Comprehensive Guide to Insolvency and Bankruptcy Code (2023)

Table of Contents

1. Background of Insolvency Code

2. Overall scheme of the Insolvency and Bankruptcy Code

3. Insolvency and Bankruptcy Board of India (IBBI)

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1. Background of Insolvency Code

Any business is an ‘organisation’. The word ‘organisation’ is derived from the word ‘organ’, which indicates that any ‘organisation’ has many properties of an ‘organ’. Like any ‘organ’, the organisation has to either grow or decay.

Like any human body, some professions, businesses and industries, which obviously are organisations, are bound to be healthy and some to be sick. A healthy organisation can also become sick after some years. Some sick organisations will die, while some might recover.

All start-ups cannot be successful. Some will succeed while some will fail.

Corporate deaths – If an organisation is not viable and is likely to be a perennially sick unit, best course is to allow it to die a natural death. A person on death bed, with practically no chance of recovery, kept alive by artificial means, is never a happy sight.

Often ‘mercy killing’ is better than prolonging the agony.

1.1 Objective of Insolvency Code

The vision of law (as given in press release of Government of India) is to encourage entrepreneurship and innovation. Some business ventures will always fail, but they will be handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on, instead of being bogged down with decisions taken in the past.

Liquidation of Corporate Debtor is last resort, resolving corporate insolvency is primary object and not recovery of money– Liquidation of corporate debtor should be a matter of last resort as Insolvency Code recognizes a wider public interest in resolving corporate insolvencies and its object is not mere recovery of monies due and outstanding – Kridhan Infrastructure (P.) Ltd.v.Venkatesan Sankaranarayan [2020] 122 taxmann.com 88 (SC 3 member bench). In this case, time was given to comply with conditions of resolution plan agreed by him.

1.2 Insolvency Code is not a substitute for recovery forum

Wherever there is existence of real dispute, provisions of Insolvency code cannot be invoked. Insolvency code is not intended to be substitute to recovery forum – Mobilox Innovationsv. Kirusa Software(2018) 1 SCC 353 = 144 SCL 37 = 85 taxmann.com 292 (SC) – quoted with approval in Transmission Corporation of Andhra Pradeshv. Equipment Conductors(2019) 12 SCC 697 = 150 SCL 447 = 98 taxmann.com 375 (SC) * Reliance Asset Reconstructionv. Hotel Poonja International(2021) 7 SCC 352.

1.3 Insolvency and Bankruptcy Code, 2016

As per preamble to the Insolvency Code, the purpose of the Act is as follows—

• 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;
• Balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues;
• Establish an Insolvency and Bankruptcy Board of India [IBBI].

Code applicable all over India including Jammu and Kashmir– Insolvency Code has been extended to Jammu and Kashmir w.e.f. 18-3-2020.

Insolvency code is a complete code (and decisions in other Acts will not apply) – Insolvency code is a consolidating Act. It is complete and exhaustive in the matters dealt with therein. The Code is Parliamentary law that is exhaustive code on the subject matter of insolvency. It is covered in Entry 9 List III of Seventh Schedule, which reads as follows Bankruptcy and Insolvency – Innoventive Industriesv. ICICI Bank(2018) 1 SCC 407 = 143 SCL 625 = 84 taxmann.com 320 (SC).

1.4 Overall Structure of Insolvency Code

Broad structure of Insolvency Code is as follows—

1.5 Insolvency Code applies to personal guarantors of corporates

Provisions relating to Insolvency Resolution and Bankruptcy for individuals and partnership firms, except those relating to ‘fresh start-up process’ have been made effective from 1-12-2019. These sections are made only partially effective i.e.they apply only for personal guarantors of corporate debtors and not for other individuals and partnership firms.

Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019 have been made effective from 1-12-2019.

NCLT will be ‘adjudicating authority’ for this purpose. NCLAT will be appellate authority.

2. Overall scheme of the Insolvency and Bankruptcy Code

An Insolvency and Bankruptcy Board of India (IBBI) has been established. This Board (IBBI) oversees the work of insolvency and bankruptcy of corporate persons, firms and individuals.

Actual work relating to insolvency and bankruptcy will be handled mostly by ‘Insolvency Professionals’ (IP). They will be members of ‘Insolvency Professional Agency’ (IPA) which will ensure that the members have sufficient knowledge and expertise in these matters. IPA will also regulate the profession of IP.

The basic idea of Insolvency Code is that when an enterprise (individual, firm or corporation person) defaults in payment of its dues, the control shifts to Committee of Creditors (CoC) of financial creditors. Actual work is handled by IP. There are specified time limits to evaluate proposals for resuscitating (rehabilitating) the enterprise or taking it to liquidation. IP has control over the debtor under supervision of CoC.

Decisions are required to be taken in a time bound manner so that there are greater chances that the enterprise is saved as a going concern and productive resources of economy can be put to best use.

Insolvency of corporate persons– Part II of Insolvency Code, 2016 [Sections 4 to 59] deals with insolvency resolution and liquidation for corporate persons.

The actual work will be mostly handled by ‘resolution professional’ (who will be registered ‘insolvency professional’) under supervision of Adjudicating Authority (NCLT).

At first instance, corporate insolvency process will be initiated. This will be initiated by (a) secured creditor/s (b) operational creditor/s or (c) corporate person itself.

Insolvency professional will form a Committee of Creditors (CoC) of financial creditors and with their concurrence, efforts will be made to evolve and finalise plan to revive the corporate person.

Plan for rehabilitation of corporate debtor will be prepared by Resolution Applicant (RA) and will be submitted to Insolvency Professional for approval by Committee of Creditors (CoC).

This process will last for 180 days, extendable by further maximum 90 days. During this period, efforts will be made to evolve a ‘resolution plan’ to rehabilitate the ailing corporate.

A Fast Track Corporate Insolvency Resolution will be available to small corporate persons.

If the efforts fail, the corporate person will be liquidated in time bound manner.

NCLT will be Adjudicating Authority and NCLAT will be appellate authority for corporate persons.

DRT will be Adjudicating Authority for non-corporate persons (individuals, firms and HUF). DRT will be Appellate Authority.

Pre-Packaged Insolvency Resolution Process (PPIRP) – New concept of Pre-Packaged Insolvency Resolution Process (PPIRP) has been introduced w.e.f. 4-4-2021. This is applicable to only MSME. This will be very useful in quick insolvency resolution of Insolvency Process of MSME.

Liquidation/Winding up of companies– In most of the cases, liquidation (winding up) of companies will be through the Insolvency Code only. Direct winding up process under Companies Act, 2013 will be used very rarely.

2.1 Bankruptcy of personal guarantors

Personal guarantors of corporate debtors have been treated as a separate class. The provisions of Insolvency Code have been made applicable to personal guarantors of corporate debtors (often directors of the company). The application for bankruptcy of individual personal guarantor will have to be filed before NCLT (and not before DRT) as per section 60(2) of Insolvency Code, 2016.

Bankruptcy of individuals and firms– Part III of Insolvency Code, 2016 (section 78 to section 187 of Insolvency Code) deals with insolvency resolution and liquidation for individuals and firms. For individuals and firms, there are two distinct processes – fresh start and insolvency resolution. These are followed by bankruptcy order.

Debt Recovery Tribunal (DRT) will be adjudicating authority and DRAT will be appellate authority for individuals and firms.

2.2 Persons to whom the Insolvency Code applies

The provisions of Insolvency and Bankruptcy Code (Insolvency Code, 2016) apply to following, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be (Section 2 of Insolvency Code, 2016).

Clauses (a) to (d) of section 2 except with regard to voluntary liquidation or bankruptcy, were notified and brought into effect on 15-12-2016. Clauses (a) to (d) of section 2 with regard to voluntary liquidation have been brought into effect on 1-4-2017:

(a) Companies incorporated under Companies Act;

(b) Companies governed under special Act (so far as of Insolvency Code, 2016 is consistent with those special Acts i.e.provisions of Special Act will prevail over of Insolvency Code, 2016);

(c) Limited Liability Partnership (LLP);

(d) Other body corporates as may be notified by Central Government;

(e) Personal guarantors to corporate debtors;

(f) Partnership firms and proprietorship firms; and

(g) Individuals, other than persons referred to in clause (e).

2.3 Insolvency Code not applicable to financial service providers unless specifically notified

The Code is not applicable to corporates in finance sector. Section 3(7) of Insolvency Code, 2016 states that “Corporate person” shall not include any financial service provider.

Thus, the Code does not cover Bank, Financial Institutions, NBFC, Insurance Company, Asset Reconstruction Company, Mutual Funds, Collective Investment Schemes or Pension Funds.

“Financial service provider” means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator – Section 3(17) of Insolvency Code, 2016.

Insolvency Code made applicable to NBFC (including housing finance companies) with assets Rs. 500 Crore or more– The provisions of Insolvency Code have been made applicable to NBFC (which include housing finance companies) with asset size of Rs. 500 crore or more as per last audited balance sheet, videNotification No. S.O. 4139(E) dated 18-11-2019. RBI will be the ‘Appropriate Financial Regulator’ for this purpose.

Under these provisions, Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 have been notified.

2.4 Insolvency Code has overriding effect

The Insolvency and Bankruptcy Code, 2016 has overriding effect over other laws – Section 238 of Insolvency Code, 2016.

Sections 53(1)and 178 of Insolvency Code, 2016 provide that distribution from sale of assets will be as specified in that section, notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force.

Priority of payment of debts of operational creditors and financial creditors who do not accept resolution plan shall be as per priority specified in section 53(1) of Insolvency Code – Sections 30(2)(b) and 30(4) of Insolvency Code. Provision of section 30(2)(b) applies to PPIRP also, as per section 54K(3) of Insolvency Code.

Resolution Plan approved by NCLT is binding on Central/State Government and local authority even in respect of statutory dues – Section 31(1) of Insolvency Code.

2.5 Limitation Act applies to proceedings before NCLT or NCLAT

The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be – Section 238A of Insolvency Code.

Section 238 of Insolvency Code provides for overriding effect to provisions of Insolvency Code over other laws.

3. Insolvency and Bankruptcy Board of India (IBBI)

An Insolvency and Bankruptcy Board of India (IBBI) has been established by Central Government under section 188(1) of Insolvency Code, 2016.

Address – Insolvency and Bankruptcy Board of India, 7th Floor, Mayur Bhawan, Shankar Market, Connaught Circus, New Delhi -110001Telephone: +91 11 2346 2900, office hours : 09:30 AM to 06:00 PM (Monday to Friday), exceptclosed holidays.

Shri Ravi Mital is Chairperson of the Insolvency and Bankruptcy Board of India for a period of five years or upto the age of sixty-five years, whichever is the earlier w.e.f. 9th February, 2022 – Notification No. SO 574(E) dated 11-2-2022.

Function of the Board (IBBI) is to exercise regulatory oversight over insolvency professionals (IP), insolvency professional agencies (IPA) and information utilities (IU).

3.1 Financial Sector Regulators

There are various regulators to regulate financial sector.

“Financial Sector Regulator” means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government – Section 3(18) of Insolvency Code, 2016.

IBBI is also a Financial Sector Regulator. NFRA (National Financial Reporting Authority) (which is being constituted) is also a ‘Financial Sector Regulator’.

Position of RBI as expert regulatory authority in matters of economic and financial policy has been reiterated in several decisions of Supreme Court – Chitra Sharmav. UOI(2018) 18 SCC 575 = 148 SCL 833 = 96 taxmann.com 216 (SC).

3.2 Adjudicating Authority (AA) and Appellate Authorities

Adjudicating Authority and Appellate Authorities are as follows:

Adjudicating and Appellate Authorities for corporate persons– National Company Law Tribunal (NCLT) constituted under section 408 of Companies Act, 2013 is the Adjudicating Authority (AA) for purpose of insolvency resolution and liquidation for corporate persons – Section 5(1) read with section 60(1) of Insolvency Code, 2016.

National Company Law Appellate Tribunal (NCLAT) is the appellate authority over decisions of NCLT – Section 61 of Insolvency Code, 2016.

Appeal against order of NCLAT can be filed to Supreme Court on question of law arising out of such order, within 45 days – Section 62 of Insolvency Code, 2016.

Of course writ jurisdiction of High Court and special leave petition (SLP) powers of Supreme Court, granted under Constitution of India, remain unaffected.

Jurisdiction of civil court has been barred – Section 63 of Insolvency Code, 2016.

Adjudicating and Appellate Authorities for individuals and firms– Debt Recovery Tribunal (DRT) will be adjudicating authority for individuals and firms – section 179(1) of Insolvency Code, 2016. However, in case of personal guarantors to corporate debtors, NCLT will be adjudicating authority for insolvency Resolution and bankruptcy process.

Powers of Adjudicating Authority for individuals and firms are specified in section 179(2) of Insolvency Code, 2016.

DRAT (Debt Recovery Appellate Tribunal) will be appellate authority – Section 181 of Insolvency Code, 2016.

Appeal against order of DRAT can be filed to Supreme Court on question of law arising out of such order, within 45 days – Section 182 of Insolvency Code, 2016.

Jurisdiction of civil court has been barred – Section 180 of Insolvency Code, 2016.

3.3 Information Utility (IU)

The Insolvency and Bankruptcy processes are expected to function on basis of financial information available electronically.

Information Utility will collect, collate, authenticate and disseminate financial information to be used in insolvency, liquidation and bankruptcy proceedings.

“Information utility” means a person who is registered with the ‘Insolvency and Bankruptcy Board of India’ (Board – IBBI) as an information utility under section 210 of Insolvency Code, 2016 – Section 3(21) of Insolvency Code, 2016.