A PROJECT REPORT ON

Analysis on Insolvency and Bankruptcy Code

SUBMITTED BY:
NAME: ISHIKA AGARWAL
ENROLMENT NO.:(A90856122017)
PROGRAM: LLB (SEMESTER 5)
BATCH: 2022-2025

SUBMITTED TO:
Mr. Arindam Saha, Assistant Professor
Amity University, Kolkata

AMITY LAW SCHOOL

AMITY UNIVERSITY KOLKATA
 DECLARATION

I, Ishika Agarwal, student of LLB 3 years programme (2022- 2025), hereby declare
that the project work submitted to the AMITY Law School, AMITY University,
KOLKATA is a record of an original work done by us under the guidance of Mr.
Arindam Saha, teacher in subject, AMITY Law School, AMITY University,
KOLKATA.

Date: 16.11.2024

Name: Ishika Agarwal (A90856122017)

Batch: 2022 – 2025
BACKGROUND

In the backdrop of Vijay Mallya episode and season of corporate defaults when public
sector banks and financial institutions are helplessly chasing their dues in largely protracted
legal battles, the Parliament of India in the first week of May swiftly passed Insolvency and
Bankruptcy Code 2016 (New Code). The New Code has received the President's assent and
awaits to be formally notified. This Code is essential because no single umbrella legislation
has governed insolvency and bankruptcy proceedings in India till now. Instead, there was
a slew of legislation governing the legal framework.

The Insolvency and Bankruptcy Code, 2016 (Code), a landmark legislation consolidating
the regulatory framework governing the restructuring and liquidation of persons (including
incorporated and unincorporated entities) was enacted into law by the Parliament on 11
May 2016. As in the case of Companies Act 2013 (2013 Act), different provisions of the
Code are being notified and operationalised in a phased manner. Part IV of the Code
provides for the setting up of an insolvency regulator, the Insolvency and Bankruptcy Board
of India (Board). The Board is empowered to frame regulations on matters pertaining to
insolvency and bankruptcy. Provisions pertaining to the constitution and powers of the
Board were notified and operationalised by the Central Government on 5 August 2016.
Subsequently, the Board was constituted on 1 October 2016 under the Chairmanship of Mr
MS Sahoo.

EARLY FRAMEWORK

Corporate Insolvency
In India till now has always been regulated and administered by multiple and sometime
overlapping laws as follows

 The Companies Act 2013

 The Sick Industrial Companies (Special Provisions) Act 1985
 The Recovery of Debts Due to Banks and Financial Institutions Act 1993
 The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002
Individual Insolvency
This has always been regulated and administered through the Presidency Towns Insolvency
Act (for residents of Mumbai, Kolkata and Chennai) and Provincial Insolvency Act (for
otherresidents) which are century old legislations and have now outlived their utility.

 The Presidency Towns Insolvency Act 1909

 The Provincial Insolvency Act 1920

THE NEW CODE & CORPORATE INSOLVENCY

1. Scope of Applicability
The law is to cover insolvencies of “corporate persons” (covering companies, limited
liability partnerships (“LLPs”), and all other entities having limited liability), as also
individuals, firms etc. While the law is admittedly a code for insolvent companies, it covers
liquidation of solvent companies as well, and thereby, serves as a complete code on
liquidation of companies.

2. Institutional Framework
 Insolvency and Bankruptcy Board of India
The primary functions of the Board will include registration of insolvency professionals,
insolvency institutions, information utilities, provide guidelines on the conduct of
bankruptcy resolution, etc.

 Adjudicating Authority (“AA”)

The AA is the primary quasi-judicial body presiding over the entire process of bankruptcy.
Incase of corporate persons, the AA will be the National Company Law Tribunal
("NCLT")and National Company Law Appellate Tribunal ("NCLAT") . The NCLT, which
was constituted under Section 408 of the Companies Act 2013, which got recently notified
on June 1, 2016. The insolvency proceedings against companies presently being handled
by the company court benches in various high courts across India will now get transferred
subject to a recent notification and an awaited notification of the Insolvency Code.

 Insolvency professionals (IPs)

IPs may be practically read as administrators (pre liquidation stage) and liquidators (post
liquidation order) – who have role to play in both insolvency, liquidation and resolution.
The following are the insolvency professionals:

- Interim resolution professional – immediately on admission of an insolvency resolution

process.

- Final resolution professional - on appointment by the Committee of Creditors.

- Liquidator – on commencement of liquidation proceedings. Typically, the final resolution

professional will act as liquidator, unless replaced by the AA.

- Resolution applicant: the entity that prepares a resolution plan.

 Information utilities
The information utilities will be storing financial information – this may be seen as
electronic filing of defaults, security interests. There will obviously be an overlap with
present filing of defaults with someone like CIBIL, security interests with the Companies
Act, etc., whichmay be eventually resolved. It is not clear whether this will dovetail into
the existing Central Registry of Securitisation Asset Reconstruction and Security Interest
of India (“CERSAI”) and/or Central Repository of Information on Large Credits
(“CRILC”) or end up adding to the plethora of registries in India.

 Interplay
The Code envisages that the insolvency resolution processes will be conducted by
insolvency professionals ("IPs"). The IPs will be licensed professionals and will be
members of insolvency professional agencies ("IPAs"), which will be created for regulation
of such IPs. The Code also provides for establishment of information utilities ("IUs"), for
collection, collation and dissemination of financial information to facilitate insolvency
resolution. The regulation and operation of these IPs, IPAs, and IUs is to be overseen by an
Insolvency and Bankruptcy Board ("Board") established under the Code.

3. Corporate Insolvency Resolution Process

 Who can initiate?
The “corporate insolvency resolution process” may be initiated on application to NCLT:

o by a financial creditor("FC"), either by itself or jointly with other financial creditor,

meaning a creditor for financial facility (which is a broadly worded expression including
financial lease and hire purchase transactions, which are treated as financial
transactionsunder applicable accounting standards);
o by an operational creditor (“OC”), meaning a creditor other than a financial creditor;
o By the corporate debtor (“CD”) himself, that is, company itself.

 On what basis?
In case of FCs, the basis of filing is the fact of a default to any FC. A default, for this
purpose, includes a default in respect of a financial debt owed not only to the applicant
financial creditor but to any other financial creditor of the CD. This drastically changes the
basis of the current provisions of “sickness” under the Companies Act, which is based
on default to a majority in value of the creditors. In addition, the only fact on which the
application for insolvency will be admitted is the fact of a default, established from the
records of the information utility.

The FC has to move an application before the NCLT showing them the proof of default and
proposing an interim IP. The NCLT will then ascertain the existence of default from the
records of an IU (i.e. information utilities) or on the basis of other evidence furnished by
the creditor.

In case of OCs, he has to first serve a demand notice along with the proof of default, giving
the debtor ten days to respond to dispute the claim. If the claim remains undisputed, then
the OC can file an application before the AA. If the claim for the above situations is not
paid within 10 days, the creditor may initiate insolvency process. This largely creates a
level- playing field between secured and unsecured creditors.

Here, the NCLT has been offered mere fourteen days' time to ascertain the existence of a
default based on the records of IUs or other evidence provided by an applicant creditor in
the corporate insolvency resolution process (CIRP). This is too without offering an
opportunity of being heard to the corporate debtor. This may defeat the principle of natural
justice vis-à- vis the corporate debtor and NCLT may end up admitting several frivolous
petitions. Some ofthese provisions need a close review.

 Roadmap after Admission of Application

Broadly, the insolvency resolution process, after an application has been admitted by the
AA will entail the following steps:

o Declaration a moratorium period

-This will prohibit actions such as, institution of suits, continuation of pending suits/
proceedings against the CD including execution of any judgement, decree or order;
disposal/encumbering of CD's assets or rights/interests therein; any action to foreclose,
recover or enforce any security interest created by the CD, etc.

One of the most important features of a bankruptcy law is the grant of moratorium during
which creditor action will remain stayed, while the bankruptcy court takes a view on the
possibility of rehabilitation. In the chapter on Sick Companies under the Companies
Act 2013, there is no provision for automatic moratorium – it merely empowers the NCLT
to grant a moratorium up to 120 days.

The Code8 talks about a mandatory moratorium – thereby, it serves almost like the
automatic moratorium under global bankruptcy laws. The moratorium will continue
throughout the completion of the resolution process – which is 180 days as mentioned
above. However, if in the meantime, the creditors’ committee resolves to approve
liquidation of the entity, then the moratorium will cease to have effect.

Explicitly, the moratorium before liquidation applies to enforcement of security interests

under SARFAESI Act as well. A moratorium also applies when an order for liquidation has
been passed by the AA.

o Appointment of an Interim IP
-Issuance of public announcement of the initiation of insolvency resolution process and call
for the submission of claims. Interim IP inter alia takes over the management and powers
of the board of directors of the CD, and collects all information relating to assets, finances
and operations of the CD for determining its financial position; collates all claims
submitted bythe creditors and constitutes a Committee of Creditors ("COC").

-The COC thereafter either resolves to appoint the interim IP as the IP or replaces the
interim IP by appointing a new IP, in accordance with the prescribed procedure. This IP
shall be appointed as the liquidator for the process.

The IP will then take over the management and assets of the CD, and can exercise the wide
powers granted to it, in the manner prescribed under the Code. It will prepare an information
memorandum in relation to the CD, on the basis of which the resolution applicant
willprepare a resolution plan. IP will scrutinize the resolution plan11 and present it to the
COC. The COC approved plan will be submitted to the AA, for its acceptance, and it is
only when the AA, gives it a final nod that the resolution plan becomes binding upon all
the stakeholdersand the insolvency resolution process of the CD is initiated. In case the AA
rejects the plan, the liquidation process of the CD will commence Even within body
corporates, small companies are fast-tracked and their insolvency resolution processes
must be completed within 90 days of submission. The Insolvency and Bankruptcy Board
of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 came in
effect from 1st December, 2016 onwards and will likewise govern the procedures under this
head.

4. Corporate Liquidation Process

 Initiation of the liquidation process
 In the event that:

o the COC cannot agree on a workable resolution plan within the IRP Period (i.e.
180days extendable once by another 90 days);
o the COC decides to liquidate the company;
o the NCLT rejects the resolution plan; or
o the corporate debtor contravenes provisions of the resolution

plan,The NCLT shall:

o Pass an order requiring liquidation of corporate debtor;

o Make a public announcement of corporate debtor entering liquidation; and
o Require a liquidation order to be sent to the registering authority of the corporate
debtor (for example Registrar of Companies in case of companies incorporated
under Companies Act).

The IP acting as the resolution professional shall, upon commencement of liquidation shall
beappointed as the liquidator for the process, unless replaced by NCLT.

o Collection of Creditors’ Claims

This has to be done within 21 days of the commencement of liquidation, and verification
of claims. The COC shall only include financial creditors as decision makers (operational
creditors with more than 10% aggregate exposure have mere observer status during the
COC meetings) and shall be responsible for deciding the important affairs of the company.

It shall also be responsible for authorising the IP (acting as resolution professional) to take
(ornot to take) certain actions such as raising interim finance up to the limit specified by
the committee, creating security on assets of the secured creditor, undertaking related party
transactions, amending constitutional documents, change of capital structure or
management of the Borrower etc.

More importantly, the COC shall approve the resolution plans received by the IP. All
decisions of the COC are required to be approved by a majority of 75% of the voting
shares/value of the financial creditors

It also includes elaborate provisions about voidable transfers and undue preferences,
incorporating several safe harbours for bona fide transactions against “clawback” rights of
a bankruptcy court.

Under existing law, the court simply has powers to preserve bona fide transactions – the
Codegives several such transactions which are protected from any clawback. In addition to
this, there are usual provisions for undervalued transactions, fraudulent transfers, etc. There
is seemingly a new provision pertaining to avoidance of “extortionate credit” contracts,
entered into within 2 years before the commencement of insolvency process.

 Realization of debt by secured creditors

-This very important section incorporates the classic principle understood over the decades
in India – which a secured creditor may either relinquish security interest or force his claim
on the overall liquidation trust assets, or may opt to realise security interest outside the
winding up process.

-The secured creditors are permitted to realise security interest according to such law as
may be applicable – thereby preserving the process of self-help realisation under the
SARFAESI Act. However, there will be reference to the liquidator for the purpose of the
liquidator identifying the asset.

Upon liquidation, a secured creditor may choose to realise his security and receive proceeds
from the sale of the secured assets in first priority. If the secured creditor enforces his claims
outside the liquidation, he must contribute any excess proceeds to the liquidation trust.
Further, in case of any shortfall in recovery, the secured creditors will be junior to the
unsecured creditors to the extent of the shortfall.

This section, however, brings a very important balance in the process of repossession
outside the liquidation process under SARFAESI Act, by requiring the secured creditor to
return the excess realised by him to the liquidator.

Thereby, the liquidator also becomes an interested party in the process of sale of secured
assets under SARFAESI Act, throwing greater burden on the creditors in being more
transparent in the conduct of the sale.

 Distribution of assets by the liquidator

Most interestingly, the section dealing with this starts with a non-obstante clause, giving
this section supremacy over conflicting provisions of a vast number of Central and
State laws. There have been several rulings of the courts, including the apex court, on
conflict of laws pertaining to claims of the state creditors over assets of companies in
winding up.

Hopefully, this section, being a dedicated section pertaining to distribution of assets on

liquidation, will operate as a special law, and will resolve the cacophony currently existing
in the matter. In fact, state dues come at number 5 in the rung.

One disturbing point is the provision which seeks to disregard contractual arrangements
between claimants of a single class. Usually, in capital market transactions, there are several
classes of preference created among creditors – for example, super senior, senior,
subordinated, etc. Clause 53 (2) may be interpreted to disregard these priorities as
“contractual arrangements”.

The Code is touted as and is expected to be a game-changer in dealing with India's mounting
arrears of recovery cases nationwide. The Code is also an important part of the incumbent
NDA government's Ease of Doing Business in India narrative and introduces a number of
changes to the present setup.

 Application for dissolution

 Order for dissolution 
 5. Fast track resolution
As a notable feature of the Code, the Code proposes a fast track resolution process, intended
to be completed within 90 days, as opposed to the 180 days’ time for a normal process. The
fast track process will be applicable for corporate debtors of a particular class, or having
assets or income up to such level as may be notified by the Central Government. Essentially
the process seems to be targeting small companies.

6. Voluntary liquidation
It would have been a pity if the process of liquidation under the Code was to be reserved
onlyfor defaulting companies, since voluntary winding up of healthy companies in India
currentlytakes enormously long time and, surprisingly, all attention has been to the speed
of incorporating companies, not winding them up. Thus, a healthy company, based on a
declaration of solvency, may pass a special resolution to liquidate itself. At least 2/3rds of
thecreditors in value must also support the members’ resolution. The rest of the liquidation
mechanics under the Code will apply to a voluntary winding up as well.

7. NCLT to mind its timelines

One of the highlight points of the Code is timely completion of the liquidation process.
Since most delays take place due to protracted time before the Benches, will keep the
benches of NCLT and NCLAT serious about timely disposal of matters. Theses sections
enact that wherethe NCLT or NCLAT does not dispose of the matter within the time limits,
the president of the forum shall record the reasons for not doing so.

Approval of Resolution Plan

The approval of a resolution plan by the National Company Law Tribunal (NCLT) in India
is a critical step in the Corporate Insolvency Resolution Process (CIRP) under the
Insolvency and Bankruptcy Code (IBC). Here is an overview of the process for the approval
of a resolution plan: Submission of Resolution Plan: Prospective resolution applicants or
bidders submit their resolution plans to the Resolution Professional (RP) within the
stipulated time frame, as specified by the NCLT. These plans should outline how they
intend to revive the financially distressed corporate debtor and repay the creditors.
Verification and Evaluation: The RP, with the assistance of professionals and experts,
verifies the resolution plans to ensure they comply with the requirements specified in the
IBC and the CIRP regulations. The RP may seek clarifications or additional information
from the resolution applicants if necessary.

Presentation to Committee of Creditors (CoC): Once the RP has completed its verification
and evaluation, the resolution plans are presented to the Committee of Creditors (CoC) for
their consideration. The CoC is composed of financial creditors who vote on the acceptance
or rejection of the resolution plans. Voting by CoC: The CoC examines the resolution plans
and votes on their acceptance. The plans that receive a vote of at least 66% in favor are
considered for further consideration. The CoC can also negotiate with the resolution
applicant to make changes to the plan, including the terms and conditions. Approval by
NCLT: If a resolution plan is approved by the CoC, it is then submitted to the NCLT for
final approval. The NCLT reviews the plan to ensure it complies with the provisions of the
IBC and that it is in the best interest of all stakeholders, including creditors. Public
Announcement: After receiving NCLT approval, a public announcement is made to inform
all stakeholders about the approval of the resolution plan.

Implementation of the Resolution Plan: Once approved by the NCLT, the resolution plan
is implemented by the resolution applicant. This typically involves the takeover of the
corporate debtor and the execution of the plan as per the approved terms. The objective is
to revive the corporate debtor and repay creditors. Monitoring and Compliance: The NCLT,
the RP, and the CoC continue to monitor the implementation of the resolution plan to ensure
compliance. The resolution applicant is expected to adhere to the terms and conditions
specified in the approved plan. Completion of CIRP: The CIRP is considered completed
when the resolution plan has been successfully implemented, and the corporate debtor is on
the path to recovery. In cases where the CIRP fails or if no viable resolution plan is
approved, the NCLT may order the liquidation of the corporate debtor. It's important to
note that the approval of a resolution plan by the NCLT is a critical stage in the insolvency
and bankruptcy process, and the NCLT carefully evaluates the plan to ensure that it is in
the best interests of all stakeholders. The goal of the CIRP is to maximize the value of assets
for creditors while reviving the financially distressed corporate debtor whenever possible.