Insolvency and Bankruptcy Code, 2016 [Hereinafter referred  as “IBC”] was passed in both the Houses of Parliament with a major objective of providing single window for insolvency and liquidation procedure.

Let’s try to understand the importance and significance of IBC with an example:

Mr. A (Creditor) has lent money to XYZ Co. with a repayment schedule over 5 years. After 2 years, XYZ Co. was unable to pay the money borrowed due to  business  failure  and declared as insolvent by the competent authority. Now Mr. A wants to recover the amount from the XYZ Co. and filed a petition against the company. The course of action and due procedure before and after implementation of IBC is as follows:

Before introduction of IBC

After introduction of IBC

The above example is illustrative purpose only, in reality the process may involve much more number of laws, regulations, adjudicating authority and process which are very time consuming in nature resulting in delayed conclusion of proceedings.

However, not every claim is eligible for making an application under IBC. Initially the monetary limit was 1 Lakh but the same was increased to 1 Crore with effect from March 2020 due to the impact of Corona on business.

An overview of IBC:

IBC has 3 terms namely Insolvency, Bankruptcy and code. The terms Insolvency and Bankruptcy can explained with the help diagram.

IBC is  a  Code  not  an Act. Act: A compilation of sections Code: A compilation of Acts.

IBC = Insolvency + Liquidation

Preamble:

• An Act to consolidate and amend the laws
• relating to reorganisation and insolvency resolution of
• corporate persons, partnership firms and individuals
• in a time bound manner
• for maximization of value of assets of such persons
• including alteration in the order of priority of payment of Government dues and
• to establish an Insolvency and Bankruptcy Board of India and such other matters

Applicability of IBC

The provisions of IBC applies to the following

1. Companies incorporated under Companies Act
2. Companies governed under special Act and Limited Liability Partnership (LLP)
3. Other body corporates as may be notified by Central Government
4. Personal guarantors to corporate debtors
5. Partnership firms, proprietorship firms and individuals other than persons referred to in clause (d).

Adjudicating Authority under IBC

Regulatory Authority under IBC

Reforms under IBC

Unlike the previous laws, the provisions of the IBC does not rely upon the concept of secured creditors, unsecured creditors and preferential creditors. Under IBC, the Corporate Insolvency Resolution Process [CIRP] can be initiated by two category of creditors namely Financial creditors and Operational Creditors

Let’s understand the meaning of Financial Creditor (FC) and Operational Creditor (OC) and other relative terms

1. Corporate debtor: A corporate person who owes debt to any person
2. Corporate person: means a company, LLP, or any other person incorporated with limited liability under any law excluding any financial service provider.
3. Debt: Liability in respect of a claim includes financial debt and operational debt
4. Financial debt: means a debt along with interest, if any, which is disbursed against the consideration for the time value of money includes guarantee or indemnity
5. Operational Debt: Claim by Creditors for trade payable, Employees, government dues.
6. Default: Non-payment, wholly or partially, of debt which is due and payable.
7. CIRP: CIRP is the process of resolving the corporate insolvency of a corporate debtor in accordance with the provisions of IBC.

Financial debt Vs. Operational debt

Understanding the meaning of Claim, right to payment and right to remedy

1. “Claim” means a claim of any debt made by the creditors or any claimants.
2. Debt gets invoked if and only of a claim is made.
3. Claim has two parts
   1. Right to payment: An enforceable obligation of CD to make payment and within the preview of limitation act, 1963 i.e., within 3 years
   2. Right to remedy for a breach of contract: A breach that gives rise to a right to payment and it may be exercised under any law and need not to be under IBC and includes right to recover the damages

Illustration

XYZ Co. purchased goods from Mr. Ram worth 10 Lakhs on 01.12.2021 with due date 31.12.2021 and took loan from SBI Bank an amount of Rs. 50 Lakhs on 01.01.2021 repayable on 21.12.2021. In this case,

In the above case, both the SBI Bank and Mr. Ram has to make the  claim for  the  dues payable on or after 31.12.2021. Unless both the parties make any claim, there is no debt. Once there is no debt and there is no claim, IBC proceedings cannot be initiated.

Initiation of CIRP in case of Financial Creditors (SBI Bank)

Initiation of CIRP in case of Operational Creditors (A - Creditor): Unlike the Financial creditors, operational creditors cannot make application directly. Operational creditors at the first has to negotiate with the defaulter and in case where the negotiations were failed and the application for insolvency was only option left, the operational creditors can make application for CIRP.

Corporate Applicant has to make an application to NCLT for CIRP against the default committed by the CD along with necessary attachments. In case, the CD being a

1. Company – Prior approval of the shareholders by passing special resolution
2. LLP – Prior approval of 3/4th  of total number of partners

Time limit for completion of CIRP is 180 days. However, such time limit shall be extended beyond 180 days and up to 90 days with 66% of voting share of Committee of  Creditors [CoC] provided that CIRP shall be completed within 330 days from insolvency commencement date.

Withdrawal of application: The NCLT may withdraw application made under section 7 or 9 or 10 when an application for withdrawal is made with 90% voting share of the CoC.

Effect of CIRP

Once application is accepted the following will take effect:

1. Declaration of Moratorium: Suspends all the suits or litigations, acquisitions  or material changes to assets, any enforcement  under  SARFAESI  Act,  2002  and Acquisition of leasehold property by owner or lessor in possession of CD. However, the concept of going concern is not disturbed and essential goods or services are not prohibited. Moratorium will be in effect till the completion of CIRP.

2.Appointment of IRP:

1. In case of FC: The name of Interim Resolution Professional [IRP] shall be proposed by FC and the person so proposed as IRP shall be appointed as IRP.
2. In case of OC: The name of IRP shall be proposed by OC. In case where OC does not propose the name of IRP, the board shall appoint the IRP. In both cases, the IRP shall conduct the CIRP till Resolution Professional [RP] is appointed.
3. Upon the appointment of IRP
   1. The management of affairs of the CD shall vest with IRP
   2. The Powers of the BOD or Partners are suspended by the IRP
   3. IRP shall be the reporting head to the Managers and officers

3. A public Announcement:

After admission of CIRP by the Adjudicating Authority, an IRP shall makes public announcement within 3 days from his appointment and calls for submission of claims from the stakeholders in

1. 1 English and 1 regional language newspaper,
2. on the website of corporate debtor, and
3. on the website of Board

Post-effect of CIRP

Whenever there is default by the CD, here the idea is to nullify the default and ensure that

the creditor is paid appropriately by evaluating various plans. Evaluation of such plans are entrusted to Resolution Applicant. In case, where the assets of CD are not sufficient to discharge the liabilities, then the only option left is to liquidate the company and discharge the liabilities which is entrusted with Liquidator. The entire procedure is handled by the RP i.e., Resolution Professional.

CIRP begins with declaration of Moratorium and concludes with the order of NCLT. An overview of the same is as follows:

Understanding the terms Information Memorandum and Resolution Plan:

1. Information memorandum

means a memorandum prepared by the RP containing relevant information of the CD for formulating a Resolution Plan.

2.Resolution plan

1. Plan proposed by any person for CIRP of the CD as a Going Concern.
2. A Resolution Applicant prepares the Resolution Plan on the basis of the information memorandum given by the RP.
3. It may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger.

3. Resolution Applicant:

The Resolution Applicant is the person who  submits  a Resolution Plan either individually or jointly with any other person.

4. Submission of Resolution Plan:

The Resolution Applicant shall submit the Resolution plan to RP. RP will present the same after its examination to the CoC for its approval. The CoC can approve the Resolution Plan by a vote of not less than 66% of the voting share of the FC.

Notes:

Committee of creditors

• First CoC meeting shall be held within 7 days from the constitution of CoC.
• CoC shall be constituted after the collection of all claims received against the CD
• CoC meeting can be either in person or through Electronic means
• Notice of CoC meeting to
  • Members of suspended board or suspended partners
  • Members of CoC and authorised representatives
  • OC if the aggregate due is not less than 10% of the debt

Appointment of RP

• The CoC may at the meeting resolve the existing IRP to act as RP or replace the IRP.

Liquidation

• NCLT may pass an order rejecting the Resolution Plan if it is satisfied that the Resolution Plan does not meet the requirements laid down under the IBC.
• Thereafter, it may pass an order of the liquidation of the CD.
• After the approval of the liquidation of the CD, the CoC will appoint the liquidator to dispose the CD’s assets and discharge the liabilities.
• The distribution of the assets will be made as per the provisions of the IBC.

Persons ineligible to make application for CIRP

Pre-packed Insolvency Resolution Process (PPIRP):

1. An amendment to IBC has been made in April, 2021 by adding a new Chapter III A (Section 54A to 54P) on “Pre-packed Insolvency Resolution Process” (PPIRP).
2. Only MSMEs are eligible for PPIRP. Micro, Small and Medium Enterprises Development Act, 2006 has defined MSMEs as given below (Rs. in upper limit):

Insolvency and Bankruptcy Code, 2016 [Hereinafter referred  as “IBC”] was passed in both the Houses of Parliament with a major objective of providing single window for insolvency and liquidation procedure.

Let’s try to understand the importance and significance of IBC with an example:

Mr. A (Creditor) has lent money to XYZ Co. with a repayment schedule over 5 years. After 2 years, XYZ Co. was unable to pay the money borrowed due to  business  failure  and declared as insolvent by the competent authority. Now Mr. A wants to recover the amount from the XYZ Co. and filed a petition against the company. The course of action and due procedure before and after implementation of IBC is as follows:

Before introduction of IBC

After introduction of IBC

The above example is illustrative purpose only, in reality the process may involve much more number of laws, regulations, adjudicating authority and process which are very time consuming in nature resulting in delayed conclusion of proceedings.

However, not every claim is eligible for making an application under IBC. Initially the monetary limit was 1 Lakh but the same was increased to 1 Crore with effect from March 2020 due to the impact of Corona on business.

An overview of IBC:

IBC has 3 terms namely Insolvency, Bankruptcy and code. The terms Insolvency and Bankruptcy can explained with the help diagram.

IBC is  a  Code  not  an Act. Act: A compilation of sections Code: A compilation of Acts.

IBC = Insolvency + Liquidation

Preamble:

• An Act to consolidate and amend the laws
• relating to reorganisation and insolvency resolution of
• corporate persons, partnership firms and individuals
• in a time bound manner
• for maximization of value of assets of such persons
• including alteration in the order of priority of payment of Government dues and
• to establish an Insolvency and Bankruptcy Board of India and such other matters

Applicability of IBC

The provisions of IBC applies to the following

1. Companies incorporated under Companies Act
2. Companies governed under special Act and Limited Liability Partnership (LLP)
3. Other body corporates as may be notified by Central Government
4. Personal guarantors to corporate debtors
5. Partnership firms, proprietorship firms and individuals other than persons referred to in clause (d).

Adjudicating Authority under IBC

Regulatory Authority under IBC

Reforms under IBC

Unlike the previous laws, the provisions of the IBC does not rely upon the concept of secured creditors, unsecured creditors and preferential creditors. Under IBC, the Corporate Insolvency Resolution Process [CIRP] can be initiated by two category of creditors namely Financial creditors and Operational Creditors

Let’s understand the meaning of Financial Creditor (FC) and Operational Creditor (OC) and other relative terms

1. Corporate debtor: A corporate person who owes debt to any person
2. Corporate person: means a company, LLP, or any other person incorporated with limited liability under any law excluding any financial service provider.
3. Debt: Liability in respect of a claim includes financial debt and operational debt
4. Financial debt: means a debt along with interest, if any, which is disbursed against the consideration for the time value of money includes guarantee or indemnity
5. Operational Debt: Claim by Creditors for trade payable, Employees, government dues.
6. Default: Non-payment, wholly or partially, of debt which is due and payable.
7. CIRP: CIRP is the process of resolving the corporate insolvency of a corporate debtor in accordance with the provisions of IBC.

Financial debt Vs. Operational debt

Understanding the meaning of Claim, right to payment and right to remedy

1. “Claim” means a claim of any debt made by the creditors or any claimants.
2. Debt gets invoked if and only of a claim is made.
3. Claim has two parts
   1. Right to payment: An enforceable obligation of CD to make payment and within the preview of limitation act, 1963 i.e., within 3 years
   2. Right to remedy for a breach of contract: A breach that gives rise to a right to payment and it may be exercised under any law and need not to be under IBC and includes right to recover the damages

Illustration

XYZ Co. purchased goods from Mr. Ram worth 10 Lakhs on 01.12.2021 with due date 31.12.2021 and took loan from SBI Bank an amount of Rs. 50 Lakhs on 01.01.2021 repayable on 21.12.2021. In this case,

In the above case, both the SBI Bank and Mr. Ram has to make the  claim for  the  dues payable on or after 31.12.2021. Unless both the parties make any claim, there is no debt. Once there is no debt and there is no claim, IBC proceedings cannot be initiated.

Initiation of CIRP in case of Financial Creditors (SBI Bank)

Initiation of CIRP in case of Operational Creditors (A - Creditor): Unlike the Financial creditors, operational creditors cannot make application directly. Operational creditors at the first has to negotiate with the defaulter and in case where the negotiations were failed and the application for insolvency was only option left, the operational creditors can make application for CIRP.

Corporate Applicant has to make an application to NCLT for CIRP against the default committed by the CD along with necessary attachments. In case, the CD being a

1. Company – Prior approval of the shareholders by passing special resolution
2. LLP – Prior approval of 3/4th  of total number of partners

Time limit for completion of CIRP is 180 days. However, such time limit shall be extended beyond 180 days and up to 90 days with 66% of voting share of Committee of  Creditors [CoC] provided that CIRP shall be completed within 330 days from insolvency commencement date.

Withdrawal of application: The NCLT may withdraw application made under section 7 or 9 or 10 when an application for withdrawal is made with 90% voting share of the CoC.

Effect of CIRP

Once application is accepted the following will take effect:

1. Declaration of Moratorium: Suspends all the suits or litigations, acquisitions  or material changes to assets, any enforcement  under  SARFAESI  Act,  2002  and Acquisition of leasehold property by owner or lessor in possession of CD. However, the concept of going concern is not disturbed and essential goods or services are not prohibited. Moratorium will be in effect till the completion of CIRP.

2.Appointment of IRP:

1. In case of FC: The name of Interim Resolution Professional [IRP] shall be proposed by FC and the person so proposed as IRP shall be appointed as IRP.
2. In case of OC: The name of IRP shall be proposed by OC. In case where OC does not propose the name of IRP, the board shall appoint the IRP. In both cases, the IRP shall conduct the CIRP till Resolution Professional [RP] is appointed.
3. Upon the appointment of IRP
   1. The management of affairs of the CD shall vest with IRP
   2. The Powers of the BOD or Partners are suspended by the IRP
   3. IRP shall be the reporting head to the Managers and officers

3. A public Announcement:

After admission of CIRP by the Adjudicating Authority, an IRP shall makes public announcement within 3 days from his appointment and calls for submission of claims from the stakeholders in

1. 1 English and 1 regional language newspaper,
2. on the website of corporate debtor, and
3. on the website of Board

Post-effect of CIRP

Whenever there is default by the CD, here the idea is to nullify the default and ensure that

the creditor is paid appropriately by evaluating various plans. Evaluation of such plans are entrusted to Resolution Applicant. In case, where the assets of CD are not sufficient to discharge the liabilities, then the only option left is to liquidate the company and discharge the liabilities which is entrusted with Liquidator. The entire procedure is handled by the RP i.e., Resolution Professional.

CIRP begins with declaration of Moratorium and concludes with the order of NCLT. An overview of the same is as follows:

Understanding the terms Information Memorandum and Resolution Plan:

1. Information memorandum

means a memorandum prepared by the RP containing relevant information of the CD for formulating a Resolution Plan.

2.Resolution plan

1. Plan proposed by any person for CIRP of the CD as a Going Concern.
2. A Resolution Applicant prepares the Resolution Plan on the basis of the information memorandum given by the RP.
3. It may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger.

3. Resolution Applicant:

The Resolution Applicant is the person who  submits  a Resolution Plan either individually or jointly with any other person.

4. Submission of Resolution Plan:

The Resolution Applicant shall submit the Resolution plan to RP. RP will present the same after its examination to the CoC for its approval. The CoC can approve the Resolution Plan by a vote of not less than 66% of the voting share of the FC.

Notes:

Committee of creditors

• First CoC meeting shall be held within 7 days from the constitution of CoC.
• CoC shall be constituted after the collection of all claims received against the CD
• CoC meeting can be either in person or through Electronic means
• Notice of CoC meeting to
  • Members of suspended board or suspended partners
  • Members of CoC and authorised representatives
  • OC if the aggregate due is not less than 10% of the debt

Appointment of RP

• The CoC may at the meeting resolve the existing IRP to act as RP or replace the IRP.

Liquidation

• NCLT may pass an order rejecting the Resolution Plan if it is satisfied that the Resolution Plan does not meet the requirements laid down under the IBC.
• Thereafter, it may pass an order of the liquidation of the CD.
• After the approval of the liquidation of the CD, the CoC will appoint the liquidator to dispose the CD’s assets and discharge the liabilities.
• The distribution of the assets will be made as per the provisions of the IBC.

Persons ineligible to make application for CIRP

Pre-packed Insolvency Resolution Process (PPIRP):

1. An amendment to IBC has been made in April, 2021 by adding a new Chapter III A (Section 54A to 54P) on “Pre-packed Insolvency Resolution Process” (PPIRP).
2. Only MSMEs are eligible for PPIRP. Micro, Small and Medium Enterprises Development Act, 2006 has defined MSMEs as given below (Rs. in upper limit):