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INSOLVENCY AND BANKRUPTCY CODE 2016

INSOLVENCY AND BANKRUPTCY CODE 2016

  • 03 Jan 2022

INTRODUCTION

Insolvency and bankruptcy code 2016 are some of the most important reforms by the Indian Government. Indian capitalism never understood the concept of bankruptcy and it is considered infamy which is wrong since a business or an idea can fail and there is nothing shameful in it. Real capitalism does not see shame in bankruptcy. Do you know the most powerful man in the world ‘DONALD TRUMP’ got bankrupt 4 times? 

During the years 2008 to 2014, banks loaned indiscriminately. This led to a very high percentage of Non Profitable Assets (NPAs) which was highlighted by asset quality reviewers of the Reserve Bank Of India, which led to the immediate action by the Government in appointing the ‘Joint Committee of Parliament’ which in its report of 2015 recommended the IBC. To cut down the burden of increasing Non-Performing Assets (NPA’s), it was necessary to bring out different kinds of reforms and an immediate change in the Insolvency and Bankruptcy Laws was also of the utmost importance. Therefore, Bankruptcy Law Reforms Committee was set up in 2014 under the chairmanship of Mr T.K. Viswanathan, also the former Union Law Secretary, recommended an Indian Bankruptcy Code to replace the existing laws on the same and applicable both to non-financial corporations and individuals. The draft of the Insolvency and Bankruptcy Code was submitted in 2015

 

THE INSOLVENCY AND BANKRUPTCY CODE, 2016

The Insolvency and bankruptcy code, 2016 (IBC) was formulated brought into existence to improve the relationship between the creditors and borrower. Insolvency and Bankruptcy Code came into existence on 1st June of 2016, National Company Law Tribunal (NCLT) and its National Company Law Appellate Tribunal (NCLAT) were set up under The Companies Act, 2013, to adjudicate disputes between matters of companies and limited liability partnership, under the Act. In the case of individuals and partnerships, the adjudicating authority will be the Debt Recovery Tribunal (DRT), which was established under the Recovery of Debts due to the Banks and Financial Institution Act, 1993.  

Individuals, as well as organizations, can apply for insolvency. One point of difference between the two is, that in the case of individuals, it is known as bankruptcy and in the case of corporate, it is known as corporate insolvency. In a situation where an individual or company is not able to pay the debt in the present or even in the near future and the total value of assets held by them are less than their liability. During the state of Insolvency financial difficulties of a company are such that it is unable to run its business due to lack of funds actually required.

 

COMPONENTS OF INSOLVENCY AND BANKRUPTCY CODE

Following are considered as key components of the Insolvency and Bankruptcy Code in the Resolution Process:


1. ADJUDICATING AUTHORITY - 

National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) are special bodies that are constituted judicially for adjudication of matters of Insolvency and Bankruptcy. The appeal for the NCLT lies to NCLAT ie National Company Law Appellate Tribunal and after NCLAT to the Supreme Court of India. If we talk about DRT, an appeal lies to DRAT and the Supreme Court of India. NCLT and DRT are tribunals separated on the basis of matters for NCLT are for Companies and Limited Liability Partnership and DRT is for Sole proprietor and Unlimited Liability Partnership.


2. COMMITTEE OF CREDITORS - 

Committee of Creditors (COC) consists of financial creditors. The function of the COC is to approve and disapprove the plan of resolution as proposed by the resolution professional in the Corporate Insolvency Resolution Process (CIRP). 75% of votes are the minimum requirement to approve the resolution plan in a meeting of COC. Operational creditors are allowed to take part only in the meeting of the committee of creditors but they don’t have the right to vote.


3. INSOLVENCY PROFESSIONALS - 

There are two types of Insolvency professionals- one is interim insolvency professionals and the other is insolvency professionals. Interim insolvency professionals are those professionals who are appointed by the adjudicating authority within 7 days from the day the application has been accepted by the adjudicating authority and Insolvency Professionals are those professionals which are appointed by the committee of the creditors by 75% of the majority voting in the first meeting of the COC. Interim Insolvency Professionals can be replaced by filing an application before the adjudicating authority if in case the COC is not satisfied with the appointed Interim Insolvency Professional. The adjudicating authority then transfers the list to the Insolvency and Bankruptcy Board of India (IBBI) for the approval of the list. The board has to respond within 10 days if they fail to respond within 10 days then the adjudicating authority directs the interim insolvency professionals that he shall continue to perform the insolvency resolution process till the time the board give their confirmation on the list of insolvency professionals.


4. INSOLVENCY AND BANKRUPTCY BOARD OF INDIA – 

The IBBI came into existence to regulate and to counter various Insolvency and Bankruptcy cases which are reported by financial and operational creditors, which especially involved banks in India, home buyers and etc. The IBBI falls under the Insolvency and Bankruptcy Code, 2016. IBBI functions as governing body for all insolvency resolution processes, insolvency professional agencies and also information utilities. Confirming the list of resolution professionals is also done by IBBI. To resolve corporate insolvency, corporate liquidation, individual insolvency and individual bankruptcy the IBBI enacts rules as well as enforce them as per the provisions of the insolvency and bankruptcy code of 2016. IBBI also actively takes part in making new amendments to the code.

 

WHO CAN FILE AN APPLICATION FOR THE RESOLUTION OF CORPORATE INSOLVENCY 


1. FINANCIAL CREDITORS - 

The financial creditors can file an application before the adjudicating authority. After furnishing the information, the adjudicating authority within 14 days has to ascertain the default and in case the default has taken place then the application is admitted. If the default has not taken place then the application is rejected. Adjudicating authority must communicate the admission of the application within 7 days of the admission to the Financial Creditors and after that corporate insolvency resolution process takes place.


2. OPERATIONAL CREDITORS -  

The operational creditor sends demand notice to the corporate debtor on the occurrence of any default. Debtor intimates the creditor within 10 days of notice of repayment of the unpaid operational or notice of the existence of disputes. If in case within 10 days the payment of dispute is not paid then an application is filed before the adjudicating authority. Then operational creditors proposed for resolution professional and the adjudicating authority within 14 days has to admit or reject the application. Commencement of insolvency resolution process.


3. CORPORATE DEBTOR - 

On the commission of default, the corporate debtor can file an application before the adjudicating authority. After furnishing information within 14 days the adjudicating authority passes an order to admit or reject the application. If in case the application is admitted, then the commencement of the insolvency resolution process takes place whereas in case the application gets rejected, notice will be sent by the adjudicating authority to rectify the defects.

 

CORPORATE INSOLVENCY RESOLUTION PROCESS

STEP 1- Application with Adjudicating Authority

STEP 2- Appointment of Interim Resolution Professional

STEP 3- Formation and confirmation of Committee of Creditors

STEP 4- Preparation of Information Memorandum by RP

STEP 5- Resolution plan proposed and approved by 66% majority by creditors.

STEP 6- Resolution plan approved by Adjudicating Authority or Liquidation. 

 

MORATORIUM - 

A moratorium is a temporary suspension of activity until future events warrant the lifting of the suspension or related issues has been resolved. Moratoriums are often enacted in response to temporary financial hardships. On commencement of corporate insolvency resolution, the NCLT can order a moratorium on the debtor’s operations for the period of 180 days. This is termed as a ‘calm period’ during this period no judicial proceedings for recovery, or enforcement of security interest, or sale or transfer of assets, or termination of essential contracts can take place against the debtor since it is a ‘calm period’.


LIQUIDATION - 

Liquidation is the process of bringing a business to an end and distributing its assets to the claimants. It is an event that usually occurs when a company has become insolvent meaning it cannot pay its obligations when they are due. As company operations end, the remaining assets are used to pay creditors and shareholders, as per the priority of their claims. General Partners are subject to liquidation. If the Resolution Process fails to find a resolution for the corporate debtor within the time period or if the resolution plan is not approved by COC by not less than 66% of the voting majority, the corporate debtor is then liquidated.

 

ACHIEVEMENTS OF INSOLVENCY AND BANKRUPTCY CODE

  • The faster insolvency resolution process has led to Ease of doing business. 

 

  • Bond markets have been deepened to increase confidence amongst the creditors in getting the money back from the debtors. 

 

  • The institutional framework has been strengthened such as Insolvency and Bankruptcy Board of India (IBBI), National Company Law Tribunal (NCLT) etc.

 

  • Non Performing Assets (NPAs) has been one of the biggest achievements of insolvency and bankruptcy code,2016 since there has been an immense drop 

 

  • The process has become more professional with the help of Resolution Professional. 

 

  • 1332 cases have been admitted before the NCLT and 4452 cases have been disposed of at the pre-admission stage within just 2 years of insolvency and bankruptcy code 2016, which has ultimately helped in recovery and settlement around Rs. 2.2 lakh crore.

 

  • 66 cases have been resolved after adjudication and realization of creditors around Rs 80,000 crore in resolution cases.

 

  • Many cases have been settled outside the courts by using the Alternative Dispute Resolution (ADR) process.

 

  • After the introduction of section 29(a) Companies pay up in anticipation of not being referred to NCLT. Potential debtors pay up to the Banks in anticipation of default.

 

  • Defaulters are now aware that if they get into IBC they will be out of the management of their company because of section 29(a), so the companies are clearing their NPAs.

 

  • No political and governmental interference is another big achievement. 


SUPREME COURT OF INDIA’S LEADING CASE LAWS ON INSOLVENCY AND BANKRUPTCY CODE, 2016

  • Innoventive Industries Ltd. Vs ICICI Bank and Ors., 2017

 

  • Surendra Trading Company vs Juggilal Kamlapat Jute Mills Company Ltd. 2017 

 

  • Mobilox Innovations Pvt Ltd. Vs Kirusa Software Pvt Ltd., 2017

 

  • Macquarie Bank Ltd Vs Shilpi cable technologies ltd., 2017

 

  • Bank of New York Mellon, London Branch vs Zenith Infotech ltd., 2017

 

  • Anuj Jain Vs Axis Bank Ltd and Ors., 2020

 

  • Arcellor Mittal India Pvt Ltd. Vs Satish Kumar Gupta and Ors., 2018

 

  • Vijay Kumar Jain Vs Standard Chartered Bank and Ors., 2019

 

  • K Sashidhar vs Indian Overseas Bank and ors., 2019

 

  • Embassy Property Development Pvt ltd vs State of Karnataka and Ors., 2019

 

  • Maharashtra Seamless Ltd Vs Padmanabhan Venkatesh and Ors , 2020

 

  • Duncans Industries Ltd vs A.J. Agrochem, 2019

 

  • Municipal Corporation of Greater Mumbai vs Abhilash lal and Ors., 2019

 

  • Jayprakash Associates Ltd. Vs IDBI Bank Ltd and Ors., 2019

 

  • Anand rao Korada vs varsha Fabrics Pvt Ltd. And Ors., 2019

 

  • Jignesh shah ors. Vs Union Of India and Ors., 2019

  • Rajendra K. Bhutta Vs Maharashtra Housing and Area Development Authority and Ors., 2020

 

  • Rahul Jain vs rave Scans Pvt Ltd. And Ors., 2019

 

  • B.K. Educational Services Pvt Ltd vs Parag Gupta and associates, 2018

 

  • State bank Of India vs. V. Ramakrishnan and Ors., 2018 

 


Book on the compilation of Supreme court of India’s Leading Case Laws on Insolvency and Bankruptcy Code 2016

By-Jayprakash Bansilal Somani (Advocate- Supreme Court of India)

One can buy the book from the following link 

https://notionpress.com/read/supreme-court-of-india-s-leading-case-laws-on-insolvency-bankruptcy-code-2016  

You can also avail of it from amazon and Flipkart platforms.


Jayprakash Somani Advocates and Solicitors

Supreme Court of India Law firm

257C, Pocket 1, Mayur Vihar phase-1, Delhi-110091

Contact: 9322188701 , 9318381287, 8384051134

Website: www.jayprakashsomani.com