Guide to IBC

GUIDE TO IBC

The Insolvency and Bankruptcy Code came into force on 11th May 2016. The purpose behind this very enactment was to lead the way towards an easy process for insolvency and to bring in a law that would amalgamate and integrate all the previously existing insolvency laws.

The Insolvency and Bankruptcy Code, 20161 (IBC) to be read with Insolvency & bankruptcy (application to adjudicating authority for insolvency resolution process for personal guarantor to corporate debtor) Rules, 2019, an act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of govt. dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected or incidental with the IBC.

It is a comprehensive Code enacted as the Preamble states, 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 maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto”.

IBC makes exit easy. Insolvency is caused due to two reasons mainly, ‘cash flow insolvency’ and ‘balance sheet insolvency’. Cash flow insolvency is, when an insolvent debtor can’t pay because he doesn’t have the money. Balance sheet insolvency is, when debts exceed assets (only cash on hand is left). Balance sheet insolvency leads to cash flow insolvency.

The IBC envisages resolution of such corporate insolvencies in a two-phase procedure. The first phase being the corporate insolvency resolution process (“CIRP”) and the second being the liquidation process.

Part II, Chapter VI of the IBC, states that there would be an adjudicating authority by the name of National Company Law Tribunal (NCLT) for insolvency resolution and liquidation of Companies, Limited Liability Partnerships (LLPs), or any entity with limited liability under any law and bankruptcy of personal guarantors thereof. In a notification dated 1st June, 2016, the Central Government had constituted 11 benches of the National Company Law Tribunal (NCLT) in different states.

IBC applies to the following:

COMPANY REGISTERED UNDER THE COMPANY ACT, 2013.
ANY OTHER COMPANY GOVERNED BY ANY SPECIAL ACT.
LIMITED LIABILITY PARTNERSHIP, LLP ACT, 2008.
SUCH OTHER BODY INCORPORATED UNDER ANY OTHER LAW BY THE CENTRAL GOVT. NOTIFICATION.
PARTNERSHIP FIRMS / PROPRIETORSHIP FIRMS.
INDIVIDUALS RELATED TO PERSON INVOLVED UNDER INSOLVENCY RESOLUTION PROCESS.
PERSONAL GUARANTORS.

Section-4 of the code talks about the pecuniary jurisdiction for the applicability of the code. It says that the jurisdiction is Rs. 1,00,000 (1 Lakh) but the central govt. through its notification can increase the limit to Rs. 1 Crore but not more than that

The Indian govt. through a recent gazette notification 3 raised the pecuniary threshold for initiation of proceedings under the IBC, 2016 to Rs. 1,00,00,000 (1 Crore) as the minimum amount of default from the existing threshold of Rs. 1 Lakh.

Terminology

1 Corporate Applicants -
It includes the corporate debtor, authorized member/partner of the corporate debtor, individual in charge of managing operations & resources of the corporate debtor & person having the control and supervision over the financial affairs of the corporate debtor.
2 Corporate Guarantor -
Corporate guarantor, who is the surety in a contract of guarantee to a corporate debtor.
3 Personal Guarantor -
Individual who is the surety in a contract of guarantee to a corporate debtor.
4 Operational Creditor -
A person to whom an operational debt is owed & includes any person to whom such has been legally assigned or transferred.
5 Operational Debt -
A claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law.

Provisions under which Corporate Insolvency Resolution Process (CIRP) can be initiated-

1 Section-7 :
Initiation of CIRP by Financial Creditor against Corporate debtor.
2 Section-9 :
Initiation of CIRP by Operational Creditor against Corporate debtor, after expiry of 10 days (notice period).
3 Section-10 :
Initiation of CIRP by Corporate Applicant, itself.

Other Important Provisions

Section-12 : Talks about the time limit for completion of Insolvency Resolution Process (IRP), which is 180 days from the date of admission, it can be extended when committee of creditors extend the period by themselves or when NCLT, if deems fit, can extend it for another 90 days but only once and not beyond 90 days.

Section-16 :talks about appointment of Interim Resolution Professional (IRP), is appointed with the power to take charge of the company which has defaulted. The professional's task is to take necessary steps to revive the company. Appointed professional also has the power to raise fresh funds to continue operations.

Section-33-59 :talks about liquidation process, Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due.

Section-60-67 :talks about powers and jurisdiction of adjudicating authority for corporate persons (NCLT, NCLAT, appeal to SC), fraudulent cases, penalties etc.

Section-78-59 :talks about fresh start process for individuals and partnership firms. It is envisaged as a solution for debtors to discharge their debts and start afresh without any liabilities.

Section-94-120 :talks about fresh start process for individuals and partnership firms. It is envisaged as a solution for debtors to discharge their debts and start afresh without any liabilities.

Section-121-187 : talks about bankruptcy provisions, Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. Bankrupt is not the only legal status that an insolvent person may have, and the term bankruptcy is therefore not a synonym for insolvency. Under section 122, bankruptcy proceedings is initiated by the debtor and by the creditor u/s 123.

Section-188-255 : talks about regulation of insolvency professionals, agencies and information utilities.

The Insolvency and Bankruptcy (Application to adjudicating authority) Rules, 2016, states the forms and rules for application before NCLT, for corporate debtors.

The Insolvency and Bankruptcy (Application to adjudicating authority for insolvency resolution process for personal guarantors to corporate debtors) Rules, 2019, states the forms and rules for application before NCLT, for personal guarantors to the corporate debtors.

CASE LAWS

Arcelor Mittal India Private Limited v. Satish Kumar Gupta & Ors. (Essar Insolvency case)4:

In this case Financial Creditors of the Essar Steel India Limited had filed an application for CIRP under section 7 of the IBC. The main issue in this case was with regard to the treatment of the secured and unsecured creditors, determining of the powers of the CoC , powers in relation to the powers of accepting the resolution plan and the constitutional validity of the section 12(3) and section 30(2) of the IBC.

The Supreme Court differentiated with regard to the payment of debts to the Secured and Unsecured creditors. It pressed on the fact that the unequals cannot be treated equally. Thus, a resolution plan cannot be rejected on the ground that the plan is unjust or unfair to a certain class of creditors, if the interest of the each class of the creditor has been looked into.

The Supreme Court also stated that the CoC has the total powers over the running of the business of the Corporate Debtor, hence such vital powers cannot be delegated to any other person or sub committees. But the Supreme Court clarified that the Sub Committees can be instituted for other purposes such as performing of administrative functions etc.

Section 12(3) of the IBC, which provided for the mandatory timeline of 330 days for completion of CIRP, if not complied with, the corporate debtor would be liquidated. The Supreme Court partially struck down the section in which the word 'mandatory' was considered as arbitrary and unreasonable under article 14 of the Indian Constitution and it also hindered with the rights of the carrying out business under article 19(1) (g). Section 30(2) of the IBC provided for the minimum payment that needs to be made dissenting financial creditors as well as the operational creditors. The Supreme Court held that this section was a mere guideline that the CoC needs to follow while it arrives at any decision regarding the resolution plan and any such decision must be taken accounitng the feasibility and the ground realities. Thus, section 30(2) was upheld by the Supreme Court.

M/S Embassy Property v. The State Of Karnataka

In the case of M/s Embassy Property Developments Pvt. Ltd. v. State of Karnataka and Ors, the Resolution Applicant, CoC and the Corporate Debtor had filed appeal in the Supreme Court challenging the interim order passed by the Karnataka High Court, which had put a stay on an order passed by the NCLT. The application in High Court was filed by the Resolution Professional. The issue which arose in this case was whether the High Court can pass any interim order under article 226/227 interfering with the order of the NCLT and also ignoring the fact that there is an alternative remedy of appealing to the NCLAT for the same?

The Supreme Court stated that the NCLT is a creation of the special statute to discharge specific functions. Therefore, it cannot be given a status higher than judicial courts which have power of judicial review over the administrative action. It also stated that NCLT's are not even civil courts, thus , it can only try cases within its statute which has been prescribed by law and no other matters i.e. matters of public interest, civil nature etc. Therefore, the HC can try matters in realm of public law which arise in matters of IBC 2016.