8/April / Lecture notes

Historical Background and structure of Insolvency and Bankruptcy code,

2016

It is better to have one codified legislation than multiple to deal with the aspects of
a company which can have a singular umbrella. This is the exact rationale for the
existence of The Insolvency and Bankruptcy Code in India which has been into
effect since 2016. IBC came into being repealing SICA (Sick Industrial Companies
Act), SICA was repealed with effect from 1 December 2016. To know the
background of IBC, it is important to know more about SICA and why it failed to
prevail as a law

The journey from SICA to IBC/ The SICA, 1985( Sick Industries Companies
Act )

The name SICA, itself connotes the reason for its actuality. India witnessed an
atmosphere of rampant industrial sickness in the 1980s in furtherance of which the
Government of India came up with key legislation i.e. The Sick Industrial
Companies Act to combat the issue. Widespread industrial sickness affects the
economy in a number of ways, thus The Act came into being to spot the sick or
potentially sick companies owning industrial undertakings and take speedy
remedial measures for their revival or in a scenario where there is no such measure,
close such units. This was an action to get the locked up investment in such
industrial units released and use them in a more productive manner.

SICA was repealed and replaced by the Sick Industrial Companies (Special
Provisions) Act of 2003, which diluted certain provisions of SICA and filled
certain gaps. One of the main changes to the new law was that, in addition to
combating occupational diseases, it also aimed to reduce the growing incidence by
ensuring that companies do not use a medical certificate simply to evade legal
obligations and access concessions granted to financial institutions to receive.

The comprehensive performance of the Act did not live up to the expected results
and thus, IBC was notified as on 28th May 2016 and the repeal of SICA came into
full effect from December 1, 2016.

IBC Kicks In

Mistakes of the past were taken in view and The Insolvency and Bankruptcy code
came into being with a wider scope and aiming to resolve the issues via more
effective provisions and implementation. It is an act to consolidate and amend the
laws having reorganization and insolvency resolution issues as the subject-matter.
The provisions of the Act shall apply to the following in case of insolvency,
liquidation, voluntary liquidation or bankruptcy;

 Company
 Limited Liability Partnership
 Partnership Firms
 Corporate Persons
 Individuals

The legislation holds the object as follow:

An Act 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."

Establishments Under The Act

The code sets out provisions for the establishment of three new institutional
structures important for the smooth functioning of IBC:

a. IBBI- Insolvency and Bankruptcy Code of India: The objective of the code
itself specifies the establishment of this Board. The board shall act as a Regulator.

b. IPAs- Insolvency Professional Agencies: Only the companies registered under

Section 8 of The Companies Act, 1956 can approach The IBBI for registration as
an insolvency Professional Agency. The Insolvency Professional Agencies will
develop professional standards, code of ethics and be the first level regulator for
Insolvency professionals members. This will lead to the development of a
competitive industry for such professionals.

c. Insolvency Professional– To render services as an insolvency professional an

individual has to be:

 A member of the Insolvency Professional Agency, and

 Registered with the IBBI

d. Information Utilities: An information utility shall provide such services as may

be specified including core services like collecting and storing information on
debts and defaults to any person if such person complies with the terms and
conditions as may be specified by regulations.
The regulator's mandate is to regulate insolvency professionals, insolvency
professional agencies and information utilities as well as to frame regulations
under the IBC.

Adjudicating Authority

 National Company Law Tribunal (NCLT) constituted under Section 408

of The Companies Act, 2013 is the adjudicating authority under the code and
shall hear insolvency resolution cases for corporate persons.
 NCLT is a quasi-judicial body established by the Government of India to
settle disputes arising between civil corporations. Whereas, National
Company Appellate Tribunal (NCLAT) is a higher tribunal where appeals
can be lodged in case the parties are not satisfied with the decision of NCLT.
 The tribunals came into existence as on 1st JUNE, 2016 by exercising the
powers given in Article 245 of the Constitution, enforced by the
government.
 The Code also recognizes Debt Recovery Tribunal (DRT) constituted
under Section 3 (1) of the Recovery of Debts Due to Banks and Financial
Institutions as the adjudicating authority for the purpose of insolvency
resolution and bankruptcy cases for partnership firms and individuals. The
Tribunal came into being for the purpose of expeditious adjudication and
recovery of debts

The Adjudicating Authority may in the furtherance of the issue either declare a
moratorium or cause a public announcement or Appoint an interim resolution
professional for investigation and finding solutions.
Process Under The Code

APPLICATION FILING:

Who can file an application

An Insolvency Resolution Process can be initiated by :

 Financial Creditor, or
 Operational Creditor, or
 Corporate itself

FINANCIAL CREDITOR:

Section 5(7) of the IBC states that 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"

A financial creditor either by itself or jointly with other financial creditors may file
an application for initiating corporate insolvency resolution process against a
corporate debtor before the Adjudicating Authority when a default has occurred.

The Adjudicating Authority shall, within fourteen days of the receipt of the
application, ascertain the existence of a default from the records of an information
utility or on the basis of other evidence furnished by the financial creditor.

OPERATIONAL CREDITOR:

In the event of late payment, operational creditors may send a request for
notification to an unpaid debtor in the form of a copy of an invoice requesting the
payment of the amount corresponding to the late payment to the debtor company in
accordance with FORM 3 OF IBC. the definition of Operational Creditor is given
out in Section 5(20 ]of the Act.

The debtor must send the notice to the mandatory creditor within ten days of
receipt of the request or copy of the invoice.

After expiry of the period of ten days from the date of delivery of the notice or
invoice demanding payment if the operational creditors do not receive payment
from the corporate debtor or notice of dispute the operational creditor may file an
application to Adjudicating Authority in FORM 5 OF IBC for initiating the
corporate insolvency resolution process.

CORPORATE:

As soon as default in payment occurs, a corporate applicant thereof may file an

application to Adjudicating Authority in FORM 6 OF IBC for initiating corporate
insolvency resolution process. It shall apply to matters relating to the insolvency
and liquidation of corporate debtors where the minimum amount of the default is
one lakh rupees

The corporate applicant shall, along with the application furnish the information
relating to-

 books of account and such other document relating to such period as may be
specified; and
 The resolution professional proposed to be appointed as an interim
resolution professions

Unlike earlier existing laws, IBC provides early trigger for insolvency resolution
with limited grace period for payment which situates the Companies in a position
where they have to be very watchful and vigilant with timely payment to their
creditors. SICA, for example, requires a 50% erosion in a company's net worth to
trigger a requirement for the board of the company to monitor and report the
deteriorating position, while the RBI guidelines requires loans that are overdue for
90 days or more to be declared as NPAs. The rationale for having the occurrence
of a payment default as the trigger is that the early detection of financial distress
helps preserve value and increases the chances that a business can be saved. Thus,
IBC has given the power of initiating a process for a company's insolvency
proceedings in case of payment default to safeguard their interest and to keep the
company's in check.

Who Can Not File an Application?

 Corporate debtor undergoing insolvency resolution process; or

 Corporate debtor having completed corporate insolvency process twelve
months preceding the date of making application; or
 Corporate debtor or financial creditor who has violated any of the terms of
plan which was approved twelve months before; or
 The corporate debtor in respect of whom a liquidation order has been made.

Post Application Process

1. EMBARGO:

All the pending actions against the debtor are stayed and no new actions are
allowed to be instituted under the umbrella of a 180 day moratorium period, during
which the debtor is prohibited from disposing off his assets. Any claim under
SARFAESI Act even is restricted for the time being and the pending actions are
put on hold. The concerned 180 day period is fundamentally a time framework
provided for companies and creditors to find a way out or take recourse to find a
solution for the deteriorating state of the company by deciding their future course
of action

2. ROLE OF INSOLVENCY PROFESSIONAL

The debtor ceases to have control of the business, which shifts to the committee of
creditors. An insolvency resolution professional is appointed to manage the
business of the debtor on behalf of the committee of creditors with a view to
preserving its assets to the maximum extent possible and to coordinate the actions
of the committee of creditors

The Insolvency Resolution process must be completed within 180 days of its
commencement, one-time extension by a further period of 90 days may be allowed
if Adjudicating Authority is satisfied. The committee of creditors needs to have
approved the resolution plan for the debtor By the end of the 180-day period
failing which the company goes into liquidation. The resolution is approved only
when 75% voting in value of the financial creditors (both secured and unsecured)
is attained.

Insolvency Or Liquidation?

IBC has provisions for initiating insolvency provisions which in a way are helpful
for the Companies to detect their decaying financial conditions on time and have a
proper chance for recovery But it is not a 100% possibility that a Company would
be able to recover from such a condition. Thus, the insolvency turns into
liquidation.
It is important to note the difference between the two concepts here. The procedure
of insolvency has in it minimalist hope for the Company as the Company
Administration aims to help the company to repay the debts in order to escape
insolvency. Whereas, Liquidation is one step ahead followed by winding up of the
company which includes the process of selling all assets before dissolving the
company completely

Under IBC, If the resolution plan is not approved by 75% of the creditors or if they
vote affirmatively to put the debtor into liquidation, the NCLT is required pass a
liquidation order. The liquidator shall be the insolvency professional who managed
the IRP or a new insolvency professional would then be appointed to manage the
distribution of assets to creditors and winding up process of the company.

The moratorium is lifted and secured creditors may enforce their security interests
under SARFAESI or other applicable laws, upon a liquidation order being passed.
The IBC gives the secured creditor two options in a liquidation scenario:

 The secured creditor can choose to relinquish its security interest and be part
of the liquidation process, in which case its dues will rank high in the
priority of distribution discussed below; or
 The secured creditor can choose to stay outside the liquidation process and
enforce its security interest, in which case, the secured creditor will lose its
priority in the distribution of assets with respect to any portion of its debt
that it could not recover on enforcement.

Conclusion

It is prima-facie that IBC is a comprehensive legislation with a speedy and specific

procedure for dealing with the issue of insolvency. The time-bound nature of IBC
is a win-win situation as the resources of the Companies are placed at the right
place in time, whether it is by payment to creditors or by winding up. The
Company does not keep running in losses for endless time period causing a setback
to the economy in whole and affecting the creditors individually. It is very well
hoped for that the implementation of the Code be as effective as expected and live
up to its legislative intent.