Insolvency and Bankruptcy Code, 2016 – Comprehensive Study Notes

INTRODUCTION

• Conceptual distinctions
  • Insolvency = state of default (inability to pay when due).
  • Untreated insolvency leads to:
  • Bankruptcy → for individuals & partnership firms.
  • Liquidation → for corporates (companies & LLPs).
  • "Bankruptcy" is the legal conclusion; every bankrupt is insolvent, but not every insolvent becomes bankrupt.
• Types of failure causing insolvency
  • Financial failure – persistent cash-flow mismatch despite viable model.
  • Business failure – breakdown in the business model/no sufficient revenue.
  • Avoidance of transactions (preferential, undervalued, extortionate, fraudulent) may also precipitate insolvency.

OBJECTIVES OF AN INSOLVENCY LAW (BLRC, Preamble)

• Provide certainty & speed for negotiation between debtor–creditor.
• Preserve/maximise value; avoid destruction of productive assets.
• Draw line between legitimate business failure vs. malfeasance.
• Promote entrepreneurship, credit availability & balanced stakeholder interests.
• Create Insolvency & Bankruptcy Board of India (IBBI) and an institutional ecosystem.

STRUCTURE OF THE CODE

• 5 Parts / 255 Sections / 12 Schedules
  • Part I – Preliminary (Ss 1-3).
  • Part II – Corporate insolvency & liquidation (Ss 4-77).
  • Part III – Individual & partnership insolvency/bankruptcy (Ss 78-187).
  • Part IV – Regulation of IPs, IPAs & IUs (Ss 188-223).
  • Part V – Miscellaneous (Ss 224-255).
• Central regulator: IBBI.
• Ecosystem’s 4 pillars:
  1. Adjudicating Authorities – NCLT/NCLAT for corporates; DRT/DRAT for individuals (except personal guarantors linked to ongoing CIRP, handled by NCLT).
  2. IBBI (Regulator).
  3. Insolvency Professionals (IPs) & IP Entities.
  4. Information Utilities (IUs).

APPLICABILITY & NON-APPLICABILITY (S 2, 3(7), 227)

• Applies to:
  • Companies $\text{(incl. those under special Acts)}$.
  • LLPs.
  • Bodies corporate notified by CG.
  • Personal guarantors to CDs.
  • Partnership & proprietorship firms.
  • Other individuals.
• Not applicable to Financial Service Providers (FSPs); yet, CG may notify select FSPs (e.g., NBFCs with $\ge Rs\,500\,\text{cr}$ assets) u/s 227.
• Co-operative societies held outside scope (NCLT Mumbai – Siddheshwar Sahakari).

KEY DEFINITIONS (SELECT, Ss 3 & 5)

• Board, Charge, Claim, Corporate Person/Debtor, Creditor.
• $\text{Debt}=\text{liability}$ (financial/operational).
• Financial Debt (S 5(8)) – advanced for $\text{time value of money}$ incl. derivative liabilities, counter-indemnities & monies from real-estate allottees.
• Operational Debt – goods/service dues incl. Govt. dues.
• Default = non-payment when due.
• Insolvency Professional (IP) & Agency (IPA), Information Utility (IU).
• Adjudicating Authority (AA).
• CoC voting share.
• Related party (corporate & individual matrices).
• Resolution applicant/plan; Base plan (for PPIRP).
• Insolvency commencement vs. initiation date.
• Moratorium.

AVOIDANCE & WRONGFUL TRADING (CH III)

• Preferential (Ss 43-44) – transfers favouring creditor within look-back.
• Undervalued (Ss 45-48).
• Transactions defrauding creditors (S 49).
• Extortionate credit (Ss 50-51).
• Fraudulent/Wrongful trading (S 66-67).
• IRP/RP/Liquidator must identify & litigate; timelines in Reg 35-A directory (NCLAT Prasant C Rath).

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

Threshold & Triggers

• Default threshold:
  • $\ge Rs\,1\,00,000$ originally; raised to $Rs\,1\,\text{cr}$ (24-03-2020).
  • CG may set higher for PPIRP.
• Who can initiate (S 6)
  • Financial Creditor (FC).
  • Operational Creditor (OC).
  • Corporate Applicant (debtor itself).
  • Restrictions u/s 11 on repeat filings, existing CIRP, completed CIRP <12 m etc.
• Temporary bar (S 10A): no CIRP filing for defaults arising $\ge$ 25-03-2020 up to 25-03-2021 (COVID).

Application by FC (S 7)

• Joint application possible.
• Class creditors & real-estate allottees: minimum $\min(100,10\% )$ of class.
• Evidence: IU record or other proof; proposed IRP.
• AA to ascertain default within 14 days (directory – Surendra Trading).
• Order: admit/reject; rectification window 7 days.
• Withdrawal: Sec 12A + Reg 30A (90 % CoC post constitution).

Application by OC (Ss 8-9)

• Prior demand notice (Form 3/4) $10$-day reply window.
• If unpaid/undisputed ⇒ Form 5 to AA.
• Must annex invoice, affidavit, IU record, proposed IRP (optional).
• Dispute standard (SC Mobilox): genuine, pre-existing.

Application by Corporate Debtor (S 10)

• Needs special resolution (company) / $\ge 3/4$ partners approval (LLP).
• Must propose IRP & furnish books.
• Case law – IGOPL Offshore (NCLT Mumbai): SR mandatory.

Order of AA (S 13)

• On admission:
  • Declare moratorium (S 14).
  • Appoint IRP (S 16).
  • Public announcement within 3 days (S 15).
• Moratorium prohibits: suits, enforcement, transfers, recovery, owner’s repossession; licences cannot be terminated if dues current.
• Supplies essential goods/services & critical supplies to continue (S 14(2)/(2A)).
• Moratorium ends on plan approval or liquidation order.

Timelines (S 12)

• Base period $180$ days.
• Single extension $\le 90$ days (CoC $\ge$ $66\%$).
• Outer cap $330$ days incl. litigation.
• SC Essar Steel allows rare further extension via judicial discretion.

Interim Resolution Professional (IRP)

• Appointment route depends on who filed.
• Term: from commencement date till RP appointed (S 22).
• Powers (S 17): take over management, access records, control bank a/cs.
• Duties (S 18): collect info, receive/verify claims, form CoC, preserve assets, file to IU.

Proof & Verification of Claims (Regs 7-9)

• FC → Form C; OC → Form B; Workmen/Employees → Form D.
• Delayed claims allowed till $90$ days from commencement.

Resolution Professional (RP)

• Appointment by 1st CoC meeting (within 7 days of constitution) with $66\%$ vote; else IRP continues.
• Eligibility: independence criteria (Reg 3).
• Duties: run CD as going concern, raise interim finance, prepare Info Memorandum, invite EoI/RFRP, evaluate & present plans, file avoidance applications.
• Certain actions need prior CoC $66\%$ approval (S 28): create security, change cap structure, related-party transactions, interim finance beyond limit, etc.
• RP fee part of $\text{CIRP costs}$; minimum fee benchmarks (IBBI Circular Mar-2022).

Committee of Creditors (CoC) (S 21)

• Constituted after claim verification.
• Members: all FCs (related parties excluded unless exempt).
• Where no FCs → 18 largest OCs + rep of workmen + rep of employees.
• Voting share $\propto$ debt; decisions normally by $\ge 51\%$, certain matters $\ge 66\%$.
• Quorum default $33\%$ voting rights (Reg 22).
• Class creditors represented by Authorised Representative (AR) (homebuyers, deposit holders etc.) – voting per prior instructions (S 25A; Reg 16A-B).

Resolution Applicant & Plan

• Ineligibility u/s 29A: undischarged insolvent, wilful defaulter, NPA $\ge 1$ yr, convicted, disqualified director, SEBI ban, transactions avoidance, invoked guarantee unpaid, etc.
• Financial entities exceptions.
• RP must vet plan against S 30(2) conditions: CIRP costs priority, OC payment $\ge$ liquidation value, feasibility/viability, legal compliance.
• CoC evaluates via evaluation matrix; simultaneous voting (Reg 39).
• Approval threshold $66\%$.
• Post-approval filing to AA (S 30(6)).
• AA order (S 31): if compliant ⇒ plan binding on CD, employees, members, creditors, guarantors, Govt. dues. Moratorium lifts; RP records with IBBI.
• If rejected ⇒ liquidation (S 33).
• Appeal lies u/s 61(3): contravention of law, material irregularity, improper OC/IRPCost treatment, etc.
• Successful RA gets “clean slate” (SC Essar Steel, S 32A protection from prior offences if change of control).

LIQUIDATION (CH III)

• Trigger scenarios (S 33):
  1. No plan received within permitted time.
  2. Plan rejected by AA.
  3. CoC (≥$66\%$) decides anytime before plan confirmation.
  4. Plan contravention post-approval (application by affected person).
• Order includes: liquidation commencement, public announcement, intimation to RoC etc.; deemed discharge of employees unless business continued.
• Upon order: suit bar except with AA leave; assets vest in liquidation estate; liquidator replaces RP.
• Case law: Munikh Hospitality – $66\%$ vote prerequisite; 51% invalid.

FAST-TRACK & PPIRP

• Fast-track CIRP (Ss 55-58): for small cos, startups, unlisted cos with $\le Rs\,1\,\text{cr}$ assets; timeline $90$ days + one extension $\le 45$ (only once).
• Pre-packaged CIRP (PPIRP) (CH III-A, 2021 Amendment): for MSME CDs; base plan by debtor; threshold $10\%$ FCs to initiate; special disposal sequencing (S 11A).

AMENDMENT CHRONOLOGY (select)

• 2018 (1st & 2nd Acts) – homebuyers as FCs, Sec 29A tweaks.
• 2019 Act – $330$-day cap, NPA cure, clarify OC/FC payments.
• Dec 2019 Ordinance/2020 Act – protection for RA from prior offences (S 32A), threshold add-ons.
• 2020 COVID – Sec 10A suspension.
• 2021 Act – PPIRP for MSMEs.

OVERRIDING EFFECT (S 238)

• Code prevails over conflicting laws incl. tax first-charge (GST etc.).

SELECT CASE LAWS (quick reference)

• Surendra Trading Co. – 14-day/7-day limits directory.
• Mobilox v Kirusa – genuine pre-existing dispute bars OC petition.
• Essar Steel CoC – RA clean slate; $330$ days flexible.
• K Sashidhar – Commercial wisdom of CoC non-justiciable.
• Lalit Kumar Jain – Personal guarantors can be hauled before NCLT.
• Prasant C Rath – Reg 35-A timeline directory.
• Bank of India v Future Retail – default admitted, CIRP.
• ACPC v Affinity – share subscription ≠ financial debt.

NUMERICAL / FORMULAE QUICK-LOOK

• Voting thresholds:
  • Routine decisions $\ge 51\%$.
  • Critical (extend CIRP, approve plan, replace RP, liquidate etc.) $\ge 66\%$.
  • Withdrawal post-admission $\ge 90\%$.
• Timeline caps:
  • CIRP $180+90\le270$; absolute $\le330$.
  • Fast track $90+45\le135$.
• Class action minima: $\min{100,10\%}$ of class/allottees.
• Moratorium immediate on admission; lifts on plan approval / liquidation.

PRACTICAL/ETHICAL IMPLICATIONS

• Code is not a recovery tool (NCLAT Amsons Communication).
• Moves control from promoters to creditors & IPs, incentivising early resolution.
• Stresses professional responsibility & independence; strict conduct code for IPs.
• Protects livelihoods by preserving CD as going concern; moratorium offers breathing space.
• Balances stakeholder rights while ensuring minimal court intervention.

REAL-WORLD CONNECT

• Successful resolutions (Essar, Bhushan Steel) indicate investor confidence & credit culture.
• PPIRP tailored for MSMEs to save jobs post-COVID.
• Cross-border & group insolvency frameworks anticipated next.

REVISION QUICK-QUESTIONS (FROM ICAI “TEST YOUR KNOWLEDGE”)

• Appeal period to NCLAT against S 9 admission? → $30$ days (plus $15$ condonation).
• Identify corporate debtor in balance sheet scenario.
• Can fast-track CIRP be extended twice? → No, only once.
• Liquidation resolution voting %? → $66\%$.
• Time to modify claim in liquidation? → $14$ days.