The Insolvency and Bankruptcy Code, 2016 - Nutshell

The Insolvency and Bankruptcy Code, 2016

This code applicable to any company, Limited Liability Partnership, any other corporate body incorporated under any law, partnership firms and individuals, in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy. 

The object of the coded is before approaching authority concern for insolvency and bankruptcy, explore the possibility of the revitalization.

This code contains five parts i.e

Part – I Preliminary

Part – II Insolvency resolution and liquidation for corporate persons

Part – III Insolvency resolution and bankruptcy for individuals and partnership

Part – IV Regulation of insolvency professional, agencies and information utilities

Part – V Miscellaneous

Process with respect to corporation Persons (Part – II apply)

Application of this part:- where the minimum amount of the default is one lakh rupees (provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees)

Who may apply 1. A financial creditor, 2. An operational creditor or 3. The corporate debtor

"financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

"financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on nonrecourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.

"operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

"operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

"Corporate debtor" means a corporate person who owes a debt to any person;

Where to apply: - before Adjudicating Authority, The National Company Law Tribunal, herein.

Impact of admission: -

1. The Adjudicating authority, by an order, appoints interim resolution professional [his tenure is only 30 days, thereafter resolution professional will be appointed] to do the insolvency resolution process, which will be completed within 180 days, from the date of admission. Extension time may be granted by the adjudicating authority, if such request of extension is supported by a resolution of 75% of committee of creditors.

2. by an order, declare moratorium

3. by an order, cause a public announcement.

Moratorium – by an order, prohibiting the following

[(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtorany of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

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

This order will be in-force till the completion of insolvency resolution process.

Duties of the insolvency resolution professional

1. taking interim management of the corporate

2. collect information related to business operation, financial and operation payments for previous two years

3. constitute committee of creditors

4. raise interim finance with the approval of committee of creditors

5. invite prospective investor and lenders

6. present all resolution plans at the meeting of the committee of creditors

7. administer the asset as recorded in the balance sheet

[assets excluding (a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment ; (b) assets of any Indian or foreign subsidiary of the corporate debtor; and (c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.]

Resolution plan:-

Any person, either corporation debtor, creditors or resolution professional, may present /propose the resolution plan, which shall be approved by the Management of corporate debtor and 75% of the Committee of Creditors, before submitting to the Adjudicating authority.

Insolvency process:-

If the adjudicating authority rejects the resolution plan, it passes an order for liquidation and to issue public announcement.

The liquidator shall receive claims of creditors within a period of 30 days from the date of commencement of the liquidation process

The liquidator / resolution professional / creditor, member or a partner of the corporate debtor, may file an application for avoidable transactions, which was made with any person within the period of one year preceding the insolvency commencement date and which were made with a related party within a period of two years preceding the insolvency commencement date

The liquidator / resolution professional may file an application for avoidance of such transaction, where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date.

The liquidator distribute the assets as follows

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following 

(i) workmen's dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following :—

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

After liquidating all the assets the liquidator apply for liquidation.

Fast track corporate insolvency resolution process

Under fast track the process shall be completed within 90 days from the insolvency commencement date. The conditions are yet to be notified by the Central Govt to process the case under fast track.

Process with respect to individuals and Partnership firms (Part – III apply)

Application of this part:- where the minimum amount of the default is one thousand rupees (provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one lakh rupees)

Where to apply:- Debt recovery tribunal is the adjudicating authority

For fresh start process

A debtor, who is unable to pay his debt and fulfils the conditions specified below, shall be entitled to make an application for a fresh start for discharge of his qualifying debt

(a) the gross annual income of the debtor does not exceed sixty thousand rupees;

(b) the aggregate value of the assets of the debtor does not exceed twenty thousand rupees;

(c) the aggregate value of the qualifying debts does not exceed thirty-five thousand rupees ;

(d) he is not an undischarged bankrupt;

(e) he does not own a dwelling unit, irrespective of whether it is encumbered or not;

(f) a fresh start process, insolvency resolution process or bankruptcy process is not subsisting against him; and

(g) no previous fresh start order under this Chapter has been made in relation to him in the preceding twelve months of the date of the application for fresh start.

On filing the application the interim moratorium period commences and ceases to have effect on the date of admission or rejection.

The appointed resolution professional should give his recommendation for admission or rejection.

On admission the moratorium period commence, and the resolution professional shall prepare the final list of the qualifying debt at-least seven days prior to the end of the moratorium period.

On receipt of the final list, the adjudicating authority, may pass a discharge order  from qualifying debt and also discharge from

(a) penalties in respect of the qualifying debts from the date of application till the date of the discharge order;

(b) interest including penal interest in respect of the qualifying debts from the date of application till the date of the discharge order; and

(c) any other sums owed under any contract in respect of the qualifying debts from the date of application till the date of the discharge order.

Insolvency process

Either the debtor or the creditor(s) file application for liquidation process.  On receipt of the application the liquidation professional will be appointed. He will submit his report  for admission or rejection.

On admission, the adjudicating authority, issued public notice for receiving claim from creditors with 21 days notice period. On receipt of the claims the resolution professional will prepare the list of creditors.

The debtor shall prepare a repayment plan with the consultation of the resolution professional, which should be approved by ¾ of creditors before submitting to the adjudicating authority. If the adjudicating authority, admits the repayment plan and on discharge of the debt, passed discharge order, if rejects, the debtor and the creditors entitle to file for bankruptcy.

Bankruptcy process

Either the debtor or the creditor(s) file application for liquidation process.  On receipt of the application the Bankruptcy trustee will be appointed.  On such appointment the adjudicating authority passes Bankruptcy order, which will be valid till the debtor is discharged.

Effect of bankruptcy order - Where a bankruptcy order has been passed against a firm, the  order shall operate as if it were a bankruptcy order made against each of the individuals who, on the date of the order, is a partner in the firm

Thereafter within 7 days from the date of the order, the statement of financial position to be submitted to the bankrupt trustee, if it is a firm, statement of firm and the statement of each partner should be submitted.

On receipt of the financial statement, the bankruptcy trustee shall conduct the administration and distribution of the estate the bankrupt.

The bankruptcy trustee may file application for discharge order 1. On expiry of 1 year from the date of bankruptcy commencement date 2. Within 7 days of the approval of the committee of creditors of the completion of administration of the estates of the bankrupt.

Disqualification of bankrupt

a. being appointed or acting as a trustee or representative in respect of any trust, estate or settlement;

b. being appointed or acting as a public servant;

c. being elected to any public office where the appointment to such office is by election; and

d. being elected or sitting or voting as a member of any local authority.

Restriction on bankrupt

(a) not act as a director of any company, or directly or indirectly take part in or be concerned in the promotion, formation or management of a company;

(b) without the previous sanction of the bankruptcy trustee, be prohibited from creating any charge on his estate or taking any further debt;

(c) be required to inform his business partners that he is undergoing a bankruptcy Process;

(d) prior to entering into any financial or commercial transaction of such value as may be prescribed, either individually or jointly, inform all the parties involved in such transaction that he is undergoing a bankruptcy process;

(e) without the previous sanction of the Adjudicating Authority, be incompetent to maintain any legal action or proceedings in relation to the bankruptcy debts; and

(f) not be permitted to travel overseas without the permission of the Adjudicating Authority.

Functions of bankruptcy trustee

(a) investigate the affairs of the bankrupt;

(b) realise the estate of the bankrupt; and

(c) distribute the estate of the bankrupt.

Duties of bankrupt towards bankruptcy trustee.

(a) giving to the bankruptcy trustee the information of his affairs;

(b) attending on the bankruptcy trustee at such times as may be required;

(c) giving notice to the bankruptcy trustee of any of the following events which have occurred after the bankruptcy commencement date,—

(i) acquisition of any property by the bankrupt;

(ii) devolution of any property upon the bankrupt;

(iii) increase in the income of the bankrupt;

(d) doing all other things as may be prescribed.

Rights of bankruptcy trustee.

(a) hold property of every description;

(b) make contracts;

(c) sue and be sued;

(d) enter into engagements in respect of the estate of the bankrupt;

(e) employ persons to assist him;

(f) execute any power of attorney, deed or other instrument; and

(g) do any other act which is necessary or expedient for the purposes of or in connection with the exercise of his rights.

General powers of bankruptcy trustee.

(a) sell any part of the estate of the bankrupt;

(b) give receipts for any money received by him;

(c) prove, rank, claim and draw a dividend in respect of such debts due to the bankrupt as are comprised in his estate;

(d) where any property comprised in the estate of the bankrupt is held by any person by way of pledge or hypothecation, exercise the right of redemption in respect of any such property subject to the relevant contract by giving notice to the said person;

(e) where any part of the estate of the bankrupt consists of securities in a company or any other property which is transferable in the books of a person, exercise the right to transfer the property to the same extent as the bankrupt might have exercised it if he had not become bankrupt; and

(f) deal with any property comprised in the estate of the bankrupt to which the bankrupt is beneficially entitled in the same manner as he might have dealt with it.

Continuance of proceedings on death of bankrupt:-

If a bankrupt dies, the bankruptcy proceedings shall, continue as if he were alive.

Priority of payment of debts

(a) firstly, the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full;

(b) secondly, —

(i) the workmen's dues for the period of twenty-four months preceding the bankruptcy commencement date; and

(ii) debts owed to secured creditors;

(c) thirdly, wages and any unpaid dues owed to employees, other than workmen, of the bankrupt for the period of twelve months preceding the bankruptcy commencement date;

(d) fourthly, any amount due to the Central Government and the State Government including the amount to be received on account of Consolidated Fund of India and the Consolidated Fund of a State, if any,in respect of the whole or any part of the period of two years preceding the bankruptcy commencement date;

(e) lastly, all other debts and dues owed by the bankrupt including unsecured debts.

Appeal:-

Order of Debt recovery tribunal shall be appealed before Debt recovery appellate tribunal within 30 days of the order.

Order of Debt recovery appellate tribunal shall be appealed before Debt recovery appellate tribunal within 45 days of the order.

Bar of jurisdiction:

No civil court shall have jurisdiction in respect of any matter in which the Adjudicating Authority is empowered by, or under, this Code to pass any order and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority under this Code.

Repeal of certain enactments and savings.

The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 are hereby repealed

All the proceedings pending under Sick Industrial Companies (special provisions) Repeal act, 2003, have been abated and such abated proceedings will refer to National Company Law Tribunal, within 180 days from the date of notification.