IBC NOTES

HISTORY

Report of the Bankruptcy Law Reforms Committee and Need for the Insolvency and Bankruptcy
Code, 2016

The Bankruptcy Law Reforms Committee (Chair: Dr. T. K. Vishwanathan) submitted its report to the
Finance Ministry on November 4, 2015. The objectives of the Committee were to resolve insolvency
with: (i) lesser time involved, (ii) lesser loss in recovery, and (iii) higher levels of debt financing across
instruments.

The Committee has recommended a consolidation of the existing legal framework, by repealing two
laws and amending six others. It has proposed to repeal the Presidency Towns Insolvency Act, 1909 and
the Provincial Insolvency Act, 1920. In addition, it has proposed to amend: (i) Companies Act, 2013,
(ii) Sick Industrial Companies (Special Provisions) Repeal Act, 2013, (iii) Limited Liability Partnership
Act, 2008, (iv) Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, (v) Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and (vi)
Indian Partnership Act, 1932.

The Committee observed that currently creditors have limited power, in case the debtor defaults in
making the payment. They are able to recover only 20% of the debt amount on an average, which
ultimately leads to lending being restricted to a few large companies. The Committee also observed that
decisions regarding the defaulting firm are business decisions, and should be taken by the creditors.

Presently, laws in India bring together the legislature, executive and judiciary for insolvency resolution.

 The Committee has moved away from this approach, and has proposed to establish a creditors
committee, where the financial creditors will have votes in proportion to their debt. The creditors
committee will undertake negotiations with the debtor, to come up with a revival or repayment plan.
 Insolvency and Bankruptcy Resolution: The report outlines the procedure for insolvency
resolution for companies and individuals. The process may be initiated by either the debtor or the
creditors.
 Presently, only secured financial creditors, can file an application for declaring a company sick.
The Committee has proposed that operational creditors, such as employees whose salaries are due, be
allowed to initiate the insolvency resolution process (IRP).
 The entire CIRP will be managed by a licensed insolvency professional. During the CIRP, the
professional will control and manage the assets of the debtor, to ensure that they are protected, while
the negotiations take place.
 The Committee has proposed to set up Insolvency Professional Agencies. The agencies will
admit insolvency professionals as members and develop a code of conduct. An environment where the
agencies compete with each other, to achieve greater efficiency and better performance.
 The report recommends speedy insolvency resolution and time bound negotiations between
creditors and the debtors. To ensure this, a 180 day time period for completion of the CIRP has been
recommended. For cases with high complexity, this time period may be extended by 90 days, if 75% of
the creditors agree.
 Information Utilities: The committee has proposed to establish information utilities which will
maintain a range of information about firms, and thus avoid delays in the CIRP, typically caused by a
lack of data.
 Insolvency regulator: The Committee has proposed to establish the Insolvency and Bankruptcy
Board of India as the regulator, to maintain oversight over insolvency resolution in the country. The
Board will regulate the insolvency professional agencies and information utilities, in addition to making
regulations for insolvency resolution in India.
 Bankruptcy and Insolvency Adjudicator: The Committee observes that individual and company
insolvency resolution has similar goals. However, the infrastructure for individual insolvency resolution
has to be spread across the country. Hence, the Committee proposes two tribunals to adjudicate
grievances under the law: (i) the National Company Law Tribunal will continue to have jurisdiction
over insolvency resolution and liquidation of companies and limited liability partnerships; and (ii) the
Debt Recovery Tribunal will have jurisdiction over insolvency and bankruptcy resolution of
individuals.

Legislations before IBC

Prior to the IBC, the insolvency and bankruptcy laws in India were multilayered and fragmented.
• Individual insolvency and bankruptcy were covered under the two pre-independence legislations: the
Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920. For companies, the
basic law dealing with their winding up or liquidation was the Companies Act, 1956.

Now, with the enactment of the IBC, winding up due to an inability to pay debt cannot be triggered
under the Companies Act, 1956, or the Companies Act, 2013.

• Sick Industrial Companies (Special Provisions) Act, 1985, was the primary rehabilitative statute that
allowed a “sick” industrial firm to voluntarily initiate a rescue and rehabilitation process if its net worth
had eroded. Two of the main reasons for its failure were the unending moratorium protection (which
was sometimes abused by the debtors in possession) and the absence of a time-bound resolution
process.

• There are various debt and security enforcement mechanisms in India. Specifically, for banks and
financial institutions, the two key laws are the Recovery of Debts Due to Banks and Financial
Institutions Act and the SARFAESI Act. The individual debt and security enforcement mechanisms
continue to exist; however, their applicability, once insolvency resolution or liquidation under IBC
commences, is restricted.

The Regulatory Mechanism and Regulatory Bodies

The regulatory mechanism as per The Insolvency and Bankruptcy Code, 2016 would be based on the
following five pillars:

• Insolvency and Bankruptcy Board of India

• Adjudicating Authority

• Insolvency Professional Agencies

• Insolvency Professionals

• Information Utilities

Insolvency and Bankruptcy Board of India

An Insolvency and Bankruptcy Board of India (IBBI) is established by Central Government under
Section 188(1) of Insolvency and Bankruptcy Code, 2016.
The Board will have powers of civil court in respect of issuing summons, discovery and production of
books, inspection of books/ registers and issue of commissions for examination of witnesses - Section
196(2) of Insolvency and Bankruptcy Code, 2016.

Constitution of Board has been specified in Section 189 of Insolvency and Bankruptcy Code, 2016. The
Board will be headed by Chairperson. It will consist of ten members out of which at least three will be
whole-time members.

Function of the Board is to exercise regulatory oversight over insolvency professionals, insolvency
professional agencies and information utilities.

Adjudicating Authority

According to Section 5(1) read with Section 69(1) of the Insolvency and Bankruptcy Code, 2016,
National Company Law Tribunal (NCLT) constituted under Section 408 of Companies Act, 2013 is the
Adjudicating Authority for the purpose of insolvency resolution and liquidation for corporate persons.
According to Section 61 of the Insolvency and Bankruptcy Code, 2016, the National Company Law
Appellate Tribunal (NCLAT) is the appellate authority over decisions of NCLT.

Debt Recovery Tribunal (DRT) will be adjudicating authority for individuals and firms - Section 179(1)
of the Insolvency and Bankruptcy Code, 2016. DRAT (Debt Recovery Appellate Tribunal) will be
appellate authority - Section 181 of the Insolvency and Bankruptcy Code, 2016.

Appeal against the order of NCLAT and DRAT can be filed to the Supreme Court on question of law
arising out of such order, within 45 days.

Insolvency Professional Agencies

Section 3(20) of the IBC defines an IPA as a person registered as such with the IBBI under section 201.
The IPAs are agencies responsible for enrolling and regulating IPs as their members. They are the first-
level regulators for IPs, and have to develop professional standards and a code of ethics for them.

Insolvency Professionals

An IP is defined in section 3(19) of the IBC as a person enrolled under section 206 with an IPA as a
member and registered with the IBBI as an IP under section 207.
Only an IP can be appointed as an interim resolution professional (IRP), a resolution professional (RP),
a liquidator, or a bankruptcy trustee under the IBC.

Under section 207, to become an IP, an individual should first enroll with an IPA as a member, and then
register with the IBBI in the manner specified by the regulations, after paying the required fee.

Information Utilities

The Insolvency and Bankruptcy professionals are expected to function on basis of financial information
available electronically. Information Utility will collect, collate, authenticate and disseminate financial
information to be used in insolvency, liquidation and bankruptcy proceedings.

“Information utility” means a person who is registered with the ‘Insolvency and Bankruptcy Board of
India’ (Board) as an information utility under Section 210 of Insolvency and Bankruptcy Code, 2016 -
Section 3(21) of Insolvency and Bankruptcy Code, 2016.

Core services rendered by an information utility include –

(a) accepting electronic submission of financial information in such form and manner as may be
specified;

(b) safe and accurate recording of financial information about the debtor;

(c) authenticating and verifying the financial information submitted by a person; and

(d) providing access to information stored with the information utility to persons as may be specified -
Section 3(9) of Insolvency and Bankruptcy Code, 2016.

CORPORATE INSOLVENCY RESOLUTION PROCESS

Trigger point for initiation

A corporate insolvency resolution process may be initiated under Chapter II of the Code in respect of a
corporate debtor who has committed a default. The trigger point for initiating the corporate insolvency
resolution process is the occurrence of default.

"Default" means non-payment of debt when the whole or any part or instalment of the amount of debt
has become due and payable and is not paid by the debtor or the corporate debtor
A default would have occurred when the debtor fails to pay the whole or any part or instalment of the
amount of debt that has become due and payable.

While a financial creditor is required to present record of default before NCLT for initiation of
the corporate insolvency resolution process, an operational credit must issue a statutory notice to
the corporate debtor in the manner provided in the Code.

Who can initiate the process?

The process for initiating corporate insolvency resolution may be initiated by

any of the following:

 A financial creditor
 An operational creditor or
 The corporate debtor itself

COMMENCEMENT BY FINANCIAL CREDITOR

A financial creditor may initiate the process either by itself or jointly with other financial creditors by
filing an application before the NCLT, if a default has occurred in respect of a financial debt owed not
only to the applicant financial creditor but to any other financial creditor of the corporate debtor. A
financial creditor is a person to whom a financial debt is owed and includes a person to whom such debt
has been legally assigned or transferred to.

As per section 7(3) of the IBC, the FC shall, along with the application, furnish:

(a) a record of the default recorded with the IU or such other evidence of default as may be specified;

(b) the name of the IP proposed to act as an IRP; and

(c) any other information as may be specified by the IBBI.

Ascertaining existence of debt default by NCLT

Within 14 days of receipt of application by NCLT, must ascertain the existence of a default from the
records of an information utility or on the basis of other evidence furnished by the financial creditor. If
NCLT is satisfied that

(i) a default has occurred; or

(ii) the application made by financial creditor is complete; or
(iii) there is no disciplinary proceedings pending against the proposed resolution professional, it
may, by order, admit such application.

The NCLT can reject the application if it finds that default has not occurred or the application made by
financial creditor is incomplete or any disciplinary proceeding is pending against the proposed
resolution professional. The NCLT is required to provide an opportunity to the applicant to rectify the
defect in the application if the NCLT finds the application to be defective. The applicant must rectify
the defect in his application within 7 days of receipt of such notice from the Adjudicating Authority.

While Innoventive Industries Limited. V. ICICI Bank stressed the dual test of the existence of “Debt”
and “Default” for admission of a company into the Corporate Insolvency Resolution Process. It was
also reiterated in E.S. Krishnamurthy v. Bharath HiTecch Builders Private Limited, the Supreme
Court’s decision in Vidharba Industries Power Limited V. Axis Bank Limited went on a difference path
by providing discretion to the Adjudicating Authority to admit or reject a Section 7 Application, despite
the existence of both “debt” and “default”. However, in M. Suresh Kumar Reddy v. Canara Bank, the
Apex Court held that if there is an existence of a financial debt and a subsequent default by the CD, the
NCLT must admit the application. The only exception is when the application itself is incomplete, in
which case the creditor will be instructed to rectify the insufficiency within 7 days.

The opportunity of Being Heard

Before admitting a CIRP application in respect of a CD, the CD must be given an opportunity to be
heard. Rules 4(3), 6(2), and 7(2) of the Application to AA Rules mandate that the applicant (FC, OC,
and corporate applicant, respectively) shall serve a copy of the application to the registered office of the
corporate debtor and to the IBBI, by registered post or speed post or by hand or by electronic means,
before filing with the Adjudicating Authority.

In practice, however, a prior service is made to the CD because the relevant registry of the NCLT may
not accept filings any other way. Further, once the application is submitted to the AA, the
acknowledged copy of it should be served on the CD. The AA then allocates a company petition
number to it. Thereafter, the application comes up for hearing before the AA.

Date of commencement

The corporate insolvency resolution process shall commence from the date of admission of the
application of financial creditor by the NCLT. Order of admission of such application shall be
communicated by the NCLT to the applicant and corporate debtor, and of rejection to the financial
creditor, within seven days.

Declaration of moratorium and public announcement

The Code provides for a moratorium from creditors action against the corporate debtor. Where the
NCLT passes an order of admission of an application for commencement of corporate resolution
process, the NCLT shall, by an order:

 Grant a moratorium mentioned in section 14.

 Appoint an interim resolution professional in the manner as laid down section 16 of the
Code.
 Cause a public announcement of the initiation of corporate insolvency resolution process
and call for the submission of claims immediately after the appointment of the interim resolution
professional.
Appointment of IRP

AA shall appoint an Interim Resolution Professional (IRP) on the Insolvency Commencement Date. As
per section 16(5), the term of the IRP continues till he is confirmed as the RP by the CoC or is replaced
by a new RP in accordance with section 22.

If the Committee of Creditors decides to replace the IRP with another IP as the RP, it is required to file
an application before the AA, together with the written consent of the proposed RP. The AA will then
forward the name of the proposed RP to the IBBI and the appointment will be made once confirmation
is received from the IBBI.

Committee of Creditors

As provided in section 21(1) of the IBC, the IRP shall, after collating claims received against the CD
and determining its financial position, constitute a CoC.

The CoC shall comprise all FCs (both secured and unsecured) of the CD. Where the CD owes financial
debts to two or more FCs as part of a consortium or agreement, each FC shall be part of the CoC and
their voting share is determined on the basis of the financial debts owed to them.

Where there is no financial debt (or where all FCs are related parties of the CD), the CoC consists of
OCs only, comprising: the 18 largest OCs by value, one representative elected by all workmen and one
representative of employees.

Treatment of Financial Creditors Vs. Operational Creditors

The Code establishes a number of distinctions in the treatment provided to them, including, but not
limited to, (i) the right to apply to NCLT (scope of adjudication), (ii) the right to participate in the
Committee of Creditors (the “CoC”), (iii) the right to receive funds under the Resolution Plan, and (iv)
the right to benefit from the liquidation of the Corporate Debtor.

The distinction in treatment of financial creditors and operational creditors are mentioned below:

Financial Creditors Operational Creditors

In accordance with Section 7(1), a When a default occurs, the operational creditor has the
financial creditor may file an application right to send the corporate debtor a demand notice of
with the Adjudicating Authority to unpaid operational debtor copies of an invoice seeking
commence the corporate insolvency payment of the defaulted amount. If the operational
resolution procedure against a corporate creditor does not receive payment from the corporate
debtor upon the occurrence of any event debtor or notification of the dispute under subsection (2)
of default. of Section 8, they may submit an application after the
lapse of 10 days from the date of delivery of the notice or
invoice demanding payment under subsection (1)
of Section 8.

According to Section 7(3), the financial As per Section 9(4), An operational creditor may nominate
creditor must include the name of the a resolution professional to serve as an interim resolution
resolution professional who will serve as professional.
an interim resolution professional with
the application.

Section 21(2) states that the committee of Operational creditors shall not be a part of the committee
creditors must be wholly composed of of creditors
financial creditors, including all financial
creditors of the corporate debtor.

A financial creditor must disclose As per Section 215(3), an operational creditor may submit
financial information as well as financial information to the information utility.
information regarding the assets over
which a security interest has been formed,
according to Section 215(2).

Section 5(28) – A financial creditor’s The operational creditor will have no voting rights at the
voting rights are proportional to the meeting of the creditor’s committee.
amount owed to such financial creditor.
The creditor committee must be approved
by a vote of at least 75% of the voting
shares.
In addition, a specific order or priority has been enlisted under Section 53 of the Code for the
distribution of liquidation assets that are owed to the corporate debtor in line with such order.
According to Sections 53(2)(b)(ii) and 53(2)(d), the secured financial creditor is given due prominence
and importance, followed by the unsecured creditors, among both secured and unsecured financial and
operational creditors, while obligations owed to operational creditors are impliedly interpreted as “any
remaining debts and dues” and are given relatively less prominence under Section 53(2)(f).

Who is operational Creditor?

An operational creditor is defined under Section 5(20) of the Insolvency and Bankruptcy
Code(hereinafter the IBC) to mean “any person to whom an operational debt is owed and includes any
person to whom such debt has been legally assigned or transferred”, and is owed an operational debt
which is defined under section 5(21) of the IBC to mean: “a claim in respect of the provisions of goods
or services including employment or a debt in respect of the repayment of dues arising under any law
for the time being in force and payable to the Central Government, any State Government or any local
authority”.

Application under Section 8 & 9.

Under Section 8(1) IBC, an operational creditor may, on the occurrence of a default, deliver a demand
notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in
the default to the corporate debtor in such form and manner as may be prescribed. Further, the Act
states under Section 9(1), after the expiry of the period of ten days from the date of delivery of the
notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does
not receive payment from the corporate debtor or notice of the dispute under subsection (2) of section
8, the operational creditor may file an application before the Adjudicating Authority for initiating a
corporate insolvency resolution process.

Right to Representation

As we approach Section 21 of the Code, the financial creditors have sufficient authority over the
operational creditors. This is so that the Committee of Creditors, which is established by the Insolvency
Resolution Professional after gathering all claims against the corporate debtor, can vote on an
insolvency resolution scheme and repayment plan against the corporate debtor. This is because Section
21 provides for the Committee of Creditors. It is important to remember that Section 21(2) clearly
excludes operational creditors and includes all financial creditors as members of the CoC, with the
exception of those categories of financial creditors or their representatives who are affiliated with the
corporate debtor.

It is very clearly understood that an operational creditor is not eligible to join the CoC and is not given
the aforementioned authority. Additionally, Section 24(3)(c) places restrictions on the right of an
operational creditor to attend such a CoC meeting. It states that those operational creditors whose
cumulative debts total at least 10% of the total debt due from the corporate debtor may attend the CoC
meeting but not participate or vote as permitted by Section 24(4), and their absence will not have any
bearing on the proceedings of the suceeding CoC meeting.

Right to Appeal the Resolution Plan

If the Operational Creditor is not satisfied with the resolution plan passed by the COC, he may appeal
the order in the NCLAT within 30 days of passing of such order. The grounds and form for this appeal
are laid down in Section 61(3) of the Act which states 1. The approved resolution plan is in
contravention of the provisions of any law for the time being in force; 2. There has been material
irregularity in exercise of the powers by the resolution professional during the corporate insolvency
resolution period; 3. The debts owed to operational creditors of the corporate debtor have not been
provided for in the resolution plan in the manner specified by the Board; 4. The insolvency resolution
process costs have not been provided for repayment in priority to all other debts; or 5. The resolution
plan does not comply with any other criteria specified by the Board.

Approval of the CoC for Certain Actions

Section 28 of the IBC details certain actions during the conduct of the CIRP for which the prior
approval of the CoC must be obtained by the RP. These actions are set out below:

• Raise any interim finance in excess of the amount as may be decided by the CoC at its meeting.

• Create any security interest over the assets of the CD.

• Change the capital structure of the CD

• Record any change in the ownership interest of the CD.

• Give instructions to financial institutions maintaining accounts of the CD for a debit transaction from
any such accounts in excess of the amount as may be decided by the CoC in its meeting.

• Undertake any related party transaction.

• Amend any constitutional documents of the CD.

• Delegate its authority to any other person.

• Dispose of or permit the disposal of shares of any shareholder of the CD or their nominees to third
parties.

• Make any change in the management of the CD or its subsidiary.

• Transfer rights or financial debts or operational debts under material contracts other than in the
ordinary course of business.

• Make changes in the appointment or terms of contract of such personnel as specified by the CoC.

• Make changes in the appointment or terms of contract of statutory auditors or internal auditors of the
CD.

Before taking any of these actions, the RP shall convene a meeting of the CoC and seek a vote of the
creditors. They should be approved by a vote of 66 percent of the voting share. If any of the actions are
taken by the RP without the approval of the CoC, they shall be void and the RP may be reported to the
IBBI by the CoC for necessary action(s) against him.

In addition to section 28 matters, certain other issues also require approval of the CoC with 66 percent
of the voting share. These are:

• extension of a CIRP from 180 to 270 days under section 12 of the IBC,

• disposal of unencumbered assets of the CD outside the ordinary course under regulation 29 of the
CIRP Regulations;

• change from IRP to RP under section 22 of the IBC or replacement of RP under section 27 of the IBC;

• approval of the resolution plan under section 30 of the IBC.

CIRP: Preparation of a Resolution Plan and its Approval

Once an application under Section 7, 9 or 10 is admitted, the CIRP proceedings of the corporate debtor
is commences and an Interim Resolution Professional (“IRP”) is appointed by the NCLT for the
corporate debtor. The IRP carries out the public announcement and invites creditors of the corporate
debtor to file their claims and thereafter, constitutes the Committee of Creditors (“CoC”) of the
corporate debtor. The CoC then appoints a Resolution Professional (“RP”) in the first CoC Meeting of
the Corporate Debtor.

Thereafter, the RP of the corporate debtor invites Prospective Resolution Applicants (“PRAs”) to revive
the corporate debtor. The process initially starts from inviting PRAs to file an Expression of Interest
(“EOI”) for securing eligibility to present a resolution plan for the corporate debtor and attains finality
after an order is passed by the NCLT approving a resolution plan thereby reviving the corporate debtor
with a new management. The said process is elaborated upon herein below:

I. ISSUANCE OF INVITATION FOR SUBMISSION OF EXPRESSION OF INTEREST

The first step in attempting to revive the corporate debtor is the publishing of the invitation of
Expression of Interest (EOI) as per Regulation 36A of the Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”)
thereby inviting eligible PRAs to submit their resolution plans. The invitation for EOI is required to be
made not later than the 60th day from the insolvency commencement date in an English newspaper and
one vernacular newspaper with wide circulation at the location of the registered office and principal
office of the corporate debtor. Not less than 15 days time period has to be provided for the submission
of EOI.

Ineligibility provided under Section 29A of the Code for PRAs are as follows.

a. an undischarged insolvent;

b. a willful defaulter; or

c. a person controlling or managing an account of a corporate debtor which is declared a non-

performing asset for a year since the commencement of the CIRP.

The EOI is required to be submitted within the time period given in the invitation for EOI. Further, as
per Regulation 36A(6) of the CIRP Regulations, an EOI received after the time specified in the
initiation for EOI is required to be rejected.
As per Regulation 36A(8) of the CIRP Regulations, the RP is required to conduct due diligence based
on the material on record to establish that the PRA complies with the eligibility norms and does not
have any disqualifications specified under Sec. 29A;

After perusing the EOIs, as per Regulation 36A(10) of the CIRP Regulations, the RP is required to
present a provisional list of PRAs to the CoC within 10 days of the last date of submission of EOIs. A
5-day window is granted for entertaining any objection to inclusion or exclusion of a PRA.

Within 5 days of the issuance of the provisional list, these provisional PRAs are required to be provided
with the Information Memorandum (“IM”), Request for Resolution Plan (“RFRP”) for preparation of a
resolution plan and the Evaluation Matrix (“EM”) which showcases the criteria for evaluating the
resolution plans as per Resolution 36B of the CIRP Regulations.

After considering the objections pertaining to inclusion or exclusion of a PRA in the provisional list of
PRAs, the RP is required to issue the final list of PRAs who shall be eligible to present a resolution plan
for the corporate debtor, within 10 days of the last date for receipt of objections.

PROCESS FROM SUBMISSION OF A RESOLUTION PLAN TO APPROVAL BY THE NCLT

According to Section 30(1) read with Regulation 39 of the CIRP Regulations, a resolution plan is
required to be submitted with the RP electronically within the time period prescribed in the RFRP.

Appraisal of the Resolution Plan by the Resolution Professional

Placement of the Resolution Plan(s) before the CoC for its approval

Voting on the Resolution Plans by the CoC

As per Regulation 39(3B) of the CIRP Regulations, when all the resolution plans are put to vote then
the resolution plan which receives the highest votes, but not less than 66%, is considered approved.

Further, in a case wherein none of the resolution plans receive 66%, the CoC is required to again vote
on the resolution plan which received the highest votes.

Approval of the Resolution Plan by the NCLT

The NCLT is required to pass an Order approving the resolution plan if the requirements under Section
30(2) of the Code are complied and such order shall bind the corporate debtor, its employees, members,
creditors, guarantors, other stakeholders of the corporate debtor.
LIQUIDATION

What is legal framework of the Waterfall Mechanism?

The waterfall mechanism is primarily governed by Section 53 of the IBC, which outlines the order of
priority for distributing the proceeds from the sale of liquidation assets.

What is the order of distribution priority under the Waterfall Mechanism?

The waterfall mechanism establishes a hierarchical order for the distribution of proceeds. The order of
priority, as per Section 53 of the IBC, is as follows:

a) Insolvency resolution process costs and liquidation costs

b) Workmen’s dues for the period of 24 months preceding the liquidation commencement date and
debts owed to secured creditors who have relinquished their security

c) Wages and unpaid dues of employees (other than workmen) for the period of 12 months preceding
the liquidation commencement date

d) Financial debts owed to unsecured creditors

e) Government dues (including debts to secured creditors for any amount unpaid following the
enforcement of security interest) and debts owed to secured creditors for any unpaid amounts following
the enforcement of security interest

f) Any remaining debts and dues

g) Preference shareholders, if any

h) Equity shareholders or partners, as the case may be

This order ensures that the most critical stakeholders, such as employees and secured creditors, receive
priority in the distribution process.

The Constitutional validity of the Waterfall mechanism and other provisions of IBC has been
challenged in the matter of Swiss Ribbons Private Limited v. Union of India wherein the Supreme
Court of India has affirmed the constitutional validity of the IBC. The court ruled that the distinct
treatment of financial and operational creditors does not infringe upon Article 14 of the Constitution of
India, as there exists a clear and rational basis for the separate classification of creditors.
Further, in the National Company Law Appellate Tribunal in the case of Times Innovative Media
Limited v. Pawan Kumar Aggarwal (Liquidator) held that operational creditors cannot claim priority
over unsecured financial creditors in liquidation. This case revolves around the question of whether a
related party unsecured financial creditor can retain priority over an operational creditor in the
distribution of liquidation assets under Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016.
The NCLAT’s decision provides clarity on the treatment of related party financial creditors in
liquidation, especially when it comes to their standing in the distribution waterfall.

The Corporate Insolvency Resolution Process (CIRP) against Brand Connect Communications (India)
Pvt. Ltd. was initiated and eventually led to liquidation. The appellant, an operational creditor,
challenged the priority given to Respondent No. 2, an ex-director and an unsecured financial creditor, in
the distribution of liquidation assets. The appellant argued that as a related party, Respondent No.2
should not be given priority over operational creditors and should be treated as an equity shareholder
instead.

The NCLAT dismissed this appeal, holding that the appellant, as an operational creditor, could not
claim priority over an unsecured financial creditor, even if that financial creditor was a related party.
The Tribunal’s decision was grounded in the interpretation of Section 53 of the IBC, which outlines the
order of priority for the distribution of liquidation assets.

The Tribunal noted that Section 53(1) clearly places unsecured financial creditors higher in the
waterfall mechanism than operational creditors. The NCLAT emphasized that there is no statutory
distinction between related and unrelated financial creditors when it comes to their place in the
liquidation waterfall.

Powers and Duties of Liquidators (Study at least 10)

Section 35 of the Code enumerates the Powers and Duties of the Liquidator which includes the
following:-

(a) to verify claims of all the creditors and consolidate them;

(b) to take into his custody or control all the assets, property, effects and actionable claims of the
corporate debtor;
(c) to evaluate the assets and property of the corporate debtor in the manner and prepare a report;
(d) to take such measures to protect and preserve the assets and properties of the corporate debtor;
(e) to carry on the business of the corporate debtor for its beneficial liquidation;
(f) to sell the immovable and movable property and actionable claims of the corporate debtor in
liquidation by public auction or private contract.
(g) to draw, accept, make and endorse any negotiable instruments on behalf of the corporate
debtor;
(h) to 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;
(i) to obtain any professional assistance, in the discharge of his duties, obligations and
responsibilities;
(j) to invite and settle claims of creditors and claimants and distribute proceeds in accordance with
the provisions of this Code;
(k) to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the
name of on behalf of the corporate debtor;
(l) to investigate the financial affairs of the corporate debtor to determine undervalued or
preferential transactions;
(m) to 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;
(n) to apply to the Adjudicating Authority for such orders or directions as may be necessary and to
report the progress of the liquidation process in a manner as may be specified by the Board; and
(o) to perform such other functions as may be specified by the Board.

VOLUNTARY LIQUIDATION

The IBC sets out a clear procedure for the voluntary liquidation of a corporate person. Section 59(1) of
the IBC states that a corporate person who intends to liquidate voluntarily and has not committed any
default, may initiate voluntary liquidation proceedings under the provisions of Chapter V of the IBC.

1. Initiation of Voluntary Liquidation

Section 59 sets out the process of initiation of voluntary liquidation of a company. This process has
been adapted in regulation 3 of the Voluntary Liquidation Regulations for corporate persons other than
a company. The process for a company is as follows:

2. Declaration of Solvency

There should be a declaration from a majority of the directors verified by an affidavit stating that:

(a) they have formed an opinion that it has no debt, or in case it has, it will be able to pay its debts
completely from the value obtained from the assets to be sold in the voluntary liquidation proceedings;
and

(b) the company is not being liquidated to defraud any person.

3. Shareholder Approval

Once this directors’ declaration is obtained, the members of the company are required to approve the
voluntary liquidation. Hence, within four weeks of the declaration there shall be:

(a) a special resolution of the members of the company in a general meeting requiring the company to
be liquidated voluntarily; or

(b) a resolution of the members of the company in a general meeting requiring the company to be
liquidated voluntarily upon expiry of its duration, or on the occurrence of any event.

In either case, the resolution should also appoint an IP to act as a liquidator for the company.

4. Approval of the Creditors

If the company owes any debt to any person, creditors representing two-thirds in value of the debts of
the company shall approve the resolution passed, as aforesaid, within seven days of such resolution.

5. Intimation to Other Regulatory Authorities

The company shall inform the Registrar of Companies and IBBI about the resolution passed to
liquidate the company, within seven days of such a resolution or the subsequent approval by the
creditors.

6. Voluntary Liquidation Commencement Date and Its Effect

Subject to approval of the creditors, the voluntary liquidation proceedings in respect of a company or
other corporate person shall be deemed to have commenced from the date of passing of the resolution
by the members, partners or contributories.

As per regulation 4 of the Voluntary Liquidation Regulations, the corporate person shall cease to carry
on its business from the LCD, except as far as required for the beneficial winding up of its business.
However, the corporate person shall continue to exist until it is dissolved under section 59(8) of the
IBC.

7. Appointment of Liquidator

The resolution passed by the members, partners, or contributories shall contain the terms and conditions
for appointment of the liquidator, including the remuneration payable to him. Regulation 6 sets out the
eligibility requirement, which is similar to the eligibility requirement for appointment of a liquidator
under the Liquidation Process Regulations. Primarily, it deals with the requirement of a liquidator to be
“independent.”

8. Application of Sections 35 to 53 of the IBC

Section 59(6) states that sections 35 to 53 shall apply to voluntary liquidation proceedings of corporate
persons.

Hence, provisions in the IBC relating to the powers and duties of the liquidator, claim verifications, the
conduct of the liquidation process, and offences and penalties that apply to a post-CIRP liquidation also
apply to voluntary liquidation.

9. Public Announcements and Claims

The liquidator shall make a public announcement in Form A of Schedule I, within five days of his
appointment, and invite stakeholders to submit their claims as of the LCD. The announcement shall
also provide the last date for the submission of claims, that is, 30 days from the LCD.

10. Realization of Assets

Regulation 31 stipulates the manner of sale of the assets of the corporate person under liquidation. It
states that the liquidator may value the property of the corporate person and sell it in any manner and
through any mode approved by the corporate person. The liquidation costs shall be deducted before any
such distribution is made.

11. Timeline

Regulation 37 of the Voluntary Liquidation Regulations provides that the liquidator shall aim to wind
up the affairs of the corporate person within one year from the LCD.

12. Final Report

Regulation 38 of the Voluntary Liquidation Regulations deals with the preparation and submission of a
final report prior to dissolution. On completion of the liquidation process, the liquidator shall prepare a
final report consisting of an audited account of the liquidation showing the receipts and payments
relating to the liquidation from the LCD.

13. Sale Statement

Along with this, the liquidator shall also give a final report regarding a sale statement in respect of all
the assets containing the realized value, cost of realization, if any, the manner and mode of sale, the
person to whom the sale is made and any other details of the sale.

14. Application to the AA

Section 59(7) explains that where the affairs of the company have been completely wound up and its
assets are completely liquidated, then the liquidator shall make an application to the AA for the
dissolution of such a corporate person. Section 59(8) states that the AA, on an application filed by the
liquidator under section 59(7), shall pass an order that the CD shall be dissolved from the date of the
issuance of the order in accordance with the directions given in such order. A copy of the order issued
by the AA under section 59(7), within 14 days from the date of such order, shall be forwarded to the
authority with which the corporate person is registered.

FRESH START PROCESS

A fresh start process is a process wherein the eligible debtors are discharged from certain debts within a
specified threshold and can start afresh without any liabilities. The fresh start process has been
conceptualized for persons who owe relatively less amount of money and have little or no income or
assets to repay their debts. Once a person makes an application to the Adjudicating Authority and the
application gets accepted, they are discharged from the qualifying debts and are not required to repay
such debts. This is a gist about fresh start process.

ELIGIBILITY

The fresh start process is enshrined under Part III of the code. Adjudicating Authority Part III of the
code means the Debt Recovery Tribunal which is considered to be the adjudicating authority of the
Fresh start process.
According to section 80 of the Code, 2016. A debtor, who is unable to pay his debt and fulfils the
conditions specified in subsection (2), shall be entitled to make an application for a fresh start for
discharge of his qualifying debt .

Sec. 80 (2). A debtor may apply, either personally or through a resolution professional, for a fresh start
under this Chapter in respect of his qualifying debts to the Adjudicating Authority if –

(a) the gross annual income of the debtor does not exceed sixty thousand rupees;

(b) the aggregate value of the assets of the debtor does not exceed twenty thousand rupees;

(c) the aggregate value of the qualifying debts does not exceed thirty -five thousand rupees;

(d) he is not an undischarged bankrupt;

(e) he does not own a dwelling unit, irrespective of whether it is encumbered or not;

(f) a fresh start process, insolvency resolution process or bankruptcy process is not subsisting against
him; and

(g) no previous fresh start order has been made in relation to him in the preceding twelve months of the
date of the application for fresh start.

WHAT IS QUALIFYING DEBT?

 an excluded debt;
 a debt to the extent it is secured; and
 any debt which has been incurred 3 months prior to the date of the application for fresh start
process.

WHAT IS AN EXCLUDED DEBT?

An “Excluded debt” means: –

 liability to pay fine imposed by a court or tribunal;

 liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other
legal obligation;
 liability to pay maintenance to any person under any law;
 liability in relation to a student loan.

PROCESS OF FRESH START

1. Appointment of Resolution Professional

The first step is the appointment of a resolution professional who is required to take the process
forward. The Adjudicating Authority shall by an order appoint the resolution professional
recommended or nominated by the Board.

2. Examination by Resolution Professional

Under Section 83 provides that once the resolution professional is appointed, they are required to
examine the application within 10 days and submit a report to the Adjudicating Authority, either
recommending acceptance or rejection of the application.

The resolution professional shall recommend the acceptance of the application if they are satisfied that
– the information supplied in the application indicates that the debtor is unable to pay his debts and they
have no reason to believe that the information supplied is incorrect or incomplete; and there is no
change in the financial circumstances of the debtor since the date of the application enabling the debtor
to pay his debts.

However, the resolution professional shall recommend the rejection of the application if it is found
that– the debtor is not eligible for a fresh start process; or the debts disclosed in the application by the
debtor are not qualifying debts; or the debtor has deliberately made a false representation or omission in
the application or with respect to the documents or information submitted.

3. ADMISSION OR REJECTION BY ADJUDICATING AUTHORITY

Section 84 prescribes that the Adjudicating Authority shall make an order either accepting or rejecting
the application for initiation of a fresh start process within 14 days of submission of report by the
resolution professional. If the application is accepted, a fresh moratorium period gets initiated against
the debtor. And if the application is rejected then the applicant become remedy less.

4. OBJECTIONS BY CREDITOR

Section 86 provides that any creditor, amount due to whom, gets discharged as a part of the fresh start
order, may file an objection with the resolution application within a period of 10 days from the date of
receipt of the order. However, the objection can be filed only on the following grounds, namely:
inclusion of a debt as a qualifying debt; incorrectness of the details of the qualifying debt specified in
the order under section.

5. APPLICATION AGAINST DECISION OF RESOLUTION PROFESSIONAL

Section 87 provides that any person aggrieved by a decision taken by the resolution professional on an
objection filed by them may make an application to the DRT. However, the application must be filed
within a period of 10 days from the date of the decision taken by the resolution professional The DRT is
required to decide upon the application within 14 days of its submission.

6. REVOCATION OF FRESH START PROCESS ORDER

Section 91 sets out the grounds on which the resolution professional may submit an application to the
DRT seeking revocation of its order made for initiation of the fresh start process. The object of section
91 is to provide for rescinding the fresh start process where due to any change in the financial
circumstances of the debtor, the debtor becomes ineligible for a fresh start process or the debtor acts in
violation of certain provisions of the Code. The DRT has to decide upon the application within a period
of 14 days.

7. DISCHARGE ORDER

Section 92 provides for the passing of a discharge order by the Adjudicating Authority at the end of the
moratorium period for discharge of the debtor from the qualifying debts. The resolution professional
shall prepare a final list of qualifying debts and submit such list to the Adjudicating Authority at least 7
days before the moratorium period comes to an end. On receiving the list and at the end of the
moratorium period, the Adjudicating Authority shall make an order discharging the debtor from the
qualified debts.
 OR

Process of fresh start

1. Application: The debtor files an application to the Debt Recovery Tribunal ('DRT') through a
resolution professional.

2. Interim Moratorium: On filing the application, an interim moratorium period begins, during
which legal actions against the debtor for debts covered under the application are stayed.

3. Examination: The resolution professional ('RP') examines the application and submits a report
to the DRT.

4. Decision: The DRT reviews the report and passes an order admitting or rejecting the
application. If admitted, the moratorium continues, and the debtor is granted a discharge order for
qualifying debts.

5. Discharge: Upon successful completion, the debtor is discharged from qualifying debts.

Insolvency Resolution Process ('IRP') for Individuals

The IRP is applicable to individuals and partnership firms whose debts exceed the threshold limit
specified by the government (currently Rs. 1,000). This process is more structured and involves the
appointment of a resolution professional to oversee the resolution.

Initiation
 The debtor or creditor can initiate the IRP by filing an application before the DRT under s. 94
and 95 of IBC.

 For Personal Guarantors to CDs, the application is filed in the National Company Law Tribunal
('NCLT').

Process

1. Application: Filed by the debtor or creditor, the application includes details of debts, assets,
and financial affairs.

2. Interim Moratorium: Similar to Fresh Start Process, an interim moratorium starts upon filing.

3. Appointment of RP: The DRT appoints a resolution professional who takes charge of the
debtor’s assets and affairs. He will be known as Bankruptcy Trustee

4. Public Notice: The Bankruptcy Trustee issues a public notice inviting claims from creditors.

5. Submission of Claims: Creditors submit their claims, which the Bankruptcy Trustee verifies.

6. Preparation of Repayment Plan: In consultation with the Bankruptcy Trustee, the debtor
prepares a repayment plan.
7. Creditors’ Meeting: The Bankruptcy Trustee convenes a creditors’ meeting to discuss and
vote on the repayment plan.

8. Approval: If most creditors approve the repayment plan ('Plan'), it is submitted to the DRT
for approval.

9. Implementation: Upon DRT’s approval, the Plan is implemented under the supervision of the
Bankruptcy Trustee.

10. Discharge: Successful implementation leads to the discharge of the debtor from the remaining
debts.

Role of Bankruptcy Trustee

The Bankruptcy Trustee plays a pivotal role in the Fresh Start Process and IRP. The Bankruptcy Trustee
responsibilities include:

 Assisting the debtor in preparing the application and repayment plan.

 Verifying creditors’ claims.

 Supervising the implementation of the repayment plan.

 Ensuring compliance with the IBC provisions and protecting the interests of all stakeholders.

Impact on Personal Guarantors (PGs)

In addition to any disqualification under any other law for the time being in force, a bankrupt shall,
from the Bankruptcy Commencement Date, shall be disqualified from –

1. being appointed or acting as a trustee or representative in respect of any trust, estate or

settlement;
2. being appointed or acting as a public servant;
3. being elected to any public office where the appointment to such office is by election; and
4. being elected or sitting or voting as a member of any local authority.

Factors Considered

Legal and Judicial Landscape

The IBC has seen various judicial interpretations, particularly concerning PGs. In several rulings, the
Hon'ble Supreme Court of India ('SC') has upheld the provisions of the IBC, emphasizing the holistic
approach towards resolution and the non-exclusivity of PGs from the insolvency process of CDs. The
SC in Lalit Kumar Jain v. Union of India resolved a significant issue regarding PGs of CDs and the
IBC provisions that allow creditors to initiate insolvency proceedings against PGs. This ruling clarifies
that individuals who provide personal guarantees for loans taken by corporate entities cannot escape
liability when the corporate debtor defaults. Consequently, PGs, including promoters and directors, are
now clearly within the scope of the IBC, ensuring that they are held accountable for the debts of the
corporate entities they support.

Similarly, in State Bank of India v. V. Ramakrishnan and Ors.[ii] SC held that IBC does not allow PGs,
such as company directors, to escape their independent and co-extensive liability to repay the entire
outstanding debt. The SC upheld the validity of the 2019 notification, applying IBC provisions to PGs,
ensuring their simultaneous liability along with CDs, also in the case of Committee of Creditors of
Essar Steel India Limited v. Satish Gupta Kumar Gupta & Ors.[iii], the SC recognized the necessity for
resolution applicants taking over a corporate debtor’s business to start with a clean slate. The SC
clarified that under IBC, the rights of subrogation and indemnification, typically granted to guarantors
under the Indian Contract Act, 1872, can be extinguished if explicitly stated in the resolution plan. This
ensures that new management can operate without legacy liabilities.

ADJUDICATING AUTHORITIES AND APPEALS

1. Adjudicating Authority in relation to insolvency resolution and liquidation for corporate

persons

Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons
including corporate debtors and personal guarantors thereof shall be the National Company Law
Tribunal having territorial jurisdiction over the place where the registered office of the corporate person
is located – section 60(1) of Insolvency Code, 2016.

2. Application for bankruptcy or insolvency resolution or liquidation of guarantor of

corporate debtor
If the surety (guarantor) does not pay after guarantee is invoked, application can be made to NCLT for
insolvency resolution of corporate guarantor (if surety is body corporate) or bankruptcy (if surety is
individual).

Normally, application relating to the bankruptcy of an individual is required to be filed before DRT
(though these provisions are not yet made effective). However, if such individual is a surety for
corporate debtor and if he does not pay guarantee amount when guarantee is invoked, application for
bankruptcy for such individual surety can be made before NCLT.

3. Appeals and Appellate Authority

Any person aggrieved by the order of the Adjudicating Authority under this part may prefer an appeal
to the National Company Law Appellate Tribunal – section 61(1) of Insolvency Code, 2016.

The appeal shall be filed within thirty days before the National Company Law Appellate Tribunal. This
period can be extended by NCLAT if sufficient cause is shown – section 61(2) of Insolvency Code,
2016.

4. Appeal to Supreme Court on question of law

Appeal against order of NCLAT can be filed to the Supreme Court within 45 days from the date of
receipt of such order on a question of law arising out of such order under this Code within forty-five
days. This period can be extended by Supreme Court by further 15 days – section 62 of Insolvency
Code, 2016.

Of course writ jurisdiction of High Court and special leave petition (SLP) powers of Supreme Court,
granted under Constitution of India, remain unaffected.

5. Civil court not to have jurisdiction where NCLT or IBBI has jurisdiction

No civil court shall have jurisdiction in respect of any matter in which the Adjudicating Authority or
IBBI is empowered by, or under, this Code to pass any order and no injunction shall be granted by any
court or other authority in respect of any action taken or to be taken in pursuance of any order passed
by such Adjudicating Authority or IBBI under this Code – section 231 of Insolvency Code, 2016.

RIGHTS OF SECURED CREDITOR UNDER SEC. 52

A secured creditor is defined under section 3(30) of IBC as a creditor in favour of whom security
interest is created. A secured creditor is not allowed to enforce its security interest against the corporate
debtor during the Corporate Insolvency Resolution Process (CIRP) in view of moratorium clause under
section 14 of IBC. The rights of the secured creditors are restored only after the commencement of
liquidation proceedings against the corporate debtor under section 33 of the Code. After the
commencement of liquidation proceedings, a secured creditor can exercise any one of the following
rights to recover its debt: –

(i) Secured creditor can either relinquish its security interest to the liquidation estate under section 52(1)
(a) or

(ii) The secured creditor can realize the security interest in the manner specified under section 52(1)(b).

Effect of secured creditor’s rights under Section 52

If the secured creditors relinquish their security interest under section 52(1)(a), they are placed 2nd
under the waterfall mechanism right after the payment of insolvency resolution process costs and the
liquidation costs. They are placed at par with “workmen’s dues for 24 months preceding the liquidation
commencement date” under section 53 of IBC. Upon relinquishment of the security interest by the
secured creditors, the secured assets become part of liquidation estate of the corporate debtor and the
liquidator can sell such assets under regulation 32 of Insolvency and Bankruptcy Board of India
(Liquidation Process) Regulations, 2016.

And, if the secured creditors decide to realize their interest in the secured assets of the corporate debtor,
such assets do not become part of the liquidation estate of corporate debtor. The secured creditors may
enforce and realize their secured interest and apply the proceeds to recover their debt. However, in such
case the secured creditors cannot sell or transfer the secured asset to any person, who is not eligible
under the Code to submit a resolution plan for the insolvency resolution of the corporate debtor in
terms of the recently introduced Regulation 37(8) of the Insolvency and Bankruptcy Board of India
(Liquidation Process) Regulations, 2016. The purpose of this amendment is to prevent the back-door
entry of the otherwise ineligible resolution applicants into the management of the corporate debtor.

When the proceeds from the realization of the secured interest are not adequate to repay the debt owed
to the secured creditors, the unpaid portion of the secured debt would be paid out of the liquidation
estate at 5th position in the order of priority under S-53 of IBC after the payment to unsecured creditors.
However, if the secured creditors have realized their security interest and proceeds are in excess of the
debt due to the secured creditors, the secured creditors shall account to the liquidator any surplus funds
received from the enforcement of such secured assets under section 52(9) of the Code.

What would happen when the secured creditor fails to exercise any of the rights mentioned under
section 52?

Regulation 21A of The (Liquidation Process) Regulations, 2016 provides that a secured creditor shall
inform the liquidator of its decision to relinquish its security interest to the liquidation estate or realise
its security interest, as the case may be, in Form C or Form D of Schedule II and where a secured
creditor does not intimate its decision within thirty days from the liquidation commencement date, the
assets covered under the security interest shall be presumed to be part of the liquidation estate.

What if there are more than one secured creditor having security interest over the same secured
assets?

The NCLAT in the matter of JM Financial Asset Reconstruction Company Limited vs Finquest
Financial Solutions Pvt. Ltd (2019 SCC Online NCLAT 918) had held that only one secured creditor
can enforce its right for realization of the debt out of the secured assets because after the realization of
security interest by one of the secured creditors under section 52(1)(b), it is bound under section 52(7)
to deposit the excess amount by way of realized proceeds in the account of the liquidator and thus, no
other secured creditor can enforce its right subsequently for realization of the amount from the same
secured assets. If one or more secured creditors have opted to realize their security interest against the
same very asset in terms of section 52(1)(b), the liquidator will act in terms of section 52(3) and find
out as to who has the 1 st charge on the secured assets from the records maintained by the information
utility or in any other manner as may be specified by the Board and pass an appropriate order.

Pre-Packaged Insolvency Resolution Process

A Corporate Debtor which has committed a default of at least Rs.10,00,000/- (Rupees Ten Lakh Only)
is eligible to make an application before the AA for initiation of PIRP. In a case where there is a default
of an amount above Rs.1,00,00,000/- (Rupees One Crore Only), PIRP will not apply.

Further, there are various other criteria that have been specified for initiation of PIRP. Following are
key conditions for a MSME to apply for initiation of PIRP:
 the MSME which is applying for initiation of PIRP should not have undergone PIRP or should
not have completed CIRP, during the 3 (three) years preceding the initiation date of PIRP;
 CIRP and PIRP cannot run simultaneously. Therefore, the MSME should not be undergoing
any CIRP;
 the MSME should be eligible under Section 29A of IBC, meaning thereby that the MSME
should not be ineligible to be the resolution applicant; and the MSME is not ordered to be liquidated as
per Section 33 of the IBC.

The application for initiation of PIRP is to be filed before the AA along with the requisite fee. The
timelines specified in the IBC for adjudication i.e., either admission or rejection of the application for
initiating PIRP is 14 (fourteen) days from the date of filing of such application. In PIRP, before an
application for initiation of PIRP is filed by the Corporate Debtor, majority of directors or partners of
the Corporate Debtor have to file a declaration before the AA. Further, a resolution has to be passed by
at least three-fourth of the number of directors or partners of the Corporate Debtor approving the filing
of the application for initiation of PIRP. Further, the approval of the financial creditors of the Corporate
Debtor, not being related parties, representing not less than 66% (sixty six percent) of the financial
creditors is also required before filing the application for initiation of PIRP.

At the stage where the application seeking initiation of PIRP is yet to be admitted, name of an
Insolvency Professional (“IP”) is to be proposed by the financial creditors of the Corporate Debtor.
Such IP is required to prepare a report confirming if the Corporate Debtor meets the requirements and
also to confirm if the base resolution plan complies with the provisions of IBC. The obligations and
duties of the IP come to an end if the application seeking initiation of PIRP is not filed within the
stipulated timeline, or if the same is admitted / rejected, as the case maybe.

The next step is the filing of the application for initiation of PIRP. The said application is required to
entail the name of the proposed Resolution Professional (“RP”) along with a report on behalf of the RP.
The AA is required to deal with the application and pass an order within a period of 14 (fourteen) days.
In case the AA is rejecting the application due to some defect, it is required to give a notice of 7 (seven)
days to the Corporate Debtor to rectify such defect.

In the event that the application for initiation of PIRP is admitted by the AA, CoC has to be constituted
within 7 (seven) days of the pre-packaged insolvency commencement date and the first meeting of CoC
has to be held within 7 (seven) days of the constitution of CoC. Further, the provisions of Section 21 of
IBC are to apply mutatis mutandis to the CoC in PIRP. It is also to be noted that though PIRP vests the
management control with the Corporate Debtor; however, CoC (by a vote of not less than sixty-six
percent) is empowered to resolve to vest the management with the RP. The CoC is required to make an
application before the AA for such change in management and such provisions which apply in case of
CIRP shall be applicable in this case.

It may further be pointed out that the Corporate Debtor is required to submit a base resolution plan
with the RP within a time frame of 2 (two) days from the order of admission passed by the AA.
Thereafter, the RP is required to submit the base resolution plan with the committee of creditors
(“CoC”).

The CoC will thereafter, grant its approval for submitting the base resolution plan before the AA for its
approval. However, before the base resolution plan is submitted with the AA, the CoC is required to
ensure that the said base resolution plan does not impair the claims owed by the Corporate Debtor to its
operational creditors. This aspect of ensuring that the base resolution plan does not impair the claims
owed by the Corporate Debtor to its operational creditors, in effect means that the operational creditors
of the Corporate Debtor are to be provided the full payment of their confirmed claims. In the event, the
operational creditors are not being paid in full of their confirmed claims, the RP is required to invite
new resolution plans, which are to compete with the base resolution plan. However, before calling for
the prospective resolution plan, the CoC will grant an opportunity to the Corporate Debtor to revise the
base resolution plan. This is in the nature of a ‘swiss challenge method’ to ensure that the operational
creditors are not made to suffer undue financial losses. On the other hand, there is no such safeguard to
secure the interests of the financial creditors of the Corporate Debtor, who may have to suffer a hair cut,
in so far as their claims are concerned.

The proposed resolution plan must be approved for submission to the AA by a vote of the COC
comprising not less than 66% (sixty six percent) of the voting shares. Thereafter, if the AA is satisfied
that the resolution plan approved by COC fulfils the requirements under IBC, it shall by an order,
within 30 (thirty) days from the date of receipt of such plan, approve the resolution plan. In case, even
after inviting competing resolution plans, the CoC does not accord its approval to the same, the RP is
required to file an application with the AA praying for termination of the entire PIRP.

PUFE TRANSACTIONS
Preferential Transactions

Preferential transactions, as defined under s. 43 of the IBC, carry significant implications for both CD
and creditors involved in distressed situations. These transactions occur when a CD extends favouritism
to specific creditors, sureties, or guarantors by transferring assets or benefits, thus elevating their
position above others. Such transactions must occur within a defined ‘relevant period’ preceding the
commencement of insolvency proceedings. The relevant period has been defined under section 43(4) of
the IBC in two terms-

i. Preference is given to a related party (other than by reason only of being an employee) during the
period of two years preceding the insolvency commencement date; or

ii. a preference is given to a person other than a related party during the period of one year preceding
the insolvency commencement date.

What should RP Do?

Identify the Look-Back Period: According to Section 43, preferential transactions are those entered into
by the corporate debtor within the look-back period (which is typically one year prior to the insolvency
commencement date for related parties and two years for other creditors).

The RP must identify the dates on which the transactions took place and check if they fall within the
look-back period.

Determine the Nature of the Transaction: A preferential transaction under Section 43 involves a
payment or transfer made by the corporate debtor to a creditor, which places the creditor in a better
position than other creditors in the event of liquidation.

Examine the Involvement of Related Parties: Section 43(2) of the IBC defines a related party, and
transactions involving related parties are more likely to be scrutinized as preferential. The RP should
assess whether the transactions were made to related parties and if such transactions were made with
the intention to prefer them over other creditors.

Assess Whether the Transaction Was Made in the Ordinary Course of Business: Section 43(3) provides
that transactions conducted in the ordinary course of business do not qualify as preferential. The RP
should determine whether the transactions were part of the usual business operations, such as trade
credit, and whether these were made to maintain normal operational continuity. The RP should evaluate
if the transactions were common in nature and consistent with prior transactions between the debtor and
creditor.

Assess the Effect on Creditors: The RP should determine whether the transaction results in the debtor’s
estate being diminished, thus adversely affecting the claims of other creditors. If the transaction gives
the creditor an unfair advantage or results in the depletion of the debtor’s assets, it could be deemed
preferential.

Challenge the Transactions if Necessary: If the RP determines that the transactions are preferential,
Section 45 allows the RP to apply to the National Company Law Tribunal (NCLT) for an order to
reverse the transaction. The RP must gather sufficient evidence to support the preferential nature of the
transaction before filing an application with NCLT.

Defend Against Management's Argument: The RP should carefully review the management’s argument
that the transactions were necessary for operational continuity. If the transaction indeed falls within the
ordinary course of business, the RP may not pursue it as preferential. However, if the RP finds that the
transaction disproportionately benefits specific creditors, it will need to challenge it.

Undervalued Transactions

Undervalued transactions, as defined under s. 45 of the IBC, involve asset transfers at values
significantly lower than their actual worth.

Key Provisions: A transaction is considered undervalued under s. 45(2) of the IBC if it involves a CD
gifting or transferring assets for a consideration significantly less than the value of the consideration
that the CD would have provided (i.e., the cost of acquisition of such assets), and provided that such
transactions are not in the ordinary course of business. The relevant period for challenging such
transactions as mentioned above varies based on whether the party involved is related or unrelated to
the CD.

Fraudulent Transactions

Fraudulent transactions within insolvency proceedings, as provided for under s. 66(1) of the IBC,
involves actions conducted with the intent to defraud creditors or for any fraudulent purpose. This
provision casts a wide net, covering various deceptive practices aimed at undermining stakeholder
interests without any specific look-back period. However, s. 66(2) of the IBC provides reasonable
grounds for defense, emphasizing the importance of due diligence and rationality in assessing
transactions.

Key Provisions: S. 66 of the IBC provides for fraudulent and wrongful trading under which if an
application is filed by the RP during the CIRP or liquidation process to act against persons who
knowingly engaged in business with the intent to defraud creditors or for any fraudulent purpose. It
allows the NCLT to impose such liabilities, including making them personally liable without any
limitation of liability, requiring them to contribute to the CD’s assets, or restraining them from
managing the CD’s affairs.

Extortionate Transactions

Extortionate transactions, as outlined in s. 50 of the IBC, are characterized by scenarios where a CD

receives financial or operational debt under terms that demand exorbitant payments. The relevant
period for scrutinizing extortionate transactions is within two years preceding the insolvency
commencement date. This timeframe facilitates a retrospective examination of transactions that may
have contributed to the financial distress of the CD by way of excessive payments of interest or similar
financial costs.