INTRODUCTION TO INSOLVENCY AND BANKRUPTCY CODE, 2016
INTRODUCTION TO INSOLVENCY AND BANKRUPTCY CODE, 2016
The Insolvency and Bankruptcy Code, 2016 (IBC) is not an incremental reform but rather a paradigm shift towards resolution of financially stressed Corporate Persons, Partnership Firms and Individuals. Important aspects of IBC are as under
EXTENT & APPLICABILITY OF THE CODE
Section 1 provides for short title, extent and commencement of the Code. The short title of the Code is “Insolvency and Bankruptcy Code, 2016”. The Code extends to whole of India.
CLASSIFICATION OF CREDITORS
Creditor has been defined in Section 2 (10) as any person to whom a debt is owed and includes a Financial Creditor, an Operational Creditor, a Secured Creditor, an Unsecured Creditor and a Decree Holder.
Under the Code every category of creditors does not have equal rights particularly in case of Corporate Insolvency Resolution Process.
STRUGGLE OF HOME BUYERS
Classification of creditors in Operational Creditors and Financial Creditors and granting them exclusive rights under the Code had disastrous impact on home buyers. Home buyers had invested huge amount of money in various projects, but under the Code, it was not clear whether home buyers will fall in category of Operational Creditors or Financial Creditors. The huge investments of the home buyers were at risk.
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RELATED PARTIES & THEIR DISABILITIES
A Related Party to a Corporate Debtor has been burdened with various disabilities in course of Corporate Insolvency Resolution Process and Liquidation Process.
A Financial Creditor, who is a Related Party to a Corporate Debtor, does not have right of representation, participation or voting in the Committee of Creditors. Related party to a Corporate Debtor is not eligible to submit Resolution Plan. Look back period for Preferential Transactions and Undervalued Transactions in case of Related Party to a Corporate Debtor is two years from insolvency commencement date while for others look back period is only one year. A Liquidator cannot sell assets of the Corporate Debtor by private sale to a Related Party to a Corporate Debtor without prior permission of the Adjudicating Authority.
INITIATION OF CORPORATE INSOLVENCY RESOLUTION PROCESS
Every creditor of a Corporate Debtor has not been given right to initiate Corporate Insolvency Resolution Process (CIRP). Only Financial Creditors and Operational Creditors can initiate CIRP. Corporate Debtor itself can also initiate CIRP.
CIRP can only be initiated if Corporate Debtor is in default in payment of debt.
MORATORIUM & ITS IMPACT
The Adjudicating Authority declares Moratorium under Section 14 of the Code while admitting application under Section 7, 9 or 10 of the Code. Moratorium provides a calm period during which Corporate Debtor could be revived and rehabilitated. During Moratorium no suit or any other legal proceedings can be initiated or continued to recover any debt. Even a Secured Creditor cannot initiate any action to realise secured interests.
INTERIM RESOLUTION PROFESSIONAL
Corporate Insolvency Resolution Process follows creditor-in-possession model. With the initiation of Corporate Insolvency Resolution Process the managerial power of erstwhile management of Corporate Debtor shifts to Interim Resolution Professional appointed by the Adjudicating Authority. The Interim Resolution Professional enters into shoes of erstwhile management for all material purposes.
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PUBLIC ANNOUNCEMENT & COLLATION OF CLAIMS
The functions of Interim Resolution Professional include making public announcement of Corporate Insolvency Resolution Process of the Corporate Debtor and call for claims from creditors of the Corporate Debtor. On the basis of collation of claims a list of claims is prepared and Committee of Creditors is constituted.
COMMITTEE OF CREDITORS & ITS COMMERCIAL WISDOM
Although Interim Resolution Professional or the Resolution Professional, as the case may be, conducts CIRP and manages the day-to-day affairs, the ultimate control and supervision of CIRP lies with Committee of Creditors. It will not be an exaggeration to say that the fate of Corporate Debtor whether it will be revived or be liquidated lies in the hands of Committee of Creditors.
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RESOLUTION PROFESSIONAL & CONDUCT OF CORPORATE INSOLVENCY RESOLUTION PROCESS
The functions of Resolution Professional are in continuation of functions of Interim Resolution Professional. The Resolution Professional exercises all the powers and duties which are vested or conferred on the Interim Resolution Professional. The Resolution Professional continues to take forward the Corporate Insolvency Resolution Process of the Corporate Debtor till Resolution Plan is approved or Liquidation Order is passed by the Adjudicating Authority.
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RESOLUTION APPLICANTS & THEIR INELIGIBILITY
Resolution Applicant, individually or jointly with other persons, submits Resolution Plan to the Resolution Professional for revival and resolution of the Corporate Debtor. In the original code there was no provision regarding ineligibly of the Resolution Applicant to submit Resolution Plan. Experience with the implementation of the act showed that the very promotors who were responsible for the decline and downfall of the Corporate Debtor were submitting Resolution Plan and trying to reclaim the Corporate Debtor with huge hair cut to the creditors. This was against the spirit of the Code.
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THE RESOLUTION PLAN
Resolution Plan is a plan proposed by Resolution Applicant for resolution of Corporate Debtor. Resolution Plan is a blueprint for revival and resolution of Corporate Debtor. Resolution Plan provides measures for resolution of the Corporate Debtor and strategies for implementation.
LIABILITY OF PRIOR OFFENCES
A Corporate Debtor is either a Company or a Limited Liability Partnership or any other body corporate. Such entities are juridical persons having separate legal identity. Legal actions including criminal proceedings can be initiated against such persons.
If Resolution Plan is approved by the Adjudicating Authority and the Corporate Debtor continues to exist in earlier form, such Corporate Debtor will still be liable for criminal offences committed prior to insolvency commencement date. Such prospects could be huge deterrents for a prospective Resolution Applicant.
LIQUIDATION OF CORPORATE DEBTOR
The purpose of the Insolvency and Bankruptcy Code is revival and resolution of the Corporate Debtor. But if all the efforts do not fructify in resolution and revival of the Corporate Debtor, the only option left is liquidation of the Corporate Debtor.
THE LIQUIDATOR
When the Adjudicating Authority passes an order for liquidation of Corporate Debtor, simultaneously it appoints Resolution Professional, who has conducted Corporate Insolvency Resolution Process, as Liquidator of the Corporate Debtor. The Liquidator has to handle Liquidation Process till dissolution of the Corporate Debtor. On the appointment of Liquidator, all powers of the board of directors, key managerial personnel, and the partners, as the case may be, cease to have effect and vests in the Liquidator.
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REVIVAL UNDER LIQUIDATION
If a Corporate Debtor has been admitted to liquidation, that is not end of the road for the Corporate Debtor. Even during liquidation, Corporate Debtor can be revived through compromise or arrangement or sold as a going concern.
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LIQUIDATION ESTATE & REALISATION OF ASSETS
The Liquidator has to form Liquidation Estate under Section 36 after his appointment, which comprises of the all the assets of the Corporate Debtor. The Liquidator holds the Liquidation Estate as a fiduciary for the benefit of all the creditors.
TREATMENT TO THE SECURED CREDITOR
Secured Creditors enjoy privileges under the Liquidation Process although they do not enjoy any privileges under the Corporate Insolvency Resolution Process. In case of Liquidation of the Corporate Debtor, the Secured Creditor has option to remain out of Liquidation Proceedings and realise secured interest separately or to relinquish security interest to Liquidation Estate under Section 52 of the Code.
WATERFALL DISTRIBUTION
All monies, including cheques and demand drafts, received through sell of assets of the Corporate Debtor have to be deposited in bank account opened in the name of Corporate Debtor following by word “in liquidation” in a scheduled bank. Such monies have to be deposited without any deduction and not later than next working day.
DISSOLUTION OF CORPORATE DEBTOR
Liquidation Proceedings culminates into dissolution of the Corporate Debtor if assets have been liquidated or closure in case the Corporate Debtor has been sold as going concern.
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REPORTING UNDER LIQUIDATION
A Liquidator has to file various reports to the Adjudicating Authority during Liquidation Process. These documents include a Preliminary Report, Asset Memorandum, Progress Reports, Sale Reports, Minutes of Consultation with Stakeholders, Final Report prior to dissolution.
AVOIDABLE TRANSACTIONS
One of the major issues, which Interim Resolution Professional or Resolution Professional or Liquidator has to face, is diversion of funds to third parties in proximity to initiation of Corporate Insolvency Resolution Process (CIRP). Such transactions are prejudicial to the creditors as they lead to depletion of assets of the Corporate Debtor. Such transactions have to be avoided for maximisation of assets of the Corporate Debtor.
PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS
Corporate Insolvency Resolution Process (CIRP) in its regular form may not be suitable to companies of smaller sizes like micro, small and medium enterprises (MSME) due to their small sizes, simpler corporate structures and deeper involvement of promotors in running of these companies. Further, COVID 19 pandemic had an adverse impact on these MSME and had caused financial stress to them. The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 on 4th April 2021 to introduce Pre-Packaged Insolvency Resolution Process (PPIRP). Subsequently, Parliament confirmed PPIRP provisions vide Insolvency and Bankruptcy Code (Amendment) Act, 2021.
FAST TRACK CORPORATE INSOLVENCY RESOLUTION PROCESS
Fast Track Corporate Insolvency Resolution Process (FTCIRP) has been envisaged for Corporate Debtors of small sizes. Section 55 provides eligibility conditions for initiation of FTCIRP.
VOLUNTARY LIQUIDATION
There can be circumstances wherein although a Corporate Person is not in financial stress or in default, but it may want to liquidate itself voluntarily. A Corporate Person may want to liquidate voluntarily due to business reasons or duration of its life has expired or an event has occurred requiring the Corporate Person to be liquidated. In such circumstances, exit has to be simple and less cumbersome as no default on the part of Corporate Debtor is involved.
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INSOLVENCY RESOLUTION OF FINANCIAL SERVICE PROVIDERS
Section 3 (18) defines “Financial Service Provider” as a person engaged in the business of providing financial services in terms of authorization issued or registration granted by a Financial Sector Regulator.
Financial Service Providers have been excluded from the definition of the Corporate Person as such Corporate Insolvency Resolution Process cannot be initiated against Financial Service Providers. There have been efforts to develop separate framework for handling insolvency and liquidation of the Financial Service Providers, but such efforts have not as yet fructified.
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INSOLVENCY RESOLUTION & BANKRUPTCY FOR INDIVIDUAL AND PARTNERSHIPS
Section 78 to Section 187 deals with insolvency resolution and bankruptcy of individual and partnership firms. These Provisions have not been notified as yet by the Central Government.
But these provisions hold relevance as these provisions (except Fresh Start Process) are applicable to Insolvency Resolution and Bankruptcy Proceedings of Personal Guarantor of Corporate Debtors, which have already been notified and are in force.
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CROSS BORDER INSOLVENCY
This is an age of globalisation. Many companies registered in India have assets in foreign countries. Similarly, many companies registered in foreign countries have assets in India. An insolvency regime cannot be complete till there is proper framework in existence for Cross Border Insolvency.
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ADJUDICATORY FRAMEWORK
Section 60 to Section 67A deals with adjudicatory framework in respect of Corporate Insolvency Resolution Process. Section 179 to Section 183 deals with adjudicatory framework in respect of Insolvency and Bankruptcy of Individual and Partnership Firms.
OFFENCES AND PENALTIES
Section 236 of the Code provides that the offences under this Code have to be tried by Special Court established under Chapter XXVII of the Companies Act, 2013. Cognizance of offence can be only taken by the Court only on a complaint made by IBBI or the Central Government or any person authorised by the Central Government in this behalf.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.
