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Dr. SHAKUNTALA MISRA NATIONAL REHABILITATION

UNIVERSITY

Lucknow

Faculty of Law

RESEARCH PROJECT ON

Insolvency and Bankruptcy code: An overview

For

COURSE ON ‘’CORPORATE LAW II”

Submitted by

Anamika yadav

B.ComLL.B/15-16/26

Academic Session: 2017-18

Under the Guidance of

Mr. Shail Shakya

Asst. Prof. in Law & Faculty for IPR-I
Faculty of Law
Dr. Shakuntala Misra National Rehabilitation University

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ACKNOWLEDGEMENT

I would like to express my /special thanks of gratitude to my teacher Mr. Shail

Shakya who gave me the golden opportunity to do this wonderful project on the
topic Insolvency and Bankruptcy code: An overview, which also helped me in doing
a lot of research and I came to know about so many new things I am really thankful
to him.

Secondly, I would also like to thank my parents and friends who helped me a lot in
finalizing this project within the limited time period.

Anamika yadav

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Table of contents

1. Introduction…………………………………………………………………4
2. Background of insolvency laws in India…………………………................5
3. Origin and needs of insolvency laws………………………………………..5
4. Committees on insolvency………………………………………………….6
 Shri. T. Tiwari Committee
 Justice V.B. Balakrishna Eradi Committee
 JJ Irani Committee
 Bankruptcy Law Reforms Committee

5. Adjudicating & Appellant Authority……………………………………….8

6. Time Bound Process………………………………………………………..8
7. Preserving Value of Business………………………………………………9
8. Procedure under Insolvency and Bankruptcy Code………………………10
9. Insolvency Resolution Process…………………………………………..…11
 Moratorium Period
 Committee of Creditors
 Approval of Resolution Plan
10. Individual Bankruptcy……………………………………………………...12
11. Conclusion…………………………………………………………………..13

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INTRODUCTION

Insolvency is when an individual, corporation, or other organization cannot meet its financial
obligations for paying debts as they are due. Insolvency can occur when certain things
happen, some of which may include: poor cash management, increase in cash expenses, or
decrease in cash flow. A finding of insolvency is important, as specific rights are enabled for
the creditor to exercise against the insolvent individual or organization. For example,
outstanding debts may be paid off by liquidating assets of the insolvent party. Prior to
proceedings, it is common for the insolvent entity to meet with the creditor in order to
attempt to arrange an alternative payment method. It is possible that a business may be
"insolvent" in cash flow, yet still solvent on the balance sheet. These cases may involve
illiquid assets, which help the balance sheet's solvency but not the cash flows. This can also
work the other way around with negative net assets (balance sheet insolvency), yet a positive
cash flow. In this case, the flow of cash is simply enough to pay off debts, despite the fact
that the business has more liabilities than assets.

Bankruptcy is not exactly the same as insolvency. Technically, bankruptcy occurs when a
court has determined insolvency, and given legal orders for it to be resolved. Bankruptcy is a
determination of insolvency made by a court of law with resulting legal orders intended to
resolve the insolvency. Insolvency describes a situation where the debtor is unable to meet
his/her obligations. Bankruptcy is a legal maneuver in which an insolvent debtor seeks relief.
The main reasons behind insolvency are primarily poor management and financial
constraints. This is much more prevalent in smaller companies. Specifically, the reasons are:
Market – Company did not recognize the need for change

Bad debts – obviously money owed by customers

Management – failure to acquire adequate skills, imprudent accounting, lack of information

systems

Finance – loss of long term finance, over gearing or lack of cash flow

Knock on effect – i.e. from other insolvencies 1

1
Krati Rajoria, Study Insolvency and Bankruptcy Code of India: The past, The Present and the Future, Journal
Academia, Available at,
http://www.academia.edu/36251565/STUDY_INSOLVENCY_AND_BANKRUPTCY_CODE_OF_INDIA_THE_PAST_
THE_PRESENT_AND_THE_FUTURE

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Background of insolvency law in India

Before the British came to India, there was no insolvency law in India. The Indian regulation
that dealt with insolvency law was initially found in Government of India Act, 1800. In 1828,
a statute was passed which marked the beginning of special insolvency legislation in India
and the statute applied to Presidency towns namely Bombay, Madras and Calcutta. It was
originally meant to be in force for a period of four years but was extended till 1843. In 1848
another statute of insolvency law namely the Indian Insolvency Act, 1848 was passed which
made a distinction between traders and non-traders. Insolvency jurisdiction under the statute
was transferred to High Courts. Its jurisdiction was also limited to presidency towns. In 1909
the present Presidency Towns Insolvency Act, 1909 was passed. Insolvency law in
mofussil/districts was made in 1877 by incorporating the rules of insolvency in Chapter 20 of
the Code of Civil Procedure, 1877. Jurisdiction in relation to insolvency matters was given to
District Courts. These rules were modified by Chapter 20 of the Code of Civil Procedure,
1882. Later on the Provincial Insolvency Act, 1907 was passed which was repealed by
present Provincial Insolvency Act, 1920.2

ORIGIN AND NEED OF INSOLVENCY LAWS

The principal focus of modern insolvency legislation and business debt restructuring
practices is not the liquidation and elimination of insolvent entities but on the remodelling of
the financial and organizational structure of debtors experiencing financial distress so as to
permit the rehabilitation and continuation of their business. In some jurisdictions, it is an
offence under the insolvency laws for a corporation to continue in business while insolvent.
In others (like the United States with its Chapter 11 provisions), the business may continue
under a declared protective arrangement while alternative options to achieve recovery are
worked out. Ultimately the basic objective of insolvency laws is the distribution of the effects
of a debtor in the most expeditious, equal and economical mode and liberation of his person
from the demands of his creditors when he has made a full surrender of his property.

2
http://www.prsindia.org/administrator/uploads/media/Bankruptcy/Bankruptcy%20Code%20as%20passed%2
0by%20LS.pdf

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COMMITTEES ON INSOLVENCY
1) Shri. T. Tiwari Committee
In the year 1981, the Reserve Bank of India, deeply concerned over the issue of alarming
increase in the incidence of industrial sickness which was resulting in loss of production, loss
of employment, loss of government revenue and unnecessary blocking of huge funds
advanced by the banks and financial institutions to the industrial undertakings, constituted a
committee under the chairmanship of Shri. T. Tiwari, Chairman, Industrial Reconstruction
Corporation of India to look into the causes of industrial sickness, to assess the depth of the
problem and to suggest remedial measures. Following the recommendations of the Tiwari
Committee, the Government of India enacted the Sick Industrial Companies (Special
Provisions) Act, 1985, (SICA) in order to provide for timely detection of sickness in
industrial companies and for expeditious determination of the preventive, ameliorative,
remedial and other measures and for enforcement of the measures. Although, the object of the
Act was laudable, the Act was factually misused by the erring promoters' to defeat the object
of the Act. Due to such inherent defects of SICA and again, for some unexplained reasons,
BIFR failed to fulfill the purpose and mandate as envisaged therein.

2) Justice V.B. Balakrishna Eradi Committee

Then came the Justice V.B. Balakrishna Eradi Committee Report in 1999 recommending,
inter alia, setting up of a National Company Law Tribunal (NCLT in short) to be vested with
the functions and power with regard to rehabilitation and revival of sick industrial companies,
a mandate presently entrusted with BIFR under SICA and forming of a liquidation committee
consisting of creditors of the company in the lines of Section 141 of the Insolvency Act, 1986
of UK to assist the Liquidator and by adopting the necessary principles enunciated under
International Monetary Fund‘s propagated norms for Orderly and Effective‘ insolvency
procedures. The statement (financial) of affair, which took the most time, is now to be filed,
in case of voluntary winding up, along with the winding up application, and in case of an
involuntary proceeding, at the time of the first defense. The liquidation program is bound to
be time bound. Other recommendations were adoption of UNCITRAL Model Law for Cross
Border Insolvency; need to encourage voluntary winding up of companies and criteria of
sickness of companies to include inability to pay debts.

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3) N L Mitra Committee
In 2001 came the Report of the Advisory Group on Bankruptcy Laws, called the N L Mitra
Committee appointed by the RBI which made several recommendations on bankruptcy law
reforms, the first among which was consolidation of bankruptcy laws into a separate code.
However, no legislative steps have still been taken in this regard.

4) JJ Irani Committee
Then the JJ Irani Committee Report in 2005 was formulated to review the laws concerning
liquidation and restructuring of the companies recommended several revisions to the
Companies Act, more particularly for a transparent and globally acceptable insolvency and
restructuring procedures, in short. The Committee has proposed significant changes in the
law to make the restructuring and liquidation process speedy, efficient and effective.
Recommendations are directed at restoring the eroded confidence of key stakeholders in the
insolvency system while balancing their interest. According to the report,it is important that
the basic principles guiding the operation of corporate entities from registration to winding up
or liquidation should be available in a single, comprehensive, centrally administered
framework.

5) Bankruptcy Law Reforms Committee

The Union Finance Minster Shri.Arun Jaitley during his Budget Speech of 2014-15
announced that an entrepreneur friendly legal bankruptcy framework would be developed for
SMEs to enable easy exit. Pursuant to the above announcement, a Committee was set-up by
the Department of Economic Affairs, Ministry of Finance, under the Chairmanship of
Mr.T.K.Viswanathan, former Secretary General, Lok Sabha and former Union Law
Secretary, on 22.8.2014 to study the corporate bankruptcy legal framework in India and
submit a report. Dr. Viswanathan submitted the Report of the Committee on November 4,
2015. The Report is in two parts: Volume I – titled ―Rationale and Design and Volume II –
titled ―Draft Insolvency and Bankruptcy Bill.3

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http://www.ey.com/Publication/vwLUAssets/ey-the-insolvency-and-bankruptcy-code-2016-an-
overview/$FILE/ey-the-insolvency-and-bankruptcy-code-2016-an-overview.pdf

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Adjudicating & Appellant Authority

The adjudicating authority for Corporates shall be National Company Law Tribunal (NCLT)
and for others shall be Debt Recovery Tribunal (DRT). The first appeal shall lie with NCLAT
& DRAT respectively and the final appeal shall lie with the Honorable Supreme Court. No
other Court shall have any jurisdiction to grant any stay or injunction in respect of matters
within the domain of NCLT, DRT, NCLAT and DRAT. This would provide a specialised
mechanism to resolve stress accounts problem. Further a separate regulator i.e. the
Insolvency and Bankruptcy Board of India (Board) would be set up to regulate various
matters under the Code.

Time Bound Process:

The Code provides that the insolvency resolution shall have to be completed within 180 days
(maximum one extension of 90 days allowed) from the date of admission of application for
insolvency resolution. If no resolution is reached in the above time frame the Code provides
for automatic liquidation. Hence once default happens and insolvency resolution application
is filed by any stakeholder, financial creditors would be forced to make intelligible choices so
as to maximise economic value of business or face liquidation. At the same time, promoters
should get sensitive about managing cash flows as default would straight lead to loss of
control over business.

Preserving Value of Business:

Once the application for insolvency resolution is admitted, there shall be complete
moratorium till completion of insolvency proceedings. Board of Directors shall remain
suspended and affairs of the company shall come under the control of the Resolution
Professional. Though the entity shall remain a going concern. Creditors shall be precluded
from taking any action against the Company including enforcement of security under
SARFAESI Act during this period. Even a lessor cannot take possession of leased assets back
during the moratorium period. Thus it shall provide an opportunity for the creditors to discuss
sensible restructuring that can provide a better value than straight liquidation even while
business and its assets are preserved during this period.

Procedure under Insolvency and Bankruptcy Code

The procedure under the code shall be as follows: -

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1. An application for initiation of insolvency resolution process to be filed before the NCLT
(in case of corporate debtor) either by (i) a financial creditor on any default or (ii) an
operational creditor after serving a 10 days demand notice to the debtor or (iii) debtor itself
upon occurrence of default. Thus a financial creditor does not need to wait for an account to
become NPA. It can go to NCLT on the next day of first recorded default. The threshold limit
for amount of default though is not less than R1 lakh or such other amount as the
Government may specify not exceeding R1 crore.

2. The NCLT shall within 14 days of filing of application ascertain whether there is a default,
whether application is technically correct and if there is any objection to the proposed interim
insolvency resolution professional. On satisfaction, it shall admit the application. There are
penalty provisions if application made is found to be frivolous or having malicious intent.

3. The NCLT upon admission shall declare a moratorium for any action against debtor and
make public announcement of admission of insolvency proceedings.

4. The interim insolvency resolution professional shall take over the management of the
entity as a going concern. He shall make a list of all the claims against the debtor and
constitute a committee of creditors consisting of all financial creditors within 30 days of
admission of application.

5. Within 7 days of its constitution, the committee of creditors shall hold its first meeting and
appoint the insolvency resolution professional.

6. The Resolution Professional's primary function is to take over the management of the
corporate borrower and operate its business as a going concern under the broad directions of
a committee of creditors. The insolvency resolution professional shall help prepare a
resolution plan which shall need to be approved by at least 75% of the value of financial
creditors. There is no class of creditors concept and all financial creditors whether secured or
unsecured shall have equal say in resolution plan.

7. The resolution plan then will be submitted to NCLT for approval. Once approved, the
order shall become binding upon all parties.

8. If no resolution plan can be approved by the requisite creditors and by NCLT within 180
days (extendable by maximum 90 days), then company shall automatically be put into
liquidation proceedings. Moratorium shall cease from the date of passing an order approving

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the resolution plan or order for liquidation. Meaning the secured creditors may enforce their
security interests. The NCLT shall appoint a liquidator who will be vested with the
management of the company and shall liquidate free and surplus assets. The money shall be
distributed as per following priority order: -

• 1st- Insolvency resolution process costs and the liquidation costs

• 2nd- debts owed to a secured creditor who has relinquished security together with
workmen’s dues for the period of 24 months preceding the liquidation commencement date

• 3rd- wages and any unpaid dues owed to employees other than workmen for the period of
12 months preceding the liquidation commencement date

• 4th- financial debts owed to unsecured creditors

• 5th- amount due to the CG and the SG together with debts owed to a secured creditor for
any amount unpaid following the enforcement of security interest

• 6th- any remaining debts and dues i.e. operational creditors

• 7th- preference shareholders

• 8th- equity shareholders or partners4

Fees payable to liquidator shall be deducted proportionately from the proceeds payable to
each class of aforementioned recipients Notably by putting the unrealised part of a secured
creditor’s claim that enforces security interest outside liquidation, to a position subordinated
to unsecured creditors, it gives a positive temptation to secured creditors to relinquish
security interest and join the normal sequence in winding up. Another mentionable point is
that the contractual arrangements between creditors inter-se shall be disregarded i.e. there
will be no consideration for second charge on security.

The Insolvency & Bankruptcy Code, 2016 has received the President's assent on 28th May
2016. The Rules governing various provisions are being notified progressively. Recently, the
Insolvency and Bankruptcy Board of India (IBBI) has notified regulations pertaining to
insolvency professionals for registration, regulation and oversight of such people under the

4
https://www.iiipicai.in/PDF/Articles/Insolvency%20and%20Bankruptcy%20Code%202016%20-
%20An%20Overview.pdf

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Code and effective from 29th November 2016. Advocates, chartered accountants, company
secretaries and cost accountants with 10 years of post-membership experience (practice or
employment) or a graduate with 15 years of post-qualification managerial experience, on
passing the Limited Insolvency Examination will be eligible to act as insolvency
professionals, the regulations said. Any other individual passing the National Insolvency
Examination will also be eligible, to become an insolvency professional. It is expected that
once the full Code is operational, it shall help cure many ills of the credit sector. It will
facilitate early, transparent and fair resolution of liquidity problems. It is also expected to
help India climb many notches on the Ease of Doing Business Index and thus forward our
march towards creation of a prosperous economy.

Insolvency Resolution Process

Moratorium Period: No suits can be initiated or continued against the corporate debtor
including execution of judgments, decrees or orders in any court of law, tribunal, arbitration
panel or any other authority during the Moratorium Period. Also the appointed Insolvency
Professional takes over the management, accounts, employees and the powers of board of
directors.

Committee of Creditors: It includes financial creditors as decision makers and is

responsible for determining the key affairs of the company.

Approval of Resolution Plan: If the Committee of Creditors approves the resolution plans
received by the Insolvency Professional by a 75% Majority then the same is sent to NCLT for
approval, on assent of which the same is applied to the Corporate Debtor.5

Individual Bankruptcy

Part III of the Code deals with the bankruptcy process for individuals and partnership firms,
and includes three processes, i.e., 'fresh start', 'insolvency resolution' and 'bankruptcy'.

 Fresh Start

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A Debtor can initiate a fresh start process for all debts, other than secured debts undertaken
within the past three months. Only the debtors whose gross annual income is less than sixty
thousand rupees and whose value of assets is less than twenty thousand rupees and who
meets other eligibility criteria can make a Fresh Start Application. Immediately after filing an
application, the Moratorium Period starts and ceases to exist after 180 days. During this
period, all existing legal proceedings against such debtor is stayed and no fresh suits,
proceedings, recovery or enforcement action can be initiated. However, the debtor can neither
act as a director of any company, nor be involved in promotion or management of a company.
Further, he cannot dispose of his assets or travel abroad, except with the permission of the
DRT.

 Insolvency Resolution

An application for Insolvency Resolution can be made by either by the debtor or a creditor
and also via their respective insolvency resolution professionals. In this case again, the
Moratorium Period commences immediately after filing an application and ceases to exist
after 180 days irrespective of that fact whether an order has been passed by the DRT or not.

a. Meeting of Creditors: It includes the creditors as decision makers and is responsible for
determining the Repayment Plan.6

b. Approval of Repayment Plan: If the debtor and creditors arrive at an agreeable

repayment plan which would restructure the debts and affairs of the debtor, and this shall be
supervised by the resolution professional. A Repayment Plan requires approval of three-
fourth majority of creditors in value.

 Bankruptcy

In case the Insolvency Resolution Process fails or the repayment plan could not be
implemented or the Repayment Plan is rejected by the DRT, the DRT passes an order of
bankruptcy. In such a case, the Resolution Professional becomes the bankruptcy trustee.
When bankruptcy is initiated, all the assets of the debtor are to be sold and the proceeds are to
be distributed amongst the creditors in the same order of priority as aforesaid.

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http://www.ey.com/Publication/vwLUAssets/ey-the-insolvency-and-bankruptcy-code-2016-an-
overview/$FILE/ey-the-insolvency-and-bankruptcy-code-2016-an-overview.pdf

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Conclusion

The Code in short, has provided a facelift to the existing corporate insolvency and individual
bankruptcy regime and tries to fill in the gaps created due to the existence of multiple parallel
legislations. It seeks to make the entire process time bound and keeps up with the existing
international standards and will hopefully bring a sense of predictability and certainty to the
Laws relating to Liquidation, Insolvency and Bankruptcy. However, its success depends on
how it is being implemented by the Board, Adjudicating Authority, Government and the
Courts. Precisely, the Code would need to overcome various legal, logistical and practical
hurdles in order to achieve its Objectives. The Code is a landmark piece of legislation
providing a major facelift to the existing regime relating to restructuring and insolvency and
bankruptcy in India. It promises to provide the one big missing piece in the existing jigsaw of
laws in the form of establishing a framework for time–bound resolution for delinquent debts.
India now has a bankruptcy and insolvency framework which is comparable with
international standards and while this will go a long way in bringing an element of certainty
and predictability to commercial transactions in the country and facilitating the ease of doing
business, the litmus test for its success will be in how it is implemented. In particular, various
practical, logistical and legal hurdles will need to be overcome and the coming months will
be crucial with a lot resting on the nuts and bolts of the rules which are now expected to be
notified under the Code.

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Annotated Bibliography

Krati Rajoria, Study Insolvency and Bankruptcy Code of India: The past, The

Present and the Future, Journal Academia, Available

at,http://www.academia.edu/36251565/STUDY_INSOLVENCY_AND_BANKRUPTCY_CODE_OF_INDIA
_THE_PAST_THE_PRESENT_AND_THE_FUTURE

The author is an Assistant Professor of Amity Law School, Amity University Madhya
Pradesh. This paper was compartmentalised into six parts. Firstly, the introduction, then the
details of the history of the evolution of insolvency and bankruptcy reforms in India
analysing its impact. Then view the code stating reasons for its enactment and highlighting its
main features and challenges in its proper implementation.

Dr. G.K. Kapoor, Company Law, 20th Edition

This book of Company Law is an authentic book of an outstanding writer. The

author of this book was G.K. Kapoor and he was the professor at International

Management Institute (IMI) and he also got the best teacher award in 2000. In this

book of the Company Law the matter contains this book is relevant and necessary

and in easy in language to understand the topic. From this book I had taken some

points related to insolvency and bankruptcy.

Avtar Singh, Company Law, 14th Edition

This is an outstanding book of the author Avtar singh of company law. In this book

the author had mentioned many things related to company law, as my topic is

insolvency and Bankruptcy code: an onerview is a topic which is given in a very

prescribed manner and I can easily understand the language of the matter which this

book contains. I had taken a small part of insolvency in my research work.

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http://www.prsindia.org/administrator/uploads/media/Bankruptcy/Bankruptcy%20Code%20a
s%20passed%20by%20LS.pdf

From this PDF I had taken some points related to insolvency and bankruptcy code .As my
research project is on Insolvency and bankruptcy code an overview, this pdf contains very
relevant and authentic matter so, I had taken some points related to insolvency and
bankruptcy code. The Insolvency and Bankruptcy Code, 2016 (Code), a landmark legislation
consolidating the regulatory framework governing the restructuring and liquidation of
persons (including incorporated and unincorporated entities) was enacted into law by the
Parliament on 11 May 2016. As in the case of Companies Act 2013 (2013 Act), different
provisions of the Code are being notified and operationalised in a phased manner.

http://www.ey.com/Publication/vwLUAssets/ey-the-insolvency-and-bankruptcy-code-2016-
an-overview/$FILE/ey-the-insolvency-and-bankruptcy-code-2016-an-overview.pdf

From this PDF I had taken some points related to insolvency and bankruptcy code .As my
research project is on Insolvency and bankruptcy code an overview, this pdf contains very
relevant and authentic matter so, I had taken some points related to insolvency and
bankruptcy code

http://www.aralaw.com/wp-content/uploads/2016/08/Newsletter-Article-Bankruptcy-Code-
May-2016.pdf

From this PDF I had taken some points related to insolvency and bankruptcy code .As my
research project is on Insolvency and bankruptcy code an overview, this pdf talks about the
finding of insolvency is important, as specific rights are enabled for the creditor to exercise
against the insolvent individual or organization. For example, outstanding debts may be paid
off by liquidating assets of the insolvent party. Prior to proceedings, it is common for the
insolvent entity to meet with the creditor in order to attempt to arrange an alternative payment
method.

https://www.iiipicai.in/PDF/Articles/Insolvency%20and%20Bankruptcy%20Code%202016%
20-%20An%20Overview.pdf

As my research project is on Insolvency and bankruptcy code an overview, this pdf contains
very relevant and authentic matter so, I had taken some points related to insolvency and
bankruptcy code. It talks about the enactment of the ‘The Insolvency & Bankruptcy Code,
2016’ on May 26, 2016 is perhaps the single biggest reform undertaken in India in recent

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times. The Code unifies and streamlines the laws relating to recovery of debts and insolvency
for both corporate and non-corporate persons. The Government and the bureaucracy must be
given credit for clutching on to this opportunity provided by the prevailing NPA distress. The
present article seeks to outline the existing mechanism for recovery of debts and revival of
sick companies and distinguish the same with provisions in the Code.

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