The Insolvency and Bankruptcy Code, 2016 is important legislation dealing with bankruptcy resolution and liquidation which received the president’s assent on 28th May 2016. The Code is consolidated legislation providing for the insolvency resolution process of individuals, partnership firms, Limited liability partnerships, and corporates.
The problem that existed in the form of bankruptcy laws before the Code was enacted was that as there existed different laws governing different parts of bankruptcy, different parts of the bankruptcy process were defined and governed by different laws that created unambiguity and lengthened the time taken for resolution and liquidation. This code replaced all the earlier existing laws relating to bankruptcy such as the Presidency Town Insolvency Act, 1909, the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act 2002, Sick Industrial Companies (Special Provisions) Act, 1985 and the Recovery of Debts Due to Banks and Financial Institutions Act,1993. The Code, by consolidating all laws regarding bankruptcy resolution and liquidation, made the process less complicated and effective. The Code also introduced an ‘Insolvency and Bankruptcy Board of India’. The adjudicating authority for corporate debtors under the Code is the National Company Law Tribunal.
The main objective of the code is to maximize the value of assets during the insolvency process, revive firms that are on the verge of bankruptcy, bring about a speedy resolution process and establish an Insolvency and Bankruptcy Fund. It was envisioned that the code would boost entrepreneurship in the economy, support credit formation, facilitate more investment in the economy and thereby improve the ease of doing business ranking of India. The focus of the code is to hand over the management of a sick firm to an insolvency professional who will manage the operation of the firm with the committee of creditors exercising control over him and at the same time protect the interest of the corporate debtors as well as that of the corporate creditors. Liquidation is a last resort option established by the Code if any plans to resurrect the firm out of insolvency are unsuccessful by resolution.
Corporate Insolvency Resolution Process
The main part of the code is the Corporate Insolvency Resolution Process, under which the management of a sick firm is taken from the debtor and handed over to a resolution professional who manages the firm as a going concern until resolution plan is initiated which would take the firm out of bankruptcy. This process is laid out from Chapter II of the Code.
The scheme of the code is such that when a default as defined under Section 3(12) occurs, the CIRP begins. An application for the commencement can be made when the corporate debtor defaults and the default is of one lakh rupees or more (as given in s.4(1)). Section 6 of the code lays down who can initiate the CIRP. It enumerates that CIRP can be initiated either by a financial creditor, operational creditor or the corporate debtor himself.
Under Section 7, a financial creditor by himself or jointly with other creditors can apply for the corporate insolvency resolution process (CIRP) against any corporate debtor before the adjudicating authority who has defaulted on its payments. It is not necessary that the financial creditor applying for CIRP must be the one to whom the debtor has defaulted, but the default can be to any other financial creditor of the corporate debtor.
Operational creditors can file for the CIRP under S.8. the process of triggering CIRP for operational creditors is different, who on the occurrence of default must first deliver a demand notice of the unpaid debt to the operational debtor as provided under s.8(1). Thereafter, the corporate debtor can, within 10 days of receipt of the notice dispute or challenge the CIRP application by bringing into notice a dispute or arbitration proceedings between him and the operational creditor. If there exists any such dispute or pending suit or arbitration proceedings, then the application is dismissed. The application is made to the adjudicating authority which can accept or reject the proposal after ascertaining whether the claim of default made is correct under s.7(5). Under the same sub-section, the adjudicating authority would reject the proposal and give seven days to the applicant to rectify the defect in his application.
On the other hand, when a corporate debtor has committed a default, the corporate applicant thereof may also file an application under s.10(1) for initiating CIRP with the adjudicating authority. The CIRP commences from the date of admission of the applicant under s.7(5)-s.7(6) of the code.
The time limit for completion of the CIRP is given under s.12 and it states that the CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate such a process. The resolution professional can, if instructed to do so by a resolution passed by the committee of creditors by a majority of 66% of the shareholders, file an application to the adjudicating authority to extend the period of CIRP. Once convinced that the CIRP cannot be completed within 180 days, the adjudicating authority can only once approve the extending of the CIRP by such further period it thinks fit, but no more than 90 days. This is done keeping in mind that the time frame for the resolution process is very important. As soon as the application is admitted, s.13 lays down that the adjudicating authority shall announce a moratorium for the purposes explained in s.14, make a public announcement for the initiation of the CIRP along with a call for the submission of claims and appoint a resolution professional in the manner as laid down under s.26.
After the CIRP has begun, the debtor is relieved from the control of the sick firm and an interim resolution professional under s.16(1) is appointed within 14 days from the insolvency commencement date, who is given control of the corporate debtor and is tasked with management of the affairs of the corporate debtor under the directions of the committee of creditors. The interim resolution professional exercises the powers of the board of directors or the partners of the corporate debtor, whose powers are suspended. The important duties of the CIRP as spelled out in s.18(1), inter alia include constituting a committee of creditors and receiving and collating all claims submitted by creditors to him. The claims submitted by operational creditors, financial creditors, workmen and employees, and other creditors can be submitted to the interim resolution professional who is to verify all the claims within 7 days of the receipt of claims and maintain a list of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest of such claims. The interim resolution professional is also tasked with protecting and preserving the value of the corporate debtor and managing the firm as a going concern under s.20(1). As soon as a CIRP is appointed, the insolvency professional shall make a public announcement of the CIRP.
After all, claims are received and collated by the interim resolution professional and after determining the financial position of the corporate debtor, the interim resolution professional is supposed to constitute a committee of creditors comprising of all the financial creditors of the corporate debtor under s.21(1). The committee of creditors is given a wide range of powers over the operation of the corporate debtor in the resolution period. The committee may in the first meeting held after 7 days of its constitution, voting by a majority of 66% either resolve to replace the interim resolution professional with another resolution professional or appoint the interim resolution professional as the resolution professional (s.22(2)). The resolution professional is hereafter supposed to conduct the CIRP and manage the operations of the corporate debtor during the CIRP. The resolution professional under s.29(1) is tasked with preparing the information memorandum which should contain all important details as specified in the Regulation 36(2) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, of the corporate debtor such as its annual financial statements, list of creditors, details of debt, details of material litigation, etc.
Submission of Resolution Plan
The next important phase of the CIRP is the submission of a resolution plan. Any individual who may be interested in putting the corporate debtor back on its feet may submit a resolution plan under s.30, based on the information memorandum prepared by the interim resolution professional. The eligibility of resolution applicants is laid down in s.29A and while submitting a resolution plan, the resolution applicant is supposed to submit an affidavit stating that he is eligible under s.29A to submit a resolution plan. S.30(2) specifies a time limit within which a resolution plan may be submitted. After the submission of a resolution plan, the resolution professional, as stated in Arcelor Mittal India Pvt Ltd v Satish Kumar Gupta, is not required to take any decision, but is only required to ensure that the resolution plans submitted conform to the requirements of s.30(2) and are complete in all respect before they are submitted to the committee of creditors.
Once the plan is approved by the committee of creditors, the resolution plan is to be submitted to the adjudicating authority under s.31 of the code. If the adjudicating authority is satisfied that the resolution plan as approved by the committee of creditors meets all the requirements in s.30(2), it shall by order approve the resolution plan which shall then be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. When the adjudicating authority concludes that the resolution plan does not conform to the requirements of s.30(2), it may be an order to reject the plan. Once the resolution plan is rejected, the adjudicating authority orders the liquidation of the corporate debtor.
Apart from the CIRP part of the Code, there are other important facets of the Code. The Code has laid down law for the establishment of an Insolvency and Bankruptcy Board of India (IBBI) and has introduced separate adjudicating authorities for individuals and companies. For individuals, the Debt Recovery Tribunal (DRT) is the adjudicating authority and for companies, it is the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). Since its introduction in 2016, the Code has undergone various changes through amendments, ordinances and case law. To serve its purpose efficiently, new changes should be added continuously to keep the Code adaptive to changing circumstances in the economic sphere of the country.
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