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Overview of IBC

BACKGROUND

There was no single law in India that deals with insolvency and bankruptcy. Provisions relating to insolvency and bankruptcy for companies can be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013. These statutes provide for creation of multiple for Board of Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies is handled by the High Courts. Individual Bankruptcy and Insolvency is dealt with under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 and is dealt with by the Courts. The existing framework for insolvency and bankruptcy is inadequate, ineffective and results in undue delays in resolution. Therefore, the Bankruptcy Law Reform Committee was proposed a new legislation, ie, the Insolvency and Bankruptcy Code, 2015.

S. No. EVENT DATE
1.

The Bankruptcy Law Reform Committee presents its Report to the Government of India.
The Report was in two parts:
Volume I- text of the findings and recommendations; and
Volume II- draft Insolvency and Bankruptcy Code.

04 November, 2015
2. Bill on the Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha. 21 December, 2015
3. The Bill was referred to Joint Committee of both the Houses of Parliament. 23 December, 2015
4. Joint Committee on the Insolvency and Bankruptcy Code, 2015 placed its Report in Lok Sabha as well as Rajya Sabha. 28 April, 2016
5. Bill on the Insolvency & Bankruptcy Code, 2016 as recommended by the Joint Committee passed by the Lok Sabha. 5 May, 2016
6. Thereafter the Bill was passed by the Rajya Sabha. 11 May 2016
7. Assented by the President of India and published in the Gazette of India, Extraordinary, Part II, Section 1, No. 37. 28 May, 2016

PREAMBLE OF THE CODE

An Act to consolidate and amend the laws relating to:

  • reorganization and insolvency resolution of
    1. (a) corporate persons,

      (b) partnership firms and

      (c) individuals

    in a time-bound manner for maximisation of value of assets of such persons,

  • to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and
  • to establish an Insolvency and Bankruptcy Board of India,
  • and for matters connected therewith or incidental thereto.

Important Definitions

DEBT 3(11)

“debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

FINANCIAL DEBT

5(8)

“financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes –

  • money borrowed against the payment of interest;
  • any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;
  • any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
  • the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
  • receivables sold or discounted other than any receivables sold on nonrecourse basis;
  • any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
  • any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
  • any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
  • the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.
OPERATIONAL DEBT 5(21)

“operational debt” means a claim in respect of the provision 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.

CREDITOR 3(10)

“creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder.

FINANCIAL CREDITOR 5(7)

“financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

In simple words, financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security- loan/ debt contracts.

OPERATIONAL CREDITOR 5(20)

“operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

In simple words, Operational creditors are those whose liability from the entity comes from a transaction on operations- trade creditors, employees, utilities.

CORPORATE DEBTOR 3(8)

“corporate debtor” means a corporate person who owes a debt to any person.

CORPORATE PERSON 3(7)

“corporate person” means-

  • a company as defined in clause (20) of section 2 of the Companies Act, 2013,
  • a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008,
  • or any other person incorporated with limited liability under any law for the time being in force

but shall not include any financial service provider.

FINANCIAL SERVICE PROVIDER 3(17)

“financial service provider” means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator.

FINANCIAL SERVICE 3(16)

“financial service” includes any of the following services, namely :–

  • accepting of deposits;
  • safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;
  • effecting contracts of insurance;
  • offering, managing or agreeing to manage assets consisting of financial products belonging to another person;
  • rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of – (i) buying, selling, or subscribing to, a financial product; (ii) availing a financial service; or (iii) exercising any right associated with a financial product or financial service;
  • establishing or operating an investment scheme;
  • maintaining or transferring records of ownership of a financial product;
  • underwriting the issuance or subscription of a financial product; or
  • selling, providing, or issuing stored value or payment instruments or providing payment services.
FINANCIAL SERVICE REGULATOR 3(18)

“financial sector regulator” means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government.


Invoke the Provisions of IBC, 2016

The minimum amount of Rs. 1 lakh and Rs. 1,000 can be increased up to Rs. 1 crore and Rs. 1 lakh, respectively, through a notification by the Central Government.

Where any corporate person commits a default in paying its-

may file an application, for initiating corporate insolvency resolution process (CIRP) with the Adjudicating Authority.

The National Company Law Tribunal will be the adjudicating authority to deal with insolvency matters of corporate person and the Debt Recovery Tribunal will be adjudicating authority to deal with insolvency matters of individual and partnership firm.

The Adjudicating Authority shall, within a period of 14 days of the receipt of the application, by an order
Admit the application Reject the application
If it is complete If it is incomplete
The Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within 7 days from the date of receipt of such notice from the Adjudicating Authority.

TIME-LIMIT FOR COMPLETION OF CIRP

Insolvency resolution process starts from the date of admission of the application which is called ‘insolvency commencement date’ and the process must be completed within 180 days of its commencement. One time extension, by further period but not exceeding 90 days.

Committee of creditors should have, by a resolution passed at its meeting by 75% of voting shares, instructed the resolution professional to seek extension of time. The Adjudicating Authority is satisfied that subject matter of the case is such that corporate insolvency resolution process cannot be completed within 180 days.

DECLARATION BY THE ADJUDICATING AUTHORITY

The Adjudicating Authority, after admission of the application, shall, by an order-

Moratorium-

The Adjudicating Authority shall by order prohibit the following, namely:

  1. The institution/continuation of suits/proceedings against the corporate person including execution of any judgement, decree or order in any court of law.
  2. Transferring, encumbering, alienating or disposing of by the corporate person of its assets/legal right/beneficial interest.
  3. Any action under the SARFAESI Act, 2002.
  4. Recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate person.

NOTE: Supply of essential goods or services to the corporate person shall not be terminated or suspended during moratorium period.

Public announcement

The public announcement shall contain the following information, namely:

    (a) Name and address of the defaulted corporate person.

    (b) Name of the Registrar with which the corporate person is incorporated or registered.

    (c) Last date for submission of claims.

    (d) Details of interim resolution professional.

    (e) Penalties for false or misleading claims.

    (f) Date on which the insolvency resolution process shall close (ie, 180 days from the date of the admission of the application).

Appointment of an interim resolution professional

The Adjudicating Authority shall appoint an interim resolution professional within 14 days from the admission of the application. The term of the interim resolution professional shall not exceed 30 days from the date of his appointment.

COMMITTEE OF CREDITORS

The interim resolution professional shall after-

Member of the committee

  • This committee shall comprise all financial creditors of the corporate person.
  • Where the corporate person has no financial debt or where all financial creditors are related parties of the corporate person, the committee shall consist of members as under:
    • (a) eighteen largest operational creditors by value:

      • If the number of operational creditors is less than eighteen, the committee shall include all such operational creditors;

      (b) one representative elected by all workmen other than those workmen included under point (a); and

      (c) one representative elected by all employees other than those employees included under point (a).

Decisions by the committee of creditors

All decisions by the committee of creditors shall be taken by a vote of not less than 75% of voting share of the financial creditors.

Appointment of resolution professional

The committee of creditors may, in their first meeting, either-

  • The resolution professional shall conduct the entire insolvency resolution process and manage the operations of the company during the corporate insolvency resolution process period.
  • The resolution professional shall exercise all such powers and duties as are vested on the interim resolution professional.
  • All meetings of the committee of creditors shall be conducted by the resolution professional.

DUTIES OF RESOLUTION PROFESSIONAL

Meetings of the committee of creditors

  • Convene and attend all meetings.
  • Present all resolution plans at the meetings.

Documents

  • Maintain an updated list of claims.
  • Prepare the information memorandum.

Rights

  • Take immediate custody and control of all the assets including business records of the company/ LLP.
  • Represent and act on behalf of the company/LLP with third parties.

Raise

Interim finances subject to the approval of the committee of creditors.

Appoint

Accountants, legal or other professionals.

Invite

Prospective lenders, investors and any other persons to put forward resolution plans.

Resolution Plan

  • The resolution professional shall prepare an information memorandum for formulating a resolution plan.
  • The resolution professional shall provide to the resolution applicant access to all relevant information in physical and electronic mode.
  • A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum.
  • The resolution professional shall examine each resolution plan and present to the committee of creditors for its approval.
  • The resolution professional shall submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority.
  • The adjudicating authority may by order approve the resolution plan and the moratorium period ends here.
  • The resolution plan will be binding on the corporate person, its employees, members, creditors, guarantors and other stakeholders.
  • If the resolution plan is not approved, or ready, within 180 days or adjudicating authority rejects the resolution plan, it will pass a liquidation order. The resolution professional will act as a liquidator and all the powers of the Board of directors will vest with the liquidator.

Fast Track Insolvency Resolution Process (FTCIRP)

An application for FTCIRP may be made in respect of the following corporate person, namely:

  • a small company as defined under section 2(85) of the Companies Act, 2013; or
  • a Startup (other than the partnership firm) as defined in the notification of the Government of India in the Ministry of Commerce and Industry number G.S.R. 501(E), dated the 23rd May, 2017; or
  • an unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding Rs. 1 crore.

FTCIRP should be completed within a period of 90 days and there is a single extension of up to 45 days, if needed.



Grounds on which company may be wound up by Tribunal [Section 271 of the Companies Act, 2013]

S. No. Grounds Petition filed by
(a) If the company has, by special resolution, resolved that the company be wound up by the Tribunal The company, any contributory
(b) If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality The Registrar (ROC), the Central Government, the State Government
(c) The Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up The Registrar (ROC), any other person authorised by the Central Government
(d) If the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years The Registrar (ROC)
(e) If the Tribunal is of the opinion that it is just and equitable that the company should be wound up  -

Conditions for initiating voluntary liquidation [Section 59 of IBC, 2016]

A corporate person (company, LLP or any other person incorporated with limited liability other than a company) who intends to liquidate itself voluntarily should ensure that it has not committed any default in payment of any debt which has become due and payable before initiating voluntary liquidation proceedings.

Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms

FRESH START PROCESS

A debtor, who is unable to pay his debt and fulfils the conditions, shall be entitled to make an application for a fresh start for discharge of his qualifying debt.

CONDITIONS
(a) Gross annual income of debtor does not exceed Rs. 60,000;
(b) Aggregate value of assets of debtor does not exceed Rs. 20,000;
(c) Aggregate value of the qualifying debts does not exceed Rs. 35,000;
(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 the relation to him in the preceding twelve months of the date of the application for fresh start.

Appointment of resolution professional

  • Where an application is filed by the debtor through a resolution professional, the Adjudicating Authority shall direct the Board (IBBI) within seven days of the date of receipt of the application and seek confirmation from IBBI that there are no disciplinary proceedings against the resolution professional who has submitted such application.
  • Where an application is filed by the debtor himself and not through the resolution professional, the Adjudicating Authority shall direct IBBI within seven days of the date of the receipt of an application to nominate a resolution professional for the fresh start process.

Examination of application by resolution professional

The resolution professional shall examine the application within ten days of his appointment, and submit a report to the Adjudicating Authority, either recommending acceptance or rejection of the application.

The Adjudicating Authority shall, within 14 days from the date of submission of the report by the resolution professional, pass an order:
Admit the application Reject the application

Effect of admission of application

On the date of admission of the application, the moratorium period shall commence in respect of all the debts.

Discharge order

  • The resolution professional shall prepare a final list of qualifying debts and submit such list to the Adjudicating Authority at least seven days before the moratorium period comes to an end;
  • The Adjudicating Authority shall pass a discharge order at the end of the moratorium period for discharge of the debtor from the qualifying debts mentioned in the list;
  • The Adjudicating Authority shall discharge the debtor from the following liabilities, namely:
    • (a) penalties in respect of the qualifying debts from the date of application till the date of the discharge order;

      (b) interest including penal interest in respect of the qualifying debts from the date of application till the date of the discharge order; and

      (c) any other sums owed under any contract in respect of the qualifying debts from the date of application till the date of the discharge order.

  • The discharge order shall be forwarded to IBBI for the purpose of recording an entry in the register.
  • INSOLVENCY RESOLUTION PROCESS

    Application by debtor to initiate insolvency resolution process

    A debtor, who commits a default, may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process.

    A debtor shall not be entitled to make an application, if he is-
    (a) an undischarged bankrupt;
    (b) undergoing a fresh start process;
    (c) undergoing an insolvency resolution process; or
    (d) undergoing a bankruptcy process

    Application by creditor to initiate insolvency resolution process

    A creditor may apply either by himself, or jointly with other creditors, or through a resolution professional to the Adjudicating Authority for initiating an insolvency resolution process against-

      (a) any one or more partners of the firm; or

      (b) the firm.

    Appointment of resolution professional

    • If the application is filed through a resolution professional, the Adjudicating Authority shall direct the Board (IBBI) within seven days of the date of receipt of the application to confirm that there are no disciplinary proceedings pending against resolution professional.
    • Where an application is filed by the creditor himself and not through the resolution professional, the Adjudicating Authority shall direct IBBI within seven days of the filing of such application, to nominate a resolution professional for the insolvency resolution process.

    Examination of application by resolution professional

    The resolution professional shall examine the application within ten days of his appointment, and submit a report to the Adjudicating Authority recommending for approval or rejection of the application.

    The Adjudicating Authority shall, within 14 days from the date of submission of the report by the resolution professional, pass an order:
    Admit the application Reject the application

    Effect of admission of application

    When the application is admitted, a moratorium shall commence in relation to all the debts.

    During the moratorium period-

    • any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed
    • the creditors shall not initiate any legal action or legal proceedings in respect of any debt; and
    • the debtor shall not transfer, alienate, encumber or dispose of any of his assets or his legal rights or beneficial interest therein.

    Public notice and claims from creditors

    The Adjudicating Authority shall issue a public notice within seven days of passing the order, inviting claims from all creditors within twenty-one days of such issue and the notice shall be-

      (a) published in at least one English and one vernacular newspaper which is in circulation in the state where the debtor resides;

      (b) affixed in the premises of the Adjudicating Authority; and,

      (c) placed on the website of the Adjudicating Authority

      The notice shall include:

      (a) details of the order admitting the application;

      (b) particulars of the resolution professional with whom the claims are to be registered; and

      (c) the last date for submission of claims.

    Repayment Plan

    The debtor shall prepare, in consultation with the resolution professional, a repayment plan containing a proposal to the creditors for restructuring of his debts or affairs.

    The repayment plan shall include the following, namely: -

      (a) justification for preparation of such repayment plan and reasons on the basis of which the creditors may agree upon the plan;

      (b) provision for payment of fee to the resolution professional;

      (c) such other matters as may be specified

    Discharge order

    • On the basis of the repayment plan, the resolution professional shall apply to the Adjudicating Authority for a discharge order in relation to the debts mentioned in the repayment plan and the Adjudicating Authority may pass such discharge order;
    • The discharge order shall be forwarded to IBBI for the purpose of recording entries in the register.

    APPEAL UNDER IBC, 2016

    Any person aggrieved by the order of the Adjudicating Authority may prefer an appeal to the National Company Law Appellate Tribunal (in case of corporate person) and the Debt Recovery Appellate Tribunal (in case of individual and partnership firm).

    PILLARS & INSTITUTIONS UNDER IBC, 2016

    1. Insolvency and Bankruptcy Board of India (Board)
    2. The Board (IBBI) shall consist of the following members, who shall be appointed by the Central Government, namely:

        (a) A Chairperson.

        (b) Three members not below the rank of joint Secretary or equivalent, one of each to represent the Ministry of Finance, the Ministry of Corporate Affairs and Ministry of Law, ex-officio.

        (c) One member to be nominated by the Reserve Bank of India, ex-officio.

        (d) Five other members to be nominated by the Central Government, of whom at least three shall be the whole-time members.

      Key functions of IBBI

      • Regulation of Information Utilities;
      • Regulation of Insolvency Professional Agencies and Insolvency Professionals; and
      • Regulation making in specific areas about procedural details in the insolvency and bankruptcy process and data collection, research and performance evaluation.
    3. Insolvency Professional Agencies (IPAs)
    4. These agencies are required to register with IBBI and IBBI shall have regard to the following principles while registering the insolvency professional agencies, namely:

      • Promote the professional development of and regulation of insolvency professionals.
      • Promote good professional and ethical conduct amongst insolvency professionals.
      • Protect the interests of debtors, creditors, etc.
      • Promote the services of competent insolvency professionals to cater to the needs of debtors, creditors, etc.

      As on date, IBBI has granted registration to the following three section 8 (not-for-profit) companies to act as Insolvency Professional Agencies under the IBBI (Insolvency Professional Agencies) Regulations, 2016:

      1. Indian Institute of Insolvency Professionals of ICAI;
      2. ICSI Insolvency Professionals Agency; and
      3. Insolvency Professional Agency of the Institute of Cost Accountant of India.

      Functions of the Insolvency professional agencies are:

      • To grant membership to persons who fulfill all requirements set out in its byelaws on payment of Membership fee.
      • Lay down standards of professional conduct for its members;
      • Monitor the performance of its members;
      • Safeguard the rights, privileges and interests of insolvency professionals who are its members;
      • Suspend or cancel the membership of insolvency professionals who are its members on the grounds set out in its bye-laws;
      • Redress the grievances of consumers against insolvency professionals who are its members; and
      • Publish information about its functions, list of its members, performance of its members and such other information as may be specified by regulations.
    5. Insolvency Professionals (IPs)
    6. Eligibility for insolvency professional

      An individual shall be eligible for enrolling as an Insolvency Professional if he-

        (a) is not a minor;

        (b) is a person resident in India;

        (c) has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has elapsed from the date of expiry of the sentence;

        (d) is not an undischarged insolvent, or has been applied to be adjudicated as insolvent;

        (e) has sound mind;

        (f) possesses the qualification and experience specified in Regulation 5.

      Qualifications under regulation 5

      An individual shall be eligible for enrollment, if he-

      Has passed the National Insolvency Examination (NIE); or

      Has passed the Limited Insolvency Examination (LIE)

      and

      has 15 years of experience in management, after he received a Bachelor's degree from a university established or recognized by law; or

      Has passed the Limited Insolvency Examination (LIE)

      and

      has 10 years of experience as a Chartered Accountant or a Company Secretary or a Cost Accountant or an Advocate.

      Every Insolvency Professional shall abide by the following code of conduct:

      • To take reasonable care and diligence while performing his duties.
      • To comply with all requirements and terms and conditions specified in the bye-laws of the insolvency professional agency of which he is a member.
      • To allow the insolvency professional agency to inspect his records.
      • To submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the insolvency professional agency of which he is a member, and
      • To perform his function in such manner and subject to such conditions as may be specified.
      • Insolvency Professionals, who will conduct the insolvency resolution process, take over the management of a company, assist creditors in the collection of relevant information, and manage the liquidation process. Duties of the Insolvency Professional are as follows:

      • Collect and collate claims submitted by creditors to him.
      • Monitor the assets of the entity.
      • Collect and collate information about assets, finances and operations of the entity.
      • Constitute a committee of creditors.
      • Take over the management of the affairs of the entity.
    7. Information Utility (IU)
    8. The Code requires creditors to provide financial information of debtors to multiple utilities on an ongoing basis. Such information would be available to creditors, resolution professionals, liquidators and other stakeholders in insolvency and bankruptcy proceedings.

      Obligations of Information Utility:

      • Collect, collate, authenticate and disseminate financial information of debtors in a universally accessible format with in a centralised electronic databases.
      • Get the information received from various persons authenticated by all concerned parties before storing such information.
      • Provide access to the financial information stored by it to any person who intends to access such information.
      • Have the ability to operate with other information utilities.

      INSOLVENCY AND BANKRUPTCY FUND

      The Code creates an Insolvency and Bankruptcy Fund. The Fund will receive voluntary contributions from any person. In case of insolvency proceedings being initiated against the contributor, he will be allowed to withdraw his contribution for making payments to workmen, protecting his assets, etc. These funds will not accrue any interest on contribution, just acting like locker in last resort.