Insolvency Code, 2016 : Synopsis & Case Laws

The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11 May 2016, received Presidential assent on 28 May 2016 and was notified in the official gazette on the same day. The Code is based upon the recommendations of the Bankruptcy Law Reform Committee to provide for a single Code to resolve insolvency for all companies, limited liability partnerships, partnership firms and individuals.  

With the advent of the Code, lenders (like banks, financial institutions, service providers) have started filing insolvency applications to recover dues from corporate borrowers. The Code being in the early stages of development is going through the judicial rigours of interpretation and evolving through precedents and amendments. 

The Note herewith captures the main features of the Code with a gist on some important case laws. 

1.       APPLICABILITY

Act is applicable to the following persons:

i). Companies;

ii). LLPs;

iii). Partnership Firms;

iv). Individuals.

and minimum amount of default to be Rs.100,000/-.

Provisions in the Act pertaining to Partnership Firms and Individuals are yet to be notified.

2.   STRUCTURE OF THE ACT

Divided into 5 parts as follows:

PART I – Preliminary/Definitions

PART II – Insolvency Resolution & Liquidation for Corporate Persons

PART III – Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms

PART IV – Regulation of Insolvency Professionals, Agencies and Information Utilities

Part V- Miscellaneous and Penal Provisions.

3.  DESIGNATED INTERMEDIARIES

i). Insolvency and Bankruptcy Board of India – Acting as an administrator of the Act;

ii). Insolvency Utilities – Data centre to keep records of financial information;

iii). Insolvency Agency - to promote professional development and regulate insolvency professionals;

iv). Insolvency Resolution Professional (IRP)– implementing resolution process.

4.   WHO CAN INITIATE AN INSOLVENCY PROCESS

i). Financial Creditor likes Banks, NBFC’s, Debenture Holders, Corporate Bond Holders, Lender in a purely loan transaction, etc.

ii). Operational Creditor like person to who have provided goods and/or services against which money is due from the Debtor.

iii). Corporate Debtor.

5.   TIMEFRAME

Within 180 days from date of admission of the insolvency resolution process with one extension of another 90 days. 

Fast Track Process has recently been notified which provides for a time frame of 90 days with one extension of 45 days. 

6.   DESIGNATED AUTHORITIES

i). NCLT – Relevant National Company Law Tribunal for proceedings against a Company/LLP with appeal to NCLAT.

ii). DRT- Relevant Debt Recovery Tribunal for proceedings against Individuals/Partnership Firms with appeal to DRAT.

7.  WHEN TO INITIATE INSOLVENCY PROCEEDINGS

i). Financial Creditor – When the Debtor commits a default in repayment of the debt when it is due and payable.

ii). Operational Creditor- When the Debtor has not paid the amount due after receiving demand notice for payment of the same along with the Invoice of such goods/services. 

iii) Corporate Debtor – Unable to pay its debt.

8.  HOW TO INITIATE INSOLVENCY PROCEEDINGS

i). Financial Creditor – File an application in the prescribed Form before the relevant NCLT along with prescribed documents together with the name of the person to act as Interim Resolution Professional (IRP) under Section 7 of the Code.

ii). Operational Creditor – File an application in the prescribed Form before the relevant NCLT along with prescribed documents which must include the demand notice and the Invoices against which payments are pending under Section 9 of the Code together with the name of the IRP or without the name of the IRP to be decided by the NCLT.

9.  MORATORIUM

Once the application filed either under Section 7 or Section is admitted by the NCLT, an order of  Moratorium is passed to prohibit inter-alia the following:

i). institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment or arbitral award;

ii). transferring, encumbering, alienating or disposing of any assets or legal rights or beneficial interest of the assets of the corporate debtor;

iii). Foreclosure, recovery or enforcing any security interest;

iv). recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor.

and order  for Public Announcement of the Insolvency Resolution  Process.

10. MANAGEMENT OF THE AFFAIRS OF THE COMPANY

The IRP becomes in charge of the management of the affairs of the corporate debtor and runs the corporate debtor as a going concern with all the employees and other stakeholders involved with the corporate debtor reporting to the IRP.

11.  COMMITTEE OF CREDITORS (COC)

Committee of Creditors is formed by the IRP to decide upon the resolution plan and manner of repayment of the debt by the corporate debtor and confirm the appointment of the IRP as the Resolution Professional or appoint a new Resolution Professional.

12.RESOLUTION PLAN

Resolution Plan inter-alia deals with the manner of payment of the debts by the corporate debtor and is required to be approved by at least 75% voting share of the COC calculated as per the proportionate financial debt owed to a creditor.

13.  FINALITY OF PROCESS

 

 Approval and acceptance of the Resolution Plan by the COC and the NCLT and thereafter becomes binding on corporate debtor, creditors, employees and all other stakeholders. If the Resolution Plan is not accepted and approved then an Order of Liquidation is passed against the corporate debtor. 

                                                                           -:CASE LAWS:-

i). Innoventive Industries Limited v. ICICI Bank Limited – NCLAT-Company Appeal (AT) (Insolvency) 1 & 2 of 2017: NCLT to follow principles of natural justice and audi alteram partem giving equal opportunity to be heard to the disputing parties. 

ii). Smart Timing Steel Limited (Operational Creditor and resident of Hong Kong SAR) v.National Steel and Agro Industries Ltd. (Corporate Debtor) – NCLAT- Company Appeal (AT) (Insolvency) 28 of 2017: Whether "a copy of certificate from the "Financial Institution" maintaining accounts of the Operational Creditor resident outside India confirming that there is no payment of unpaid operational debt by the 'Corporate Debtor' as prescribed under clause (c) of sub-section 3 of Section 9 of the 'I & B Code' is mandatory or directory? - Mandatory in nature and must followed even for companies resident outside India and having no account with Financial Institution in India.

iii). JK Jute Mills Company Limited v. M/s.Surendra Trading Company-NCLAT- Company Appeal (AT) (Insolvency) 9 of 2017: Whether the time limit prescribed in the Code for admitting or rejecting a petition or initiation of insolvency resolution process is mandatory? – Time is of essence of the Code for all the stakeholders involved including the Adjudicating Authority.

iv). Kirusa Software Pvt.Ltd. v. Mobilox Innovations Pvt.Ltd. – NCLAT- Company Appeal (AT) (Insolvency) 6 of 2017 & Philips India Limited v. Goodwill Hospital & Research Centre Ltd. NCLAT- Company Appeal (AT) (Insolvency) 14 of 2017- What does "dispute" and "existence of dispute" means for the purpose of determination of a petition under section 9 of the Code? - For the purpose of sub-section (2) of Section 8 and Section 9 a 'dispute' must be capable of being discerned from notice of corporate debtor and the meaning of "existence" a "dispute, if any", must be understood in the context. The dispute under I&B Code, 2016 must relate to specified nature in clause (a), (b) or (c) i.e. existence of amount of debt or quality of goods or service or breach of representation or warranty. If the 'corporate debtor' has raised a dispute, and brought to the notice of the 'operational creditor' to take appropriate step, prior to receipt of notice under sub-section (1) of Section 8 of the 'I & B Code', one can say that a dispute is pending about the debt. Mere raising a dispute for the sake of dispute, unrelated or related to clause (a) or (b) or (c) of Subsection (6) of Section 5, if not raised prior to application and not pending before any competent court of law or authority cannot be relied upon to hold that there is a 'dispute' raised by the corporate debtor. Mere a dispute giving a colour of genuine dispute or illusory, raised for the first time while replying to the notice under Section 8 cannot be a tool to reject an application under Section 9 if the operational creditor otherwise satisfies the adjudicating authority that there is a debt and there is a default on the part of the corporate debtor.

v). Era Infra Engineering Ltd v. Prideco Commercial Projects Pvt. Ltd.- NCLAT- Company Appeal (AT)(Insolvency) No.3 1 of 2017 & Seema Gupta v. Supreme Infrastructure India Ltd. & Ors. – NCLAT- Company Appeal (AT) (Insolvency) 53 of 2017 – Mandatory to issue Notice under section 8 of the Code prior filing an application under Section 9 of the Code.

vi). Col. Vinod Awasthy v. AMR Infrastructures Ltd. – NCLT (Principal Bench)- C.P. No. (IB)-10(PB)/2017 – Term “Operational Debt” discussed and what constitues “Operational Creditor” - The term operational debt would have to be confined to the four categories included in the definition - goods, services, employment and government dues. The applicant being an allotee of apartments being developed by AMR does not fall within the ambit of definition of operational creditor under the Code and payments required to be made by AMR (assured returns) under the Agreement until possession cannot be termed as an operational debt.

vii). Nikhil Mehta & Sons (HUF) & Ors.v. AMR Infrastructures Ltd. – NCLT (Principal Bench) – C.P.No. (ISB) –(03) PB/2017 – Terms “Financial Creditor” , “Financial Debt” and “ time value of money” discussed – Financial debt is a debt along with interest  which is disbursed against the time value of money. A Financial Creditor is a person who has a right to financial debt. NCLT cited Black’s Law Dictionary to interpret the words “Time Value” to mean “the price associated with the length of time that an investor must wait until an investment matures or related income is earned”.

- Arkodeb Sinha