MODULE 1 : INTRODUCTION & BASIC

CONCEPTS
1. INTRODUCTION

1.1. What is Insolvency?

Insolvency is a financial situation when an individual or company is

unable to meet its financial obligations as they become due. This situation
arises when a person or entity lacks sufficient liquid assets, such as cash, to settle
outstanding debts.

Insolvency can be triggered by various factors, including poor financial

management, declining revenue streams, unexpected expenses, or a
combination of these elements. It can occur in case of corporates as well as
non corporate businesses like individual proprietor, firms, LLPs etc.

Assets Liabilities

Let us understand with the help of example:

Example 1: Company
Imagine a private company, GreenGrow Pvt. Ltd., that manufactures eco-friendly
gardening tools.

GreenGrow borrowed ₹1 crore from a bank to expand its production facilities and
promised to repay the loan in monthly installments of ₹5 lakh. The company’s
monthly income from selling its gardening tools is ₹15 lakh. However, due to rising
raw material costs and higher employee salaries, GreenGrow’s monthly expenses
have increased to ₹18 lakh.

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This means the company is already losing ₹3 lakh every month (₹15 lakh income
- ₹18 lakh expenses). On top of this, it still needs to pay the ₹5 lakh loan
installment.

GreenGrow Pvt. Ltd. now faces insolvency because:

1. Its expenses are higher than its income.
2. It doesn’t have enough cash or resources to repay the bank loan on time.
If GreenGrow cannot recover (e.g., by reducing expenses, increasing sales, or
securing additional funds), it may have to go through insolvency proceedings.

Example 2: Individual
Imagine a bakery owner, Rohan.
Rohan owns a small bakery and sells delicious cakes. To run his bakery, he
borrowed ₹5,00,000 from a bank to buy ovens and other equipment. He also has
monthly expenses, like rent, staff salaries, and electricity bills, totaling ₹1,00,000.
Rohan’s bakery earns ₹80,000 per month from cake sales. However, his monthly
expenses (₹1,00,000) are higher than his income (₹80,000).

Additionally, he has to repay the bank loan in installments of ₹20,000 per month.
But since Rohan is already spending more than he earns, he doesn’t have enough
money to pay back the loan.

This situation is called insolvency. Rohan doesn’t have enough money (cash flow)
or assets to cover his debts and expenses.

If this continues and Rohan cannot resolve the situation (like earning more or
reducing expenses), he may have to declare bankruptcy and close his bakery.

Causes of
Insolvency

Loss of key
Poor cash Economic Increased Legal disputes Unexpected
clients or
management downturns competition and liabilities expenses
contracts

1.2. Insolvency vs Bankruptcy vs Liquidation

To understand the financial distress lifecycle of a business or individual, it's

important to distinguish between insolvency, bankruptcy, and liquidation.
These terms are often used interchangeably, but they refer to different stages and
processes. While insolvency is the financial condition of being unable to meet
obligations, bankruptcy is the legal declaration of that inability. If recovery isn't
possible, the process may end in liquidation, where assets are sold to settle
debts. Let’s explore how these concepts are connected yet distinct.

Particulars Insolvency Bankruptcy Liquidation

Definition Insolvency is the Bankruptcy is a legal Liquidation is the
financial state where declaration that an process of winding up
an individual or entity individual (or a company by selling
partnership) is
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 is unable to pay its insolvent and unable its assets to repay
debts as they fall due. to repay debts. creditors.
Scope It is the starting point Applicable only to It applies only to
of financial distress individuals and companies and LLPs
and may lead to partnerships, not under the IBC
resolution or companies.
liquidation.
Process Corporate Insolvency Triggered when the Initiated if the CIRP
under IBC Resolution Process insolvency resolution fails (no resolution
(CIRP) for companies. process for plan approved within
Insolvency Resolution individuals fails. 330 days) or if the
Process for individuals Governed by company voluntarily
and partnerships. provisions under Part opts for liquidation.
III of the IBC.
Objective To assess financial To discharge the To distribute proceeds
viability and explore a individual from debts to creditors in a
resolution plan for after selling their structured manner as
revival. assets (except per the waterfall
exempted assets) for mechanism (Section
equitable distribution 53).
among creditors.
Outcome If resolution fails, the Post-bankruptcy, the The company ceases
process may lead to debtor gets a fresh to exist after
liquidation or start, free from past liquidation.
bankruptcy. liabilities.

1.3. Types of Insolvency

Cash-flow Insolvency
Cash-flow insolvency occurs when an individual or organization possesses
sufficient assets to satisfy outstanding obligations, yet lacks the immediate liquid
funds necessary to make timely payments. For instance, a real estate developer
may own valuable properties, but struggle to cover a loan payment due to delays
in securing new tenants or closing on a sale.
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Lehman Brothers (2008 Financial Crisis)
Lehman Brothers was a global financial services firm that faced cash-flow
insolvency during the 2008 financial crisis. The firm had enough long-term assets
which included real estate-backed securities, but lacked the liquid funds to meet
short-term liabilities as market confidence in its solvency plummeted. This liquidity
crisis escalated to bankruptcy that marked a crucial moment in the global financial
meltdown.

Balance-sheet Insolvency
Balance-sheet insolvency is a scenario where an individual or entity's total
liabilities exceed their total assets. For example, a small business owner may have
accumulated significant debt to finance expansion, only to see their revenues
decline, leaving them with more debt than the value of their business assets. While
bankruptcy may result, balance-sheet insolvent parties may still have sufficient
cash flow to meet their immediate financial obligations.

General Motors (2009)

General Motors (GM), once the largest automaker in the world, faced balance-
sheet insolvency during the 2008-2009 global financial crisis. The company's
liabilities, including pension obligations and debts, far exceeded its assets. GM had
insufficient assets to address its long-term obligations, regardless of the fact that
it had some cash flow from ongoing sales. GM filed for bankruptcy in New York on
June 1, 2009, making it the largest industrial bankruptcy in US history. The
company had $82 billion in assets and $173 billion in liabilities.

2. Background

2.1. Historical Perspective of Insolvency and Bankruptcy Laws

The origins of insolvency laws in the UK, USA, and Europe can be traced back to
ancient times when debtors were harshly punished for failing to repay their debts.
Insolvency laws in the UK, USA, and Europe evolved significantly during the 19th
century, transitioning from punitive approaches to more structured and business-
oriented frameworks. In the UK, the Bankruptcy Act of 1869 was a landmark
reform that abolished imprisonment for debt and introduced voluntary bankruptcy,
signaling a shift towards treating insolvency as a commercial issue rather than a
moral failing. Across Europe, industrialization prompted countries like France and
Germany to establish codified insolvency systems. Meanwhile, in the USA, the first
federal bankruptcy law was enacted in 1800, primarily influenced by English laws,
but it evolved significantly to prioritize the reorganization and rehabilitation of
debtors, especially through the Bankruptcy Reform Act of 1978. These systems
collectively laid the groundwork for modern insolvency laws, focusing on equitable
treatment of creditors and balancing the rights of debtors.

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 From Punitive to
Protective From Inconsistency
to Structured
Solutions

India’s insolvency framework prior to the Insolvency and Bankruptcy Code, 2016
(IBC) was fragmented, outdated, and ineffective in addressing financial distress
efficiently. It was governed by a plethora of laws, including the Presidency Towns
Insolvency Act, 1909, the Provincial Insolvency Act, 1920, and corporate-specific
laws like the Companies Act, 1956 and the Sick Industrial Companies (Special
Provisions) Act, 1985 (SICA). These laws lacked a cohesive approach, leading to
prolonged litigation and delays in resolving insolvency cases. For instance, the
Board for Industrial and Financial Reconstruction (BIFR), set up under SICA, was
often criticized for its inefficiency. The absence of a unified framework not only
hindered creditor recoveries but also discouraged foreign investment. Recognizing
these gaps, the introduction of the IBC marked a turning point, consolidating
insolvency processes under a single, time-bound mechanism to promote ease of
doing business and economic growth.

2.2. Insolvency and Bankruptcy laws before the introduction of the IBC, 2016
Following were the different laws governing individual and corporate insolvency
prior to IBC in India:

1. The Presidency-Towns Insolvency Act, 1909 governed insolvency

proceedings in the Presidency towns of Bombay, Calcutta, and Madras. The
Act established specialized courts to handle insolvency cases, defined
specific acts of insolvency, and regulated the management and distribution
of assets through an official assignee. One of its important provisions was
the prioritization of creditor payments, while also allowing debtors to be
discharged under certain conditions. It also introduced penalties for
fraudulent activities related to insolvency to ensure a more structured
approach to debt recovery and asset distribution.

2. The Provincial Insolvency Act, 1920 extended the governance of

insolvency proceedings to areas outside the Presidency towns. It defined
acts of insolvency and enabled both creditors and debtors to petition for
relief. The Act regulated the adjudication, management, and distribution of
assets by appointing receivers through the courts. The focus was on
ensuring fair debt repayment while also protecting the rights of debtors and
creditors. Additionally, it imposed penalties for misconduct and aimed to
uphold integrity during insolvency proceedings.

3. The Companies Act, 1956 was the foundational law for the winding up or
liquidation of companies. Even after the Companies Act, 2013 was enacted,
the provisions relating to winding up and liquidation under the 1956 Act
continued to govern the process until they were notified under the new law.
If a company could not meet its debt obligations, it could be wound up
under this Act. The liquidation process that followed was often time-
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 consuming, and there were no mandatory provisions for company
rehabilitation or reorganization before winding up. This process could take
several years unless a time-bound closure mechanism was adopted.

4. The Sick Industrial Companies (Special Provisions) Act, 1985

(SICA) was introduced to address the issue of industrial companies facing
sickness or the risk of it. It established the Board for Industrial and Financial
Reconstruction (BIFR), which was responsible for identifying sick companies
and prescribing either revival measures for viable units or closure strategies
for unviable ones. The Act aimed to prevent the collapse of industrial
companies by offering a structured process for diagnosing and addressing
financial distress in the industrial sector.

5. The SARFAESI Act, 2002 provided banks and financial institutions with
the legal authority to recover non-performing assets (NPAs) without the
need for court intervention. This Act enabled these institutions to enforce
security interests, regulate asset reconstruction companies, and maintain a
central registry for transactions. By overriding other laws, SARFAESI
ensured that actions taken in good faith for asset recovery were protected,
and it imposed penalties on non-compliance.

6. The Recovery of Debts and Bankruptcy Act, 1993 (RDB Act)

established specialized tribunals for the recovery of debts owed to banks
and financial institutions. The Act created Debt Recovery Tribunals (DRTs)
and Appellate Tribunals and outlined their jurisdiction, powers, and
procedures for resolving disputes. One of the key features of this Act was
its focus on secured creditors by giving them priority in debt recovery.

7. The Indian Partnership Act, 1932 dealt with insolvency and dissolution
within partnerships. If a partner became insolvent, it could trigger the
dissolution of the partnership. The Act provided for dissolution by mutual
consent, court order, or insolvency. Upon dissolution, the assets of the
partnership were liquidated to settle outstanding debts, and any remaining
assets were distributed according to the partnership agreement or profit-
sharing ratio.

8. The Limited Liability Partnership (LLP) Act outlined the framework for
the dissolution and winding up of LLPs. Under this Act, the Tribunal was
empowered to enforce compromises or arrangements for LLPs and
facilitated their reconstruction or amalgamation when necessary. It also
provided specific grounds under which the Tribunal could order the winding
up and dissolution of an LLPs and offered a legal structure for managing
LLPs facing financial difficulties or structural changes.

9. The Reserve Bank of India (RBI) has been instrumental in formulating

voluntary mechanisms for debt restructuring. These mechanisms were
introduced through circulars and included schemes like corporate debt
restructuring, joint lenders' forums, strategic debt restructuring, and the
Scheme for Strategic Structuring of Stressed Assets. These voluntary
schemes aimed to provide banks and financial institutions with more

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 flexibility in handling stressed assets, thus preventing defaults and ensuring
more efficient debt recovery processes.

2.2.1. Issues with Fragmented Insolvency and Bankruptcy Framework in India

Overlapping
Jurisdictions

Lack of
Rehabilitation
Inefficient
and Time-
Debt Recovery
bound
Processes
Issues

Loss of Value Impact on

of Corporate Creditors and
Debtor’s Assets Businesses

1. Overlapping Jurisdictions
Multiple judicial and regulatory bodies, like the High Courts, the DRT, and the
BIFR, resulted in jurisdictional conflicts and delays. This lack of coordination led
to conflicts in decisions and overall inefficiencies.

2. Inefficient Debt Recovery

Mechanisms like SARFAESI and the Recovery of Debts Act are procedural and
often slow which meant creditors couldn’t recover dues efficiently.
RBI’s restructuring mechanisms lacked statutory enforcement, which left banks
with limited tools for effective resolution of stressed assets. The lack of statutory
backing meant borrowers could delay or avoid compliance, leaving banks
powerless.

3. Impact on Creditors and Businesses

The absence of a robust insolvency resolution framework meant businesses often
faced liquidation rather than restructuring. This often results in job losses, loss of
value and economic disruption.

4. Loss of Value of Corporate Debtor’s Assets

Prolonged insolvency proceedings caused a rapid decline in the value of distressed
assets. Assets of corporate debtors were either sold piecemeal or became non-
operational during drawn-out litigation.

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5. Lack of Rehabilitation and Time-bound Processes
Laws like the Companies Act and SICA failed to prioritize rehabilitation, with no
mandatory mechanisms for restructuring or resolution.
SICA’s indefinite moratorium periods and lack of deadlines enabled debtors to
misuse protections, further delaying recovery.

2.2.2. The need, objective and application of IBC

Need
Prolonged insolvency proceedings deterred foreign investments, increased bad
loans (NPAs), and reduced economic growth. The IBC was introduced to address
these issues, providing a unified and efficient legal framework.
A codifying statute is one which codifies the law, or in other words, purports to
state exhaustively the whole of the law upon a specific subject. The purpose of
the IBC, 2016 as a codifying statute is to present an orderly and authoritative
statement of the leading rules of law on a insolvency and bankruptcy.

Objective
The IBC aims to achieve the following:
1. Time-Bound Resolution:
o Establishes a structured process for resolving insolvency and
bankruptcy within a maximum of 330 days (including litigation).
2. Maximization of Value:
o Ensures that the value of a debtor’s assets is preserved and
maximized for all stakeholders, including creditors, employees, and
shareholders.
3. Promote Entrepreneurship:
o By offering a quick exit for failing businesses, it encourages
entrepreneurship and reduces the stigma of failure.
4. Balance Interests:
o Protects both creditor and debtor interests by providing a fair and
transparent process for resolution or liquidation.
5. Increased Creditor Confidence:
o Provides creditors with greater control through a Creditors’
Committee (CoC), boosting trust in the recovery process.
6. Ease of Doing Business:
o Improves India’s global ranking in ease of doing business by offering
a predictable, efficient insolvency process.
7. Reduction in NPAs:
o Helps banks and financial institutions resolve stressed assets more
effectively, reducing non-performing assets (NPAs).
Preamble of IBC, 2016:
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.

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 Time-Bound
Maximization of
Resolution of
Asset Value
Insolvency

Promote
Reduction in NPAs
Enterpreneurship

Balancing
Ease of doing
Stakeholders'
business
Interests

Increased
Creditors
confidence

Application
The IBC applies to all the business entities i.e. Companies registered under
Company Act 2013 or under Special Act, LLPs, Body corporates notified by CGs,
Partnership firms, Proprietors, Individuals and personal guarantors to corporate
debtors.
1. Corporate Insolvency:
o Applicable to companies and limited liability partnerships (LLPs).
o Initiated when a corporate debtor defaults on payments (threshold:
₹1 crore).
o The resolution process is conducted under the supervision of the
National Company Law Tribunal (NCLT).
2. Individual and Partnership Insolvency:
o Applicable to individuals and unregistered partnerships.
o Governed by provisions under the IBC, but full implementation is still
awaited.

Insolvency
Professionals
(IPs)

Insolvency
and
Bankruptcy
Pillars Information
Board of
India (IBBI)
of IBC Utilities (IUs)

Adjudicating
Authorities
(AAs)

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 3. Structure of the IBC, 2016

IBC, 2016

PART III: Insolvency PART IV: Regulation of

PART II: Insolvency
Resolution and Bankruptcy Insolvency Professionals, PART V: Miscellaneous
PART I: PRELIMINARY Resolution and Liquidation
for Individuals and Agencies, and Information Provisions
for Corporate Persons
Partnership Firms Utilities

PART I: Preliminary (Sec 1 -3)

General provisions: title, extent, application, and definitions.
PART II: Corporate Insolvency and Liquidation (Sec 4 - 77)
1. Corporate Insolvency Resolution Process (CIRP):
 Initiation, moratorium, resolution plans, and professional duties.
2. Liquidation:
 Liquidator’s powers, claims verification, asset distribution, and
dissolution.
3. Pre-Packaged Insolvency:
 Fast-track resolution for eligible corporate debtors.
4. Adjudication and Penalties:
 Authority powers, appeals, and offences.
PART III: Individual and Partnership Insolvency (Sec 78 - 187)
1. Fresh Start Process:
 Relief for low-income debtors.
2. Insolvency and Bankruptcy:
 Application, moratorium, repayment plans, and discharge.
3. Adjudication and Offences:
 Authority roles, appeals, and penalties.
PART IV: Regulation of Professionals and Utilities (Sec 188-223)
Governing Board (IBBI), insolvency professionals, and information
utilities.
PART V: Miscellaneous (Sec 224-225)
Supplementary provisions and special cases.

Overriding Effect of the IBC, 2016

Section 238 of the Insolvency and Bankruptcy Code (IBC):
This section declares that the provisions of the IBC override anything contained in
any other law in force or any instrument having effect by virtue of such law.
The IBC is considered a comprehensive code addressing insolvency and
bankruptcy matters. However, it does not invalidate the application of other laws
for unrelated matters. Many statutes have been amended to explicitly state that
their provisions, either wholly or partially, are subject to the provisions of the IBC.

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Innoventive Industries Ltd. Vs. ICICI Bank & Another [(2018) 1 SCC 407]
In the first case of CIRP admission under the IBC, the Supreme Court examined
whether a financial creditor could commence insolvency proceedings under the
IBC when the Corporate Debtor (CD) was protected from repaying debt under the
Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRUA).
The Supreme Court held that the MRUA is repugnant to the IBC. Under the MRUA,
the state government may:
a. Take over the management of the undertaking.
b. Impose a moratorium in a manner similar to that contained in the IBC.
However, giving effect to the MRUA would hinder the plan/scheme adopted under
the IBC. There would be a direct clash between the moratoriums under the two
statutes. The non-obstante clause of the IBC will prevail over the non-obstante
clause in the MRUA. This is because, under the non-obstante clause in the IBC,
any right of the CD under any other law cannot override the provisions of the IBC.
Pr. Commissioner of Income Tax Vs. Monnet Ispat And Energy Ltd. [SLP
No. 6483-2018 & other petitions]
The case involved determining whether the provisions of the Income Tax Act,
1961, could override the IBC.
The Supreme Court held that the IBC supersedes any inconsistent provisions in
other enactments, including the Income Tax Act, 1961.The decision reaffirmed the
primacy of the IBC in resolving insolvency and bankruptcy matters over conflicting
laws.

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4. Overview of the Steps in the Process

Starting the Process: Begins with an application

to and subsequent order by the Adjudicating
Authority (AA) after a default is confirmed –
Corporate Insolvency Resolution Process (CIRP)

Management: During CIRP, the current board of

directors loses control, and an IP takes charge,
supervised by the Committee of Creditors (CoC).

Calm Period: A moratorium stops any legal action

against the company during the resolution
process.

Resolution Plan: Proposals for resolving

insolvency are considered and approved by the
CoC and the AA.

Liquidation: If no resolution is found, liquidation

follows.

5. Important Definitions

Caveat with the Definitions under the Code

The Insolvency and Bankruptcy Code (IBC), 2016 contains two sections for
definitions:
1. Section 3 in Part I: These definitions apply to the whole of the Code.
2. Section 5 in Part II: These definitions apply only to Part 2 provisions of
the Code, which particularly deal with insolvency resolution and liquidation
for Corporate Debtors.

A. Corporate Debtors
A debtor is a person, business, or entity that owes money, goods, or services to
another party, known as the creditor. This obligation arises from borrowing funds,
purchasing goods or services on credit, or other financial transactions.

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

B. Corporate Person
"Corporate person" means a company as defined in clause (20) of Section 2 of the
Companies Act, 2013, a limited liability partnership as defined in clause (n) of sub-
section (1) of Section 2 of the Limited Liability Partnership Act, 2008, 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, except NBFCs with assets over
₹500 crores.

C. Person
"person" includes—
(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a trust;
(e) a partnership;
(f) a limited liability partnership; and
(g) any other entity established under a statute (Section 3(23)).

D. Debts
"Debt" means a liability or obligation in respect of a claim which is due from any
person and includes a financial debt and operational debt [Section 3(11)].

E. Creditors

A "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)].

Creditors are individuals, institutions, or entities to whom a person, business, or

organization owes money or financial obligations. They provide goods, services,
or funds on the understanding that payment will be made at a future date.

F. Financial Creditor
A "financial creditor" is 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)].

e.g. A bank lends ₹50 lakhs to a manufacturing company to expand its operations.
The company agrees to repay the loan in monthly instalments over five years
along with interest. The bank, in this case, is a financial creditor. If the company
fails to pay its debt, the bank has a right to initiate insolvency proceedings under
IBC as a financial creditor.

G. Financial Debt:

Section 5(8): A financial debt means a debt along with interest, if any, which is
disbursed against the consideration for the time value of money and includes:

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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 a non-
recourse 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 guarantees or indemnities
for any of the items referred to in sub-clauses (a) to (h) of this clause.

In M/S. Orator Marketing Pvt. Ltd. vs. M/S. Samtex Desinz Pvt. Ltd.
(2021), The Supreme Court observed that NCLT and NCLAT have overlooked
the words “if any” which could not have been intended to be otiose. ‘Financial
debt’ means outstanding principal due in respect of a loan and would also include
interest thereon, if any interest were payable thereon. If there is no interest
payable on the loan, only the outstanding principal would qualify as a financial
debt.

H. Operational Creditor
An "operational creditor" is a person to whom an operational debt is owed and
includes any person to whom such debt has been legally assigned or transferred
[Sec 5(20)]

e.g. Company A supplies raw materials to Company B on credit. Company B fails

to pay for the supplied raw materials within the agreed timeline. In this case,
Company A becomes the operational creditor because the unpaid amount is an
operational debt (arising out of the supply of goods or services). If Company A
legally assigns or transfers this debt to Person X, then Person X will also be
considered an operational creditor under Section 5(20).

I. Operational Debt:
Section 5(21): 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.

J. Claim
"Claim" means:

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a) A right to payment, whether or not such right is reduced to judgment, fixed,
disputed, undisputed, legal, equitable, secured, or unsecured.
b) A right to remedy for breach of contract under any law for the time being
in force, if such breach gives rise to a right to payment, whether or not such right
is reduced to judgment, fixed, matured, unmatured, disputed, undisputed,
secured, or unsecured (Section 3(6)).

K. Default
"Default" means non-payment of debt when whole or any part or installment of
the amount of debt has become due and payable and is not repaid by the debtor
or the corporate debtor, as the case may be (Section 3(12)).

L. Charge
A charge means an interest or lien created on the property or assets of a debtor
to secure repayment of a debt- Section 3(6).

M. Core Services
"core services" means services rendered by an information utility for—
(a) accepting electronic submission of financial information in such form
and manner as may be specified;
(b) safe and accurate recording of financial information;
(c) authenticating and verifying the financial information submitted by a
person; and
(d) providing access to information stored with the information utility to
persons as may be specified (Section 3(9)).

N. Financial Information
"financial information", in relation to a person, means one or more of the
following categories of information, namely:—
(a) records of the debt of the person;
(b) records of liabilities when the person is solvent;
(c) records of assets of person over which security interest has been
created;
(d) records, if any, of instances of default by the person against any debt;
(e) records of the balance sheet and cash-flow statements of the person; and
(f) such other information as may be specified (Section 3(13)).

O. Financial Institution
"financial institution" means—
(a) a scheduled bank;
(b) financial institution as defined in section 45-I of the Reserve Bank of
India Act, 1934;
(c) public financial institution as defined in clause (72) of section 2 of the
Companies Act, 2013; and
(d) such other institution as the Central Government may by notification
specify as a financial institution (Section 3(14)).

P. Financial Product
"financial product" means securities, contracts of insurance, deposits, credit
arrangements including loans and advances by banks and financial
institutions, retirement benefit plans, small savings instruments, foreign

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 currency contracts other than contracts to exchange one currency (whether
Indian or not) for another which are to be settled immediately, or any other
instrument as may be prescribed(Section 3(15)).

Q. Financial Service
"financial service" includes any of the following services, namely:—
(a) accepting of deposits;
(b) safeguarding and administering assets consisting of financial products,
belonging to another person, or agreeing to do so;
(c) effecting contracts of insurance;
(d) offering, managing or agreeing to manage assets consisting of financial
products belonging to another person;
(e) rendering or agreeing, for consideration, to render advice on or soliciting
for the purposes of—
(i) buying, selling, or subscribing to, a financial product;
(ii) availing a financial service; or
iii) exercising any right associated with a financial product or
financial service;
(f) establishing or operating an investment scheme;
(g) maintaining or transferring records of ownership of a financial product;
(h) underwriting the issuance or subscription of a financial product; or
(i) selling, providing, or issuing stored value or payment instruments or
providing payment services (Section 3(16)).

R. Financial Sector Regulator

"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(17)).

S. Property
"property" includes money, goods, actionable claims, land and every
description of property situated in India or outside India and every description
of
interest including present or future or vested or contingent interest arising out
of, or
incidental to, property (section 3(27)).

T. Security Interest
"security interest" means right, title or interest or a claim to property, created
in favour of, or provided for a secured creditor by a transaction which secures
payment
or performance of an obligation and includes mortgage, charge,
hypothecation,

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 assignment and encumbrance or any other agreement or arrangement
securing payment
or performance of any obligation of any person:
Provided that security interest shall not include a performance guarantee
(Section 3(31)).

U. Insolvency professionals (IPs)

An IP is one of the most important components of the IBC ecosystem. An IP is a
regulated and licensed professional, responsible for managing and overseeing the
CIRP and/or the liquidation process of the CD, and the resolution and bankruptcy
process for partnerships and individuals. The IBC gives various powers to IPs,
while subjecting them to regulatory and judicial oversight. The first level of
regulatory oversight of an IP is provided by the insolvency professional agency
(IPA) with which the IP is registered. To support IPs, the concept of an insolvency
professional entity (IPE), a regulated service provider supporting IPs, is also
recognized.

Eligibility

No individual is eligible to be registered as an IP if he/she:

. is a minor;
a. is not resident in India;
b. does not have the specified qualification and experience;
c. has been convicted of an offence punishable by a prison term exceeding six
months, or for an offence involving moral turpitude, and a period of at least
five years has not lapsed since the sentence expired. If a person has been
convicted of any offence for which the prison term was seven years or more,
he/she will not be eligible for registration at all;
d. is an insolvent yet to be discharged, or has applied to be adjudicated as an
insolvent;
e. has been declared to be of unsound mind;
f. is not a “fit and proper” person. There are three criteria determining “fit and
proper”:
. integrity, reputation, and character;
. absence of convictions and restraining orders;
. competence, including financial solvency and net worth.

Qualification and Experience

Apart from being eligible, an individual needs the following qualifications to
register as an IP:
. He/she should have passed the Limited Insolvency Examination not before
12 months from applying for enrollment with the IPA.

. After enrollment, he/she should have completed any pre-registration

educational courses as may be required by the IBBI from an IPA.

. He/she should also:

. have successfully completed the National Insolvency Program, as may
be approved by the IBBI; or
a. have successfully completed the Graduate Insolvency Program, as may
be approved by the IBBI; or

By CA Mukta Kunte 17 | P a g e
 b. have 15 years of experience in management, along with a Bachelor’s
degree from a recognized university; or
c. have 10 years of experience as:
● a chartered accountant enrolled as a member of the Institute of
Chartered Accountants of India;
● a company secretary enrolled as a member of the Institute of
Company Secretaries of India;
● a cost accountant enrolled as a member of the Institute of Cost
Accountants of India; or
● an advocate enrolled with the Bar Council.
(note: USA has a debtor in possession regime where no Insolvency Professional is
appointed to take over the management of the Corporate Debtor. The Corporate
Debtor retains the management.)

In Re Mr. Vijay Kumar Garg, Insolvency Professional (IP), No.

IBBI/DC/26/2020 dated June 8, 2020,[49]

In the matter of Mr. Vijay Kumar Garg, Insolvency Professional the Disciplinary
Committee of the IBBI examined the act of an RP appointing a firm to provide
support services during the CIRP.

The Disciplinary Committee observed that primarily, it is the RP who has the
responsibility to integrate all the professional services required by him
during the CIRP and he is not permitted to outsource the job of
integration to a third party. The committee further observed that the IBC
provides for appointing an IP based on his capabilities and strength to
handle CIRPs. If the RP does not possess the requisite strength to manage the
CIRP and needs additional support to perform his primary functions, it is advisable
that the RP build up his own capacity before taking up any assignments under the
IBC.

Regarding the appointment of professionals by the RP, the Disciplinary Committee

observed that “professionals” in India are generally members of a professional
body that adheres to a Code of Conduct and has acquired expertise in a specialized
field such as legal, valuation, or accounting. The Disciplinary Committee also
distinguished between the appointment of an IPE by the IP and the appointment
of any other company/limited liability partnership (LLP) to provide support
services to the IP. It noted that a company/LLP generally pursues its activities as
per the objectives contained in its charter and can apply for registration for all
legal objects. As such, no restrictions are imposed on incorporating a company/LLP
in terms of net worth, holding of shares, majority capital contribution by its
members, and composition of board/partnership that exists in the case of IPEs.
An IPE is recognized by the IBBI in accordance with regulation 12(1) of
the IP Regulations if its sole objective is to provide support services to
IPs, who are its partners or directors, as the case may be.

The Disciplinary Committee noted that providing infrastructure, personnel, and

back office support services cannot be classified as “professional services”
involving skill or even a “profession” falling within the definition given in Black’s
Law Dictionary. Further, the firm engaged cannot be regarded as an IPE
since it has not been recognized by the IBBI under regulation 12 of the

By CA Mukta Kunte 18 | P a g e
IP Regulations. Thus, it does not fall within the definition of the term
“professional.” Because the firm is not a professional with the authorization of a
regulator of any profession to render any professional service, and its conduct and
performance are not subject to oversight by any regulator of any profession, the
Disciplinary Committee held that appointing a firm is in contravention of section
20(2) of the IBC.

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