Insolvency and Bankruptcy Code 2016 - Decoded

Effective date:

The Code has come into effect in phases from 05.08.2016 to 15.12.2016. Some provisions are yet to come into effect. The Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 have come into effect from 01.12.2016.

Repeals:

(i) Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 are repealed [Sec.243]. [Sec.243 has not yet come into effect.]

(ii) By Sec.4(b) of Sick Industrial Companies Act (SICA) Repeal Act, 2003 as amended by Sec.252 of IBC read with 8th Schedule thereto, notified w.e.f. 01.12.2016, any reference made or enquiry pending before the Board or before the Appellate Authority under SICA shall stand abated. SICA is repealed on 25.11.2016 w.e.f. 01.12.2016 and consequently BIFR and AAIFR are dissolved. Reference may be made by company to NCLT within 180 days from commencement of IBC.].

Amendments:

The following Acts have been amended:

• Partnership Act, 1932; [Sec.245 and 1st Schedule have not yet come into effect]
• Central Excise Act, 1944; [Sec.246 and 2nd Schedule]
• Income Tax Act, 1961; [Sec.247 and 3rd Schedule]
• Customs Act, 1962; [Sec.248 and 4th Schedule]
• DRT Act, 1993; [Sec.249 and 5th Schedule have not yet come into effect]
• Finance Act, 1994; [Sec.250 and 6th Schedule]
• SARFAESI Act, 2002; [Sec.251 and 7th Schedule]
• Payment & Settlement Systems Act, 2007; [Sec.253 and 9th Schedule]
• LLP Act, 2008; [Sec.254 and 10th Schedule]
• Companies Act, 2013 [Sec.255 and 11th Schedule]

Application:

Code applies to incorporated companies under Companies Act, any company governed by Special Act, to Limited Liability Partnership (LLP), other body corporate incorporated under any law, partnership firms and individuals. [Sec.2 & Sec.3(7)].

Board:

• Central Government shall establish Insolvency & Bankruptcy Board of India (Board) [Secs.3(1), 188 & 189].
• Board shall perform its powers and functions as set in Sec.196.
• Board may constitute advisory, executive or other committees [Sec.197].

Adjudicating Authority:

Adjudicating authority in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors is National Company Law Tribunal (NCLT) [Secs.5(1) & 60]. Adjudicating Authority in relation to insolvency matters for individuals and partnership firms is Debt Recovery Tribunal (DRT) [Secs.79(1) & 179].

Overriding effect: Provisions of IBC to override other laws, even if inconsistent [Sec.238].

The ouster of civil court jurisdiction: No civil court shall have jurisdiction in respect of any matter covered by the Code and no order or injunction shall be granted by any court [Secs.63 & 231].

Implications of the Code for Corporates:

Reading the definition of the words 'claim' [Sec.3(6)], 'creditor' [Sec.3(10)], 'debt' [Sec.3(11)], 'default' [Sec.3(12)], 'corporate debtor' [Secs.3(8)], 'financial debt' [Sec.5(8)], 'operational debt' [Sec.5(21)] and Sec.4, where the minimum amount of default is Rs.1 lac by a corporate debtor, a creditor, that is, a 'financial creditor' [Sec.5(7)], an 'operational creditor' [Sec.5(20)], a secured creditor, an unsecured creditor and a decree holder, even if amount is disputed or unsecured, can file an application by initiating corporate Insolvency Resolution Process (IRP) against such corporate debtor before NCLT having territorial jurisdiction.

The following 'claims' lie before NCLT against the corporate body:

(i) Right to payment, whether by judgement or not, fixed, disputed, undisputed, legal, equitable, secured or unsecured [Sec.3(6)(a)].

(ii) Right to remedy for breach of contract under any law giving rise to a right to payment, whether or not under judgement or fixed, matured, unmatured, disputed, undisputed, secured or unsecured [Sec.3(6)(b)].

'Debt' means a liability or obligation in respect of a claim due from any person, including a financial debt or operational debt [Sec.3(11)].

Debt along with interest, if any, is a 'financial debt' disbursed against consideration for value of money and includes debts as set out in Sec.5(8)(a) to (i).

Claim in respect of provision of goods or services including employment or as debt in respect of dues arising under any law is an 'operational debt' [Sec.5(21)].

'Default' is non-payment of debt whether whole or any part of the amount of the debt becoming due and payable and is not repaid by the corporate debtor or debtor, as the case may be [Sec.3(12)].

'Creditor' means 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 [Sec.3(10)].

'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 [Sec.5(7)].

A financial creditor is one whose relationship with the entity is a pure financial contract, such as a loan or debt security. In other words, money lent and to be received back is a financial debt.

For the financial creditor to trigger the Insolvency Resolution Process (IRP), his claim should be a financial debt, that is, the debt satisfying the requirements of Sec.7 read with Sec.5(7) & (8) of IBC. A financial transaction should be in the nature of a debt, a transaction which has consideration for time value of money [Order of NCLT in Nikhil Mehta & Sons vs. M/s. Anil Infrastructures Ltd. – CP No.(ISB) – 03(PB)/2017 dated 23.01.2017]. 

'Operational creditor' means a person to whom an operational debt is owed and includes assignor or transferee of an operational debt [Sec.5(20)].

Operational creditor is therefore one whose liability from the entity comes from a transaction on operations.

Thus, where there exists a debt, that is loan given and receivable with interest, if any, it is a 'financial debt' whether disputed or undisputed and a person can initiate IRP before NCLT as a financial creditor. Where there is a 'claim' on account of supply of goods or services or employee has a claim or there exists a debt in respect of repayment of dues arising under any law, it is an operational debt and a person can initiate IRP before NCLT as an operational creditor.

Where creditor has both a financial transaction as well as operational transaction with the entity, in such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.

Person includes:

• an individual;
• a Hindu Undivided Family;
• a company;      
• a trust,
• a partnership;
• a limited liability partnership; and
• any other entity established under a statute, and includes a person resident outside India [Sec.3(23)].

'Corporate debtor' means a corporate person who owes a debt to any person [Sec.3(8)].

'Corporate person' means a registered company under Companies Act, 2013, a LLP, or any other person incorporated with limited liability under any law for the time being in force, but shall not include any financial service provider [Sec.3(7)].

Who can initiate Corporate Insolvency Resolution:

1. A 'financial creditor' [Sec.5(7)] entitled to a 'financial debt' under Sec.5(8) can initiate corporate insolvency resolution process against the corporate debtor/person committing a default [Sec.6].

2. This insolvency resolution process can be initiated also by 'operational creditor' [Sec.5(20)] on the corporate debtor/person, for operational debt having a claim in respect of:

(i)  provision of goods or services;

(ii) employment or a debt in respect of 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.

3. 'Corporate debtor' can itself also initiate corporate insolvency resolution in respect of a debt which a corporate person owes to any person [Sec.3(8) & (6)].

Insolvency Resolution Process for Corporate Persons:

Chapter II of Part-II of the Code read with the Insolvency & Bankruptcy (Application to Adjudication Authority) Rules, 2016 (Rules) and the Insolvency & Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 regulate the insolvency resolution process.

The insolvency resolution process shall be conducted in accordance with provisions of Rules and Regs.27 to 40 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Process by:

1. Financial Creditor:

Any financial creditor either, by himself or with other financial creditors, may under Sec.7 read with Rule 4 of Rules file an application before NCLT in Form-1 with required documents and records for initiating corporate insolvency resolution process against a corporate debtor when a default has occurred. Under Rule 10 (Schedule thereto), the application is to be filed with a fee of Rs.25,000/-. The date in which an application is made to NCLT for initiating corporate IPR is 'initiate date' [Sec.5(11)].

Along with the application in Form-1 the financial creditor shall furnish -

(a) record of the default with the information utility or such other record or evidence of default as may be specified [Sec.7(3)(a)];

(b) the name of the resolution professional proposed to act as an interim resolution professional [Sec.7(3)(b)] with a written communication from insolvency professional in Form-2 [Rule 9(1)];

(c) record of existing liability with the debtor;

(d) record of default from credit contract and where applicable, information of such default as filed at a registered information utility;

(e) any other information as specified by the Board [Sec.7(2) & (3)].

On application for corporate insolvency resolution process made by financial creditor or the corporate debtor, the Resolution Professional, shall be appointed as Interim Resolution Professional [Sec.16(2)].

A financial creditor shall submit proof of claim with documents to the Interim Resolution Professional in Form-C [Reg.8].

Moratorium: NCLT shall by order declare moratorium for prohibiting all actions including institution of suits or continuation of pending suits, transferring of assets, enforcing any security under SARFEASI or recovery of any property [Sec.14].

Public Announcement: NCLT shall by an order immediately after the appointment of the interim resolution professional cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims [Sec.13(1)(b)]. Public announcement shall contain information as set out in Sec.15. A public announcement is to be made by Insolvency Professional of the commencement of insolvency proceedings against corporate debtor, immediately on his appointment as an Interim Resolution Professional [Sec.13(1)(b) & Sec.15 and Reg.6.

After approval of NCLT, the moratorium order passed by NCLT shall cease to have effect and resolution professional shall forward all records relating to the conduct of the corporate insolvency resolution process and the resolution plan to the Board to be recorded on its database [Sec.31(3)].

After NCLT ascertains the existence of a default from the records of an information utility or on the basis of other evidence furnished and if NCLT is satisfied that a default has occurred, may admit the application [Sec.7(4) & (5)].

The corporate insolvency resolution process shall commence from the date of admission of the application [Sec.7(6)]. Date of admission of an application for initiating corporate insolvency resolution process by NCLT is the 'insolvency commencement date' [Sec.5(12)].

The corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application, i.e., insolvency commencement date [Sec.5(12) & Sec.12].

Resolution Plan: It means a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern [Sec.5(26)]. Any person who submits a resolution plan to the Resolution Professional is a Resolution Applicant [Sec.5(25)]. A resolution plan provides the measures required for implementing the insolvency resolution process as provided in Regs.37 to 39 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

The Resolution Professional shall prepare an information memorandum as required under Sec.29 and submit resolution plans to the committee of creditors for its approval. On approval of resolution plan by committee of creditors, the Resolution Professional shall submit the same to NCLT [Sec.30]. NCLT, if satisfied may by order approve the resolution plan, which shall be binding on corporate debtor and all stakeholders. NCLT may reject the resolution plan, if it does not confirm to the requirements under Sec.30(2) [Sec.31(1)(2)].

Information Memorandum: The Interim Resolution Professional or Resolution Professional shall submit information memorandum to each Member of the Committee [Reg.36 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016].

Committee of Creditors: The Committee of Creditors is regulated by Secs.21, 22, 24, 27, 28 and Regs.16 to 26 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

The Interim Resolution Professional, after collection of all claims against corporate debtor constitute a Committee of Creditors [Sec.21(1)].

Where a corporate debtor has no financial debt or where all financial creditors are related parties of a corporate debtor, a committee shall be set up [Reg.16].

The Committee of Creditors in its first meeting by a majority of vote of not less than 75% of the voting share of financial creditors, appoint the Interim Resolution Professional as a Resolution Professional or to replace the Interim Resolution Professional by another Resolution Professional [Sec.22(2)]. The Committee of Creditors may replace the Resolution Professional by the Committee of Creditors [Sec.27].

2. Operational Creditor:

An operational creditor, on occurrence of default by corporate debtor, may deliver to corporate debtor a demand notice in Form-3 or a copy of an invoice attached with a notice in Form-4 of unpaid operational debt, demanding payment of the amount involved in respect of provision of goods or services [Secs.5(20), (21), 8(1) & Rule 5].

After the expiry of 10 days from the date of delivery of notice or invoice demanding payment under Sec.8(1), if operational creditor does not receive payment from the corporate debtor or receives the notice of dispute under Sec.8(2), the operational creditor may file an application under Rule 6 in Form-5 before NCLT with a fee of Rs.2,000/- [Rule 10(3) Schedule], for initiating a corporate insolvency resolution in Form-5 [Sec.9, Rules 5 to 7], accompanied with documents and records as required under Sec.9(3) and under Reg.7(2).

Where an operational creditor initiating a corporate insolvency resolution process, proposes a Resolution Professional to act as an Interim Resolution Professional, the Resolution Professional shall be appointed as Interim Resolution Professional [Sec.9(4) read with Sec.16(3)(b)]. NCLT shall appoint an Interim Resolution Professional within 14 days from the insolvency commencement date [Sec.16(1)]. Operational creditor shall obtain a written communication from Insolvency Resolution Professional in Form-2 for appointment as an Interim Resolution Professional [Rule 9(1)]. Operational creditor shall submit proof of claim to International Resolution Professional in Form-B of the Schedule [Reg.7(1)].

On application made by operational creditor for corporate insolvency resolution and where no proposal for appointment of an Interim Resolution Professional is made, NCLT shall make a reference to the Board for recommendation of Insolvency Professional to act as Interim Resolution Professional [Sec.16(3)(a)]. The Board shall within 10 days recommend the name of an Insolvency Professional to the Adjudicating Authority [Sec.16(4)]. The term of Interim Resolution Professional shall not exceed 30 days from the date of his appointment [Sec.16(5)]. The creditor shall bear the cost of proving the debt [Reg.11].

Two registered valuers shall be appointed by Interim Resolution Professional to determine the liquidation value of the corporate debtor [Reg.27]. Insolvency resolution professional costs/expenses (including fee to be paid to the Interim Resolution Professional) shall be fixed by Applicant, if not then NCLT shall fix it [Regs.31 to 34].

On satisfying conditions under Sec.9(5)(ii), NCLT shall admit the application within 14 days of receipt of the application or reject the application if covered under any of the clauses under Sec.9(5)(iii).

3. Workman or employee:

A 'workman or employee' shall submit proof of claim to the interim resolution professional in Form-D [Reg.9].

4. Corporate Applicant:

An application for initiating Corporate Insolvency Resolution Process may be also made by a corporate debtor itself as a corporate applicant in Form-6 [Rule 7(1)] with documents and fee of Rs.25000/- [Rule 10(3), Schedule thereto] with following documents:

• Audited record of business operation for previous 2 years;
• Audited record of financial and operation payments for previous 2 years;
• Audited statement of list of assets and liabilities at the time of application;
• A signed statement of truth of document;
• A proposed resolution professional [Sec.10 & Rule 7].

Fast Track Corporate Insolvency Resolution:

An application for fast track corporate insolvency resolution may be made along with proof of existence of default by records in following circumstances:

(i) The corporate debtor is with assets and income below a level notified by Central Government; or

(ii) A corporate debtor is with such class of creditors or such amount of debt as may be notified by Central Government; or

(iii) Corporate debtor is in such other category as may be notified by Central Government [Sec.55].

The fast track insolvency resolution process shall be completed within a period of 90 days from the date of insolvency commencement [Secs.56 & 57].

Similar process as for conducting a corporate insolvency resolution shall be followed [Sec.58].

[Provisions relating to Fast Track Corporate Insolvency Resolution have yet not come into effect. No Regulations are framed for fast track corporate insolvency resolution.]

Regulation of:

1. Insolvency Professional Agency (IPA):

IPA is regulated by Secs.199 to 205 and IBBI (Insolvency Professional Agencies) Regulations, 2016.

A registered company is eligible to be registered as IPA under eligibility criteria set out in Reg.3. IPA is required to be registered with the Board before carrying on business as insolvency professional agency [Secs.3(20), 199 & 201]. Application for registration to the Board is in Form-A with a non-refundable application fee of Rs.10 lacs [Reg.4]. The validity of registration is five years and renewal thereof is with a non-refundable application fee of Rs.5 lacs [Reg.4].

IPA is to adopt principles set out in Sec.200 and perform functions set out in Sec.204, like, grant membership, lay down standards of professional conduct, monitor performance of its members, safeguard rights of insolvency professionals, redress grievances of consumers against insolvency professionals, etc.

IPA shall make byelaws consistent with model byelaws specified by the Board under Sec.196 [Sec.205]. Model byelaws are framed by Board under IBBI (Model Byelaws and Governing Board of Insolvency Professional Agencies) Regulations, 2016.

2. Resolution Professional (Insolvency Professional) / Interim Resolution Professional:

Resolution professional/Interim resolution professional is regulated by Secs.206 to 208 and IBBI (Insolvency Professionals) Regulations, 2016.

Resolution Professional is Insolvency Professional appointed to conduct the corporate insolvency resolution process and includes an Interim Resolution Professional [Sec.5(27)].

An individual may be appointed as insolvency professional provided he is not disqualified under Reg.4, has qualifications as set out in Reg.5 and is a fit and proper person as set out in Expln. to Reg.4.

An Insolvency Professional is eligible for appointment as a Resolution Professional for a Corporate Insolvency Resolution Process of a corporate debtor, if he, and all partners/directors of insolvency professional entity of which he is a partner or director are independent of the corporate debtor [Reg.3 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016].

The individual is required to pass National Insolvency Examination conducted by Board through a designated agency. If he passes Limited Insolvency Examination, he should possess 15 years experience in management after Bachelor’s Degree from a recognised university and should have 10 years experience as a Chartered Accountant, Company Secretary, Cost Accountant or an Advocate, besides being an individual of integrity, reputation and character, competent and experienced in the field of finance, law, management, insolvency or such other field, including financial insolvency and net worth [Regs.3, 4 & 5].

A person has to enrol himself as a member of an insolvency professional agency then and be registered with the Board to render his services as insolvency professional [Secs.2(19), 206, 207 & Regs.6 & 7].

Insolvency Professional is to follow Code of Conduct as set out in First Schedule to the Regulations and perform functions and obligations as set out in Sec.208 [Sec.93].

Resolution Professional shall conduct the corporate insolvency resolution process, manage the operations of the corporate debtor, exercise his powers and perform his duties as provided in Secs.23 to 25.

Interim Resolution Professional shall perform his duties and exercise his rights as set out in Secs.17 to 20 of the Code, like, exercise powers of Board of Directors or partners of corporate debtor and manage the affairs of the corporate debtor as a going concern.

3. Information Professional Entity:

Information Professional Entity (IPE) is regulated by Regs.12 & 13 of IBBI (Insolvency Professionals) Regulations, 2016.

LLP, a registered partnership firm or a company may be recognised as an Insolvency Professional Entity, if majority of partners of LLP or registered partnership firm or a majority of the whole-time directors of the company are registered as Insolvency Professionals [Reg.12]. IPE is jointly and severally liable for all acts or omissions of its partners or directors as insolvency professionals committed during such partnership or directorship.

Application for recognition/registration as an insolvency professional entity is to be made to the Board in Form-C [Reg.12(2)]. If the Applicant is eligible, Board may grant a certificate of recognition as an information professional entity in Form-D [Reg.13].

4. Information Utility:

Information Utility is regulated by Secs.3(21), 209, 210, 212 to 215 and  IBBI (Information Utilities) Regulations, 2017.

Any person to carry on its business as information utility, may apply to the Board for certificate of registration with particulars as set out in Secs.3(21), 209 & 210. No person shall be eligible to be registered as an information utility unless it is a public company and satisfies the conditions of registration set out in Reg.3.

Information utility to provide core services to any person complying with terms and conditions specified in the Regulations [Sec.213]. Core services are set out in Sec.3(9) read with Reg.17, like, accepting electronic submissions of final information and ensuring  safe and accurate recording thereof and providing access thereof to safeguard persons, etc. The information utility shall charge fees as set out in Reg.32. The information utility shall provide information as required by the Board and submit a report to the Board annually [Reg.36]. 

The obligations and duties of information utility are set out in Sec.214 read with Regs.28 to 30, like, creating and storing financial information in an universally accessible format, accept electronic submissions, meet minimum service quality standards, publish substantial information, have inter-operatability with other information utilities, etc.

An insolvency professional may submit reports, registers and minutes in respect of any insolvency resolution, liquidation of bankruptcy proceedings to an information utility for storage which shall be available for access to any person, the Board or Adjudicating Authority [Reg.38].

A person shall register itself with information utility for submitting or accessing information. On registration of a person, the information utility shall intimate it of its unique identifier [Regs.18 to 27]. The financial creditor shall submit the financial information in prescribed form to information utility relating to assets in relation to which any security interest has been created [Sec.215].

Liquidation Process for Corporates:

Liquidation process is regulated by Secs.33 to 54 and IBBI (Liquidation Process) Regulations, 2016. Voluntary liquidation of corporate persons is regulated by Sec.59.

NCLT shall on the happening of events set out in Sec.33(1)(a) & (b), pass an order requiring the corporate debtor to be liquidated. The procedure to be followed is as set out in Chapter-III [Secs.33 to 54].

The Resolution Professional shall provide the liquidation value to the Committee [Reg.35 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016].

Where corporate debtor has given a preference to certain transactions or undervalued the transactions or has been a party to an extortionate credit transaction, the Liquidator or the Resolution Professional shall apply to the NCLT for avoidance of preferential transactions or undervalued transactions or extortionate credit transactions [Secs.43 to 51].

A secured creditor has rights under Sec.52.

The proceeds from the sale of the liquidation assets shall be distributed as provided under Sec.53.

On the complete distribution of assets of corporate debtor, NCLT on application of Liquidator shall dissolve the corporate debtor [Sec.54].

An Insolvency Professional shall be eligible to be appointed as a Liquidator.   Such Insolvency Professional shall be either partner or director of the Insolvency Professional Entity, of which every partner or director is Insolvency Professional and is independent of the corporate debtor [Reg.3].

Liquidator shall prepare and submit, a preliminary report [Reg.13], progress reports [Reg.15], asset memorandum, sale reports, minutes of consultation with stakeholders and final report prior to dissolution [Reg.5].

A person shall prove his claim for his debt including interest on the liquidation commencement date [Reg.16].

Claim by operational creditor to be in Form-C [Reg.17].

Claim by financial creditor to be in Form-D [Reg.18].

Claim by workman or employee to be in Form-E [Reg.19].

Claim by any other stakeholder to be in Form-G [Reg.20].

Claimant shall bear the cost of proving his claim [Reg.24].

On a complete distribution of assets of corporate debtor, the Adjudicating Authority on application of Liquidator shall dissolve the corporate debtor [Sec.54].

Voluntary Liquidation:

A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under Sec.59 read with IBBI (Corporate Voluntary Liquidation Process) Regulations, 2017 notified on 31.03.2017, w.e.f. 01.04.2017.

Appeals:

Any person aggrieved by an order of NCLT, may appeal under Sec.61 to National Company Law Appellate Tribunal (NCLAT) within 30 days of the order of NCLT on the grounds set out in Sec.61(3). An appeal against liquidation order may be filed on grounds of material irregularity or fraud committed in relation to such a liquidation order [Sec.61(4)].

Appeal to Supreme Court:

Any person aggrieved by an order of NCLAT may file an appeal to the Supreme Court on a question of law arising out of such order within 45 days from the date of such order [Sec.62].

Insolvency Process for Individuals & Partnership Firms:

Part-III regulates fresh start, insolvency resolution and bankruptcy for individuals and partnership firms.

Adjudicating Authority:

Adjudicating Authority is DRT having territorial jurisdiction [Sec.79(1)].

Implications of Code:

Unlike the process of insolvency against the corporates where claim/debt of any nature whether disputed or undisputed would be adjudicated by NCLT, under this Part, the pre-condition is a ‘qualifying debt’. It is an amount including interest owed by the debtor under any contract for a liquidated sum, payable either immediately or at certain future time This Part applies to default of not less than Rs.1000/- [Sec.78]. The qualifying debt does not include an excluded debt, a secured debt and any debt incurred three months prior to the date of application for fresh start process [Sec.79(19)]. Excluded debts are set out in Sec.79(15).

Fresh start process by Debtor:

Fresh start process initiated by debtor is regulated by Secs.80 to 94.

This is a process adopted by the debtor when he is unable to pay a qualifying debt [Sec.80(1)].

The debtor may apply either personally or through a resolution professional to DRT for a fresh start in respect of the qualifying debt, provided he qualifies within clauses (a) to (g) of Sec.80(2).

A fresh start is for discharge of his qualifying debt after his application to that effect under Sec.81, appointment of resolution professional under Sec.82(2) and examination of his application by resolution professional [Sec.83].

Interim moratorium shall commence on the date of filing of such application to all debts, any legal action or legal proceeding pending in respect of any debts shall be stayed and no creditor shall institute any legal action or proceedings in respect of any such debt. Interim moratorium shall cease to have effect on date of admission or rejection of such application [Sec.81(1)(2)].

Application shall be in prescribed form and contain information as set out in clauses (a) to (h) of Sec.81(4), supported by an affidavit.

Adjudicating Authority may within 14 days from date of submission of request by resolution professional, pass an order either admitting or rejecting the application.

The application when accepted shall state the amount which has been accepted as qualifying debts by the resolution professional and other amounts eligible for discharge of the applicant for purposes of fresh start order [Sec.84(2)].

On date of admission of the application, the moratorium period shall commence in respect of all the debts [Sec.85(1)]. All consequences as set out in Sec.85(2)(3) shall follow. Moratorium ceases to have effect on expiry of 180 days beginning with the date of admission unless order admitting application is revoked.

Before the moratorium period comes to an end, the resolution professional shall prepare a final list of qualifying debts at least seven days before moratorium period ends. At the end of moratorium period DRT shall by order discharge the debtor from qualifying debts and from liabilities set out in Sec.92(3). Debtor shall not be discharged from debts not included in qualifying debts and liabilities not included. Discharge order shall be forwarded to the Board [Sec.92].

On admission of application, creditor is given an opportunity to raise objections on grounds set out in Sec.86(1)(a)(b) only. Resolution professional shall examine the objections and either accept or reject the objections within 10 days of the application [Sec.86(5)].

Debtor or Creditor aggrieved by the decision of resolution professional may within 10 days of such decision, challenge such decision before DRT on the grounds set out in Sec.87(1)(a) to (c).

DRT shall decide the application within 14 days of such application and forward its order to the Board for such action as required against resolution professional.

Resolution professional may submit an application to DRT seeking revocation of its order on the grounds set out in Sec.91(1)(a)(b)(c). DRT may, within 14 days of the receipt of application admit or reject the application. If application of resolution professional is accepted the moratorium and fresh start process shall cease to have effect. Copy of the order shall be forwarded to the Board [Sec.91].

Insolvency Resolution Process:

1. By debtor:

Debtor who commits a default may himself apply in prescribed form with prescribed fees either personally or through a resolution professional to DRT for initiating the insolvency resolution process, provided he is not disqualified under Sec.94(4) and debts are not excluded debts set out in Sec.79(15), Secs.94(3) and 94(5). In case of a partnership firm, majority partners of partnership firm shall file the application [Sec.94(2)].

2. By creditor:

A creditor may apply either by himself or jointly with other creditors or through a resolution professional to DRT with specified details and documents set out in Sec.95(4)(a) to (c) for initiating an insolvency resolution process in the prescribed form and prescribed fee. Application may also be made by creditor in relation to any partnership debt against the firm or any one or more partners of the firm.

The insolvency process as set out from Secs.96 to 104 is more or less similar to the insolvency process for the corporates, namely, commencement of interim moratorium, appointment of resolution professional, report of resolution professional, moratorium on admission of application, public notice, claims of creditors and so on.

The debtor shall prepare in consultation with resolution professional a repayment plan containing a proposal to the creditors for restructuring of his debts or affairs and then the process from Secs.105 to 113 to be followed, such as, report of resolution professional, meetings of creditors, rights of secured creditors, approval of plan by creditors, etc.

DRT shall by an order, approve or reject the repayment plan on the basis of report of the creditors submitted by resolution professional. DRT, on approval of repayment plan, may provide directions for implementing repayment plan [Sec.114]. Such repayment plan shall be binding on creditors and debtor [Sec.115(1)].

If repayment plan is rejected by DRT the debtor and creditors shall be entitled to file application for bankruptcy. Copy of order shall be forwarded to the Board [Sec.115].

Implementation of repayment plan shall be supervised by resolution professional [Sec.116].

On the basis of repayment plan, the resolution professional shall apply to DRT for discharge order in relation to debts mentioned in repayment plan under Sec.119.

Discharge order may be for early discharge or discharge on complete implementation of repayment plan. Discharge order shall be forwarded to the Board [Sec.119].

[N.B.: The provisions of Secs.78 to 120 dealing with insolvency resolution and bankruptcy for individuals and partnership firms and regulations thereto have not come into effect till date. No forms, no fees, etc. have therefore been prescribed.]

Bankruptcy order for Individuals and Partnership Firms:

Adjudicating Authority shall be DRT having territorial jurisdiction [Sec.179]. No civil court shall have jurisdiction [Sec.180].

Any debt owed by the debtor as on bankruptcy commencement date, any debt for which the debtor may become liable after bankruptcy commencement date but before his discharge and where any interest is due as a part of the debt proved under Sec.171, is a bankruptcy debt [Sec.79(5)].

Application by creditor:

Creditor can make an application for bankruptcy of debtor under Sec.121 within a period of three months from the date of the order, individually or jointly with other creditors to DRT with documents set out under Sec.123 from the order of DRT of rejection of application by insolvency professional for initiation of insolvency resolution process under Sec.100(4) read with Secs.94 & 95, from order of DRT under Sec.115(2) of rejection of the repayment plan under Sec.114, from order of DRT under Sec.118(3) on the report submitted by Resolution Professional that the repayment has not been completely implemented within a period of three months of the date of the order [Sec.121].

Application by Debtor:

Application for bankruptcy may be made by debtor under Sec.122. On the filing of such an application, interim moratorium shall continue till bankruptcy commencement date [Sec.124]. Bankruptcy commencement date is the date on which a bankruptcy order is passed by DRT [Sec.79(6) & Sec.126].

Process of Bankruptcy:

The process of bankruptcy is as set out in Sec.125, that is, appointment of insolvency professional as the bankruptcy trustee. Proof of debt and that by secured creditor is to be done in accordance with Secs.171 & 172, to be entitled to distribution of dividends [Sec.177].

DRT shall pass a bankruptcy order within 14 days of receiving the confirmation or nomination of the bankruptcy trustee [Sec.126]. Bankruptcy order shall continue to be valid and have effect till the debtor is discharged [Sec.127]. 

The effect of bankruptcy order and objections of bankrupt and further proceedings are as set out in Sec.128 to Sec.137. Restrictions on bankrupt are as set out in Sec.141 and disqualifications of a bankrupt are as set out in Sec.140.

The estate of bankrupt includes all property belonging to or vested in the bankrupt at the bankruptcy commencement date and all that is set out in Sec.155. All after acquired property by the bankrupt can be claimed by bankruptcy trustee [Sec.159]. All documents as provided in Sec.156 shall be delivered to the bankruptcy trustee.

Any disposition of property made by the debtor during the period between the date of filing of the application for bankruptcy and bankruptcy commencement date shall be void [Sec.158].

The administration and distribution of the estate of the bankrupt by bankruptcy trustee with his functions, duties, rights and general powers are as set out in Secs.149 to 154.

The provisions regarding onerous property of bankrupt, disclaimer thereof and of leaseholds, challenge against disclaimed property, and undervalued transactions are as set out from Secs.160 to 164.

Preference transactions or extortionate transactions by a bankrupt with the associate during the period of two years ending on the date of application for bankruptcy and any other transaction giving preference entered into by the bankrupt during the period of six months ending on the date of the application for bankruptcy, causing the bankruptcy process to be triggered may, on application of bankruptcy trustee be declared by DRT as void and such part may be declared as part of the estate of the bankrupt [Secs.165 & 167]. Such order under Secs.164 or 165 shall be subject to exclusions in Sec.166.    

Bankruptcy trustee may declare interim dividends for distribution amongst creditors whose debts are proved [Sec.174].

Distribution of property which cannot be sold can be done by bankruptcy trustee with approval of committee of creditors [Sec.175].

On realisation of the entire estate of the bankrupt final dividend may be declared as provided under Sec.176.

Priority of payment of debts are as set out in Sec.178.

If bankrupt dies, the bankruptcy proceedings shall continue as if he was alive [Sec.169] and his estate shall be administered as set out in Sec.170.   

On the expiry of one year from bankruptcy commencement date or within seven days of approval of the Committee of Creditors of the completion of administration of the estate of the bankrupt under Sec.137, DRT shall pass a discharge order under Sec.138 on application by bankruptcy trustee and the effect thereof is as provided under Sec.139.

Appeals:

From the order of DRT, appeal lies to DRAT. From the order of DRAT, appeal lies to Supreme Court [Secs.181 & 182].

[Provisions of Secs.55 to 58, 121 to 187, 195, 227 to 229, 243, 245 & 249 of IBC have yet not come into effect. No Regulations relating to the insolvency & bankruptcy of individuals and partnership firms are as yet framed.]

Analysis by K.R. Bulchandani, Advocate & Solicitor, ably assisted by Mr. Avik Sarkar & Mr. Amit Nikam, Advocates, team of M/s. Kamal & Co., Mumbai.