This article is written by Sakshi Jaiswal, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
The Insolvency and Bankruptcy Code (‘Code’), 2016 commenced on 1st December 2016. The Code came in as a boon for persons and entities facing financial distress in India. However, it is seen that the Code is not as buoyant as it looks in its statute because the real challenge starts at the stage of implementation of this law in our country. Many mistakes the Insolvency law to be a substitute of a recovery forum in our country, however, that is not the case. The procedure enumerated under the Code can lead an entity to either re-evolve or become bankrupt. On implementing the Code in India, the Courts, as well as the Creditors, face a number of issues.
The Code is still at its nascent stage and is evolving every day, therefore, lawyers face a number of problems in their decision making and filing process of the Insolvency applications. The latest amendment in Code was witnessed as per Press Release by the Ministry of Corporate Affairs on 17.07.2019.
The law in India is very clear on the subject of Insolvency and Bankruptcy. This article primarily talks about the practise of the Insolvency and Bankruptcy laws by Advocates in India including but not limited to the Corporate Insolvency Resolution Process (CIRP) as well enumerated under the Act.
The Insolvency & Bankruptcy Act is a consolidated Code which is covered in Entry 9 List III of Seventh Schedule of the Constitution of India. The main objective of the Code is to make the process of Insolvency of a corporate person, partnership firm or an individual a creditor driven in a time-bound manner. It is to be noted that w.e.f 23.11.2017 the Code is made applicable to the personal guarantors of the corporates as well. The objective of the Code extends to the formation of an Insolvency and Bankruptcy Board of India (IBBI) which will oversee the work of insolvency and bankruptcy of corporate persons, firms and individuals.
The term “Corporate person” has been defined under Section 3(7) of the Code as “corporate person”:
- Company as defined in clause (20) of Section 2 of the Companies Act, 2013 (18 of 2013),
- a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009),
- or any other person incorporated with limited liability under any law for the time being in force.
However, it is important to note that the aforesaid definition does not include a financial service provider such as Bank, Financial Institutions such as NBFC’s, Insurance Company, Asset Reconstruction Company, Mutual Funds, Collective Investment Schemes or Pension Funds. Therefore, they cannot be sued under the Code.
Step 1 – Identification of Occurrence of ‘Default’
The first step to being taken up before filing an insolvency application in National Company Law Tribunal (NCLT) is to check whether there has been a ‘default’. The term default has been defined under Section 3(12) and explained under Section 7 of the Code as non-payment or non-remittance in respect of the financial debt. However, it must be noted that this debt may not only be owed to the applicant financial creditor but can be owed to any other financial creditor of the corporate debtor once the corporate debtor has been declared insolvent and the CIRP commences. Once the default has been established, the Counsel of the applicant must check whether a CIRP has been initiated with respect to the Corporate Debtor on the IBBI website. If yes, then the Creditor shall directly send the prescribed Form depending upon the Class of the creditor they belong to, to the appointed Insolvency Professional and directly move on with Step 6 i.e, formulation of resolution plan or participation in the CoC meeting. Hence, without default, an insolvency application cannot be filed. The default shall be above the amount of Rupees One Lakh.
Step 2 – Identification of the kind of ‘Creditor’
There are two kinds of creditors who may file an application under the Act. The Creditors who may avail benefits under the act are-
- Financial Creditors – Financial Creditor is a person to whom a financial debt is owed in the nature of money lent by banks or financial institutions, debt raised by acceptance of credit notes, debt pursuant to purchase of debentures, loan stock and so on and so forth. The term ‘financial debt’ has been interpreted by NCLAT in Nikhil Mehta and Sons vs. AMR Infrastructure Ltd. and reiterated in Shailesh Sangani vs. Joel Cardoso and Priority Marketing Private Limited.
- Operational Creditors – Operational Creditor is a person to whom an operational debt is owed in the nature of claim or debt arising in a series of transaction in respect of goods and services. The nature of the operational debt must be transactional.
- Corporate Applicant – Corporate Applicant is the Corporate Debtor or its authorised representative. Therefore, a debt-ridden entity also has the right to apply to NCLT and undergo the procedure of Insolvency under the Code.
This is the first question that the Courts determine in an insolvency application. The rights of both the creditors i.e, Financial and Operational are different as they differ on various levels and there has been an on-going debate regarding the same before the latest amendment in the Code in 2019. The clarification regarding homebuyer being a Financial Creditor has been upheld vide Judgement dated 09.08.2019 by the Supreme Court in Pioneer Urban Infrastructure Land and Infrastructure Limited v. Union of India and Others.
The Financial Creditor may file an application under Section 7 of the Code whereas the Operational Creditor may file an application under Section 9 of the Code before the NCLT.
The Code has enumerated under Section 10 on how a corporate debtor may file an insolvency application against itself under the name of ‘corporate applicant’. A corporate applicant can be the corporate debtor or its authorised agent. When a corporate debtor becomes incapable of paying its debts, it may apply to NCLT under Section 10 of the Code for initiation of insolvency process against itself. However, it is must for the corporate applicant to prove that it is bonafide insolvent and only then shall the Court proceed against it under the Code.
In most cases, liquidation of companies will be under the regulations of the Code and the direct winding up under the Companies Act, 2013 may be used very rarely.
Step 3 – Appointment of Insolvency Professional
An Insolvency Professional is a professional who is registered with the IBBI and are members of the Insolvency Professional Agency (IPA). Actual work relating to insolvency and bankruptcy is handled by an Insolvency Professional who is monitored by the IPA. It is the duty of the IPA to monitor the work of an Insolvency Professional and also to make sure such members have sufficient knowledge and expertise in such matters. A Financial Creditor under Section 7 shall mandatorily appoint an Interim Resolution Professional while filing an application under Section 7. However, an Operational Creditor under Section 9 may appoint an Interim Resolution Professional (IRP) while filing an application under Section 9, but the same is not mandatory.
An Insolvency Professional is given the power by the Court to effectively run and manage the entity and assets of the entity at all times during the process of resolution as an on-going concern. Being a new legislation, the Code is evolving with every passing day and so are the rights and duties of an Insolvency Professional. An Insolvency Professional has control over the debtors under the supervision of the Committee of Creditors (CoC).
Step 4 – Filing Process in NCLT
After preparation of the draft of application u/s 7, 8 or 9, the same is filed physically as well as electronically before the NCLT. The filing process, as well as documents required for filing the application also changes from time to time, therefore, all professional must stay updated by the same through the IBBI website. The filing process may also differ in different NCLTs.
Step 5 – Acceptance of Application by NCLT and Issue of Notice
The Court needs to be satisfied that there is a default and the corporate debtor is insolvent in order to declare an entity as insolvent and give a moratorium. Once an Insolvency Application is accepted by Court at the request of the Applicant, the Court issues a notice to the Corporate Debtor to come before the Court on the next date of hearing, to raise an objection, if any. However, if no default is ascertained by NCLT within 14 days, it must record reasons for the same in its order. The moratorium under Code starts from the Insolvency Commencement date and is in force till the Corporate Insolvency Resolution Process period and during such period no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the Corporate Debtor however such moratorium does not extend to any sort of criminal proceeding against the Corporate Debtor.
Step 6 – Insolvency Resolution
The Insolvency Professional appointed by the applicant takes over the Insolvency process of the Corporate Debtor as soon as moratorium begins. The IRP makes a public announcement for calling other creditors and forms a committee of all the Creditors. Since this is a time bound process, there is a time limit for everything. Therefore, the creditors must check the website of Code from time to time to avoid any delays. The Insolvency Professional can be changed by the CoC by voting. Meetings are held of the CoC’s within equal intervals of time to further the cause of the Insolvency procedure. The CIRP ought to conclude within the moratorium. The latest amendment of the Code has increased the moratorium period to 330 days which includes time spent in legal proceedings such as appeals or writs that may be opted for by the parties. However, if the Resolution process does not complete in the given time frame of 330 days, 90 days extension may be given which is subject to no extension whatsoever.
A Resolution Plan can provide for the restructuring of the Corporate Debtor such as amalgamation, merger or demerger and once the plan is approved by NCLT it is binding on Central and State Government as well as local authorities in terms of statutory dues. CoC has the power to liquidate the Corporate Debtor before the Resolution Plan is passed. It has also been clarified by the latest amendment that if there are number of creditors belonging to the same class, then they must be represented by an authorised representative, who shall attend the CoC meeting in lieu of those creditors, but the authorised representative shall make sure to obtain consent of the creditors on any decision it takes on behalf of them. The operational creditors have an extended right under the amended Code which provides that they should recover an amount equivalent to the amount they would have recovered under the process of liquidation of the Corporate Debtor.
The Insolvency and Bankruptcy practise in India boast of, probably the single largest body of case laws currently. There is no stability due to the frequent changes in the legislature. However, the Code has come in the form of blessing for the creditors and financial institutions. It has formulated the basis of insolvency practise in India. Insolvency is a lucrative practise and time-bound process. It has made the lives of many individuals and entities easy.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.
 (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
 S. 5(7), Insolvency and Bankruptcy Code, 2016.
 S. 5(8), Insolvency and Bankruptcy Code, 2016.
 Company Appeal (AT) (Insolvency) No. 07 of 2017
 Company Appeal (AT) (Insolvency) No. 616 of 2018
 S. 5(20), Insolvency and Bankruptcy Code, 2016.
 S. 5(21), Insolvency and Bankruptcy Code, 2016.
 S. 5(5), Insolvency and Bankruptcy Code, 2016.
 Writ Petition (Civil) No. 43 of 2019
 S. 5(5), Insolvency and Bankruptcy Code, 2016.
 Refer to Section 14 of the Act.
 S. 7(4) and 7(5), Insolvency and Bankruptcy Code, 2016.
 S. 12(3), Insolvency and Bankruptcy Code, 2016.
 S. 5(26), Insolvency and Bankruptcy Code, 2016.
 S. 31(1), Insolvency and Bankruptcy Code, 2016.
 S. 25A, Insolvency and Bankruptcy Code, 2016.
 S. 30(2) (b) and 30(4), Insolvency and Bankruptcy Code, 2016.