INSOLVENCY &

BANKRUPTCY CODE, 2016Decoding the Corporate Insolvency Resolution Process with judicial views

PURPOSE OF THE CODE

Consolidate and amend the laws relating to reorganisation and insolvency resolution in a time bound manner

Maximise the value of assets

Promote entrepreneurship

Check availability of credit and balance the interests of all the stakeholders

Provides order of priority of payment of Government dues

Establish an Insolvency and Bankruptcy Board of India

CORPORATE INSOLVENCY

RESOLUTION PROCESS (CIRP)

IMPORTANT TERMS

SECTIONS TERMS DEFINITION

S. 3(1) Board Means Insolvency & Bankruptcy Board of

India established under S. 188(1)

S. 3(7) Corporate

Person/Corpor

ate Debtor

• Company as defined in CA, 2013• An LLP [As per LLPAct,2008]• Any other person incorporated with limited

liability under any law for the time being inforce

• Excludes - Financial service provider

S. 3(8) Corporate

Debtor

means a corporate person who owes a debt

to any person.

SECTIONS TERMS DEFINITION

S. 5(6) Dispute includes a suit or arbitration proceedings relating

to—

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;

S. 5(12) Insolvency

Commencement

Date

means the date of admission of an application for

initiating corporate insolvency resolution process by

the Adjudicating Authority

S. 5(26) Resolution Plan means a plan proposed by any person for

insolvency resolution of the corporate debtor as a

going concern

S. 5(27) Resolution

Professional

means an insolvency professional appointed to

conduct the corporate insolvency resolution

process and includes an interim resolution

professional

APPLICANTS

Financial Creditor

[S. 5(7)]

• any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Operational Creditor

[S. 5(20)]

• a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred

Corporate Applicant

[S. 5(5)]

• Corporate debtor

• Member/Partner of the corporate debtor authorized to make an application for CIRP

• Individual in charge of managing the operation and resources of the corporate debtor

• Person having control & supervision over the financial affairs of the corporate debtor.

CORPORATE INSOLVENCY RESOLUTION

PROCESSInitiation of CIRP by

Financial Creditor/Operational Creditor/ Corporate

Applicant and Admission of

Application by NCLT

Declaration of Moratorium and Public

Announcement by NCLT

Appointment of Interim Resolution Professional

Committee of Creditors (CoC) appointed by the

Interim Resolution Professionals

CoC may accept the Professional appointed by NCLT or appoint a

new one.

The Professional shall conduct the CIRP and

prepare an Information Memorandum

Professional shall come up with a Resolution Plan, approve it and submit it to CoC for

approval

If 75% of CoC approves the plan, it is submitted

to NCLT

NCLT may accept/reject the plan

Flowchart (Contd.)

• Implementation of plan

• Cessation of MoratoriumIf NCLT accepts the plan

• Liquidation

• If the approved plan is contravened, liquidation process shall take place

If NCLT rejects the plan

The entire process shall be completed within Resolution Period (180 days; extendable by 90 days)

Flowchart

INITIATION OF CIRP BY FINANCIAL

CREDITOR

Default of minimum Rs. 1 Lakh (could be higher, if so notified by the Central Government) by the Corporate Debtor

Application by Financial Creditor before NCLT

Application to be submitted in prescribed form with requisite information

NCLT has to ascertain the existence of a default from such information and according accept or reject such application within 14 days of receipt of the application

INITIATION OF CIRP BY OPERATIONAL

CREDITOR

Default by of minimum Rs. 1 Lakh (could be higher, if so notified by the

Central Government) the Corporate Debtor

Delivery of demand notice [Form 3 of Insolvency and

Bankruptcy (Application to Adjudicating

Authority) Rules, 2016] of unpaid operational

debt/invoice copy by the Operational Debtor

Corporate Debtor, within 10 days of

receipt of notice/invoice bring

to the notice of Operational Creditor

Operational Creditor may fie an application as per Form 9 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 before

NCLT If, after expiry of 10 days, the payment/notice of

dispute is not received

Application to be filed in prescribed manner

with requisite information.

Operational Creditor may propose a

resolution professional to act as an interim

resolution professional

NCLT has to ascertain the existence of a default from such information

and according accept or reject such

application within 14 days of receipt of the

application

Existence of any

dispute or any

pending suit or

arbitration

proceeding

Repayment of

unpaid

operational debt

by sending an

attested record

of such payment

INITIATION OF CIRP BY CORPORATE

APPLICANT

Default by of minimum Rs. 1 Lakh (could be higher, if so notified by the Central Government) the Corporate Debtor

Application by Financial Creditor before NCLT

Application to be submitted Form 6, specified in Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with requisite documents and records

NCLT has to ascertain the existence of a default from such information and according accept or reject such application within 14 days of receipt of the application

MORATORIUM

Moratorium or the calm period declared by NCLT through an order during which the

following is prohibited:

The institution of suits or continuation of any pending suits or proceedings against

the corporate debtor including execution of any judgment, decree or order in

any court of law, tribunal, arbitration panel or other authority;

Transferring, encumbering, alienating or disposing of by the corporate debtor

any of its assets or any legal right or beneficial interest therein;

Any action to foreclose, recover or enforce any security interest created by the

corporate debtor in respect of its property including any action under the

SARFAESI Act, 2002

The recovery of any property by an owner or lessor where such property is

occupied by or in the possession of the corporate debtor.

Order of moratorium shall have effect till the date of completion of CIRP

Where NCLT approves the resolution plan or passes an order of liquidation, the

moratorium ceases to have effect from the date of such approval or passing of order.

INSOLVENCY/INTERTIM RESOLUTION

PROFESSIONAL

As per Regulation 3 of Insolvency and Bankruptcy (Insolvency Resolution)Regulation, 2016, an insolvency professional shall be appointed as a ResolutionProfessional

He is eligible to be appointed as an independent director on the board of thecorporate debtor u/s 149 of the Companies Act, 2013, where the corporate debtor is acompany

He is not a related party of the corporate debtor.

He is not an employee or proprietor or a partner of a firm of auditors or companysecretaries in practice or cost auditors of the corporate debtor in the last threefinancial years.

He is not an employee or proprietor or a partner of a legal or consulting firm that hasor had any transaction with the corporate debtor amounting to ten per cent or more ofthe gross turnover of such firm in the last three financial years.

Duties for a Resolution Professional have been laid down in Section 18 & 25 ofthe Code.

COMMITTEE OF CREDITORS

The Insolvency/Interim Resolution Professional shall constitute a Committee of Creditors comprising of only financial creditors.

Related parties are not a part of financial creditors

All decisions of the Committee shall be taken by a vote of minimum 75% of voting share of the financial creditors

Representatives of the operational creditor, who hold at least 10% of the debt, may attend the meetings but have no voting rights.

The Committee has a right to require the Resolution Professional to furnish any financial information of the corporate debtor during the CIRP which must be provided within 7 days of such requisition.

LIQUIDATION PROCESS

Resolution plan not received by NCLT

Resolution Plan rejected by NCLT

Decision of the CoC to liquidate, but before confirmation of the

Resolution Plan

Contravention of the approved Resolution Plan

GROUNDS

Initiation of Liquidation Process

Initiation of Liquidation Process by liquidation order of NCLT including a public

announcement of liquidation and sending

such order to the authority where Corporate Debtor is

registered

Appointment of Liquidator

•Resolution Professional can act

as a Liquidator

•Can be proposed by the Board

Formation of Liquidation Estate

Consolidation of Claims by the Liquidator

•Claims of the creditors are to be collected within

30 days from the commencement of liquidation process

Verification of Claims by the Liquidator

within time specified by the Board (IBBI)

Admission/Rejection of Claims by the Liquidator and

Determination of valuation of claims

Any Appeal against the decision of the

Liquidator by a creditor to be

preferred within 14 days of the decision

Realization of excess money by secured

creditors from liquidation of secured

assets accounted and remitted to the

Liquidator

Payment of secured and unsecured debts in the specified order

of priority.

After liquidation of all the assets, the

liquidator applies for dissolution of

corporate debtor before NCLT.

Dissolution of corporate debtor shall be effective from the

date of order by NCLT.

Copy of the order to be sent to Registrar of

Companies within 7 days to complete the

liquidation process.

DISTRIBUTION OF ASSETS

Assets are distributed in the order of priority:

Cost of insolvency process and liquidation cost paid in full

Following debts are ranked equally:

Workmen’s dues for 24 months preceding the liquidation commencement date

Debts of Secured Creditor

Wages and dues of other employees for 12 months preceding the liquidation commencement date

Debts to Unsecured Creditors

Following dues are ranked equally:

Amount due to the Central & State Government, including amount received on account of Consolidated Fund, whole or in part for 2 years preceding liquidation commencement date.

Debts owed to a Secured Creditor for any amount unpaid following enforcement of security interest

Remaining debts and dues

Preference Shareholders, if any

Equity Shareholders

FAST TRACK CIRP

The entire process shall be completed within 90 days; extendable to 45 days.

Applicants for a fast track Resolution Process

•Creditor

•Corporate Debtor

Such application can be made against the corporate debtor when:

•Corporate Debtor with assets and income below a level as may be notified by Central Government

•Corporate Debtor with such class of creditors or such amount of debt as may be notified by the Central Government

•Other such category of corporate persons as may be notified by the Central Government

The application must be filed with the following:

•The proof of existence of default as evidence recorded by Information Utility or other such means

•Other information which may establish that the Corporate Debtor is eligible for fast track Resolution Process

JUDICIAL INTERPRETATION

Innoventive Industires v. ICICI Bank

HIGHLIGHTS OF THE DECISION

The concept of default under the Insolvency Code is very wide. It is simpliciter a non-payment of debt when the

same becomes due and includes non-payment of even

a part thereof. Even non-payment of a disputed

financial debt when due would constitute a default under the Code. In other

words, as long as the debt is due it does not matter if the

same is disputed.

There is a difference in the initiation of insolvency

proceedings of a financial creditor (u/S. 7) and an

operational creditor (u/S 8). In the case of a corporate

debtor who commits a default of a financial debt, the

adjudicating authority has merely to see the records of

the information utility or other evidence produced by the

financial creditor to satisfy itself that a default has occurred. The scope of enquiry before the adjudicating authority is therefore limited to assessing the records provided by the financial creditor to satisfy

Where an application is sent to the adjudication authority,

it may only reject it on a defence taken by the

corporate debtor that the debt was not due and not

otherwise. It is at the stage of Section 7(5), where the

adjudicating authority is to be satisfied that a default

has occurred, that the corporate debtor is entitled to point out that a default

has not occurred

Earlier State law is repugnant to the later Parliamentary

enactment. As under the said State law, Maharashtra Relief

Undertaking Act (MRU Act) Act operates in the same field as

the Insolvency Code it is repugnant to Insolvency Code

and that the later non-obstante clause (Section 238)

of the Parliamentary enactment (Insolvency Code) will also prevail over the limited

non-obstante clause contained in Section 4 of the

Maharashtra Act.

Mobilox Innovations Pvt.Ltd. v.Kirusa

Software Pvt. Ltd.

HIGHLIGHTS OF THE DECISIONThe definition of “dispute” is

“inclusive” and not “exhaustive”. The same has to be given wide

meaning provided it is relatable to the existence of the amount of the debt, quality of goods or service or

breach of a representation or warranty. It cannot be restricted to a pending proceeding or ‘lis’ and includes proceedings initiated or pending before consumer court,

tribunal, court or mediation, conciliation etc.

The corporate debtor must raise a dispute with sufficient particulars which relate to the existence of

amount of debt or quality of goods or services or breach of

representation or warranty.

Mere illusory dispute raised for the first time while replying to the

demand notice cannot be a tool to reject the application under

Section 9, where the operational creditor successfully satisfies the

Adjudicating Authority about the existence of debt and default.

Uttam Galva Steel Limited Vs. DF

Deutsche Forfait AG

HIGHLIGHTS OF THE DECISION

Unlike Section 7 of the Code, a notice under Section 8 is to be

issued by an "Operational Creditor" individually and the

petition under Section 9 has to be filed by Operational Creditor

individually and not jointly. Further, a joint application under

Section 9 by one or more ‘Operational Creditor’ is also not

maintainable.

A demand notice is different from a lawyer’s notice and an

advocate/company secretary/chartered accountant

can send demand notice on behalf of corporate debtor only

if he has the authority of the board of directors. He is also

required to state his position or relation with debtor in the

notice. In the absence of such authority, his notice is invalid.

Along with the application under Section 9, a certificate from a

financial institution, maintaining accounts of the operational

creditor, confirming that there is no payment of an unpaid operational debt by the

corporate debtor is mandatory.