Company law Assignment

RAGHAV PANNDEY

ROLL NO. 66

BATCH 2

Submitted to : Mrs. . Priyanka Chaudhary

INSOLVENCY IN IBC
The Union Cabinet has approved the proposal to make amendments in the Insolvency and Bankruptcy
Code (IBC), 2016, through the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019. The
amendments aim to remove certain difficulties being faced during insolvency resolution process to realise
the objects of the code and to further ease doing of business.

In 2016 first time there was a standard bill pass as Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in
companies and among individuals.

Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.

Bankruptcy, on the other hand, is a situation whereby a court of competent jurisdiction has declared a
person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the
creditors. It is a legal declaration of one’s inability to pay off debts.

The Government implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related
to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA), a problem that has been
pulling the Indian economy down for years.

The Code is quite different from the earlier resolution systems as it shifts the responsibility to the creditor
to initiate the insolvency resolution process against the corporate debtor.

Why does India need a bankruptcy law?

 India is a capital starved country and therefore it is essential that capital isn’t frittered
away on weak and unviable businesses. Quick resolution of bankruptcy can ensure this.
 Today, bankruptcy proceedings in India are governed by multiple laws — the Companies
Act, SARFAESI Act, Sick Industrial Companies Act, and so on. The entire process of
winding up is also very long-winded, with courts, debt recovery tribunals and the Board
for Industrial and Financial Reconstruction all having a say in the process.
 According to the World Bank’s Doing Business 2016 report,
 On average, secured creditors in India recover only 25.7 cents for every dollar of credit
from an insolvent firm at the end of insolvency proceedings. This contrasts poorly
with the OECD countries where creditors recover 72.3 cents.
 The whole insolvency process takes 4.3 years to conclude in India whereas it takes just
1.7 years in OECD countries.
  Because of the above reasons, India ranks an abysmal 136 out of 189 countries with
respect to “resolving insolvency”.
 Ring-fencing the companies resolved under the IBC from regulatory actions during past
management can make the IBC process attractive for investors and acquirers.
 The 2016 Code provides for a time-bound process to resolve insolvency. When a default in
repayment occurs, creditors gain control over the debtor’s assets and must make decisions to
resolve insolvency within a 180-day period. To ensure an uninterrupted resolution process, the
Code also provides immunity to debtors from resolution claims of creditors during this period.
The Code also consolidates provisions of the current legislative framework to form a common
forum for debtors and creditors of all classes to resolve insolvency.

Who facilitates the insolvency resolution under the Code?

 The Insolvency Professionals: These professionals will administer the resolution process,
manage the assets of the debtor, and provide information for creditors to assist them in decision
making.
 Insolvency Professional Agencies: insolvency professionals will be registered with insolvency
professional agencies. The agencies conduct examinations to certify insolvency professionals and
enforce a code of conduct for their performance.
 Information Utilities: Creditors will report financial information of the debt owed to them by the
debtor. Such information will include records of debt, liabilities and defaults.
 Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the
National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal
(DRT), for individuals. The duties of the authorities will include approval to initiate the
resolution process, appoint the insolvency professional, and approve the final decision of
creditors.
 Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals,
insolvency professional agencies and information utilities set up under the Code.

Objectives of IBC
 To consolidate and amend all existing insolvency laws in India.
 To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
 To protect the interest of creditors including stakeholders in a company.
 To revive the company in a time-bound manner.
 To promote entrepreneurship.
 To get the necessary relief to the creditors and consequently increase the credit supply in the
economy.
 To work out a new and timely recovery procedure to be adopted by the banks, financial
institutions or individuals.
 To set up an Insolvency and Bankruptcy Board of India.
 Maximization of the value of assets of corporate persons.
 Salient features of the Insolvency and Bankruptcy Code, 2016
 Covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.

National Company Law Tribunal (NCLT) for companies and LLPs

Debt Recovery Tribunal (DRT) for individuals and partnership firms
Insolvency Resolution Process
The Code makes a significant departure from the existing resolution regimen by shifting the
responsibility on the creditor to initiate the insolvency resolution process against the corporate
debtor. Under the existing legal framework, the primary onus to initiate a resolution process lies
with the debtor, and creditor may pursue separate actions for recovery, security enforcement and
debt restructuring.
Insolvency Resolution and Liquidation Process for Corporates
If the default is above Rs.1 Lakh (may be increased up to Rs.1 Cr by the Government, by
notification), the creditor may initiate insolvency resolution process. The Code proposes two
independent stages:
1. Insolvency Resolution Process 
2. Liquidation
Resolution process
Insolvency Resolution Process – during which financial creditors assess whether the debtor’s
business is viable to continue and the options for its rescue and resurrection;.
Inability to pay back the amount to its creditors or investors or lenders on time and also for a
very long time by any corporate or business entity, makes a company to be insolvent and this
state is called as insolvency for which the application of insolvency is submitted to the National
Company Law Tribunal (NCLT) by anyone of Financial Creditor or Operational Creditor or
Corporate Debtor himself.  In case of corporate debtor himself, the operational creditor has to
send a prior notice of demand for 10 days to the corporate debtor before the initiation of
insolvency resolution process.
Bank or Financial institution or any other lender or anyone providing loan, credit facility or other
financial assistance falls into the category of “Financial Creditors”
Someone who has been extended a payment of credit during the course of business is
an “Operational Creditor”. Suppliers and service providers are covered under this provision.

Insolvency Resolution process by a Financial Creditor

 Financial creditor either by himself or jointly shall initiate filing of application before
NCLT against the corporate debtor for insolvency proceedings.
 The proof of default and the name of the proposed insolvency professional to be
appointed shall be submitted along with the application
 Financial Creditors under Section 7 of IBC, 2016 by Operational Creditors under Section
9 of the IBC, 2016 and by the Corporate Debtor himself under Section 10 of the IBC,
2016.
 NCLT may reject the application if it is of the opinion that the corporate debtor is not
default or if there is any proceeding pending against the proposed resolution professional.
  Within fourteen days of making application to it, NCLT has to entertain the application.
Insolvency Resolution process by an Operational Creditor
 An operational creditor will have to serve 10 days of prior notice to the corporate debtor
asking him to pay back the dues before initiating insolvency resolution process.
 In the event of corporate debtor not paying back the amount in that time period and
doesn’t bring to the notice of operational creditor about any dispute or any arbitration
proceeding pending against it then the operational creditor can file application for
insolvency resolution.
Insolvency Resolution by the Corporate Debtor
As per provisions contained in Chapter- II of the Code, where a corporate debtor has defaulted
on the payment of dues to a financial or operational creditor, the corporate debtor or any
applicant (i.e. the financial or operational creditor) can file the application for the initiation of
insolvency resolution process along with the books of accounts and other financial documents of
the business. Furthermore, as per Section 10 (3) (b) the corporate debtor shall also file the name
of the proposed resolution professional along with the application.

Time period for the completion of the insolvency resolution process

1. Corporate insolvency process shall be completed within 180 days of admission of
application by NCLT. Upon admission of application by NCLT, Creditors’ claims will be frozen
for 180 days, during which time NCLT will hear proposals for revival and decide on the future
course of action. And thereupon, no coercive proceedings can be launched against the corporate
debtor in any other forum or under any other law, until approval of resolution plan or until
initiation of liquidation process.
2. NCLT appoints an interim Insolvency Professional (IP) upon confirmation by the
Insolvency and Bankruptcy Board (hereinafter, “the Board”) within 14 days of acceptance of
application. Interim IP holds office for 30 days only. Interim IP takes control of the debtor’s
assets and company’s operations, collect financial information of the debtor from information
utilities.
3. NCLT causes public announcement to be made of the initiation of corporate insolvency
process and calls for submission of claims by any other creditors.
4. After receiving claims pursuant to public announcement, interim IP constitutes the
creditors’ committee. All financial creditors shall be part of creditors’ committee and if any
financial creditor is related party of corporate debtor, then such financial creditor will not have
any right of representation, participation or voting. Operational creditors should be part of
Creditors’ Committee (without voting right) if their aggregate dues are not less than 10% of the
debt.
5. Creditors’ committee shall meet first within seven days of its constitution and decide by
75% of votes either to replace or confirm interim IP as Resolution Professional. Thereupon,
Resolution Professional is appointed by the NCLT upon confirmation by the Board. The
creditors’ committee,with a majority of 75% votes, can change Resolution Professional any time.
6. The creditors’ committee has to then take decisions regarding insolvency resolution by
a 75% majority voting.
7. If three-fourths of the financial creditors consider the case complex and require
extension of time beyond 180 days, the NCLT can grant a one-time extension of up to 90 days.
8. Resolution Professional to conduct entire corporate insolvency resolution process and
manage the corporate debtor during the period.
9. Resolution Professional shall prepare information memorandum for the purpose of
enabling resolution applicant to prepare resolution plan.A resolution applicant means any person
who submits resolution plan to the resolution professional. And upon receipt of resolution plans,
Resolution Professional shall place it before the creditors’ committee for its approval.
10. Once a resolution is passed, the creditors’ committee has to decide on the restructuring
process that could either be a revised repayment plan for the company, or liquidation of the
assets of the company. If no decision is made during the resolution process, the debtor’s assets
will be liquidated to repay the debt.
11. The resolution plan will be sent to NCLT for final approval, and implemented once
approved.

Public announcement of Moratorium

Upon the admission of insolvency resolution application before it, NCLT will make a public
announcement for the submission of claims by the creditors. Also, NCLT appoints the interim
resolution professional.

Moratorium
 The moratorium will be declared by the NCLT for prohibiting the following: 
 Institution of any suit or pending suit including execution of any judgement or decree
against the corporate debtor.
 Transferring, encumbering, alienating or disposing of any property or right or beneficial
interest.
 Any action to foreclose, recover or any security interest created by the corporate debtor in
respect of his property.
 Recovery of any property by the owner or lessor which is under the possession of the
corporate debtor.
Terminate the supply of goods and services to the corporate debtor.
On the date on which the resolution process is approved or on the date of liquidation order the
moratorium shall cease to have effect. Insolvency resolution professional or Committee of
creditors do not have any powers, conferred by the Code, to invalidate / withdraw or cancel any
of the pending actions or proceedings involving the corporate debtor. There will be no impact on
the proceedings which are pending before the imposition of moratorium except that during
moratorium period, such proceedings or actions will be adjourned sine die.
In case of Canara Bank V. Deccan Chronical Holdings Ltd.  the National Company Law
Tribunal (Hyderabad) held that the power of the Hon’ble Supreme Court Article 32 of the
Constitution of India and Hon’ble High Courts under Article 226 of Constitution of India cannot
be curtailed by any provision of an Act or a Court. Therefore the moratorium under IBC
excludes these proceedings under the Constitution.
Liquidation– if the insolvency resolution process fails or financial creditors decide to wind
down and distribute the assets of the debtor.

When does Liquidation Process start under IBC 2016?

Section 33 of the Code provides: (1) Where the Adjudicating Authority, — (a) before the expiry
of the insolvency resolution process period or the maximum period permitted for completion of
the corporate insolvency resolution process does not receive a resolution plan; or (b) rejects the
resolution plan for the non-compliance of the requirements specified therein, it shall— (i) pass
an order requiring the corporate debtor to be liquidated in the manner as laid down in Code; (ii)
issue a public announcement stating that the corporate debtor is in liquidation; and (iii) require
such order to be sent to the authority with which the corporate debtor is registered (2) Where the
resolution professional, at any time during the corporate insolvency resolution process but before
confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the
committee of creditors to liquidate the corporate debtor, the Adjudicating Authority shall pass a
liquidation order. (3) Where the resolution plan approved by the Adjudicating Authority is
contravened by the concerned corporate debtor, any person other than the corporate debtor,
whose interests are prejudicially affected by such contravention, may make an application to the
Adjudicating Authority for a liquidation order. (4) On receipt of an application under sub-section
(3), if the Adjudicating Authority determines that the corporate debtor has contravened the
provisions of the resolution plan; its hall passes a liquidation order. (5) When a liquidation order
has been passed, no suit or other legal proceeding shall be instituted by or against the corporate
debtor.
Liquidation process can be initiated under following circumstances as of section 33 of
the insolvency and bankruptcy code 2016-When no resolution plan is submitted by interim
resolution professional as received from adjudicating authority on or before the expiry of
insolvency resolution period.

When the resolution plan as received by interim resolution professional is

non-compliant to section 31.
When a request is received from committee of creditors to liquidate the corporate debtor during
the corporate insolvency resolution period and same is communicated by the interim resolution
professional to the adjudicating authority. When the corporate debtor disobeys the resolution
plan which is approved by adjudicating authority and the person or creditor who is getting
affected by this files an application to adjudicating authority for liquidation of corporate debtor
and the adjudicating authority finds the corporate debtor guilty.

Priority List of Creditors:

The company’s filing for liquidation falls under two categories, solvent and insolvent. An
insolvent company is at a shortfall of cash even after liquidation of company assets to pay off its
creditors, in such a scenario, there could be conflict of interest amongst the creditors because of
insufficient assets to pay all the creditors in full. Hence the law attempts to maintain the equality
amongst the creditors and follow a transparent process to liquidate the assets of the company to
be distributed equally amongst the creditors as per the size of their claim. Below is the priority
list as per which the assets after liquidation are distributed. (Section 53)

Insolvency Resolution Process Costs and Liquidation Cost:

 Workmen's dues and debts due to secured creditor who has relinquished security interest.
 Wages and dues of employees other than workmen.
 Financial debts owed to unsecured creditors.
 Dues to the Government and dues owed to a secured creditor who has realized security
interest but the proceeds are insufficient to meet the debts
 Residuary debts and dues
 Preference shareholders
 Equity Shareholders or partners
Process followed for liquidation: 
 Once the liquidation process is initiated as per the above-mentioned criteria’s, then the
moratorium shall commence. Following the moratorium, a public announcement shall be
made about the corporate debtor being liquidated.
 A liquidator is appointed as per section 34 and the fee to be paid to him for the
proceedings is decided. The fee for liquidator is part of proceeds from liquidation estate.
The resolution professional also acts as a liquidator unless he is replaced by NCLT.
Liquidation trust is formed as per section 36 of insolvency and bankruptcy Code. This
section is core of company liquidation process as it defines what assets of corporate
debtor shall form part of the liquidation estate, how the assets will be distributed by
liquidator, and who shall hold the estate as fiduciary for the benefit of all the creditors.
 Then the claims from the creditors are processed. There are various sections which help
in this process. Section 38 defines how to consolidate the claims from financial and
operational creditors, section 39 defines how to verify claims, section 40 defines the
process of acceptance and rejection of claims and section 42 defines how the applications
against the liquidator decision shall be processed
Fast Track Insolvency Resolution Process
The Code has provided for a fast track insolvency resolution process in respect of corporate
debtors, qualification to be notified by the Government. The process shall be completed in 90
days (extendable by maximum 45 days). Provisions of insolvency process apply to fast track
insolvency. This will be an enabler for start-ups and small and medium enterprises to complete
the resolution process quickly and move on.

Voluntary Liquidation of Corporate Person

The Code provides for voluntary liquidation proceedings by corporate person who intends to
liquidate itself and has not committed any default and can pay off its debts fully from proceeds
of liquidation of its assets. The law requires a declaration to that effect from majority of directors
of the company also stating that the company is not being liquidated to defraud any person. A
resolution passed to this effect shall be approved by creditors representing two-thirds value of the
company’s debts. Voluntary liquidation commences when such resolution is passed by the
creditors as above. Provisions of liquidation process apply to voluntary liquidation. Once the
debtor is completely wound up and assets liquidated, the NCLT passes an order for its
dissolution.

Achievements of the IBC

 IBC is a vast improvement on the two earlier laws legislated to recover bad loans —the Sick
Industrial Companies (Special Provisions) Act, 1985 (SICA) and the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (RDDB).
 Speedier Resolution: Before IBC, resolution processes took an average of 4-6 years, after the
enactment of IBC; they came down to 317 days.
 Higher Recoveries: Recoveries are also higher: 43% after the IBC, against 22% before it.
 Due to the institution of IBC, we have seen that many business entities are paying up front before
being declared insolvent. The success of the Act lies in the fact that many cases have been
resolved even before it was referred to NCLT.
 A steady increase in the number of admitted corporate insolvency resolution process (CIRP)
cases.
 By the end of March 2019, a total of 1858 cases were admitted for resolution – of which 152 have
been appealed/reviewed/settled, 91 have been withdrawn, 378 ended in liquidation and 94 have
ended in approval of resolution plans.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018

 The Ordinance amends the Insolvency and Bankruptcy Code, 2016 to clarify that allottees under
a real estate project should be treated as financial creditors.
 The voting threshold for routine decisions taken by the committee of creditors has been reduced
from 75% to 51%. For certain key decisions, this threshold has been reduced to 66%.
 The Ordinance allows the withdrawal of a resolution application submitted to the NCLT under
the Code. This decision can be taken with the approval of 90% of the committee of creditors.

Issues with IBC, 2016

 Missing the deadline: IBC mandates that an insolvent asset must be resolved in 270 days. Out of
the 12 big accounts initially referred to IBC, five cases are pending for more than 600 days due to
continuous litigation by some party or the other. Among the most prominent examples of this
chequered journey for the IBC is the Essar Steel insolvency. It has been more than 600 days since
the Rs 50,000-crore account entered the IBC.
 Lack of benches and judges: India has 14 NCLTs, and two are yet to start functioning. The
government had a couple of years back announced to set up 24 bankruptcy courts. The NCLT
judge roster shows 27 members have been sharing the workload against the target of appointing
60 judicial and technical members. Delhi and Kolkata are sharing the workloads of Jaipur,
Chandigarh, Guwahati and Cuttack benches. Recently the government highlighted that it has been
taking steps to increase capacity of National Company Law Tribunal (NCLT) and increased its
benches from 10 to 15. Also, 26 new members have been added taking total strength to 52.
 Haircuts: It is the extent of write off that banks undertake as part of a resolution plan to get the
company back on track. So far financial creditors have got 43 per cent of their claims and 188 per
cent of the liquidation value. Steps should be taken so that haircuts are reduced.
  All these factors are raising concerns that IBC will meet the same fate as DRT and SARFAESI
and banks will eventually lose confidence in IBC
 The recent Supreme Court order setting aside RBI’s decision to send all power companies to the
NCLT has also set a wrong precedent.

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018 – Key
features:
 Allottees under a real estate project should be treated as financial creditors (debate is open for
want of clarity over secured/unsecured creditors).
 The voting threshold for routine decisions taken by the committee of creditors has been reduced
from 75% to 51%.
 During the insolvency resolution process, a committee consisting of financial creditors will be
constituted for taking decisions (by voting) on the resolution process.
 The Code prohibits a person from being a resolution applicant if his account has been identified
as a non-performing asset (NPA) for more than a year.
 The Code also bars a guarantor of a defaulter from being an applicant.
 A resolution applicant may withdraw a resolution application, from the National Company Law
Tribunal (NCLT), after such process has been initiated. Such withdrawal will have to be approved
by a 90% vote of the committee of creditors.
 The ineligibility criteria for resolution applicants regarding NPAs and guarantors will not be
applicable to persons applying for resolution of MSMEs.
 The amendment bill of 2018 brought fair amount of improvements in the process of insolvency
and further strengthening the relation between creditors and debtors.

The Insolvency and Bankruptcy Amendment Bill 2020

Parliament passed amendments to the insolvency law that will help safeguard successful bidders
of insolvent companies from the risk of criminal proceedings for offences committed by previous
promoters. The Insolvency and Bankruptcy Code (Amendment) Bill, 2020 was passed by voice
vote in Rajya Sabha. It was approved by Lok Sabha on March 6. The Bill replaces an ordinance.
Replying to a short debate on the bill, Finance Minister Nirmala Sitharaman said amendments are
in sync with the time and also adhere to a Supreme Court order in “letter and spirit”. The bill
seeks to remove bottlenecks and streamline the corporate insolvency resolution process. It aims to
provide protection to new owners of a loan defaulter company against prosecution for misdeeds of
previous owners. The latest changes pertain to various sections of the IBC as well as the
introduction of a new section.

Highlights and analysis:

 The amendment brings the much awaited changes needed in the insolvency sector.
 Finance Minister said amendments are sync with time and also adhere to a Supreme Court
order in “letter and spirit”.
 It allows creditors to initiate an insolvency resolution process, if a company defaults on
its payments. It introduces an additional threshold for certain classes of financial creditors,
including allottees of real estate projects, for initiating the resolution process. At
least 10% of them or 100 such persons have to jointly initiate the process.
  It empowers the resolution professional to require suppliers to continue providing
goods and services. This provision will not apply if the debtor has unpaid dues arising
from such supplies during the moratorium period.
 It provides that the company will not be liable for any offence committed prior to the
insolvency resolution process, if there is a change in the management or control of the
company.
 Under it, the insolvency resolution process commences when the Insolvency Resolution
Professional (IRP) is appointed. It states that the  IRP must be appointed on the date of
admission of the application by NCLT,  which will be considered as the insolvency
commencement date.
 In case of defaults by real estate developers, the insolvency resolution application should
be filed jointly by at least 100 homebuyers or 10% of their total number. The rationale for
adding such a threshold only for certain creditors is unclear. Further, a homebuyer wishing
to initiate the process may not have details of other allottees. The FM clarified that
requirement of minimum number of home buyers in the IBC has been included to  avoid
“frivolous litigations“.
 The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution
process. It aims to provide protection to new owners of a loan defaulter company against
prosecution for misdeeds of previous owners
 It empowers the resolution professional to require suppliers to continue providing goods and
services during the moratorium period. This provision overrides the agency of suppliers to
negotiate and decide whether to continue a contractual arrangement. It may also force supply of
goods and services even if the supplier finds it risky or unviable.
 In order to balance the rights of the suppliers, it provides that suppliers have to continue
supplying only if their current dues are paid. In other countries, additional safeguards are
available. These include the right to seek a payment guarantee, and court-granted permission to
terminate contract in cases where the supplier demonstrates that continuation will cause hardship.
 However, even after anticipation, cross border insolvency framework has not been
included in the amendment.

Conclusion
A lot many things have been settled through repeated amendments but still, a lot needs to be done. Not
only do the new amendments plug loopholes in the Insolvency and Bankruptcy Code (IBC), which some
promoters had used to stall resolution of their bankrupt companies, but the changes also seek to ensure
time-bound resolution of insolvency cases. There has been a marked improvement in the recovery process
which is already leading to billions of dollars being invested in the country due to the protection of
creditor rights. Compared to other markets, the pace at which we have achieved this is also noteworthy. In
the US, for example, it took 10 years (from 1978) for the bankruptcy law to attain some stability. The
progress in India has been remarkable by global standards Operationalisation of IBC, till now, has been
spoiled by myriad factors ranging from frivolous challenges posed by operational creditors and promoters
to shortage of judges in tribunals. As a result, an important piece of legislation like IBC, which was
expected to usher in a new era of ease of doing business, may fall into the trap of implementation failure.
Timely amendments, which provide more teeth to the Code, can only rescue the process. New
amendments of 2019 in IBC should be closely watched and observed in that light.