Insolvency and Bankruptcy Code, 2016 (IBC)

Overview

In India, the legal and institutional machinery for dealing with debt default was not in line with global standards. The recovery action by creditors, through various laws has not been able to aid recovery for lenders nor aid restructuring of firms. The objective of IBC is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximisation of value of assets of such persons and matters connected therewith or incidental thereto.

IBC is a bankruptcy law which seeks to consolidate and amend among others the following legislative framework relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals:

• Recovery of Debts due to Banks and Financial Institutions Act, 1993
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
• Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) repealed
• Winding up provisions of the Companies Act, 1956, Companies Act, 2013 and LLP Act, 2013
• The Presidential Towns Insolvency Act, 1909
• Provincial Insolvency Act, 1920

The legal framework contains a set of Rules and Regulations framed under this Act. The legal framework is still in its nascent stage. The Insolvency and Bankruptcy Board of India was established on October 1, 2016 as the regulator.

Salient features

1. Applies to Companies, Partnerships, LLPs, Individuals and any other body specified by the Central Government.
2. Also applies to personal guarantors to corporate debtors; partnership firms and proprietorship firms; and individuals (other than personal guarantors). [Insolvency and Bankruptcy Code (Amendment) Act, 2017]
3. Provides for clear, coherent and speedy process for early identification of financial distress and resolution of companies and limited liability entities if the underlying business is found to be viable.
4. Two distinct processes for resolution of individuals, namely- “Fresh Start” and “Insolvency Resolution”.
5. Four pillared institutional infrastructure: -
   1. Insolvency Professionals (IPs’) – the resolution processes will be conducted by licensed IPs. They would play a key role in the efficient working of the bankruptcy process. They would be regulated by ‘Insolvency Professional Agencies (IPA). The Insolvency and Bankruptcy Board of India (‘IBBI’) has recently notified the Model by laws and Governing body of IPAs. As per recently notified regulations, not-for-profit companies having a minimum net worth of ₹10 crore will be eligible to act as an IPA. IBC has become operational with IPAs getting registered.
   2. Information Utilities (‘IUs’)– IUs will be established to collect, collate and disseminate financial information to facilitate insolvency resolution. This would eliminate delays and disputes about facts when default does take place.
   3. National Company Law Tribunal (NCLT) – it will be the forum where companies’ insolvency will be heard and Debt Recovery Tribunal (DRT) will be the forum where individual and firms’ insolvencies will be heard. These institutions, along with their appellate bodies, viz., NCLAT and DRATs will be adequately strengthened so as to achieve world class functioning of the bankruptcy process.
   4. The Insolvency and Bankruptcy Board of India – this body will have regulatory oversight over the IPs, IPAs and IUs.

Initiation of Corporate Insolvency Resolution Process (CIRP)

If Corporate Debtor commits default of more than ₹ 1 lakh, financial creditor, operational creditor or corporate debtor itself may initiate CIRP.

Insolvency Resolution by Financial Creditor

Financial Creditor either itself or jointly with other financial creditor or any other person on behalf of financial creditor may file an application against corporate debtor before Adjudicating Authority. [Insolvency and Bankruptcy Code (Second Amendment) Act, 2018]

Insolvency Resolution by Operational Creditor

Operational Creditor may deliver demand notice along with copy of Invoice. Corporate Debtor shall within 10 days bring to notice of creditor either existence of dispute if any or payment of unpaid dues [Insolvency and Bankruptcy Code (Second Amendment) Act, 2018]

On expiry of 10 days Operational Creditor may file an application before Adjudicating Authority.

Insolvency Resolution Process

1. The Code specifies insolvency resolution processes for companies and individuals, which will have to be completed within 180 days. This limit may be extended to 270 days in certain circumstances by vote of minimum sixty-six per cent voting share. The resolution process will involve negotiations between the debtor and creditors to draft a resolution plan.

   CIRP can also be completed under Fast Track Corporate Insolvency Resolution Process within a period of 90 days as specified under section 57.

   The essential idea of the new law is that when a firm defaults on its debt, control shifts from the shareholders / promoters to a Committee of Creditors, who have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use. This is in complete departure with the experience under the SICA regime where there were delays leading to destruction of the value of the firm.

2. Adjudicating Authority shall within 14 days accept or reject the application. Upon acceptance of application the CIRP shall commence and Interim Resolution Professional be appointed till the date Resolution Professional is appointed.
3. The IP will invite applications from Resolution Applicants for submission of resolution plans. The Resolution plan may be submitted by the applicants, either singly or jointly. The resolution applicant is required to fulfil such criteria as may be determined by the IP with the approval of the Committee of Creditors, depending upon the complexity and scale of operations of the business of the corporate debtor, and such other conditions as may be specified by the Board. [Insolvency and Bankruptcy Code (Amendment) Act, 2017].
4. A person shall not be eligible to submit a resolution plan if such person or any other person acting jointly or in concert with such person does not meet the conditions specified under section 29A the Act. [Insolvency and Bankruptcy Code (Amendment) Act, 2017].
5. Adjudicating Authority shall pass order of Liquidation if resolution plan has not been received and Resolution Professional shall act as liquidator.
6. The assets will be distributed in the following order, in case of liquidation: (i) fees of insolvency professional and costs related to the resolution process, (ii) workmen’s dues and secured creditors, (iii) employee wages, (iv)unsecured creditors, (v) government dues and remaining secured creditors (any remaining debt if they enforce their collateral)(vi) any remaining debt, and (vii) shareholders.
7. Liquidator shall make an application to Adjudicating Authority for dissolution where the assets have been completely liquidated.
8. The process will end under two circumstances, (i) when the creditors decide to evolve a resolution plan or sell the assets of the debtor, or (ii) the 180-day time period for negotiations has come to an end. In case a plan cannot be negotiated upon during the time limit, the assets of the debtor will be sold to repay his outstanding dues. The proceeds from the sale of assets will be distributed based on an order of priority. The assets cannot be sold to a person not eligible to be a resolution applicant. [Proviso to section 35 inserted vide Insolvency and Bankruptcy Code (Amendment) Act, 2017].
9. For cross border insolvency, the Central Government may enter into agreements with other countries to enforce provisions of the Code. (Cross border insolvency relates to an insolvent debtor who has assets abroad).

There is a general penalty of minimum of 1 lakh and maximum 2 crore for offences or violations for which there is no penalty or punishment prescribed under the Code. [Insolvency and Bankruptcy Code (Amendment) Act, 2018]

The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market. It would take India from having among relatively weak insolvency regimes to providing businesses a stronger framework. It lays the foundations for the development of the corporate bond market, which would finance the infrastructure projects of the future. The passing of this Code and implementation of the same will give a big boost to ease of doing business in India.

Report of the Insolvency Law Committee dated 26-3-2018

Insolvency Law Committee set up in November 2017 presented its report to the Government on views and issues arising from implementation of the Insolvency and Bankruptcy Code, 2016. The key recommendations of the Report are as follows:

1. In recognition of the importance of Micro, Small and Medium Enterprises (MSMEs) to the Indian economy and the unique challenges faced by them, it has been recommended to allow the Central Government to exempt MSMEs from application of certain provisions of the Code;
2. In order to address the problem of unintended exclusions under section 29A that disqualifies certain persons from submitting resolution plans under the Code, it has been recommended to streamline it so that only those who contributed to defaults of the company or are otherwise undesirable are rendered ineligible. Moreover, being mindful of the Non-Performing Asset (NPA) crisis in the country, the need to encourage the market for NPAs was felt and accordingly several carve-outs from section 29A have been recommended for pure play financial entities. In order to prevent retrospective application of any proposed change, it has been recommended to add a proviso that the amendments shall be applicable to resolution applicants that have not submitted resolution plans as on date of coming into force of the said amendment;
3. It has been recommended that home buyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of home buyers by the Hon’ble Supreme Court in ongoing cases.
4. To clear the confusion regarding treatment of assets of guarantors of the corporate debtor vis-à-vis the moratorium on the assets of the corporate debtor, it has been recommended to clarify by way of an explanation that all assets of such guarantors to the corporate debtor shall be outside scope of moratorium imposed under the Code;
5. In order to fulfill the stated objective of the Code i.e. to promote resolution, it has been recommended to re-calibrate voting threshold for various decisions of the committee of creditors;
6. In order to enable the corporate debtor to continue as a going concern while undergoing Corporate Insolvency Resolution Process (CIRP) it has been recommended to empower the NCLT on the application of IP to allow expansion of the scope of essential goods and services beyond what is specified in CIRP Regulations;
7. In order to cater to exceptional circumstances warranting withdrawal of an application for CIRP post-admission, it has been recommended to allow such exit provided the Committee of Creditors approves such action by ninety per cent of voting share;
8. In order to prevent misuse of section 10 of the Code, which permits initiation of CIRP by Corporate Applicant, it has been recommended to provide for the requirement of special resolution passed by the shareholders of the Corporate debtor or resolution passed by at least three-fourths of the total number of partners of the corporate debtor as the case may be;
9. In order to facilitate successful implementation of the resolution plan by the successful bidder, it has been proposed to allow one year time to obtain necessary statutory clearances from Central, State and other authorities or such time as specified in the relevant law, whichever is later.
10. Recommendations for cases of cross border insolvency will be provided separately by the Committee.

How to be an Insolvency Professional

Chartered Accountants with 10 years plus experience is eligible to be Insolvency Professional (IP). One need to Pass Limited Insolvency Exam conducted by National Institute of Securities Market (NISM).

Web sites for further information

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The amendments

1. Prescribe threshold for certain categories of financial creditors : Financial Creditors who are allottees under real estate project and financial creditors falling in category of creditor referred in clause (a) and (b) of sub-section (6A) of section 21, may initiate CIRP against the corporate debtor before the adjudicating authority by filing a joint application comprising of not less than 100 allottees or not less than 10% of the total number of allottees, whichever is less. Further if any application already filed by the aforesaid categories has not been admitted by the adjudicating authority before the commencement of the Ordinance, then such an application will be required to be modified to comply with the Ordinance within 30 days of its commencement, failing which the application shall be deemed to be withdrawn before its admission.
2. Clarification on persons not entitled to make application: Corporate debtor will now be permitted to initiate CIRP against other corporate debtors.
3. No suspension or termination of a license, permit, registration, etc. given by the government under the moratorium period : License, permit, registration, quota, concession, clearances or a similar grant or right given by the central government, state government, local authority, sectoral regulator or any other law for the time being in force shall not be suspended or terminated on the grounds of insolvency. However, ensure that there should not be any default in payment of the current dues arising in relation to the use or continuation of such license, permits, etc. during the moratorium period.
4. Continuance of supply of goods and services critical for the Corporate Debtor : Supply of the goods and services critical to protect and preserve the value of the Corporate Debtor and for the purposes to manage its operations as a going concern, which may be deemed fit as per the interim resolution professional or resolution professional, as the case may be during the moratorium period. This provision will not apply if the corporate debtor has failed to pay the suppliers during the moratorium period or other specified circumstances.
5. Time limit for the appointment of the interim resolution professional (IRP): Time limit for appointment of the IRP has now been changed from a period of 14 days from the insolvency commencement date to the date on which the insolvency is commenced.
6. Liability for offences committed prior to the commencement of the CIRP: Corporate debtor will not be liable for an offence committed prior to the commencement of the CIRP from the date the resolution plan is approved by the adjudicating authority.
7. Filing of Forms after due date of submission shall be accompanied by fee of ₹500 per Form each month after 01.04.2020 [Insolvency and Bankruptcy Board of India (Amendment) Regulations, 2020]

Forms filed under Insolvency and Bankruptcy Code

Few Judgments under IBC

1. Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd dt. 10.08.2018

   It was held that Income tax dues being in nature of crown debts, do not take precedence over secured creditors who are private person.

2. State Bank of India vs. V. Ramakrishnan & Anr dt. 14.08.2018

Section 14 of the Insolvency and Bankruptcy Code, 2016, which provides for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition, will not apply to a personal guarantor of a corporate debtor.

3. K Sashidhar vs. Indian Overseas Bank & Ors dt. 05.02.2019

   Resolution plan of the concerned corporate debtor not being approved by requisite percent of voting share of the financial creditors; and in absence of any alternative resolution plan presented within the statutory period of 270 days, the inevitable sequel is to initiate liquidation process under Section 33 of the Code.

4. State Bank of India vs. SKC Retails Ltd. Through IRP & anr

   NCLAT held that as per Regulation 33, Applicant is required to fix the fees paid to Interim Resolution Professional. However, NCLT is required to fix expense where applicant fails. Thus, Applicant is required to bear the expense which is reimbursed by Committee of Creditors to the extent Committee ratifies.

The MCA vide notification No. S.O. 1205 (E) dated 24.03.2020 increased the threshold for initiation of insolvency process under the IBC from ₹ 1 lakh to ₹ 1 crore. This was made due to the pandemic situation of COVID-19.