANKRUPTCY LAW 7

ACHIEVE?

3. POINTS AS TO PREVIOUS REGIME 9

4. JURISDICTION AND JURISPRUDENCE UNDER 12

INSOLVENCY AND BANKRUPTCY CODE, 2016

5. CAN CREDITORS PLAY CONSTRUCTIVE ROLES? 24

6. INSOLVENCY PROFESSIONALS 25

7. INSOLVENCY RESOLUTION PROCESS AND 33

LIQUIDATION PROCESS:

8. INSOLVENCY AND BANKRUPTCY CODE, 2016: 42

NEW REGIME AND EMMERGING
JURISPRUDENCE
(*Consolidated Article)

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 IMPORTANT DATES

A. Insolvency and Bankruptcy Code, 2016

S.No Event Date
.
1. IBC passed by the Parliament 5th May, 2016
2. Assented by the President 28th May, 2016
3. Notification date of the Act (has been done in stages)

i. Section 188 to 194 (Establishment and 5th August, 2016

Incorporation of Board)
ii. Establishment of IBBI 1st October, 2016
iii. Provisions relating to power and functions of 1st November, 2016
IBBI
iv. Provisions relating to IPA 15th November, 2016
v. Provisions relating to CIRP 30th November, 2016
vi. Provisions related to liquidation 9th December, 2016
vii. Provisions of Voluntary liquidation, IU and 30th March, 2017
Cross – Border Insolvency
viii. Provisions of Voluntary Liquidation or 15th May, 2017
bankruptcy come into force
ix. Fast Track Corporate Insolvency Resolution 14th June, 2017
Process
1. The Insolvency and Bankruptcy Code 18th January, 2018
(Amendment)Act, 2017
2. The Insolvency and Bankruptcy Code (Second 17 August, 2018
Amendment) Act, 2018
3. The Insolvency and Bankruptcy Code (Third 06th August, 2019
Amendment) Act, 2019
4. The Insolvency and Bankruptcy Code (Fourth 13th March, 2020
Amendment) Act, 2020
5. Extent of the Insolvency and Bankruptcy 18th March, 2020
Code, 2016 to whole of India

B. Rules made under the IBC, 2016

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 S.No Event Date
.
1. IBBI (Application to Adjudicating Authority) Rules, 30th November, 2016
2016
2. The Insolvency and Bankruptcy (Application to 15th November, 2019
Adjudicating Authority for Bankruptcy Process for
Personal Guarantors to Corporate Guarantors) Rules,
2019
3. The Insolvency and Bankruptcy (Application to 15th November, 2019
Adjudicating Authority for Insolvency Resolution
Process for Personal Guarantors to Corporate
Debtors) Rules, 2019
4. The Insolvency and Bankruptcy (Insolvency and 15th November, 2019
Liquidation Proceedings of Financial Service
Providers and Application to Adjudicating Authority)
Rules, 2019

C. Regulations made under the IBC, 2016

There are total 55 regulations in place of which:

S.No Event Date

.
Regulation relating to IBC, 2016
1. IBBI (IPAs) Regulation, 2016 21st November, 2016
2. IBBI (Model Bye-laws and Governing Board of IPAs) 21st November, 2016
Regulation 2016
3. IBBI (IPs) Regulations, 2016 23rd November, 2016
4. IBBI (Insolvency Resolution Process for Corporate 30th November, 2016
Persons) Regulations, 2016
5. IBBI (Liquidation Process) Regulations, 2016 15th December, 2016
6. IBBI (Voluntary Liquidation Process) Regulations, 31st March, 2017
2017
7. IBBI (Information Utilities) Regulations, 2017 31st March, 2017
8. IBBI (Inspection and Investigation) Regulations, 2017 14th June, 2017
9. IBBI (Fast Track Insolvency Resolution Process for 15th June, 2017
Corporate Persons) Regulations, 2017 
10. IBBI (Grievance and Complaint Handling Procedure) 7th December, 2017
Regulations, 2017
11. IBBI (Mechanism for Issuing Regulations) 22nd October, 2018
Regulations, 2018

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12. IBBI (Insolvency Resolution Process for Personal 20th November, 2019
Guarantors to Corporate Debtors) Regulations, 2019
13. IBBI (Bankruptcy Process for Personal Guarantors to 20th November, 2019
Corporate Debtors) Regulations, 2019
Some of the Important Amendments made in the Regulations
1. IBBI (Fast Track Insolvency Resolution Process for 16th August, 2017
Corporate Persons) (Amendment) Regulations, 2017
2. IBBI (Insolvency Resolution Process for Corporate 16th August, 2017
Persons) (Amendment) Regulations, 2017 
3. Insolvency and Bankruptcy Board of India 29th September, 2017
(Information Utilities) (Amendment) Regulations,
2017
4. IBBI (Fast Track Insolvency Resolution Process for 5th October, 2017
Corporate Persons) (Second Amendment)
Regulations, 2017
5. IBBI (Insolvency Resolution Process for Corporate 5th October, 2017
Persons) (Second Amendment) Regulations, 2017 
6. IBBI (Fast Track Insolvency Resolution Process for 7th November, 2017
Corporate Persons) (Third Amendment) Regulations,
2017
7. IBBI (Insolvency Resolution Process for Corporate 7th November, 2017
Persons) (Third Amendment) Regulations, 2017 
8. IBBI (Fast Track Insolvency Resolution Process for 31st December, 2017
Corporate Persons) (Fourth Amendment) Regulations,
2017
9. IBBI (Insolvency Resolution Process for Corporate 31st December, 2017
Persons) (Fourth Amendment) Regulations, 2017 
Some of the Important Regulations made for internal functioning of the Board
1. Insolvency and Bankruptcy Board of India 31st January, 2017
(Engagement of Research Associates and Consultants)
Regulations, 2017
2. IBBI (Advisory Committee) Regulations, 2017 31st January, 2017
3. IBBI (Procedure for Governing Boards Meetings) 31st January, 2017
Regulations, 2017
4. IBBI (Employees’ Service) Regulations, 2017 24th August, 2017
Some of the Important Circulars issued by the Insolvency and Bankruptcy Board of
India
1. Fees payable to an insolvency professional and to 16 Jan 2018
other professionals appointed by an insolvency
professional
2. Disclosures by Insolvency Professionals and other 16 Jan 2018
Professionals appointed by Insolvency Professionals
conducting Resolution Processes
3. Insolvency professional to use Registration Number 03 Jan 2018

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 and Registered Address in all his communications
4. Insolvency professional to ensure compliance with 03 Jan 2018
provisions of the applicable laws.
5. Insolvency professional not to outsource his 03 Jan 2018
responsibilities

What can a sound bankruptcy law achieve?1

(a) Improved handling of conflicts between creditors and the debtor: The role of the law, in
a formal bankruptcy process, is to lay down rules of procedure into which the conflict is
channelled, and results in a solution. A sound legal framework provides procedural

1
Clause 3.2.3, Page 22, The report of the Bankruptcy Law Reforms Committee.

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 certainty about the process of negotiation, in such a way as to reduce problems of
common property and reduce information asymmetry for all economic participants.

(b) Avoid destruction of value: A sound legal process also provides flexibility for parties to
arrive at the most efficient solution to maximise value during negotiations. If the
enterprise is insolvent, the payment failure implies a loss which must be borne by some
of the parties involved. From the viewpoint of the economy, some firms undoubtedly
need to be closed down. But many firms possess useful organisational capital. Across a
restructuring of liabilities, and in the hands of a new management team and a new set of
owners, some of this organisational capital can be protected. The objective of the
bankruptcy process is to create a platform for negotiation between creditors and external
financiers which can create the possibility of such rearrangements.

(c) Drawing the line between malfeasance and business failure: Under a weak insolvency
regime, the stereotype of “rich promoters of defaulting entities” generates two strands of
thinking:
(a) the idea that all default involves malfeasance and
(b) The idea that promoters should be held personally financially responsible for defaults
of the firms that they control.
However, the following perspectives are useful in the context of enterprises:
a. Some business plans will always go wrong. In a growing economy, firms make risky
plans of which some plans will fail, and will induce default. If default is equated to
malfeasance, then this can hamper risk taking by firms. This is an undesirable
outcome, as risk taking by firms is the wellspring of economic growth. Bankruptcy
law must enshrine business failure as a normal and legitimate part of the working
of the market economy.
b. Control of a company is not divine right. When a firm default on its debt, control of
the company should shift to the creditors. In the absence of swift and decisive
mechanisms for achieving this, management teams and shareholders retain control
after default.
c. Bankruptcy law must give honest debtors a second chance, and penalise those who
act with mala fide intentions in default.

(d) Clearly allocate losses in macroeconomic downturns: Bankruptcy reforms are

particularly important in avoiding extreme problems in a business cycle downturn or a
financial crisis. A business cycle downturn or a financial crisis will lead to certain firms
failing. With a sound bankruptcy framework, these losses are clearly allocated to some
people. Loss allocation could take place through taxes, inflation, currency depreciation,
expropriation, or wage or consumption suppression. These could fall upon foreign
creditors, small business owners, savers, workers, owners of financial and non-financial
assets, importers, exporters. In turn, this creates predictability about the allocation of the
losses. Without this predictability, events of downturns and crisis lead to greater
instability in the economy. The predictability generated by these two institutional

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 arrangements will increase the robustness of the economy when faced with a downturn.
In turn, downturns will become shorter and shallower. The ability of the economy to
sustain high levels of credit, safely, will be enhanced and the economy can move on
faster after a downturn or a crisis.

POINTS AS TO PREVIOUS REGIME

1. Till date, approximately 31000 cases have been filed before NCLT, of which 3312 cases
are undergoing CIRP.

2. The limited liability company is a contract between equity and debt. As long as debt
obligations are met, equity owners have complete control, and creditors have no say in

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 how the business is run. When default takes place, control is supposed to transfer to the
creditors; equity owners have no say.2

3. Previously, creditors know that they have weak rights in terms of recovery. Hence, they
averse to lend. But after the formulation of the Insolvency and Bankruptcy Code, 2016,
rights of creditors has been strengthened in terms of recovery of the debt.
Therefore, it is beneficial to the companies where, debt is an efficient tool for corporate
finance.

The rationale behind the introduction of an integrated code to solve Insolvency and
Bankruptcy matters was the multiplicity in difficulties which were hampering the growth
of Indian economy altogether. Some of the major difficulties included:
a) Existing laws does not provide viable exit strategy for debtors.
b) The process of resolving Insolvency Laws not being time bounded.
c) The High Courts were unable to devote exclusive attention to winding up cases which
is essential to conclude the winding up of companies quickly. The experiment with
BIFR for speedy revival of companies has also not been encouraging.3
d) Individual and Corporate Bankruptcy were governed by a host of legislations making
the procedure quite complex and cumbersome.
e) There were multiple laws and adjudicating authorities to adjudge the matters relating
to financial distress and the insolvency of the Companies and Individuals in India.
The Legal and institutional framework therein does not aid lenders in effective and
timely recovery or restructuring of defaulted asset.
f) The Country is surviving with alarming backlog of cases relating to Insolvency and
Bankruptcy in the Country.
g) Creditors had low powers against defaulting debtors. Thus, even at the time of default
by debtors the control stayed with the promoter instead of transferring the same to the
creditors.

Previous Insolvency regime for Individuals and Partnership firms:

Purpose For Individuals and Partnership firms

2
Page 10, The report of the Bankruptcy Law Reforms Committee
3
Report of the High Level Committee on’Law Relating To Insolvency And Winding Up Of Companies, 2000’
headed by Justice V. BalakrishnaEradi

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 Relevant acts Adjudicating Authority

For Recovery SARFAESI Act, 2002 (Only DRT/ DRAT

of Loans/ Banks can recover)
debts due
RDDBFI Act, 1993 DRT/ DRAT
(Only bank or a Financial
Institution can recover)

Revival and
Rehabilitatio
n of the
debtor

Insolvency & Provincial Insolvency Act, 1920 District Court (Principal Civil
Bankruptcy Court of original jurisdiction
outside the limits of
Presidency towns)

The Presidency Town High Courts at Calcutta,

Insolvency Act, 1909 Madras and Bombay

Previous Insolvency regime for Corporates:

Purpose For Corporate/Limited Liability Partnership

Relevant acts Adjudicating Authority

For Recovery SARFAESI Act, 2002 (Only DRT/ DRAT

of Loans/ Banks can recover)
debts due
RDDBFI Act, 1993 (Only Banks DRT/ DRAT
and a Financial Institution can
recover)

Revival and SICA Act, 1985 (Only BIFR/ AAIFR

Rehabilitatio applicable to Industrial
n of the

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 debtor Companies)

Winding up/ SICA Act, 1985 BIFR/ AAIFR

Liquidation/
Companies Act, 1956 High Court

Limited Liability Partnership High Court

Act, 2008

Thus, in order to overcome all such difficulties in the erstwhile laws and to aid creditors
in recovering defaulted assets in timely and effective manner, the Insolvency and
Bankruptcy Code,2016 is an attempt to integrate and consolidate all the laws and
adjudicating authorities relating to insolvency, bankruptcy, liquidation, revival and
rehabilitation.

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Jurisdiction and Jurisprudence under Insolvency and Bankruptcy
Code, 2016:
a. The IBC was passed by the parliament on May 11, 2016 and was notified in the
official gazette on May 28, 2016 upon the receipt of Presidential assent on the same
day.
b. As on date, there are more than 10 excluding the amendment regulations, viz.,
regulations relating to Fast Track Insolvency Resolution Process, Insolvency
resolution process for corporate persons, Liquidation, voluntary liquidation,
Insolvency professionals, Insolvency Professional Agencies and Information utilities.

Purpose For Corporates /Limited For Individuals and

Liability Partnership Partnership firms

Relevant acts Adjudicating Relevant Adjudicating

Authority acts Authority

For Recovery SARFAESI DRT/DRAT SARFAESI DRT /DRAT

of Loans/ debts Act, 2002 Act, 2002
due
RDDBFI DRT/DRAT RDDBFI DRT/DRAT
Act, 1993 Act, 1993

Insolvency/ Insolvency NCLT/ Insolvency DRT/DRAT

Liquidation and and NCLAT and
Bankruptcy Bankruptcy Bankruptcy
Code, 2016 Code, 2016

Till date the provisions relating to Insolvency Resolution and Liquidation for Corporate
Persons have been notified and Insolvency resolution and Bankruptcy for Individuals and
Partnership firms has not been notified. So, as on date the adjudication with respect to
insolvency of individuals and partnership firms shall be governed by the Provincial
Insolvency Act, 1920 and the Presidency Town Insolvency Act, 1909.

4. A sound bankruptcy process is one that helps creditors and debtors realise and
agree on whether the entity is facing financial failure and business failure. This is
important to allow both parties to realise the maximum value of the business in the

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 insolvency.4 The financial rearrangement between the debtors and the creditors was to
preserve the economic value of the business. In the conventional understanding, the
enterprise in the above example would be treated as a ‘failed business model’ and be
closed down. The value that could have been earned of keeping it as a going concern is
lost. Through a financial rearrangement, the enterprise remains a going concern.5

5. A pro-creditor jurisdiction may be defined as one which permits a creditor to protect

itself against insolvency. A pro-debtor jurisdiction may be defined as one which permits a
debtor to maximise its assets available for distribution, with the ultimate goal of saving
the debtor and its employees through reorganisation. 6 In economic terms, a debtor may
mainly wish to protect its assets from the action of creditors, may wish to remain existing
management and control over its activities, or may wish to continue the business without
further creditor interference.7

6. Viable Enterprise: An enterprise that is facing financial failure is considered a viable

enterprise when there is a possible financial rearrangement that can earn the creditors a
higher economic value than shutting down the enterprise.

7. Unviable Enterprise: An enterprise where the cost of the financial arrangement required
to keep the enterprise going is higher than the NPV of future expected cash flows then
such enterprise is considered unviable or bankrupt and is better shut down as soon as
possible.

8. After careful deliberation, the Bankruptcy Law Reform Committee elected to follow a
system similar to that of the UK’s practitioner led insolvency procedures as opposed to
the US Chapter 11 debtor-in- possession system, which it perceived would have
required much more involvement of the Indian courts. As a result, architecturally the
Code has many similarities to the UK’s Insolvency Act 1986 and administration
process; however, it differs in a number of important respects.

9. Markets need freedom broadly at three stages of a business - to start a business (free
entry), to continue the business (free competition) and to discontinue the business
(free exit). IBC is one of the reforms which provide a viable exit strategy for these
companies and big boost to ease of doing business in India. 

10. In recent times India, among many other countries has experienced a progression in
financially distressed companies. Consequently, the existing law on Insolvency and
Bankruptcy has been confronted with its ability to rehabilitate by balancing the rights

4
Page 20, The report of the Bankruptcy Law Reforms Committee
5
Page 20, The report of the Bankruptcy Law Reforms Committee
6
Wood, Principles of International Insolvency (1st ed., Sweet & Maxwell, London, 1995), p 3.
7
Insolvency Law Reform in Transition Economies, mike falke, insolvency law reform in transition economies

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 and obligations of both the debtors and creditors and provide a viable exit strategy
for these companies.

11. The IBC, 2016 provides for a modern framework to deal with bankruptcy and insolvency
of corporate persons, partnership firms and individuals thereby giving a big boost to ease
of doing business in India.

12. The Code creates a new institutional framework which consists of adjudicatory bodies, a
regulator, insolvency professionals and information utilities.
The Code provides for two corporate insolvency processes:
corporate insolvency resolution process, a new time bound resolution process; and
liquidation, a winding up process.

13. Unlike the SICA, which relied on the test of erosion of net worth to determine sickness,
the Code prescribes an objective test — that of payment default in respect of a debt.
Though winding up proceedings could also be initiated upon a default on the ground of
inability to pay debt under the Companies Act, the than resolution of insolvency.

14. As per the Global Competitiveness Report, India has notched 16 points in a very short
span of time. This Report assess the competitiveness of economies by the stages of
development such as the applicable rule of law, institutional framework, innovation and
sophistication. Also, it has been marked as second most competitive BRICS economy.

15. India ranks 130th among 190 countries in World Bank’s Ease of Doing Business,
2017Also, the World Bank, in its World Bank Group Flagship Report on Doing
Business 20178, has positioned India at 136 in the ranking of 190 economies on the ease
of resolving insolvency. It is further emphasised in the report that, India takes 4.3 years
on an average to resolve insolvency process.

16. The Preamble to the Code states its objectives: “An Act to consolidate and amend the
law relating to reorganization and insolvency resolution of corporate persons,
partnership firms and individuals in a time bound manner for maximization of value
of assets of such persons, to promote entrepreneurship, availability of credit and
balance the interest of all the stakeholders including alteration in the order of priority
of payment of Government dues..”provides for re-organisation and insolvency resolution
of corporate persons, partnership firms and individuals in a time bound manner for
maximization of value of assets.

In the case of YenamullaMalludora vs P. Seetharatnam (AIR 1966 SC 918), Supreme

Court of India observed that “the object of the law of insolvency is to seize the property

8
World Bank Group Flagship Report on ‘Doing Business 2017 – Equal Opportunity for all – Economy profile
2017: India’

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 of an insolvent before he can squander it and to distribute it amongst his creditors. It is
however not every debtor who has borrowed beyond his assets or even one whose
property is attached in execution of his debts, who can be subjected to such control. The
jurisdiction of the Court commences when certain acts take place which are known as
acts of insolvency and which give a right to his creditor to apply to the Court for his
adjudication as an investment.”

17. It envisages specific roles for each participant- the stakeholders comprising debtors and
creditors, and the ecosystem comprising AA, Insolvency and Bankruptcy Board of India,
information utilities, and insolvency professionals- in different processes and specifies
timelines for performance of each task in a process.

18. The driving force behind the potential of a successful Insolvency Resolution Process for
the rehabilitation of the financially distressed companies is the constitution of a
committee of creditors to oversee the formation of a viable resolution plan. The fact
that the stakeholders/interested parties themselves have directly been made
responsible for the success of the resolution process is one of the defining features of
the IBC, 2016.

19. Another salient feature of the Code is the strict timeline for resolution of insolvency
and liquidation proceedings. When decisions are taken in a time-bound manner, there is
a greater chance that the corporate entity can be saved as a going concern, and the
productive resources of the economy (labour and capital) can be put to the best use.
This timely resolution process is in the essence of the following principle i.e. ‘justice
delayed is justice denied’. Timeline prescribed under the Insolvency and the Bankruptcy
Code, 2016 and the Regulations made thereto:

Process Time Limit as provided Total Time Limit

under the Act
CIRP 180 + 90 (Extension) 280 days
FTIRP 90 + 45 (Extension) 135 days
Voluntary 1 year 12 months
Liquidation
Liquidation 2 years 2 years

20. There are 3 main sources of Law:

a. Customary law
b. Statutory law

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 c. Case law

21. Case law provides certainty; in the sense that a case with sufficiently similar material
facts yields a similar outcome. It also provides consistency and fairness as similar cases
are dealt in the same way. It assumes additional significance in the initial days of a
statutory law such as the Insolvency and Bankruptcy Code, 2016(Code), when different
plausible views emerge on an issue and the right view needs to be established.

22. The ensuing case laws illustrate the following essential elements recognised / upheld by
the Adjudicating Authority:
a. In the matter of M/S. Innoventive Industries limited vs. ICICI Bank &Anr the
Supreme Court stated that “the limited liability company is a contract between
equity and debt. As long as debt obligations are met, equity owners have
complete control, and creditors have no say in how the business is run. When
default takes place, control is supposed to transfer to the creditors; equity
owners have no say”. Further, Supreme Court has also stated that “Entrenched
managements are no longer allowed to continue in management if they cannot
pay their debts.”

b. In the matter of Japyee Infratech on the issue of whether the homebuyer will be
considered as financial creditors or not, Supreme Court ordered the following:
- Jaypee Associates, the parent company of Jaypee Infratech, told to deposit
Rs 2000 crore.
- IRP to submit interim resolution plan in 45 days, to also consider
homebuyers’ interests.
- MD and directors, other than nominee directors of lenders, of Jaypee
Infratech and Jaypee Associates barred from leaving the country without
court’s permission.
- Amicus curiae appointed to assist proceedings by IRP.
c.
d. Time is the essence of the Code:
J.K. Jute Mills Company Limited V. M/s. Surendra Trading Company: It has
been observed that the procedural part of Section 7 / Section 9 / Section 10 are
directory in nature. The Code broadly prescribes four timelines in respect of
CIRP:
(a) 14 days for the AA to admit or reject an application for initiation of CIRP;

16
 (b) 7 days for an applicant to rectify defects in the application for CIRP;
(c) 30 days for the Interim Resolution Professional to discharge his duties; and
(d) 180 days for creditors to complete a CIRP.
Held, that timelines of 14 and 30 days are directory in nature, while those of 7 and
180 days (180 + 90 = 270 days) are mandatory under the Code.

e. Proceedings under the Code are not adversarial in nature

DF DuetscheForfait AG and Anr. Vs. M/s. Uttam Galva Steel Ltd.:

The Hon’ble NCLT observed that “if we start looking at this draconian law
gobbling up the companies and branding orders as harsh, then we remain where
we are, perhaps will go down further, yes one can understand to get conversed to
new law and to see the fruits of it, it will take time, but for the sake of this reason,
we cannot wish away the mandate of this nation come through Parliament.”

f. Principles of natural justice (including abuse and misuse of the process under the
Code)

SreeMetaliks Ltd and Anrv. UOI [W.P. 7144 (W) OF 2017]:

The Hon’ble High Court observed that the principles of natural justice are not
ousted by the Code can be found from section 7(4) of the Code and Rule 4 of the
Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
Adherence to the principles of natural justice by NCLT or NCLAT would not
mean that an ex-parte order can never be passed by either of them. They may
anytime proceed to pass such an order provided the reasons for grant of such an
order and why it has been chosen not to adhere to the principles of natural justice
at that stage are recorded.

M/s Innoventive Industries Ltd. Vs. ICICI Bank &Anr [Company Appeal
(AT) (Insolvency) No. 1 &2 of 2017]

NCLAT observed that “.. we are of the view and hold that the Adjudicating
Authority is bound to issue a limited notice to the corporate debtor before
admitting a case for ascertainment of existence of default based on material
submitted by the corporate debtor and to find out whether the application is
complete and or there is any other defect required to be removed. Adherence to
Principles of natural justice would not mean that in every situation the
adjudicating authority is required to afford reasonable opportunity of hearing to
the Corporate debtor before passing its order.” It further observed: “Therefore, it
will be imperative for the "adjudicating authority" to adopt a cautious approach
17
 in admitting Insolvency Application by ensuring adherence to the principle of
natural justice.”

g. Penalties charged under the code

Unigreen Global Private Limited [CP. No.IB-39 (PB)/2017]

The NCLT imposed a penalty of Rs. 10 lakh on the applicant and two of its
directors for abusing the power under the code for purposes other than its avowed
objectives.

M/s Starlog Enterprise Limited Vs. ICICI Bank Limited [Company appeal
(AT) (Insolvency No. 5 of 2017)]
The NCLAT has imposed a fine of Rs. 50,000/- NCLAT has penalised ICICI
Bank for moving default application against Starlog with misleading claims 

Neeta Chemicals (I) Private Limited (NCIPL) Vs. State Bank of India (CP.
No. (IB)/ 128/ 10/ HDB/ 2017)
NCLT's Hyderabad bench has imposed a fine of Rs 10 lakh on the Neeta
Chemicals for initiating insolvency proceedings with "malafide intention". The
Corporate Debtors were attempting to misuse the moratorium provisions under
the insolvency law to escape auction of assets by lenders under the Sarfaesi (The
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest) Act.

h. Interpretation of definition of Operational Creditor and operational debt

In the matter of Col. Vinod Awasthy v/s AMR Infrastructure Ltd, Col.
Awasthy filed an application under section 9 of the Code to initiate CIRP of AMR
Infrastructure Ltd. in respect of default in payment of assured returnstill
possession of a flat, as contemplated under an MoU executed between the parties.
TheNCLT, vide order dated 20th February, 2017, dismissed the application as the
applicant is notan OC. It observed that the ‘operational debt’ under the Code is a
claim in respect of provisionof goods or services, including dues on account of
employment or a debt in respect ofrepayment of dues arising under any law for
the time being in force and payable to Central orState Government or local
authority. Hence operational debt is confined to four categories likegoods,
services, employment and Government dues. It is not any debt other than financial
debt.Hence, non-payment of aforesaid assured return is not an operational debt
and the applicant isnot an OC.

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i. Interpretation of definition of Financial Creditors and Financial debt
In the matter of Nikhil Mehta & Sons (HUF) & others Vs. M/s AMR
Infrastructure Limited (CP No. 03/PB/2017) The NCLT, vide order dated 23rd
January, 2017,held that the applicant is not a FC and hence dismissed the
application. It reiterated that theessential requirements for a debt to qualify as a
‘financial debt’ is that it is ‘disbursed againstthe consideration for the time value
of money’. Financial debt is usually for a sum of moneyreceived today to be paid
over a period of time in the future in a single or series of paymentsin future. The
instant case is a pure and simple agreement of sale or purchase of a property.
Itobserved: “Merely because some ‘assured amount’ of return has been promised
and it standsbreached, such a transaction would not acquire the status of a
‘financial debt’ as thetransaction does not have consideration for the time value of
money, which is a substantiveingredient to be satisfied for fulfilling requirements
of the expression ‘Financial Debt’.

The order of the NCLT referred to in Para 13 came up on appeal before the
Hon’ble NCLATin the matter of Nikhil Mehta and Sons Vs. AMR Infrastructure
Limited. The Hon’ble NCLATperused the agreement between the parties and the
‘annual returns’ of the respondent and basedon the same, observed that the
amount paid by the appellants (flat buyers) fulfilled the conditionof ‘disbursement
against the consideration of time value of money’. The corporate debtor raisedthe
amount through transactions of sale and purchase agreement having the
commercial effectof a borrowing as per section 5 (8) (f) of the Code and hence the
appellants are FCs undersection 5 (7) of the Code.

j. Balancing interest of stakeholders:

In the matter of ProwessInternational Pvt. Ltd. Vs. Parker Hannifin India
Pvt. Ltd., the Hon’ble NCLAT held: “In thecircumstances, instead of interfering
with the impugned order, we remit the case to theAdjudicating Authority for its
satisfaction whether the interest of all stakeholders have beensatisfied and
whether one or other creditor has not raised any claim like Punjab National
Bank,after giving notice to individual claimant and taking into consideration of
the InsolvencyResolution plan and report of the Insolvency Resolution
Professional as may be prepared, theAdjudicating Authority may close the
proceedings.”

k. Power of SC under Article 142 of the Constitution of India

In the matter of Lokhandwala Kataria Construction Private Limited Vs Nisus
Finance and Investment Managers LLP issue raised before SC was “whether
National Company Law Appellate Tribunal could utilize the inherent power
recognized by Rule 11 of the National Company Law Appellate Tribunal Rules,
19
 2016 to allow a compromise before it by the parties after admission of the
matter.”It was held that, prima facie the inherent power could not be so
utilized and this appears to be the correct position in law. But SC to put a
quietus to the matter before us has utilised the power under Article 142 of the
Constitution and take the Consent Terms dated 28.06.2017 and 12.07.2017
entered into between the parties on record.

l. Various other cases:

 In the matter of Davinder Ahluvalia&Anr v/s Sumit Aviation, NCLT
has admitted a case filed by a guarantor under insolvency resolution
proceedings for a loan where the borrower had taken the loan from a bank,
but failed to repay it. 
 There are 3 cases wherein liquidation order has been passed by NCLT i.e.
VNR infrastructures ,Bhupen Electronics and
 Synergies -Dooray Automotive Limited v/s MamtaBinani where
resolution plan has been approved.
 In the case of Neelkanth Township and Construction Pvt. Ltd.
VsUrban Infrastructure Trustees Ltd, NCLAT pronounced that, “IBC,
2016 is not an act for recovery of claim, it relates to initiation of CIRP.If
there is debt which includes interest and there is default of debt and
having continuous course of action, the argument that the claim of money
by respondent is barred by Limitation cannot be accepted.”

 In the matter of Uttam Galva Steels Ltd. (‘Appellant’ / ‘Corporate

Debtor’) v/s DF Deutsche Forfait AG and Misr Bank (‘Operational
Creditors’ / ‘Respondents’), NCLAThas set aside the order passed by
Adjudicating Authority, Mumbai Bench.Has declared the said order w.r.t.
appointment of Interim Resolution Professional, declaring moratorium,
freezing of accounts and publication of newspaper advertisement as
'illegal', and allows the Appellant to function independently through its
Board of Directors;
Following issues were raised in the appeal –
(i) Whether joint application by two or more Operational Creditors u/s 9 of
the Insolvency & Bankruptcy Code (‘IBC’ / ‘Code’) is maintainable,
Held:NCLAT notes that an insolvency resolution process by Financial
Creditor can be initiated either by itself or jointly with other Financial
Creditors, however joint application u/s 9 by one or more Operational
Creditors is not maintainable
(ii) Whether it is mandatory to file ‘Certificate of recognized financial
institution’ along with the application u/s 9 of the Code,

20
 Held:Observes that the Certificate (as contemplated under IBC) has been
issued by ‘Misr Bank’ - a Foreign Bank that is not a ‘notified Financial
Institution’ under the Code, and accordingly, holds the application u/s 9 of
the Code as not maintainable
(iii) Whether Demand Notice with invoice u/s 8 of the Code can be issued
by any lawyer on behalf of an Operational Creditor; Perusing the
provisions of Secs. 7, 8 & 9 of the IBC,
Held: As regards issuance of Demand Notice by lawyer, NCLAT peruses
the Code and Adjudicating Authority Rules and accordingly states, “An
Advocate / Lawyer or Chartered Accountant or Company Secretary in
absence of any authority of the Board of Directors, and holding no
position with or in relation to Operational Creditor cannot issue any notice
u/s 8 of the Code”;
In present case, the Advocate/Lawyer has given notice and there is nothing
on record to suggest that lawyer was authorized by the Board of Directors,
resultantly opines that the Notice cannot be treated as a ‘Notice’ u/s 8
w.r.t. the issue of existence of debt, notes that Notice of winding up was
issued by the Respondents and the claim was disputed by Appellant much
prior to the notice u/s 8 (issued by Lawyer) and the suit between the
parties was pending;

 In the matter of Essar Steel India Limited V/s Reserve Bank of India &
Ors., the petitioner has sought for the following reliefs:
a. Issue a writ, order or direction or any other writ, order or direction
quashing / setting aside the decision of:
- the RBI contained in impugned Press Release directing the
lenders to initiate proceedings under the IBC, 2016 in relation
to the Petitioner.
- the State Bank of India (“SBI”) of filing proceedings under the
IBC, 2016 in relation to the Petitioner.
- the Standard Chartered Bank (“SCB”) of filing proceedings
under the IBC, 2016 in relation to the Petitioner.
b. Issue a writ, order or direction
- restraining the NCLT (Ahmedabad Bench) from proceeding
further with proceedings in the petition initiated under Section
7 of IBC, 2016 by SBI and SCB.
- directing RBI to place the Petitioner in the category of
companies falling in para 4 of the Press Release dated
13.6.2017 directing the banks to finalise the resolution plan
within six months.
Pursuant to the prayers sought, the Hon’ble High Court of Gujrat by Order
dated 17.07.2017 has pronounced the judgment as reproduced hereunder:

21
 a. Press release was issued in pursuance to the amended provisions of
the Banking Regulation Act, 1949 in the form of section 35AA or
35AB of the BRA, 1949. On that note, it was directed against
Petitioner which has debt to the tune of more than Rs. 32000 crores at
the end of March 31, 2017 and when total debt is more than Rs. 45,000
crores, it is clear that RBI is authorised to direct any banking
company to initiate banking resolution process. Hence,there is no
option, but to leave the issue at the discretion of the lenders to take
appropriate steps in accordance with law, thereby, without
interference of this Court under the constitutional mandate. Further,
RBI should see that benefit of all its scheme is equally offered
extended to all without any discrimination. [Page 78, Para 39(12) ]
Hence, Directions issued by the RBI is not in the nature of the
classification. Also, such classification is not irrational, arbitrary or
discriminatory. Hence, first relief is not granted. [Page 79, Para
40B, 40C]
b. State Bank of India can initiate the proceedings under section 7 of the
IBC, 2016. Since, it is the individual decision of the concerned
person who is entitled to file such application. Hence, it cannot be
held that the Banking Company is not eligible to initiate the
proceedings under section 7 of the IBC, 2016. Hence, second relief
is also not granted. [Page 80, Para 40D]
c. Standard and Chartered Bank is a Private Bank. Hence, it is not
amenable to the writ jurisdiction of the Court. Hence, with respect to
the SCB the petition stands dismissed.
Further, SCB can initiate the proceedings under 7 of the IBC, 2016 as
it is their individual decision. Hence, the third relief is also not
granted. [Page 80, Para 40E, 40F]
d. Forth relief is also not granted as it is the tribunal which shall
decide whether to admit or reject the petition. There are many issues
which is the subject matter of the Tribunal and left for the perusal of
the Tribunal. [Page 82, Para 40H]
 Allahabad High Court in the matter of Sanjeev Shriya&Ors v/s SBI,
Section 60(1) of the Code makes NCLT the adjudicating authority for
insolvency resolution for corporate persons including corporate debtors
as well as “personal guarantors.”  In view of the moratorium,
proceedings are still in fluid stage and until liability is crystallised, against
debtors/guarantors, there is no occasion for the DRT to proceed against the
corporate guarantors.
23. Even various other regulators like SEBI and RBI have taken steps to support the
objectives under the code. Recently, RBI issued a Press release on June 13, 2017

22
directing the banks to file insolvency proceedings under the provisions of the Insolvency
and Bankruptcy Code, 2016 based upon the recommendation of the Internal Advisory
Committee. And Tribunal has admitted application for initiating insolvency resolution
process against 11 companies out of 12 companies and against one company NCLT
(Delhi Bench) has reserved the order due to various pending winding up proceedings.
RBI has prepared the second list of over large defaulters and it has sent out letter to the
lenders asking them that these accounts should first be resolved through any of RBI’s
schemes before 13 December, failing which cases should be filed against these
companies under the IBC at the NCLT before 31 December.

Also, SEBI in its Board Meeting held on 21st June, 2016, has approved the proposal to
provide exemption from open offer obligations, under the SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 2011, for acquisitions pursuant to resolution plans
approved by NCLT under the Insolvency and Bankruptcy Code, 2016. Further, it has also
issued a circular on August 4, 2017 wherein listed entities has to disclose the default
occurred in payment of principal amount and interest of any securities and loans within 1
working day from the date of default.

Can Creditors play constructive roles?

23
 The Economic question raised in the bankruptcy process was when Corporate Debtor
defaults what is to be done.9 The matter was deliberated and it was observed that there
are numbers of possibilities which can be envisioned such as liquidation, debt
restructuring etc. The Bankruptcy Law Reform Committee reiterated that the appropriate
disposition of a defaulting firm is a business decision, and only the creditors should make
it.

The Committee of Creditors is a key decision-making body in every CIRP. The speed of
decision making at the Committee of Creditors should match the pace at which the
Code has progressed.
Banks are in the process of developing internal guidelines & decision matrices to enable
the attendees of CoC to have efficient decisions in time. The speed of CoC would also
depend upon the expertise of the IP. The IP should provide relevant information before
time to CoC members, to help them take internal approvals and come better prepared for
CoC voting.

INSOLVENCY PROFESSIONALS
9
Page 12, The report of the Bankruptcy Law Reforms Committee

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 i. Insolvency Professionals must take care that their advice should be in full conformity with
the insolvency law as their decisions and advise shall have an impact on the whole
insolvency resolution process.
ii. The Code has casted huge responsibility on Insolvency Professionals which was earlier with
organs of the state i.e. either judiciary or with the government. The Code being progressive
in nature, one may find that many of the responsibilities entrusted to the Insolvency
Professional are not available to them in foreign jurisdictions. Accordingly, Insolvency
Professionals should discharge their responsibilities that that go hand in hand with the duties
entrusted to them.
iii. Good Practices can be developed from foreign jurisdictions which have a well- developed
and stable Insolvency Law. Furthermore, the competency and capacity of the Insolvency
Professionals needs to be developed in view of the fact that sooner cross border insolvency
shall be the part of the Insolvency Code.
iv. Insolvency Professionals who do not discharge their responsibilities, should be not be
allowed to function with impunity.
a. It has been noticed that Insolvency Professionals are accepting number of
assignments simultaneously. Since the Resolution Process requires large
commitments (specifically for big corporate debtors) in terms of verifying numerous
claims, preparing information memorandum and performing various other functions
effectively. Therefore, it may not be possible for any individual Insolvency
Professional to discharge the responsibility of many big corporate debtor at one point
of time as he would not be able to do justice for the effective resolution.
Recently, the Hon’ble Hyderabad Bench of NCLT, in the matter of Lanco Infratech Limited
suggested the Financial Creditor i.e. IDBI Bank Limited on the same lines with the same
concern.
v. The main task of an Insolvency Professional should be to rescue the business of the
corporate debtor.
vi. Globally also, Insolvency Practitioner's (IP) duty in insolvency appointments is to
maximise the realisation of assets and when appropriate to pay a dividend to the creditors
from surplus funds in the order of priority as laid down in law. The challenges for an
insolvency practitioner can vary depending on the situation, but can include:
a. Dealing with and potentially directly running any type of business
b. Piecing together what went wrong in the company and reporting this to creditors
c. Taking steps to preserve jobs and rescue corporations where possible
d. Dealing with complex legal claims where there are parties whose actions contributed to
the company insolvency
e. Acting as a negotiating intermediary between debtors and creditors to find suitable
repayment solutions to avoid insolvency

25
vii. As per the Code of Conduct of IPs [First Schedule to Insolvency and Bankruptcy Board of
India (Insolvency Professionals) Regulations 2016]:
a. An IP must maintain integrity by being honest, straightforward in all professional
relationships.
b. An IP must not misrepresent any facts or situations.
c. An IP shall not take up an assignment under the Code if he, any of his relatives, any of
the partners or directors of the insolvency professional entity of which he is a partner or
director, or the insolvency or the insolvency professional entity of which he is a partner
or director is not independent, in terms of the Regulations related to the processes under
the Code, in relation to the corporate person/ debtor and its related parties.
d. An IP should disclose the existence of any pecuniary or personal relationship with any of
the stakeholders entitled to distribution under sections 53 or 178 of the Code.
e. An IP must maintain and upgrade his professional knowledge and skills to render
competent professional service.
f. An IP must not act malafide or be negligent while performing his functions and duties
and must must adhere to the time limits prescribed in the Code and the rules, regulations
and guidelines thereunder for insolvency resolution, liquidation or bankruptcy process.
g. An IP must ensure that confidentiality of the information relating to the insolvency
resolution process, liquidation or bankruptcy process, as the case may be, is maintained at
all times.

viii. Role and Responsibilities of IPs:

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I. Powers and functions/duties of IPs as Interim Resolution Professional:

Powers [From the date of appointment]:

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 a. Management of the affairs of the corporate debtor shall vest in him. Here, he
can act and execute in the name and on behalf of the corporate debtor, have the
authority to access the electronic records of corporate debtor from information
utility having financial information of the corporate debtor and also have the
authority to access the books of account, records and other relevant documents of
corporate debtor available with government authorities, statutory auditors,
accountants and such other persons as may be specified. [section 17]
b. Powers of the board of directors shall stand suspended and be exercised by him.
[section 17]
c. The officers and managers of the corporate debtor shall report to him and
provide access to such documents and records of the corporate debtor as may be
required by him. [section 17]
d. The financial institutions maintaining accounts of the corporate debtor shall
act on his instructions in relation to such accounts and furnish all information
relating to the corporate debtor available with them to him. [section 17]
e. To protect and preserve the value of the property can appoint accountants or
other legal professionals, enter into contracts on behalf of the corporate debtor
or to amend or modify the contracts or transactions, to raise interim finance
without prior consent of the creditors where the value of such property is not less
than the amount equivalent to twice the amount of the debt, except that all raising
of finance with prior consent of creditors and also can issue instructions to
personnel of the corporate debtor. [section 20]
f. He may access the books of account, records and other relevant documents and
information, to the extent relevant for discharging his duties under the Code.
g. He may call for such other evidence or clarification as he deems fit from a
creditor for substantiating the whole or part of its claim.
h. He 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.
i. He shall determine amount of claim.

Functions/Duties:

a. Collect all information relating to the assets, finances and operations of the
corporate debtor for determining the financial position of the corporate debtor.
[section 18]
b. Receive and collate all the claims submitted by creditors to him. [section 18]
c. Constitute a committee of creditors. [section 18]
d. Monitor the assets of the corporate debtor and manage its operations until a
resolution professional is appointed by the committee of creditors. [section 18]

27
 e. File information collected with the information utility. [section 18]
f. Take control and custody of any asset over which the corporate debtor has
ownership rights. [section 18]
g. Protect and preserve the value of the property of the corporate debtor. [section 20]
h. Where interim resolution professional is replaced with new resolution
professional then interim resolution professional shall provide all the information,
documents and records pertaining to the corporate debtor in his possession and
knowledge to the resolution professional. [section 23]
i. He shall file a report certifying constitution of the committee to the
Adjudicating Authority on or before the expiry of thirty days from the date of his
appointment.
j. The interim resolution professional shall within seven days of his appointment,
appoint two registered valuers to determine the liquidation value of the corporate
debtor in accordance with Regulation 35:

II. Powers and functions/duties of IPs as Resolution Professional:

Powers

i. He shall exercise powers as are vested or conferred on the interim resolution

professional. [section 23]
ii. For preserving and protecting the assets of the corporate debtor, including the
continued business operations of the corporate debtor he can undertake the
following actions[section 25]:
a. take immediate custody and control of all the assets of the corporate
debtor, including the business records of the corporate debtor
b. represent and act on behalf of the corporate debtor with third parties
c. raise interim finances subject to the approval of the committee of creditors
d. appoint accountants, legal or other professionals
e. maintain an updated list of claims
f. convene and attend all meetings of the committee of creditors
g. prepare the information memorandum in accordance with section 29

28
 h. invite prospective lenders, investors, and any other persons to put forward
resolution plans
i. present all resolution plans at the meetings of the committee of creditors
j. file application for avoidance of transactions in accordance with Chapter
III, if any

Functions/Duties:

i. He shall perform duties as are vested or conferred on the interim resolution

professional. [section 23]
ii. Meeting of committee of creditors should be conducted in conformity with the
provisions under the IBC and regulations. [section 24]
iii. Preserve and protect the assets of the corporate debtor, including the continued
business operations of the corporate debtor. [section 25]
iv. Preparation of information memorandum for formulating resolution plan.[section
29]
v. No actions enumerated under section 28 to be performed without approval of
committee of creditors. And any act performed without their approval shall be
void. Some of them are:
a. Raise any interim finance in excess of the amount as may be decided by
the committee of creditors in their meeting;
b. Create any security interest over the assets of the corporate debtor;
c. Change the capital structure of the corporate debtor, including by way of
issuance of additional securities, creating a new class of securities or
buying back or redemption of issued securities in case the corporate
debtor is a company;
d. Record any change in the ownership interest of the corporate debtor;
e. Give instructions to financial institutions maintaining accounts of the
corporate debtor for a debit transaction from any such accounts in excess
of the amount as may be decided by the committee of creditors in their
meeting;
f. Undertake any related party transaction;
g. Amend any constitutional documents of the corporate debtor;

29
Powers and functions/duties of IPs as Liquidator:

Powers:

i. All powers of the board of directors, key managerial personnel and the partners of
the corporate debtor, as the case may be, shall cease to have effect and shall be
vested in the liquidator. [section 35]
ii. Take into his custody or control all the assets, property, effects and actionable
claims of the corporate debtor. [section 35]
iii. To take such measures to protect and preserve the assets and properties of the
corporate debtor. [section 35]
iv. Sell the immovable and movable property and actionable claims of the corporate
debtor in liquidation by public auction or private contract, with power to transfer
such property to any person or body corporate, or to sell the same in parcels in
such manner as may be specified subject to secured creditors role in liquidation
proceedings. [section 35]
v. to draw, accept, make and endorse any negotiable instruments including bill of
exchange, hundi or promissory note in the name and on behalf of the corporate
debtor, with the same effect with respect to the liability as if such instruments
were drawn, accepted, made or endorsed by or on behalf of the corporate debtor
in the ordinary course of its business. [section 35]
vi. take out, in his official name, letter of administration to any deceased contributory
and to do in his official name any other act necessary for obtaining payment of
any money due and payable from a contributory or his estate which cannot be
ordinarily done in the name of the corporate debtor, and in all such cases, the
money due and payable shall, for the purpose of enabling the liquidator to take
out the letter of administration or recover the money, be deemed to be due to the
liquidator himself.
vii. to obtain any professional assistance from any person or appoint any professional,
in discharge of his duties, obligations and responsibilities. [section 35]
viii. Invite and settle claims of creditors and claimants and distribute proceeds.
[section 35]
ix. to institute or defend any suit, prosecution or other legal proceedings, civil or
criminal, in the name of on behalf of the corporate debtor. [section 35]

30
 x. to investigate the financial affairs of the corporate debtor to determine
undervalued or preferential transactions. [section 35]
xi. take all such actions, steps, or to sign, execute and verify any paper, deed, receipt
document, application, petition, affidavit, bond or instrument and for such
purpose to use the common seal, if any, as may be necessary for liquidation,
distribution of assets and in discharge of his duties and obligations and functions
as liquidator. [section 35]
xii. Liquidator has power to access any information from the sources encapsulated in
section 37 of the IBC. [section 37]
xiii. He may appoint professionals to assist him in the discharge of the duties,
obligations and functions for a reasonable remuneration and such remuneration
shall form part of liquidation cost.
xiv. He can seek consultation of the stakeholders to complete liquidation process.
xv. He can seek help of the personnel of the corporate debtor inn collection of the
information necessary for the conduct of the liquidation.

Functions/Duties:

i. Collect, consolidate, verify, modify and withdrawal claims of all the creditors.
Admission, rejection, valuation of claims. [section 35, 38,39, 40, 41]
ii. Evaluate the assets and property of the corporate debtor in the manner as may be
specified by the Board and prepare a report. [section 35]
iii. To carry on the business of the corporate debtor for its beneficial liquidation.
[section 35]
iv. Liquidator shall compose and hold the liquidation estate as a fiduciary for the
benefit of all the creditors. [section 36]
v. Duty of Liquidator to furnish information to creditors when requested by them. If
not been able to provide then furnish reasons in writing o such creditors. [section
37]
vi. He shall prepare and submit various reports such as sales report, preliminary
report, as asset memorandum, progress report, minutes of the consultation with
stakeholders and final report prior to dissolution to the Adjudicating Authority.
He shall preserve such reports for 8 years after the dissolution of the corporate
debtor.
vii. He shall complete and brought up to date all the books of account which were
incomplete on the insolvency commencement date.

31
viii. Maintain Registers and Books and preserve them for 8 years after the dissolution
of the corporate debtor.

32
INSOLVENCY RESOLUTION PROCESS AND LIQUIDATION
PROCESS:

Part II of the IBC deals with the Insolvency Resolution and Liquidation of corporate
persons. The process to wind up the corporate person completes in two phases i.e.
Insolvency resolution process and Liquidation. The first phase of the insolvency and
bankruptcy process is the period of insolvency resolution during which insolvency is
assessed and a solution is reached within a stipulated time period. In case a solution is not
reached within the specified time limit, the second phase of the process begins wherein
the entity is declared bankrupt. At this point, a registered entity enters into liquidation
whereas an individual enters into bankruptcy resolution.10

3.1 INSOLVENCY RESOLUTION PROCESS (PHASE –I)

Insolvency Resolution Process under IBCfor Corporate Persons

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3.1.1 CORPORATE INSOLVENCY RESOLUTION PROCESS:

(a) What is the trigger point to initiate CIRP?

The process can be initiated against corporate debtor who has not paid the whole or any part
or instalment of the debt which has become due and payable and has not been repaid by him.
10
Point No. 4.4, “The report of the Bankruptcy Law Reforms Committee” headed by Dr. T.K. Viswanathan.

33
 The minimum amount of default to initiate CIRPis Rs. 1,000,0000/- 11., (One Crore as per
amended provisions)

(b) Who are eligible to file the application?

Any person who is a financial creditor or operational creditor or the corporate debtor himself
can initiate the CIRP.12 For the purpose of this section:

 Corporate Debtor means “a corporate person who owes a debt to any person.”13
 Financial Creditor means “any person to whom financial debt is owed and includes any
person to whom such debt has been legally assigned or transferred to.”14
 Operational Creditor means “any person to whom the operational debt is owed and
includes any person to whom such debt has been legally assigned or transferred to.”15

(c) Who are not eligible to file the application?

Section 11 of the IBC prescribes the conditions under which a corporate debtor and a
financial creditor would not be entitled to make an application to initiate CIRP. The non-
eligibility conditions are as follows:
i. Corporate debtor undergoing a CIRP;
ii. Corporate debtor having completed CIRP twelve months preceding the date of making of
the application;
iii. Corporate debtor or a financial creditor who has violated any terms of resolution plan
which was approved twelve months before the date of making of an application under
this chapter
iv. Corporate debtor in respect of whom the liquidation order has been made.

(d) Which adjudicating authority shall adjudicate the matter?

Section 5(1) of the IBC states that NCLT to be the adjudication authority for Insolvency
Resolution and Liquidation Process.

(e) At what time the process shall commence and what is the time-limit for completion
of insolvency resolution process?

11
Section 4(1) of IBC.
12
Section 6 of IBC
13
Section 3 (8) of IBC
14
Section 5(7) of IBC
15
Section 5 (12) of IBC

34
 The process shall commence from the date of admission of the application by the
Adjudicating Authority. The CIRP should be completed within a period of 180 days from the
date of admission of application to initiate such process.16

(f) Concept of “Moratorium”:

Black’s Law Dictionary17 defines Moratorium as,“An Authorised postponement, usually a

lengthy one, in the deadline for paying debt or performing an obligation or the period of this
delay or the suspension of a specific activity.”

As per the provisions of IBC, NCLT shall, after admission of application of the Company,
declare Moratorium. During ‘Moratorium Period’, all below mentioned activities shall be
prohibited18:

i. Institution of suits, continuation of pending suits or proceedings against the debtor;

ii. Execution of any judgment, decree or order in any court of law, tribunal, arbitration panel
or other authority;
iii. Transferring, encumbering, alienating or disposing of by the corporate debtor any of its
asset or any legal right or beneficial interest therein;
iv. Any Action to foreclose, recover or enforce any security interest created by the corporate
debtor in respect of its property including action under SARFAESI Act, 2002.
The recovery of any property by an owner or less or where such property is occupied by
or in the possession of the corporate debtor.

Validity of the Moratorium Period19: It shall commence from the which the NCLT shall pass
such order declaring moratorium and it will be valid uptill the completion of the insolvency
resolution period or where the NCLT has approved the resolution plan or has passed the
order for liquidation of the corporate person, any of the dates as the case may be.

(g) IRP – Appointment, Term,Powers and Duties, Costs:

Appointment& Tenure20: Appointment of Interim Resolution Professional shall be effected

by the NCLT within 14 days from the CIRP commencement date. In case application for
CIRP is made by financial creditor21 or corporate debtor22 himself or operational creditor,

16
Section 7(6), 9(6), 10 read with section 12 of IBC
17
Black’s Law Dictionary by Bryan A. Garner, 10th Edition.
18
Section 14 of the IBC
19
Section 14(4) of the IBC
20
Section 16
21
Section 7
22
Section 10

35
23

24
then the resolution professional proposed by them in their application shall be appointed as
IRP if no disciplinary proceedings are pending against them. ThetermofIRP shall not be more
than 30 days from the date of his appointment.

Powersof IRPdrawn from corporate debtorafter his appointment:

Duties of IRP23:Some of the key duties of IRP are:

i.
ii.

iv.
Receive and collate all claims submitted by the creditors to him.
Assess financial position of the corporate debtor.
iii.
He shall constitute 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. 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.
v. File information collected with Information Utility.

IRP Costs24:

Applicant under IBC shall fix the expense to be incurred on or by the interim resolution
professional. Where applicant has not fixed the expense Adjudicating Authority shall fix the
expense. The applicant shall bear the expenses which shall be reimbursed by the committee
to the extent it ratifies. The amount of expenses ratified by the committee shall be treated as
insolvency resolution process cost.

Section 18 of IBC
Regulation 33 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

36
p
C
r
c
e
v
lh
a
m
ti
f
o
s
t
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u
ff
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O
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b
ifi
 ‘Expenses’ here means the fee to be paid to the interim resolution professional and other
expenses, including cost of engaging professional advisors, to be incurred by the interim
resolution professional.

(h) CoC – Constitution, Power, Meeting25:

Constitution:IRP shall constitute a committee of creditors. It shall comprise of all financial

creditors of the Corporate Creditors. Any related party to corporate debtor cannot carry their
representation as a financial creditor.All the decision of CoC shall be taken by a vote not less
than 75% of the voting share of the financial creditor.

Power of CoC:It shall have the power to call for any financial information of corporate
debtor during CIRP from Resolution Professional. It has power to approve and reject the
resolution plan.

Meeting of CoC:Directors/Partners and one representative of Operational Creditors (if the

aggregate dues are more than 10%) can attend the meetings of CoC but shall not have right to
vote in such meetings.

(i) Resolution Professional - Appointment, Tenure, Duties, Costs:

Resolution Professional shall conduct the entire CIRP process and manage the operations of
the corporate debtor during this period.

Appointment:Section 22 of the IBC deals with the appointment of resolution professional.

The committee of creditors, may, in the first meeting, by a majority vote of not less than 75%
of the voting share of the financial creditors, either resolve to appoint the interim resolution
professional as a resolution professional or to replace the interim resolution professional by
another resolution professional.

Term:Term of Resolution professional will be till the end of CIRP unless replaced during the
CIRP.Further, if he is not replaced then in second phase shall act as Liquidator also.

Duties:
i. Meeting of committee of creditors should be conducted in conformity with the provisions
under the IBC and regulations. [section 24]
ii. Preserve and protect the assets of the corporate debtor, including the continued business
operations of the corporate debtor. [section 25]
iii. Preparation of information memorandum for formulating resolution plan.[section 29]

25
Section 21 of IBC

37
 iv. No actions enumerated under section 28 to be performed without approval of committee
of creditors. And any act performed without their approval shall be void. Some of them
are:
 Raise any interim finance in excess of the amount as may be decided by the
committee of creditors in their meeting;
 Create any security interest over the assets of the corporate debtor;
 Change the capital structure of the corporate debtor, including by way of issuance of
additional securities, creating a new class of securities or buying back or redemption
of issued securities in case the corporate debtor is a company;
 Record any change in the ownership interest of the corporate debtor;
 Give instructions to financial institutions maintaining accounts of the corporate debtor
for a debit transaction from any such accounts in excess of the amount as may be
decided by the committee of creditors in their meeting;
 Undertake any related party transaction;
 Amend any constitutional documents of the corporate debtor;

Resolution Professional Costs26:The CoC shall fix the expense to be incurred on or by the
resolution professional and the expenses shall constitute insolvency resolution professional
costs. ‘Expenses’ here would mean the fee to be paid to the resolution professional and other
expenses, including the cost of engaging professional advisors, to be incurred by the
resolution professional.

(j) Information Memorandum:

Resolution Professional shall prepare an Information Memorandum which shall contain

relevant information for formulating resolution plan.RP shall submit an information
memorandum in electronic form to each member of the CoC and any potential resolution
applicant.

(k) Resolution Plan:

Resolution plan is the plan to resolve the distress in the Company by formulating such terms
to revive and rehabilitate. A resolution applicant shall submit a resolution plan to the
resolution professional prepared on the basis of Information memorandum. 27Resolution
professional after examining each resolution plan received by him shall present to the CoC
for its presentation. The CoC may approve or reject the same. In addition, the resolution
professional shall submit the resolution plan as approved by the committee of creditors to the
Adjudicating Authority.

26
Regulation 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
27
Section 30(1) of the IBC

38
 i. Approval of resolution plan28:

ii. Time line to complete CIRP

S.No Events Section/ Timeline (Day)

. Regulation
1. File an application to initiate corporate Section 7(1) X
insolvency resolution process.
2. i. NCLT shall accept or reject the Section 13(1) X+14
application
ii. After admission of application,
NCLT shall by an order declare:
 Moratorium
 Cause a public announcement
for initiation of corporate
insolvency resolution process
 Appoint an interim resolution
professional
3. Commencement of corporate Section 7(6) X+14
insolvency resolution process
4. Appointment of Interim Resolution Section 16(1) X+28
Professional (“IRP”) u/s 16 by NCLT
5. Public Announcement (“PA”) of Reg 6(1) of IBBI X+31
corporate insolvency resolution (IRPCP)Regulation
process u/s 15 by IRP , 2016
6. Submission of claims by financial Last date specified
creditors for submission in
PA
7. Verification of claims by IRP Within 7 days from
the last date of the
28
Section 31 of IBC

39
 receipt of claims
8. Constitution of Committee of Section 21 read X+61
Creditors (“COC”) by IRP with Section 16(5)
9. First Meeting of COC Section 22(1) X+68
10. Appointment of Resolution Section 22(2) X+68
Professional (“RP”)
11. Submission of the Information Section 29 (1) read X+82
Memorandum by RP to each member with Reg 36(1) of
of the committee and any potential IBBI
resolution applicant (IRPCP)Regulation
, 2016
12. Submission of resolution plan by Reg39(1) of IBBI X+90
resolution applicant to RP (IRPCP)Regulation
, 2016
13. i. Approval of resolution plan by Section 12 X+180
Committee of Creditors**
ii. Submission of approved resolution
plan to NCLT
iii. NCLT if satisfied, by an order
accept the resolution plan***

X: File an application to initiate corporate insolvency resolution process.

*CIRP shall be completed within 180 days from the date of admission of the application to
initiate such process. Such period can be extended upto 90 days more upon application by
Resolution Professional presented before NCLT [Resolution Professional shall file application
when instructed by a resolution passed at a meeting in the committee of creditors by a vote of
75% of the voting shares].

** If committee of creditors does not approve the resolution plan within 180 days, then NCLT
shall pass an order requiring the company to be liquidated.

***If NCLT rejects the resolution plan then also then NCLT shall pass an order requiring the
company to be liquidated.

3.1.2 FAST TRACK INSOLVENCY RESOLUTION PROCESS29

(a) Applicability of FTIRP?

Application for FTIRP can be made in respect of the following person:

Section 55 to 58 of IBC deals with FTIRP. The process for conducting a CIRP and the provisions relating to
29

offences and penalties shall apply FTIRP as the context may require: Section 58

40
i. A Corporate Debtor with assets and income below a level as may be notified by the
Central Government.
ii. A Corporate with such class of creditors or such amount of debt as may be notified by the
Central Government.
iii. Such other persons as may be notified by the Central Government.

(b) Who can file Application for FTIRP?

Application may be filed by the creditors or the Corporate Debtor himself. The key
documents which need to be presented with the application are:

i. Proof of the existence of default as evidenced by records available with IU.

ii. Proof to establish that the corporate debtor is eligible for FTIRP.

(c) What is the Insolvency Commencement Date?

Insolvency commencement date shall be the same as in CIRP i.e. admission of the
application by NCLT.

(d) What is the time period for completion of FTIRP? Can such time period be
extended?

i. FTIRP should be completed within a period of 90 days from the date of insolvency
commencement date.
ii. Yes, 90 days period can be extended. But only when, CoC in its meeting resolves to
extend the time, by a vote of 75% of the voting share. Consequently instructs to file an
application for extension of time to NCLT.
iii. It could be extended maximum upto 45 days.
iv. Extension would be granted only once.

41
INSOLVENCY AND BANKRUPTCY CODE, 2016: NEW REGIME AND EMMERGING
JURISPRUDENCE

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”30

Introduction

It has been a paradox that an economy which allowed free entry after 1991 and free competition
after 2002 did not permit free exit and, in the process, suffered the inefficiencies of several
zombie entities in the system for so long.

The legal framework allowed both the individuals and the corporates to trade, set up
manufacturing units and provide services and also undertake public private partnership ventures
and even allowed the scope of the venture capital for new entrepreneurs and startups.
In this process, as usual capital was infused mainly public sector banks on long term basis.
However, it is well-known fact that rampant default in payment of debts to the lenders led to
failure of businesses and has weakened the credit availability in the market and, ultimately
adversely affected the economy at large. Such a situation has been responsible fora raptured
socio-economic scenario.

30
The dialogue above is from Ernest Hemingway’s 1926 novel, The Sun Also Rises.
42
The warning signs as to the distress are always there, even at the beginning of default. Over a
period of years, sometimes decades, a tiny trickle of warning signs turns into a steady stream…
and eventually a great flood.The same we find with Indian ‘Twin-Balance Sheet’ problem. The
factual status largely goes as the legal and institutional machinery for dealing with debt default
being not in line with the context of the problem. The recovery action by creditors, for example
under the Indian Contract Act, 1872 or special laws such as the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, could not bring in desired outcomes. At
the corporate front, action through the Sick Industrial Companies (Special Provisions) Act, 1985
and the winding up provisions of the Companies Act, 1956 could not aid recovery for lenders nor
aid restructuring of firms.
Laws dealing with individual insolvency, namely, the Presidential Towns Insolvency Act, 1909
and the Provincial Insolvency Act, 1920 did not provide any confidence to the lenders.

This environment resulted not only in diminished debt access for borrowers, poor state of the
credit markets in India dominated by secured credit but also deterioration of the asset value in
long drawn winding up or liquidation process, thus, leaving little scope for the corporate bond
market to develop.

MEANING OF ‘BANKRUPTCY’ AND ‘INSOLVENCY’

Today, “Insolvency” refers to a situation when a person or company cannot pay its debts as they
become due and payable. The term “Bankruptcy” refers to the insolvent estates of individuals,
while “Liquidation” or “Corporate Insolvency” refers to the insolvent estates of companies.

The term “bankruptcy” stems from the Italian word “banca” (or “banco”) and “rotta” (or
“rotto”). The literal translation of these words is “broken bench”.

The Ponte Vecchio, literally Old Bridge, is a famous medieval bridge over the Arno, in Florence,
Italy, noted for having shops (mainly jewellers) built along it. Presumably first erected in Roman
times, it was originally made of wood. After being destroyed by a flood in 1333 it was rebuilt in

43
1345, this time in stone. It always hosted shops and merchants (legend says this was originally
due to a tax exemption), which displayed their goods on a table after authorisation of the
Bargello (a sort of a lord mayor, a magistrate and a police authority). It is said that the economic
concept of bankruptcy originated here: when a merchant could not pay his debts, the table on
which he exposed (the "banca") was physically broken ("rotta") by soldiers, and this practice was
called "bancarotta" (broken table). Not having a table anymore, the merchant was not able to sell
anything more to anyone.

HISTORY

The legal framework governing insolvency in India comprises two distinct regimes – one for
individual insolvency, and another for corporate insolvency – with the two having no interface
with one another.

The legal framework for Individuals:

(a) In case of Presidency Towns: In India, the first special Insolvency legislation was enacted
in 1828. Under this Act, the first Insolvency Courts for relief of insolvent debtors were
established in the Presidency towns. Then later, the Presidency Towns Insolvency Act,
1909 was enacted which is still in force.

(b) In case of Mofussil:

- Initially around 1859, provisions relating to insolvency in the Civil Procedure Code,
was applicable to those debtors who were arrested or imprisoned in the execution of a
decree of money or against whose property an order of attachment was passed in
execution of such a decree. Hence, it was limited to cases where legal proceedings in
which legal proceedings were instituted and judgement obtained.

- Later, by enacting Provincial Insolvency Act, 1907, the provision was made where in
the debtor could be adjudicated on his own petition or on a petition by a creditor. This
Act of 1907 was repealed by 1920 Act, which is still in force.

The legal framework for the corporates had been provided under the Companies Act, 1956,
SARFAESI Act, and SICA for the purposes of winding up on the ground of default in payment

44
of debt. However, the then existing framework could not achieve the desired outcome, on the
contrary gave rise to multiple malpractices.

Earlier try-outs and Committees

(a) Shri T. Tiwari Committee

Following the recommendations of the Tiwari Committee, the Government of India
enacted the Sick Industrial Companies (Special Provisions) Act, 1985, (SICA) in order to
provide for timely detection of sickness in industrial companies and for expeditious
determination of the preventive, ameliorative, remedial and other measures and for
enforcement of the measures.

(b) Justice V.B. Balakrishna Eradi Committee

In 1999, setting up of a National Company Law Tribunal (NCLT in short) to be vested
with the functions and power with regard to rehabilitation and revival of sick industrial
companies, a mandate presently entrusted with BIFR under SICA and forming of a
liquidation committee consisting of creditors of the company on the lines of Section 141
of the Insolvency Act, 1986 of UK to assist the Liquidator. Other recommendations were
adoption of UNCITRAL Model Law for Cross Border Insolvency; need to encourage
voluntary winding up of companies and criteria of sickness of companies to include
inability to pay debts.

(c) N L Mitra Committee

In 2001, the Report of the Advisory Group on Bankruptcy Laws, known as the report of
the N L Mitra Committee appointed by the RBI which made several recommendations on
bankruptcy law reforms, the first among which was consolidation of bankruptcy laws into
a separate code.

(d) JJ Irani Committee

Then the JJ Irani Committee Report in 2005 was formulated to review the laws
concerning liquidation and restructuring of the companies recommended several
revisions to the Companies Act, more particularly for a transparent and globally

45
 acceptable insolvency and restructuring procedures, in short. The Committee has
proposed significant changes in the law to make the restructuring and liquidation process
speedy, efficient and effective.

WHYInsolvency and Bankruptcy Code?

The rationale behind the introduction of an integrated code to solve Insolvency and
Bankruptcy matters was the multiplicity in difficulties which were hampering the growth of
Indian economy altogether. Some of the major difficulties included:

a) Existing laws does not provide viable exit strategy for debtors.

b) The process of resolving Insolvency Laws not being time bound.

c) The High Courts were unable to devote exclusive attention to winding up cases which
is essential to conclude the winding up of companies quickly. The experiment with
BIFR for speedy revival of companies has also not been encouraging.31

d) Individual and Corporate Bankruptcy were governed by a host of legislations making

the procedure quite complex and cumbersome.

e) There were multiple laws and adjudicating authorities to adjudge the matters relating
to financial distress and the insolvency of the Companies and Individuals in India.
The Legal and institutional framework therein does not aid lenders in effective and
timely recovery or restructuring of defaulted asset.

f) The Country is surviving with alarming backlog of cases relating to Insolvency and
Bankruptcy in the Country.

g) Creditors had low powers against defaulting debtors. Thus, even at the time of default
by debtors the control stayed with the promoter instead of transferring the same to the
creditors.

Moreover, the World Bank, in its World Bank Group Flagship Report on Doing Business 201732,
has positioned India at 136 in the ranking of 190 economies on the ease of resolving insolvency.
31
Report of the High Level Committee on ‘Law Relating To Insolvency And Winding Up Of Companies, 2000’
headed by Justice V. Balakrishna Eradi

46
It is further emphasised in the report that, India takes 4.3 years on an average to resolve
insolvency process.

Bankruptcy Law Reforms Committee

In order to overcome all such difficulties in the erstwhile laws and to aid creditors in recovering
defaulted assets in timely and effective manner, the Union Finance Minister Shri. Arun Jaitley
during his Budget Speech of 2014-15 announced that an entrepreneur friendly legal bankruptcy
framework would be developed for SMEs to enable easy exit. Pursuant to the above
announcement, the Bankruptcy Law Reforms Committee was set-up by the Department of
Economic Affairs, Ministry of Finance, under the Chairmanship of Mr. T. K. Viswanathan,
former Secretary General, Lok Sabha and former Union Law Secretary, on 22.8.2014 to study
the corporate bankruptcy legal framework in India and submit a report. Dr. Viswanathan
submitted the Report of the Committee on November 4, 2015 and the Insolvency and
Bankruptcy Code, 2016 was enacted on May 28th, 2016.

After careful deliberation, the Bankruptcy Law Reform Committee elected to follow a system
similar to that of the UK’s practitioner led insolvency procedures as opposed to the US
Chapter 11 debtor-in- possession system, which it perceived would have required much more
involvement of the Indian courts. As a result, architecturally the Code has many similarities to
the UK’s Insolvency Act 1986 and administration process; however, it differs in a number of
important respects.

Unlike the SICA, which relied on the test of erosion of net worth to determine sickness, the Code
prescribes an objective test — that of payment default in respect of a debt. Though winding up
proceedings could also be initiated upon a default on the ground of inability to pay debt under
the Companies Act, but because of multiple laws and various forums led to delayed exit and
failed the processes.

As per the Global Competitiveness Report, India has notched 16 points in a very short span of
time. This Report assess the competitiveness of economies by the stages of development such as
32
World Bank Group Flagship Report on ‘Doing Business 2017 – Equal Opportunity for all – Economy profile
2017: India’

47
the applicable rule of law, institutional framework, innovation and sophistication. Also, it has
been marked as second most competitive BRICS economy.

In the case of YenamullaMalludora vs P. Seetharatnam (AIR 1966 SC 918), Supreme Court of

India observed that “the object of the law of insolvency is to seize the property of an insolvent
before he can squander it and to distribute it amongst his creditors. It is however not every
debtor who has borrowed beyond his assets or even one whose property is attached in execution
of his debts, who can be subjected to such control. The jurisdiction of the Court commences
when certain acts take place which are known as acts of insolvency and which give a right to his
creditor to apply to the Court for his adjudication as an investment.”

What can a sound bankruptcy law achieve?33

(e) Improved handling of conflicts between creditors and the debtor: The role of the law, in
a formal bankruptcy process, is to lay down rules of procedure into which the conflict is
channelled, and results in a solution. A sound legal framework provides procedural
certainty about the process of negotiation, in such a way as to reduce problems of
common property and reduce information asymmetry for all economic participants.

(f) Avoid destruction of value: A sound legal process also provides flexibility for parties to
arrive at the most efficient solution to maximise value during negotiations. If the
enterprise is insolvent, the payment failure implies a loss which must be borne by some
of the parties involved. From the viewpoint of the economy, some firms undoubtedly
need to be closed down. But many firms possess useful organisational capital. Across a
restructuring of liabilities, and in the hands of a new management team and a new set of
owners, some of this organisational capital can be protected. The objective of the
bankruptcy process is to create a platform for negotiation between creditors and external
financiers which can create the possibility of such rearrangements.

(g) Drawing the line between malfeasance and business failure: Under a weak insolvency
regime, the stereotype of “rich promoters of defaulting entities” generates two strands of
thinking:
33
Clause 3.2.3, Page 22, Report of the Bankruptcy Law Reforms Committee.

48
 - the idea that all default involves malfeasance and
- the idea that promoters should be held personally financially responsible for
defaults of the firms that they control.

However, the following perspectives are useful in the context of enterprises:

(i) Some business plans will always go wrong. In a growing economy, firms make risky
plans of which some plans will fail, and will induce default. If default is equated to
malfeasance, then this can hamper risk taking by firms. This is an undesirable
outcome, as risk taking by firms is the wellspring of economic growth. Bankruptcy
law must enshrine business failure as a normal and legitimate part of the working
of the market economy.
(ii) Control of a company is not divine right. When a firm default on its debt, control of
the company should shift to the creditors. In the absence of swift and decisive
mechanisms for achieving this, management teams and shareholders retain control
after default.
(iii) Bankruptcy law must give honest debtors a second chance, and penalise those who
act with mala fide intentions in default.

(h) Clearly allocate losses in macroeconomic downturns: Bankruptcy reforms are

particularly important in avoiding extreme problems in a business cycle downturn or a
financial crisis. A business cycle downturn or a financial crisis will lead to certain firms
failing. With a sound bankruptcy framework, these losses are clearly allocated to some
people. Loss allocation could take place through taxes, inflation, currency depreciation,
expropriation, or wage or consumption suppression. These could fall upon foreign
creditors, small business owners, savers, workers, owners of financial and non-financial
assets, importers, exporters. In turn, this creates predictability about the allocation of the
losses. Without this predictability, events of downturns and crisis lead to greater
instability in the economy. The predictability so generated will increase the robustness of
the economy when faced with a downturn. In turn, downturns will become shorter and
shallower. The ability of the economy to sustain high levels of credit, safely, will be
enhanced and the economy can move on faster after a downturn or a crisis.

49
 (i) To provide a paradigm shift in the jurisprudence of resolving insolvencies, i.e., to provide
for creditor-in-control regime instead of erstwhile debtor in possession model.

Objective of the Code

There were several enactments dealing with different aspects of insolvency and bankruptcy of
different persons prior to the enactment of the Code. The Codeprovides for a comprehensive
regime dealing with all aspects of insolvency and bankruptcy of all kinds of persons.

The process enshrined under the insolvency and bankruptcy law regime provides procedural
certainty in which conflicts are channelled through a creditor-in-control system in which a key-
role is held by the Insolvency Professional who facilitates the resolution as a going concern when
revival is the symmetry for all economic participants and looks after the easy exit/liquidation
when the case so chronic that the cure will affect and disturb the biology of the concerned
corporate business.

The Codeprovides for a market determined, time-bound mechanism for orderly resolution of
insolvency, wherever possible, and ease of exit, wherever required. It provides for the ultimate
economic freedom, freedom to exit, addresses honest business failures and thereby promotes
inclusive growth. It improves ease of doing business, promotes entrepreneurship, develops
corporate debt market, increases options for corporate financing, reduces cost of funds, balances
interests of stakeholders and does much more. For the potential to improve growth, and promote
inclusive growth, and for addressing key economic and legal problems, the Code constitutes the
biggest economic reform of the decade. We may call it as second generation of economic reform
post-independence.

The Code aims to promote entrepreneurship, availability of credit, and balance the interests of all
stakeholders by consolidating and amending the laws relating to reorganization and insolvency
resolution of corporate persons, partnership firms and individuals. It intends to provide for the
following:

i. Completion of insolvency process in time bound manner

50
 ii. Maximisation of value of assets

iii. Balance the interest of stakeholders

iv. Development of credit market

v. Facilitate more investments

vi. Promote Entrepreneurship

vii. Improve Ease of Doing Business

viii. Facilitate higher economic growth
ix. Non-adversarial representative process to prevent multiple litigations
x. Clear, coherent and speedy process for early identification of financial distress
and resolution of companies and limited liability entities if the underlying
business is found to be viable.

Architecture under the Code

The Code provides for a full-proof architecture comprising of four pillars to establish robust
compliance mechanism, as follows.

51
 # Four Pillars of IBC Processes , Courtesy – IBBI Website

(a) Insolvency Professionals

An important component of the ecosystem is the ‘Insolvency Professional’ who has been
entrusted with a wide range of functions so as to effectively strive to maximise the value of
assets of debtor during the resolution process. Under the scheme of the Code, "insolvency
professional" is a person enrolled under section 206 with an insolvency professional agency
as its member and registered with the Board as an insolvency professional under section 207.
The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations,
2016, under its regulation 5 provides for the requisite qualifications and experience for the
purpose of registration as an Insolvency Professional. It provides that an individual shall be
eligible for registration, if he –
(a) has passed the National Insolvency Examination;

52
 (b) has passed the Limited Insolvency Examination, and has fifteen years of
experience in management, after he received a Bachelor’s degree from a
university established or recognized by law;
(c) has passed the Limited Insolvency Examination and has ten years of
experience as –
(i) a Chartered Accountant enrolled as a member of the Institute of
Chartered Accountants of India;
(ii) a Company Secretary enrolled as a member of the Institute of
Company Secretaries of India;
(iii) a Cost Accountant enrolled as a member of the Institute of Cost
Accountants of India, or
(iv) an advocate enrolled with the Bar Council of India.

Role of the Insolvency Professional

The Bankruptcy Law Reforms Committee has put forth the role of an Insolvency
Professional as:-

“when default takes place an Insolvency Resolution Process (IRP) can be initiated and
run for as long as 180 days. The IRP is overseen by an “Insolvency Professional‟ (IP)
who is given substantial powers. The IP makes sure that assets are not stolen from the
company, and initiates a careful check of the transactions of the company for the last two
years, to look for illegal diversion of assets. Such diversion of assets would induce
criminal charges…”

It further states:
“These Insolvency Professionals will be delegated the task of monitoring and
managing matters of business by the Adjudicator, so that both creditors and the debtor
can take comfort that economic value is not eroded by actions taken by the other.”

After registration, he may be appointed as an interim resolution professional or resolution

professional in insolvency resolution process of different entities under Chapter II of Part
II of the Code. He may be appointed as a liquidator in accordance with the provisions of
Chapter III or Chapter V of Part II of the Code. The Code also envisages the role of
"bankruptcy trustee" for an Insolvency Professional which means the insolvency
professional appointed as a trustee for the estate of the bankrupt under section 125.
Every insolvency professional is required to abide by the Code of Conduct as laid down
by the Board and Insolvency Professional Agencies.

When the insolvency resolution process is triggered, the insolvency resolution

professional is initially appointed for 30 days as an interim resolution professional and
public announcement is made for submission of claims by the stakeholders to the interim
resolution professional. He is required to receive, collate and verify the claims. He has to
conduct the meeting of the Committee of creditors which may approve in the first
meeting his continuance thereafter as a resolution professional or his replacement by
other insolvency professional to act as a resolution professional.

53
 In the light of section 20 of the Insolvency and Bankruptcy Code, 2016, the role of the
Insolvency Professional becomes very crucial and important. Sub-section (1) of section
20 of the Code provides that “the interim resolution professional shall make every
endeavour to protect and preserve the value of the property of the corporate debtor and
manage the operations of the corporate debtor as a going concern.” Sub-section (1) of
section 25 of the Code also casts similar duty on the resolution professional as well.
Further clause (d) of the sub-section (2) of section 20 of the Code provides that “… to
issue instructions to personnel of the corporate debtor as may be necessary for keeping
the corporate debtor as a going concern;”

Section 25 (2) of the Code enumerates various duties including taking of immediate
custody and control of all the assets of the corporate debtor. Its clause (d) provides that a
resolution professional may appoint accountants, legal or other professionals for
preserving and protecting the assets of the corporate debtor, including the continued
business operations of the corporate debtor.

The role of insolvency professional is to facilitate the Committee of Creditors, to receive

claims, to manage affairs of the corporate debtor, to raise interim finance, to represent
and act on behalf of the corporate debtor with third parties, to prepare an information
memorandum, to invite persons to put forth their resolution plan and to take all such steps
as may be required for an on-going concern. However, approval of committee of
creditors is required for certain acts which are enumerated under section 28 such as, to
change in the capital structure of the corporate debtor and to create security interest over
the assets of the corporate debtor. If such action is taken without approval of the
Committee, it shall be void.

(b) Information Utilities

An Information Utility is a corporate entity which is registered with IBBI under Section
210 of IBC, 2016 as per the eligibility criteria prescribed.It provides authenticated
information about debts and defaults. It is an electronic repository of the debts and
defaults unparallel in the world. Access to the records of debt and defaults is made
available to the Resolution Professionals, Creditors and other stakeholders in the
Insolvency Resolution Process so that all stakeholders can make decisions based on the
same information.
The Bankruptcy Law Reform Committee observes:
“The information infrastructure required for the insolvency and bankruptcy process that
is proposed in this report consists of two sets of rules: rules that govern information
submission and rules that govern information access and release during insolvency. The

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 operations of the process require a class of “bankruptcy and insolvency information
utilities” (referred to as IUs): firms which stand ready to receive information filings that
are required under this Code, and stand ready to deliver information when requested. As a
caveat, it must be added that the provisions relating to IUs contained in the Code are
enabling provisions to facilitate the development of an industry of IUs that will happen
over time.”
“The Board will license and regulate the working of the IUs. There is the possibility of a
market failure developing in the form of market power where a small number of firms
reap monopoly profits. Hence, this is intended to be an open competitive industry with
exactly one tariff (the price charged upon the person submitting information).”

Information Utilities are required to collect, collate, authenticate and disseminate

financial information. They would maintain electronic databases on lenders and terms of
lending, thereby eliminating delays and disputes when a default actually takes place.
While the role of IU’s and their efficacy is yet to come to the fore, the successful
implementation and usage of IU’s and their information thereon will correspondingly
enable the success of IBC

(c) Adjudicating Authority

Under the Indian insolvency regime, NCLT has been designated as the specialized
tribunal in the form of adjudicating authority. NCLT playsan important role in providing
judicial sanctity to the whole resolution process. The functions of NCLT are not only
limited to adjudication, but also extend to protection of interests of all stakeholders
connected thereto. The main objective of the adjudicating authority is to ensure that
corporate insolvency resolution process is completed within the legal framework laid
down in the Code and timelines are adhered to. Further, orders of NCLT can be appealed
before NCLAT (National Companies Law Appellate Tribunal) and finally with the
Supreme Court of India.

(d) Insolvency and Bankruptcy Board of India: the Regulator

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 The Board is responsible for regulating the process and developing as well regulating the
Insolvency Professionals. It is responsible for accrediting Insolvency Professionals (IPs)
& Information Utilities (IUs), and Insolvency Professional Agencies.

The Board was established on 1st October 2016, has made plethora of regulations to
support the smooth implementation of the Code. The Board till date has registered more
that 1300 Insolvency Professionals, three IPAs, and one IU. The Board has been at the
forefront in building capacity, educating the market and proactively supporting the
implementation of the Code and monitoring the compliance regime of the process.
IBBI has a crucial role in holding the entire ecosystem of IBC together and making sure
the Code is moving forward in the right direction.

Resolution Jurisprudence under the IBC

The courts have been sensitive and proactive in laying down and simplifying the underlying
jurisprudence of the resolution process which is evident from the numerous pronouncements .
(a) Creditor-in-Control
In Innoventive Industries Ltd. Vs. ICICI Bank and ANR, the Hon’ble Supreme Court
gleaned through the report of the Bankruptcy Law Reforms Committee to have an insight
into why the Code was enacted. It excerpted: "The limited liability company is a contract
between equity and debt. As long as debt obligations are met, equity owners have
complete control, and creditors have no say in how the business is run. When default
takes place, control is supposed to transfer to the creditors; equity owners have no say.
It held: “we thought it necessary to deliver a detailed judgment so that all Courts and
Tribunals may take notice of a paradigm shift in the law. Entrenched managements are
no longer allowed to continue in management if they cannot pay their debts.”

(b) Principle of Natural Justice under the Code

In SreeMetaliks Limited &Anr. Vs. Union of India, the Hon’ble Supreme
Courtobserved that a proceeding for declaration of insolvency of a company has drastic
consequences for a company. Such proceeding may end up in its liquidation. A person
cannot be condemned unheard. Where a statute is silent on the right of hearing and it
does not in express terms, oust the principles of natural justice, the same can and should
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 be read into in. When the NCLT receives an application under Section 7 of the Code of
2016, therefore, it must afford a reasonable opportunity of hearing to the corporate debtor
as Section424 of the Companies Act, 2013 mandates it to ascertain the existence of
default as claimed by the financial creditor in the application.

(c) Existence of a ‘dispute’

In Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited (Civil
Appeal No. 9405 of 2017), the Hon’ble Supreme Court has settled several issues in this
matter. As regards ‘existence of a dispute’ under section 8(2)(a) of the Code, it clarified
that what is material is that a dispute must exist in fact. It should not be spurious,
hypothetical or illusory and it should not be a patently feeble legal argument or an
assertion of fact unsupported by evidence. It is not material whether the dispute would
succeed or not and it is not necessary to examine the merits of the dispute at this stage.

(d) Position of NCLT not subordinate to High Court

In Jotun India Private Limited Vs. PSL Limited [Company Petition No.434 of 2015],
the Hon’bleBombay High Court held: “NCLT is not a court subordinate to the High
Court and hence as prohibited by the provisions of Section 41 (b) of the Specific Relief
Act, 1963 no injunction can be granted by the High Court against a corporate debtor
from institution of proceedings in NCLT.” It further held: “..since the IBC is admittedly a
successor statute to SICA, and Section 64 (2) of IBC being pari-materia to Section 22 of
SICA, the argument that the Company Court has the power to injunct proceedings before
NCLT in cases of pending winding up petitions is entirely misplaced and contrary to
legislative intent.”.

(e) Financial Creditor on higher position and importance of new economic law
In AkshayJhunjhunwala&Anr. Vs. Union of India & Ors [WP No. 672/2017], the
issue before the Calcutta High Court for consideration waswhether the treatment of a
Financial Creditor (FC) on a pedestal higher than an operational creditor (OC) and
bestowing a higher or better right to the FC is just and proper or whether the same
offends any provision of the Constitution of India. The Hon’ble High Court observed that

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 the Bankruptcy Law Reforms Committee gives a rationale to the FCs being treated in a
particular way vis-à-vis an OC ininsolvency proceedings with regard to a company. The
rationale of giving a particular treatment to a FC in the process of the insolvency of a
company under the Codecannot be said to offend any provisions of the Constitution of
India. It relied on two pronouncements of the Hon’ble Supreme Court: (i) In Bhavesh D.
Parish & Ors., the Supreme Court expressed the view that the Court should be slow in
staying the applicability of a piece of legislation particularly in the economic spheres
even if arguable points are raised unless such provisions are manifestly unjust or
glaringly unconstitutional. (ii) In P. Laxmi Devi, the Supreme Court held that the Courts
while dealing with legislations particularly in economic matters should presume in favour
of the constitutionality of a statute.

(f) Power of SC under Article 142 of the Constitution of India

In the matter of LokhandwalaKataria Construction Private Limited Vs Nisus Finance and
Investment Managers LLP, issue raised before SC was “whether National Company Law
Appellate Tribunal could utilize the inherent power recognized by Rule 11 of the
National Company Law Appellate Tribunal Rules, 2016 to allow a compromise before it
by the parties after admission of the matter.” It was held that, prima facie the inherent
power could not be so utilized and this appears to be the correct position in law. But SC
to put a quietus to the matter before us has utilised the power under Article 142 of the
Constitution and take the Consent Terms entered into between the parties on record.

Effect and Impact of IBC

The outcome of the Code is very encouraging and inspiring which is evident from more than 79
resolutions completed, 63 cases withdrawn, 302went into liquidation within a period of two
years leading to both speedy resolution and recovery. The most important outcome is the
tectonic change in the behaviour of borrowers and lenders. The overall credit-behaviour is
taking a paradigm change currently. The fear of the default and loosing the sight of the business
is acting as the key deterrent.Moreover, it has generated two new set of professions, i.e.,
Insolvency Profession and Valuation Profession under the Code meeting the global standards.

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It is worth mentioning that the process under the Code improved the World Bank ‘Ease of
Doing’ Ranking and India was adjudged as the most improved jurisdiction in the world by
Global Restructuring Review, London.

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