BANKRUPTCY LAW

Role of National Company Law Tribunal in Insolvency

and Bankruptcy Code, 2016

Submitted by:- Submitted to:-

Sourav Punia Ms. Vaneeta Patnaik
LLM075223
WB NUJS
 Introduction

During the Dravidian age, a set of laws was put in place and followed, leading
to the creation of the Indian judicial system. This practice was continued by the
Aryans upon their arrival, and each subsequent immigrant community
established its own laws and judicial system. The duty of dispensing justice fell
on a monarch for a long time, with formal courts not being introduced until
colonization. The British Raj established the first court in the 1600s. Although
there were doubts about the system's fairness, the institution of courts
represented a significant development in the nation's history by setting standards
for the population to adhere to.

The Supreme Court of India currently holds the highest authority in the country,
with jurisdiction over the entire nation. High Courts handle state-specific
jurisdictions; within the judiciary, there are Civil Courts and Criminal Courts
that hear and resolve cases. However, with changing times and new issues, it
has become evident that the courts are overwhelmed and overloaded with cases
exceeding their capacities.1

It was expected that the Supreme Court would consider the proposal of
establishing specialized tribunals in the S.P. Sampath Kumar v. Union of India
case. The Law Commission of India's 124th Report conducted a detailed
examination of the necessity for independent tribunals and how they should be
structured to handle cases within their specific domains effectively. Following
this comprehensive study, the tribunals were eventually set up upon receiving
approval for the resolution.

Tribunals are not traditional courts but have the power to interpret laws, making
them quasi-judicial entities. Various tribunals, such as the Armed Forces
Tribunal, National Green Tribunal, Central Administrative Tribunal, Income Tax
1
Vaishnav, Ashu. (2023). NCLT and Its Shortcomings in Corporate Insolvency. Indian
Journal of Law and Legal Research, 5.
Appellate Tribunal, and Customs, Excise and Service Tax Appellate Tribunal,
have been created. The area of corporate law, in particular, required the
establishment of a quasi-judicial body to address legal concerns.

The Company Law Board, established under The Companies Act, 1956, was
responsible for addressing legal issues related to companies. In 1999, there were
suggestions to replace the Board with a tribunal. However, it wasn't until 2013,
with the passing of the Companies Act 2013, that these proposals were put into
effect. This new law rendered the previous legislation obsolete and paved the
way for forming the National Company Law Tribunal (NCLT) and National
Company Law Appellate Tribunal (NCLAT) as governing bodies empowered to
deal with company law matters.

National Company Law Tribunal

Establishing the National Company Law Tribunal and the National Company
Law Appellate Tribunal was challenging. The idea was first proposed by the
Justice Eradi Committee in 1999, which recommended the creation of a national
tribunal to handle issues related to insolvency and company winding up. The
Companies (Second Amendment) Act, 2002 incorporated provisions for the
establishment of NCLT and NCLAT based on this advice. However, the Act
faced opposition, and the tribunal's structure was deemed illegal. The
Companies Act 2013 was later amended to improve the provisions. Despite
some challenges, the matter was eventually resolved when the Supreme Court
ruled in favor of setting up the tribunals.2

On June 1st, 2016, the National Company Law Tribunal was established as
outlined in Section 408 of the Companies Act, 2013. The Tribunal consists of a
president who must have previous or current experience in the High Court,
2
National Company Law Tribunal – the new era of Corporate world. (2022). Annual Research Journal of SCMS,
Pune, 10.
along with other judicial or technical members if necessary. Its main objective is
to resolve disputes arising from business dealings, oversee and resolve them
efficiently, and promptly finalize the necessary procedures. However, it faces
significant scrutiny from the public regarding its handling of insolvency
matters, which is one of its key responsibilities.

Since its establishment, the Tribunal has generally performed well, but there are
definitely areas where it falls short. The frequent amendments to the Insolvency
and Bankruptcy Code of 2016 have led to changes in how NCLT and NCLAT
function. There are a lot of unresolved issues, and the Tribunal's shortcomings
are being highlighted due to the unfair treatment of insolvent businesses during
the resolution and liquidation process.

Jurisdiction

It's crucial to understand that the key factor is the company's registered office
when settling insolvency and closing down companies. Any requests for
liquidating a company or starting insolvency procedures must be directed to the
National Company Law Tribunal (NCLT), which has jurisdiction over the
company's registered office.3

Furthermore, if a company wishes to dissolve voluntarily, it can submit a

request to the National Company Law Tribunal (NCLT), which oversees the
registered office of the corporate entity.

The Debt Recovery Tribunal (DRT) now has the authority to handle cases
involving individuals and partnership organizations. If a personal guarantor or a
corporate debtor faces insolvency or bankruptcy, the application must be
submitted to the National Company Law Tribunal. This is especially important
if the individual is a personal guarantor for a specific corporate debtor and the
corporate debtor's liquidation or insolvency process is already in progress at the
3
Suresh, R. (2024, January 3). The jurisdiction and functions of the National Company Law Tribunal. IndiaFilings
- Learning Centre.
National Company Law Tribunal. Therefore, the National Company Law
Tribunal now has the power to oversee applications regarding insolvency
resolution or bankruptcy of an individual who acted as a personal guarantor for
a corporate debtor in such cases.

Admission of Insolvency Resolution Application before NCLT

The National Company Law Tribunal (NCLT) may receive an Insolvency

Resolution Application from any of the following three parties4:-

1. Financial Creditor
2. Operational Creditor
3. Corporate itself

Financial Creditor

A single financial creditor can apply to the NCLT by themselves or alongside

other creditors, per Section 7 of the Insolvency and Bankruptcy Code, 2016.
This application can be made to the NCLT after a default has occurred. It is
important to note that the definition of a default under this section encompasses
any financial obligations owed to the corporate debtor's creditors, including the
creditor who has filed an application with the NCLT.

Certain prerequisites must be considered before submitting an application to the

NCLT Tribunal:-

 First off, if there is even the slightest uncertainty or disagreement about

the playability of the amount claimed by either the Operational Creditor
or the Financial Creditor, an application made before NCLT under
Sections 7 and 8 of the Insolvency and Bankruptcy Code won't be

4
Garg, R. (2021, January 10). What is the role played by NCLT in insolvency proceedings - iPleaders. iPleaders.
 maintainable before the tribunal. (Soril Infra Resources Ltd. v. Annapurna
Infrastructure Pvt. Ltd. and Ors.)
 Second, the application cannot be maintained before the Tribunal if the
creditor's amount is time-barred.
 Finally, sustaining a short or no delivery claim is impossible.

Documents required by the Financial Creditor

The NCLT application will be filed in Form 6 along with the necessary
documents as per Section 7 of the IBC Code, 2016. The required papers
include:-5

 A record of the debtor's default.

 Proof of the default.
 Correspondence between the parties involved in the lawsuit.
 An account statement showing that the financial creditor has fulfilled the
debtor's financial obligation.
 A formal notice sent to the financial creditor by the corporate debtor.
 Any response from the financial creditor by the corporate debtor should
be included.
 A board resolution must also be attached to identify the person signing
the petition.
 The Ministry of Corporate Affairs has confirmed receiving a payment of
Rs. 25000.
 Copies of the Articles of Association (AOA) and Memorandum of
Association (MOA) have been provided for the corporate debtor.
 The Insolvency Resolution Professional has given written consent.
 A temporary stay of proceedings has been requested.

5
Sharma, A. K. (2019, July 2). How does the insolvency resolution process work? | Mint. Mint.
Operational Creditor

In the Insolvency and Bankruptcy Code of 2016, Section 8 deals with the
Operational Creditor's petition. As per this section, the creditor must send a
notice demanding payment within 10 days, along with a copy of the invoice, in
case of default in repayment. The petition cannot be filed before the Tribunal if
the debtor has not been served with the invoice.6

The debtor has 10 days to confirm if there is a disagreement and present proof
of it or submit documents showing payment to the creditor.

As per Section 9 of the Insolvency and Bankruptcy Code from 2016, if ten days
have passed and the operational creditor still hasn't been paid by the debtor, the
operational creditor can submit an application to the tribunal.

Documents required by the operational creditor

The following paperwork must be submitted with the aforementioned petition:-

 An invoice with a breakdown of the products or services rendered.
 Account summary.
 Correspondence exchanged between the parties involved in the lawsuit.
 Written consent from the Professional in Insolvency Resolution.
 An affidavit confirming that the corporate debtor was not informed of the
dispute.
 In order to confirm that the company owing money has not settled the
debts, it is necessary to get a copy of the certificate from the financial
institutions where the creditor's statements are held.
 A board resolution is required to indicate who is signing the petition.
 It is also important to show that the Ministry of Corporate Affairs has
received a payment of Rs. 25000.

6
Taxmann. (2021, November 17). ‘Operational Creditors’ under Insolvency and Bankruptcy Code, 2016.
Taxmann Blog.
  Provide copies of the company's Articles of Association and
Memorandum of Association.
 A formal request for a temporary halt to legal proceedings should be
made.

It's important to keep in mind that under the bankruptcy and insolvency code of
2016, the operating creditor is not obligated to suggest an insolvency resolution
professional. Instead, the IRP will be selected from the board if the adjudicating
authority is not designated. Therefore, it's highly recommended that the
operating creditor include the name of the IRP in the petition when submitting it
to ensure that the IRP is a specific individual.

It's crucial to remember that Section 7(4) of the Code requires the National
Company Law Tribunal to ascertain if a default has occurred within 14 days of
receiving the creditor's application.

Admission by NCLT

The tribunal will consider approving the application if they find that there was a
default, the application was submitted correctly, and there are no ongoing
disciplinary actions with the proposed IRP. NCLT can also decide to reject the
application. The creditor applying must receive a notice from the Tribunal
before a denial, giving them seven days to fix any issues with their application. 7

Petition by Corporate Debtor itself

In line with section 10(1) of the Code, it states that when a company fails to
meet its obligations, another company can request to start resolving the
company's financial difficulties through the appropriate legal channels.

7
Dua Associates. (2022, October 18). Admission or rejection: Powers of the adjudicating authority - dua
associates.
Additionally, the company facing financial difficulties can directly request the
adjudicating authority for assistance.

Declaration of Moratorium

When a financial creditor, operational creditor, or corporate debtor files a

petition, Section 13 allows the NCLT to declare a moratorium under Section 14.
In other words, Section 14 mandates the NCLT to declare a moratorium once a
petition is accepted.8

Scope of Moratorium

The IBC Code outlines the limitations of the moratorium in Section 14.
According to this provision of the NCLT, the following actions are prohibited:

1. Initiation or continuation of any legal proceedings against the corporate

debtor, including decisions made by arbitrators, courts, tribunals, or other
authorities.
2. Transfer, encumbrance, sale, or disposal of the corporate debtor's assets,
beneficial interests, or legal rights.
3. Any steps taken to reclaim, enforce, or retrieve any security interest held
by the company in its assets, such as actions taken under the 2002
SARFESI Act.
4. When the owner or any lessor of a property takes back possession from a
corporate debtor who has occupied the property, it is known as the
property's recovery.

Powers in order to extend the time limit

The usual time limit to complete insolvency resolution is 180 days; in expedited
cases, it is 90 days, per Section 12 of the Code. Should the committee of
creditors direct the resolution professional, they will need to seek an extension

8
Govindarajan, M. (2024). Exceptions to moratorium under Section 14(1) of the Insolvency and Bankruptcy
Code, 2016. In THE RESOLUTION PROFESSIONAL (p. 24).
from NCLT if the deadline of 180 days or 90 days, depending on the case, is
exceeded.

The National Company Law Tribunal (NCLT) has the authority to provide a
one-time extension beyond the standard maximum period in cases where the
subject matter is particularly complex and cannot be resolved within the
standard time frame. This extension cannot exceed 90 days for regular cases and
45 days for fast-tracked cases. The NCLT is permitted to grant only one
extension in each case.

Approval of Resolution Plan

The National Company Law Tribunal (NCLT) will approve the resolution plan
only if it meets the criteria set out in the Code. A group of creditors has already
given the plan the green light. All parties involved in the plan, such as debtors,
employees, members, creditors, guarantors, and other stakeholders, must follow
the approved plan. However, the NCLT has the power to reject a resolution plan
if it does not comply with the Code. Once the plan is approved, the Insolvency
Resolution Professional (IRP) will hand over all related documents to the
Board, be relieved of their duties, and end the moratorium period.9

Power to Initiate Liquidation Process

If the plan to resolve the issue is not accepted due to Code requirements not
being met, or if the time limit for the resolution process has expired without an
agreed-upon plan, or if the committee of creditors informs the adjudicating
authority through a resolution professional that the corporate debtor will be
liquidated before the plan is confirmed, or if the corporate debtor or any related
party violates the approved plan, the NCLT can order liquidation.10

9
Insolvency and Bankruptcy Board of India. (n.d.). Insolvency and Bankruptcy Code, 2016 Drafting and
negotiating of RESOLUTION PLAN.
10
Maharathy, S. J. (2020, March 5). Role of Liquidator vs. RP in Insolvency Proceedings. Lexology.
When the resolution professional is unable to fulfill their duties and liquidation
proceedings commence, they are replaced by a new liquidator. This new
appointment occurs if the resolution professional fails to meet legal obligations
or if there are complaints against them.

Dissolution Order

The liquidator must submit a request to dissolve the company to the NCLT once
all business operations have ceased and assets have been liquidated. The NCLT
will then issue an order to dissolve the company upon receiving the request. The
company will officially dissolve on the date of the order by the NCLT. The
authority where the company is registered must be notified of the dissolution
within seven days (fourteen days for voluntary liquidation) of the order date.11

Avoidance of Preferential Transactions

If a liquidator or resolution professional suspects that a corporate debtor

transferred the property to particular individuals to benefit them over others in a
potential liquidation scenario, they can request the National Company Law
Tribunal (NCLT) to intervene and stop these preferential transactions. When
someone asks to avoid a preferential transaction, the NCLT can decide to do
several things. They may order that the property that was transferred becomes
owned by the company in debt; cancel any security interest that the company
created; require someone who benefited from the transaction to pay back the
benefits; restore the guarantor's position after they were released from their
debts; or ask for security or a charge on a property to pay off a debt mentioned
in the order.

For transactions with related parties, the period is two years before insolvency
starts, and for other transactions, it is one year before insolvency begins.

Avoidance of Undervalued Transactions

11
Sirwalla, P. (2024, April 22). Tax impact of living abroad with NRI spouse | Mint. Mint.
If a company transfers or gives away assets for very little or no value outside of
its usual business activities, the resolution professional or liquidator (or a
creditor, member, or partner of the company if they are not available) can
request the NCLT to nullify the transaction and undo its consequences.12

Upon discovering that the transaction was undervalued and the resolution
professional or liquidator failed to submit an application, the NCLT will issue
an order. This order will (i) undo the transaction and revert to the original state
and (ii) instruct the Board to initiate disciplinary proceedings against the
resolution professional or liquidator, as appropriate.

In some cases, when an order-reversing effect occurs, certain properties

transferred during transactions may become owned by the corporate debtor. This
order may also involve releasing or discharging any security interests granted by
the corporate debtor, requiring payment of consideration determined by an
independent expert, or instructing the beneficiary to pay a specified amount to
the liquidator or resolution professional as directed by the NCLT.

Avoidance of Extortionate Credit Transactions

A transaction is considered exorbitant when one party is required to pay an

extremely high-interest rate or face unfair credit terms. According to the Code,
engaging in coercive business practices related to operational or financial debt
is prohibited within two years prior to insolvency. The resolution professional or
liquidator can seek approval from the NCLT to cancel exorbitant credit
transactions.

Upon examination of the application, the NCLT found that the credit terms
demanded exorbitant payments from the debtor. As a result, they issued an order
that could either return the debtor to their original financial state before the
transaction, eliminate or reduce the debt, modify the terms of the agreement,
12
Srivats, B. K. (2024, January 28). IIIPI unveils guidelines for ‘Avoidance Transactions’ in IBC Landscape.
BusinessLine.
compel any involved party to refund money received, or relinquish any security
interest obtained through the unfair transaction.

Power in Case of Malicious and Fraudulent Proceedings

The National Company Law Tribunal (NCLT) has the power to ensure that
insolvency proceedings are only started for legitimate reasons, such as resolving
financial difficulties or winding up a company, and not for any deceitful or
illegal motives. If someone initiates insolvency or liquidation proceedings in a
wrongful or dishonest manner, the NCLT can impose heavy fines of up to one
crore rupees. Additionally, individuals who abuse the voluntary liquidation
process for fraudulent purposes may be penalized with fines of up to one lakh
rupees.13

Power in Case of Fraudulent and Wrongful

The National Company Law Tribunal (NCLT) can act if it finds that a corporate
debtor has been engaging in fraud to deceive creditors. This could include
holding individuals responsible for their involvement in these transactions or
holding directors/partners accountable for contributing to the corporate debtor's
assets.

How NCLT and IBC Helping the Corporate Finance

The Indian corporate finance system relies on two key components: the
National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy
Code (IBC). These organizations play a crucial role in enhancing the financial
well-being of Indian businesses by offering a legal framework to address
corporate insolvency and bankruptcy issues. To streamline the process of
resolving insolvency and bankruptcy cases in India, the IBC was introduced in
2016. This code consolidates all relevant procedures into a single platform,
13
Law, K. (n.d.). Fraudulent Initiation of Insolvency resolution Process – K Law.
replacing the convoluted system of conflicting rules and regulations that existed
before. The NCLT is responsible for supervising the efficient and prompt
resolution of bankruptcy and insolvency issues per the code.14

The NCLT is a special court set up as part of the IBC to handle corporate
insolvency and bankruptcy disputes. It consists of accounting, corporate law,
and bankruptcy experts who resolve conflicts between creditors and businesses.
The NCLT has the power to make decisions regarding a company's financial
troubles and enforce them through methods like resolution and liquidation.

The Insolvency and Bankruptcy Code (IBC) and National Company Law
Tribunal (NCLT) provide several benefits for corporate finance in India. They
establish a clear and efficient legal framework for resolving insolvency and
bankruptcy issues, which has increased investor confidence in the Indian
business industry.

Additionally, the Insolvency and Bankruptcy Code (IBC) and the National
Company Law Tribunal (NCLT) have significantly reduced the duration
required to resolve bankruptcy and insolvency matters. Previously, this posed a
major issue in India, with cases lingering for years or even decades. The prompt
and efficient resolution of insolvency and bankruptcy cases under the time-
bound framework of the IBC benefits creditors and debtors alike.

Recovery rates for creditors have improved since implementing the IBC and
NCLT. In the past, creditors often struggled to retrieve their funds when debtors
failed to make payments within the previous legal framework. With the
introduction of the IBC and NCLT, measures have been put in place to ensure
that creditors are involved in the resolution process and can efficiently recover
their debts, such as establishing a creditors' committee.

14
Suresh, R. (2024b, January 3). The jurisdiction and functions of the National Company Law Tribunal.
IndiaFilings - Learning Centre.
 Powers of NCLT

The NCLT was established under the Insolvency and Bankruptcy Code IBC
2016. NCLT plays a significant role in the Indian corporate landscape. It is a
specialized quasi-judicial body responsible for resolving various matters related
to Indian businesses and company registration. It is responsible for handling
various powers and duties, including:-15

1. The panels, consisting of a president, a judicial member, and a technical

member, are responsible for exercising the tribunal's authority.
2. The court can decide based on what it thinks is best, but only after giving
both sides a chance to speak and listen to what they have to say.
3. Can scrutinize own orders.
4. If someone doesn't agree with a decision made by the tribunal, they can
appeal to the Appellate Tribunal.
5. The rules from the Code of Civil Procedure won't limit the NCLT or
Appellate Tribunal, but they will follow the principles of natural justice.
The tribunals can make their own rules, but these rules must comply with
the laws and regulations set by the government.
6. In order to fulfill the responsibilities outlined in this legislation and
handle legal matters related to the specified issues, the NCLT is
empowered with similar authority as a court under the Code of Civil
Procedure, 1908. This includes:-
 summoning individuals to appear,
 administering oaths,
 requesting document production and discovery,
 collecting evidence through affidavits,
 accessing public records as defined in the Indian Evidence Act of
1872,
15
IndiaFilings. (2024, January 3). National Company Law Tribunal – powers & jurisdiction. IndiaFilings - Learning
Centre.
  reviewing its own decisions,
 authorizing commissions to investigate materials and witnesses.
7. Any decision made by the NCLT can be enforced similarly to a court
order.
8. The proceedings of the NCLT are seen as judicial proceedings according
to Sections 193 and 228.
9. While the law is in operation, civil courts are not allowed to hear cases
that fall under the jurisdiction of the NCLT. During this period, only the
NCLT has the power to issue an injunction.

Conclusion

One significant historical development in this century has been the

liberalization, privatization, and globalization reforms, leading to the rise of
corporations. As the world witnessed this trend, India's economy embraced it,
promoting business growth. However, despite good intentions, many businesses
faced challenges in the competitive market, resulting in corporate bankruptcies.

Following the highlighting of the need for a law, many countries quickly started
implementing laws related to corporate insolvency. However, India has been
lacking strong legislation to assist bankrupt companies for a long time. In the
past, numerous businesses would end up going bankrupt without any legal
support, leading to little motivation for business owners to start new ventures.
Thankfully, Indian companies finally saw a ray of hope with the introduction of
the Companies Act of 2013 and the Insolvency and Bankruptcy Code of 2016.
These laws established a dedicated tribunal to address insolvency issues.

The establishment of the National Company Law Tribunal had been highly
anticipated by the business community, who closely monitored its operations.
While the Tribunal has made notable strides, it has not fully lived up to its
potential. Significant defaults reported by the Tribunal have hindered the
insolvency process. Initially praised for altering corporate insolvency laws, it
has failed to deliver as companies still face challenges with liquidation due to
inadequate decisions. The Tribunal's delay in resolving cases is a departure from
its intended purpose at inception. Just like humans, the Tribunal lacks a proper
litigation process. While it's normal for new things to fully develop, the Tribunal
has been functioning for four years yet still makes repeated mistakes. This is a
significant problem that needs to be addressed.

Despite its current limitations, the Tribunal has the potential to be successful. It
is recognized as a positive change made by the Indian legislature for good
reason. While there are concerns, they are resolved with a qualified panel. The
Tribunal should start with small steps to achieve its goals. It can ultimately
achieve its intended purpose by continuing in the right direction and following
the proper legal procedures.

Recovering money from debtors has become easier for corporations, operational
creditors, and financial creditors since the introduction of the IBC Code in 2016.
The National Company Law Tribunal (NCLT), the adjudicating body, has been
granted significant authority to ensure a fair balance between the interests of the
creditors and corporate debtors.