05 Dr. Adukia's Insight into Insolvency Regime with ...drrajkumaradukia.com/resource/Image/sector.pdf · Indian legal and political system, to name a few like Regulating Act of 1773,

Insight into the Insolvency Regime in India with Special Reference to Real Estate Sector

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Dr. Rajkumar S. Adukia

Winner of National Book Honours Award 2018

Author of more than 200 books

B.Com. (Hons.), LLB, FCA, FCS, FCMA, CFE, MBA,

Dip. IFRS (UK), DLL&LP, DIPR, Dip. in Criminology, PhD

Email:[email protected]

Phone No: 9820061049

Evolution of Laws in India and Introduction to Insolvency & Bankruptcy Code, 2016

Laws in India have evolved from religious prescription of Vedic Age to the

current constitutional and legal system. Ancient India had distinct tradition of law as can be

evidenced by Arthashastra, dating from 400 BC and the Manusmriti, from 100 AD which

were influential treatises in India, texts that were considered authoritative legal guidance. The

common law system, as existing today, came to India with the British East India Company

which was granted charter by King George I in 1726 to establish “Mayor’s Courts” in

Madras, Bombay and Calcutta. However, following the First War of Independence in 1857,

the control of company territories in India passed to the British Crown. Supreme courts were

established replacing the existing mayoral courts. These courts were converted to the first

High Courts through letters of patents authorized by the Indian High Courts Act passed by

the British parliament in 1861.

In British Era, some of the Acts of parliament of United Kingdom were directly affecting

Indian legal and political system, to name a few like Regulating Act of 1773, Charter Acts of

1793 and 1813, Government of India Act of 1858. However, the oldest act enacted by East

India Company which pertained solely to India was Bengal Regulation III of 1818. Some of

the oldest known Acts of India, some of which are even operational today are Indian Slavery

Act, 1843, Societies Registration Act, 1860, Indian Penal Code, 1860,Indian Contract Act

1872, Negotiable Instrument Act, 1881, etc. Constitution of India lays down the Indian Legal

systems largely based on the Government of India Act, 1935 passed by British Parliament.

The Indian constitution lays out a federal Union of 29 States, 6 union territories and 1


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national capital territory. The Union and States have separate executive and legislative

branches. Law generated by the Union is superior to that of the States. Besides, India

maintainsa hybrid legal system with a

mixtureof civil, commonlaw andcustomaryorreligiouslaw within its legal framework. As per

the report of the committee to identify the central acts which are not relevant or no longer

needed or require repeal/re-enactment in the present socio-economic context, dated -

November 5, 2014, a total of 6612 of Central Acts were enacted between 1836 and 2014 of

which 2781 were in force or in Statute book. Of this 1741 Act were identified by the

committee for repeal. After careful examination and consultation with various

Ministries/Departments in the Government of India, four Acts have been enacted to repeal

1175 Central Acts by Parliament. A list of remaining 422 Central Acts was circulated among

all the Ministries/ Departments for their comments on repeal of Acts pertaining to their

respective Ministries/Departments. Besides, there are over 6,600 state laws in India (Source:

http://www.lawsofindia.org/thestates.php)

Resolution and Insolvency Regime in India

A good legal framework backed by efficient infrastructural mechanism is most essential to

facilitate the extension of credit and enable economic development. A well designed legal,

institutional and regulatory framework that balances debtors and creditors rights in respect to

insolvency/bankruptcy proceedings is essential part of any developed or developing

economy. An ideal legislature in this respect should provide for the restructuring and

preservation of distressed yet viable businesses, and at same time provide for the orderly

liquidation of distressed and non-viable businesses as it offers predictability and enhances

investor’s confidence in credit recovery system. Besides, the law should also ensure the

transparency, efficiency and most essentially timeliness of resolution mechanism, as these

have a direct impact on the allocation of credit risk and risk management in the financial

sector, and consequently also influence access to credit and its cost.

Insolvency and Bankruptcy Code, 2016 (herein after referred to as The Code) enacted on 28th

May, 2016, is an historical Act as it introduces a comprehensive legal and institutional

machinery to deal with increasing defaults in repayments of debts, in a manner where

interests of all the stakeholders are balanced. One of the reasons cited for enactment of the

Code, also incorporated in its Preamble, is to consolidate the existing scattered and


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complicated and still incomprehensive resolution and insolvency regime as can be evidenced

from following:

The individual insolvency and bankruptcy were dealt in the Presidency Towns

Insolvency Act, 1909, which covers the insolvency of individuals, partnerships and

associations of individuals in the three erstwhile Presidency towns of Chennai,

Kolkata and Mumbai and the Provincial Insolvency Act 1920, which was the

insolvency law for individuals including their proprietorship establishments, in other

areas.

Corporate insolvency was mostly covered by the Companies Act 2013 (earlier

Companies Act, 1956)which contained provisions for rescue and rehabilitation of all

registered entities in Chapter XIX, and Winding-up in Chapter XX. However, these

provisions were not notified nor was National Company Law Tribunal (“NCLT”)

constituted to exercise powers in relation to sick industrial companies.

The Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) was the only

central corporate rescue law in force but it applied to industrial companies only.

The Recovery of Debt Due to Banks and Financial Institutions Act (RDDBFI Act)

1993 gave banks and a specified set of financial institutions greater powers to recover

collateral at default.

The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act (SARFAESI), 2002 envisaged specialised resolution agencies in

the form of Asset Reconstruction Companies (“ARCs”) to resolve Non-performing

Assets (“NPAs”) and other specified bank loans under distress.

RBI had Strategic Debt Restructuring Scheme (SDR) and Scheme for Sustainable

Structuring of Stressed Assets (S4A) for structuring of debts overdue to financial

institutions.

Hence, it is evident that the earlier process of dealing with stressed and bad debts was highly

fragmented and scattered over numerous legislations with varied enforcement and judicial

agencies.

Why Code?

Generally, an enactment/a statute/a bill/a regulation which has passed through several

legislative steps needed for it and which has become law is called an ACT whereas a specific


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type of action made by legislature that tries to cover a complete system of laws in a given

area is called a CODE. India now has three pieces of legislation referred to as Code: Indian

Penal Code 1860, The Code of Criminal Procedure (CrPC),1973 and now Insolvency and

Bankruptcy Code, 2016. Another Code by name of Direct Tax Code is in draft stage since

past many years, which if enacted will simplify direct tax laws in India. It is pertinent to note

that the most supreme Indian Legislation, which is Constitution of India has neither the word

Act or Code nor year affixed to it. Article 393 of the Constitution which gives the short title

to it simply refers to it as the Constitution of India.

The Insolvency and Bankruptcy Code is referred as Code and not an Act as it deals with the

topic of debt resolution and recovery in India comprehensively (except for financial service

providers) including both corporate, non-corporate business structures, individuals and to

limited extent even cross border insolvency. It is also comprehensive as it allows for

resolution as well as liquidation processes.

The enactment is also referred to as Code because as per section 238 of the Code, provisions

of the Code override other laws where they are inconsistent with other laws. Here it is

pertinent to note that w.e.f 6th June, 2018, Section 238A has been introduced and the

provisions of the Limitation Act, 1963 has been specifically made applicable to the

proceedings or appeals before the adjudicating and appellate authorities under the Code

through Section 34 of the IBC (Amendment) Ordinance, 2018 and later through IBC (Second

Amendment) Act, 2018. Note that the period of limitation specified for various kinds of suits

under THE SCHEDULE annexed to the Limitation Act, 1963 varies from 10 days to thirty

years. For instance, suit by a mortgagor to redeem or recover possession of immovable

property mortgaged can be filed anytime within 30 years of the day when right to redeem or

to recover possession accrues. Similarly, any suit (except a suit before the Supreme Court in

the exercise of its original jurisdiction) by or on behalf of the Central Government or any

State Government, including the Government of the State of Jammu and Kashmir can be filed

within 30 years of the day when the period of limitation would begin to run under Limitation

Act against a like suit by a private person.

Also note that the period of limitation will not apply on filing of claims by the creditors but

only on proceedings and appeals before adjudicating and appellate authorities.

The Insolvency and Bankruptcy Code, 2016


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Though the Insolvency and Bankruptcy Code, 2016, came into effect from May 28, 2016, but

its sections were first notified on August 5, 2016. The Code has been first amended by the

Insolvency and Bankruptcy (Amendment) Ordinance, 2017, passed on November 23, 2017,

vide Notification No. DL – N (04)/0007/2013-17 in order to strengthen the existing

insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.

This Ordinance became an Act on January 18, 2018, after being passed by both the houses of

Parliament and receiving President’s assent. It is known as the Insolvency and Bankruptcy

Code (Amendment) Act, 2018. It was made applicable from November 23, 2017. The

Ordinance had 9 Sections and the final Act had 10 Sections, the 10th Section being inserted to

repeal the Ordinance.

Sections 2, 5, 25, 30, 35 and, 240 of the Code were amended, and new Sections 29A and

235A were inserted in the Code.

The second amendment is made vide The Insolvency and Bankruptcy Code (Amendment)

Ordinance, 2018, issued by the President on June 6, 2018, vide notification No. DL – N

(04)/0007/2003 – 18. This amendment incorporates the recommendations made by the

Insolvency Law Committee and smoothens out many difficulties faced earlier.The Ordinance

inserted four new sections 12A, 25A, 238A and 240A and amended a few other sections.

The Insolvency and Bankruptcy (Second Amendment) Bill, 2018 was introduced in the

monsoon session of the parliament on 23rd July, 2018 to repeal the IBC (Amendment)

Ordinance, 2018. It was passed in Lok Shabha and Rajya Sabha on 31st July and 10th August

respectively. It received the assent of the President on the 17th August, 2018 and thus the

Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 was promulgated. The

IBC (Second amendment) Act, 2018 are in lines with the ordinance except for few minor

incidental changes.


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Chapter 1: Legislative Framework &Structure of the Code

After all the amendments, the structure of the Code is as follows:

The Code Comprises of 5 parts, 261 sections (255 at the onset + 6 sections added by

amendments) and 12 Schedules. (12th schedule added as per the IBC (Second Amendment)

Act, 2018)

Part Chapter

Number

Chapter Name Sections

included

I Preliminary 1-3

II Insolvency Resolution and Liquidation for Corporate

Persons

I Preliminary 4-5

II Corporate Insolvency Resolution Process 6-32

III Liquidation Process 33-54

IV Fast Track Corporate Insolvency Resolution

Process

55-58

V Voluntary Liquidation of Corporate persons 59

VI Adjudicating Authority for Corporate Persons 60-67

VII Offences and Penalties 68-77

III Insolvency Resolution and Bankruptcy for Individuals and

Partnership Firms

I Preliminary 78-79

II Fresh Start Process 80-93

III Insolvency Resolution Process 94-120

IV Bankruptcy Order for Individuals and

Partnership Firms

121-148

V Administration and Distribution of the Estate

of the Bankrupt

149-178

VI Adjudicating Authority for Individuals and

Partnership Firms

179-183

VII Offences and Penalties 184-187

IV Regulation of Insolvency Professionals, Agencies and

Information Utilities


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I The Insolvency and Bankruptcy Board of

India

188-195

II Powers and Functions of the Board 196-198

III Insolvency Professional Agencies 199-205

IV Insolvency Professionals 206-208

V Information Utilities 209-216

VI Inspection and Investigation 217-220

VII Finance, Accounts and Audit 221-223

V Miscellaneous 224-255

Schedules

THE FIRST SCHEDULE - Amendment to the Indian Partnership Act, 1932- Section

245

THE SECOND SCHEDULE - Amendment to the Central Excise Act, 1944- Section

246

THE THIRD SCHEDULE - Amendment to the Income-Tax Act, 1961- Section 247

THE FOURTH SCHEDULE - Amendment to the Customs Act, 1962- Section 248

THE FIFTH SCHEDULE - Amendment to the Recovery of Debts Due to Banks and

Financial Institutions Act, 1993- Section 249

THE SIXTH SCHEDULE - Amendment to the Finance Act, 1994- Section 250

THE SEVENTH SCHEDULE - Amendment to the Securitization and Reconstruction

of Financial Assets and Enforcement of Security Interest Act, 2002- Section 251

THE EIGHTH SCHEDULE - Amendment to the Sick Industrial Companies (Special

Provisions) Repeal Act, 2003- Section 252

THE NINTH SCHEDULE - Amendment to the Payment and Settlement Systems Act,

2007- Section 253

THE TENTH SCHEDULE - Amendment to the Limited Liability Partnership Act,

2008- Section 254


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THE ELEVENTH SCHEDULE - Amendments to the Companies Act, 2013- Section

255

THE TWELFTH SCHEDULE – Acts for the purpose of Section 29A(d) (inserted by

the Insolvency and Bankruptcy Code (SecondAmendment) Act, 2018, effective from

June 6, 2018)

Rules under the Code

The following four Rules have been notified by the Central Government under the Code:

The Insolvency and Bankruptcy Board of India (Salary, Allowances and other Terms

and Conditions of Service of Chairperson and members) Rules, 2016 on 29th August,

2016;

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

on 30th November 2016;

The Insolvency and Bankruptcy Board of India (Form of Annual Statement of

Accounts) Rules, 2018 on 1st May, 2018; and

The Insolvency and Bankruptcy Board of India (Annual Report) Rules, 2018 on 1st

May, 2018.

Regulations under the Code

The Insolvency and Bankruptcy Board, principle regulator of the Code has issued following

14 Regulations so far:

1. Insolvency and Bankruptcy Board of India (Model Bye- Laws and Governing Board

of Insolvency Professional Agencies) Regulations, 2016

2. Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies)

Regulations, 2016

3. Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations,

2016

4. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for

Corporate Persons) Regulations, 2016

5. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016

6. Insolvency and Bankruptcy Board of India (Engagement of Research Associates and

Consultants) Regulations, 2017


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7. Insolvency and Bankruptcy Board of India (Procedure for Governing Board

Meetings) Regulations, 2017

8. Insolvency and Bankruptcy Board of India (Advisory Committee) Regulations, 2017

9. Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017

10. Insolvency and Bankruptcy Board of India (Voluntary liquidation Process)

Regulations, 2017

11. Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations,

2017

12. Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process

for Corporate Persons) Regulations, 2017

13. Insolvency and Bankruptcy Board of India (Employee Services) Regulations, 2017

14. Insolvency and Bankruptcy Board of India (Grievance and Complaint Handling)

Regulations, 2017

Besides, Draft Rules and Regulations have been issued under the Insolvency Resolution

Process for Individuals and Firms

i. Draft Insolvency and Bankruptcy (Application to Adjudicating Authority for

Insolvency Resolution Process for Individuals and Firms) Rules, 2017, and

ii. Draft Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for

Individuals and Firms) Regulations, 2017.

iii. IBBI (Mechanism for Issuing Regulations) Regulations, 2018


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Chapter 2: Extent,Applicability and Preamble of the Code

This Code is applicable to

Companies and LLPs (termed as Corporate debtor)

Personal guarantors to corporate debtors

Partnership Firms and proprietorship firms

Individuals

Any other body incorporated under any law for the time being in force, as the

Central Government may by notification specify in this behalf.

Part II of the Code is Applicable to Companies and LLP where amount of default is rupees

one lakh or more, though central government may by notification specify a higher amount not

exceeding one crores rupees. Part III of the Codewhen notified will be applicable to

Individual and Partnership Firms, where amount of default is rupees one thousand or more.

This Code is applicable to whole of India except Part III which provides the provisions for

Partnership firms and Individuals, is not applicable for the State of Jammu and Kashmir.

Preamble of the Code

Preamble to the Code, establishes the purpose of the Act which are as follows: -

(a) To consolidate and amend the laws relating to reorganisation and insolvency resolution of

corporate persons, partnership firms and individuals.

(b) To fix time periods for execution of the law in a time bound manner.

(c) To maximize the value of assets of interested persons.

(d) To promote entrepreneurship

(e) To increase availability of credit.

(f) To balance the interests of all the stakeholders including alteration in the order of priority

of payment of Government dues.

(g) To establish an Insolvency and Bankruptcy Board of India as a regulatory body for

insolvency and bankruptcy law.


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THIS CODE IS NOT APPLICABLE TO FINANCIAL SERVICES PROVIDERS1.

Accounts referred by RBI for resolution under IBC:

An Internal Advisory Committee (IAC) was constituted by the Reserve Bank, comprised

majorly of its independent Board Members to advise it with regards to the cases that may be

considered for reference for resolution under the Insolvency and Bankruptcy Code, 2016.

The IAC, at its first meeting on June 12, 2017, recommended for IBC reference all accounts

with fund and non-fund based outstanding amount greater than Rs. 5000 crores, with 60% or

more classified as non-performing by banks as of March 31, 2016. 12 such accounts were

referred. The amount of money stuck in these 12 accounts was estimated to be around Rs.

175,000 crores.Thereafter a similar list was sent to the banks in August. The second list

consisted of 28 accounts of which 25 have been referred to the National Company Law

Tribunal for the initiation of insolvency proceedings.

As on March 31, 2018, there were 525 corporates undergoing resolution under the IBC. A

total of 701 cases were admitted for insolvency resolution under the Code, for the period

between January 2016 to March 2018, of which 67 cases are under appeal/review, resolution

plan has been approved in 22 cases and in 87 cases, liquidation proceedings have

commenced.

1 U/s 3(17) of the Code Financial Service Providers means person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator. U/s 3(18) Financial sector regulator 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


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Chapter 3: Authorities under the Code

Ecosystem for functioning of the Code

Insolvency and Bankruptcy Code is being administered by Ministry of Corporate Affairs

(MCA). Besides, the Code envisages an institutional ecosystem comprising

Insolvency and Bankruptcy Board of India (IBBI/Board) as main regulator,

National Company Law Tribunal (NCLT) & Debt Recovery Tribunal (DRT) as

adjudicating authority for Part II and Part III of the Code respectively,

National Company Law Appellate Tribunal (NCLAT) and Debt Recovery Appellate

Tribunal (DRAT) as appellate authorities for Part II and Part III of the Code

respectively,

Information Utilities (IUs) as information depository to store financial data like

borrowings, default and security interests among others of firms,

Insolvency & Bankruptcy Board of India (IBBI)

Insolvency Professional

Agencies (IPAs)

Insolvency Professional Entities (IPEs)

Insolvency Professionals (IPs)

Information Utilities (IUs)

Adjudicating Authorities (AA)

National Company Law Tribunal (NCLT)

National Company Appellate Tribunal

(NCLAT)

Debt Recovery Tribunal (DRT)

Debt Recovery Appellate Tribunal

(DRAT)

Appellate Authorities


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Insolvency Professionals (IPs) as registered and specially qualified professionals

entrusted with job of interim resolution professional, resolution professional,

liquidator or bankruptcy trustee under the code

Insolvency Professional Agencies (IPAs) which acts as nodal agencies between IBBI

and IPs and registers IPs to perform functions under the Code and

Insolvency Professional Entities (IPEs) which are registered partnership firm or a

company with sole objective to provide support services to insolvency professionals,

who are its partners or directors.


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Chapter 4: Adjudicating Authorities for Corporate Persons

Sections 60-67 of Chapter VI of Part II of the Insolvency and Bankruptcy Code, 2016 deal

with the Adjudicating Authorities for the Corporate Persons.

The National Company Law Tribunal (NCLT) shall be the adjudicating authority for the

corporate debtor in insolvency resolution or liquidation or Bankruptcy of the corporate

guarantors or personal guarantors of the corporate debtor. Any proceedings pending against

any of the mentioned parties, in any court or tribunal shall stand transferred to the

Adjudicating Authority dealing with insolvency resolution or liquidation proceedings of such

corporate debtor.

The NCLT shall have jurisdiction to entertain or dispose of any application or proceeding by

or against the corporate debtor or the corporate person, any claims made by or against the

corporate debtor or corporate person, including claims by or against any of its subsidiaries

situated in India and any question of priorities or any question of law or facts, arising out of

or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor

or corporate person under this Code.

For the purpose of calculation of period of limitation for any suit or application by or against

the corporate debtor, the period during which moratorium is in place shall be excluded.

The appeals against the orders of the Adjudicating Authority shall be filed with the National

Company Law Appellate Tribunal (NCLAT) within 30 days. The NCLAT, if satisfied that

there was sufficient cause for the delay in filing the appeal may allow an appeal after the

expiry of 30 days, but such period shall not exceed 15 days.

Grounds of appeals against the approval of resolution plan u/s 31

the approved resolution plan is in contravention of the provisions of any law for the

time being in force;

there has been material irregularity in exercise of the powers by the RP during the

corporate insolvency resolution period;

the debts owed to operational creditors of the corporate debtor have not been provided

for in the resolution plan in the manner specified by the Board;

the insolvency resolution process costs have not been provided for repayment in

priority to all other debts; or

the resolution plan does not comply with any other criteria specified by the Board.


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Appeal against the order for liquidation passed u/s 33 can be filed on grounds of material

irregularity or fraud committed in relation to such a liquidation order.

A person aggrieved by the order of NCLAT may file an appeal with the Supreme Court on a

question of law, not later than 45 days. A delay of maximum 15 days maybe condoned, if the

Supreme Court is satisfied that there were sufficient grounds for such delay.

Civil courts will not have any jurisdictions in matters over which NCLT or NCLAT has

jurisdictions, as per the Code.Applications are to be disposed and orders to be passed by the

NCLT/ NCLAT within the period specified by the Code, and in case of failure to do so,

reasons for the same to be recorded and the President of the NCLT or the Chairperson of the

NCLAT may, after considering the reasons so recorded, extend the period specified in the

Act, but not by more than ten days.

The Adjudicating Authority may impose a penalty of not less than Rs. 1 lakh which may

extend to Rs. 1 crore, on a person, who initiates the insolvency resolution process or

liquidation proceedings with any malicious or fraudulent intent.

If during the CIRP or a liquidation process, it is found that the business of the corporate

debtor has been carried out with intent to defraud the creditors of the corporate debtor or for

any fraudulent purpose, the NCLT may on RP ’s application, order such persons to make

contributions to the assets of the corporate debtor as it may deem fit.

The NCLT may order the director or the partner of the Corporate debtor, on application by

the RP to make such contribution to the assets of the corporate debtor if such person had

known or ought to have known that CIRP was inevitable and he did not exercise due

diligence in minimising potential loss to the creditors of the corporate debtor.

If such person is a creditor of the corporate debtor, then the NCLT may direct that the whole

or any part of any debt owed by the corporate debtor to that person and any interest thereon

shall rank in order of priority of payment under section 53 after all other debts owed by the

corporate debtor.


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Chapter 5: Regulation of Insolvency Professionals, Agencies and Information Utilities

Part IV of the Insolvency and Bankruptcy Code deals with the provisions related to the

facilitators in the implementation of the Code.

There are in all 7 Chapters in this part, with sections from 189-223. Of the 7 chapters, 5

chapters deal with Insolvency and Bankruptcy Board of India and its Powers and Functions,

Insolvency Professional Agencies, Insolvency Professionals and Information Utilities. These

facilitators form the ecosystem of the Code. Each of these can be briefly described as:

The Insolvency and Bankruptcy Board of India

It is the Regulator established by the Code. It is headed by Dr. M. S. Sahoo and is

headquartered in Delhi. It was constituted on October 1, 2016. Commonly termed as IBBI, it

is empowered to issue regulation on matters provided u/s 240 of the Code.

Insolvency Professional/ Insolvency Professional Entity

Under various processes of the Code, RP is required to be appointed for administration of

corporate debtor, or, if company is in liquidation then liquidator. Insolvency Professional

Entity is a group of Insolvency Professionals registered with Board. They are service

providers under the Code. Insolvency Professional shall be member of Insolvency

Professional Agency and shall have requisite qualification and experience. He shall also pass

Limited Insolvency Examination. As on August 27, 2018, there are 1977 Insolvency

Professionals and 80 Insolvency Professional Entities.

Insolvency Professional Agency

An Insolvency Professional Agency is a collective Body of Insolvency Professionals. It shall

be incorporated and registered with Board as per the provisions of the Code. At present, ICSI,

ICAI and ICAI (CMA) had registered there IPA respectively.

Information Utility

Information Utility is an organization incorporated with a purpose to store financial

information of transaction relating to debt. Data can be requested during the processes of the

Code. At present, National E-Governance Services Limited is registered as Information

Utility under the Code.


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Each of the above facilitators are governed by the sections of the Code and various rules and

regulations issued and amended from time to time by the Board.

For a detailed study on all the rules and regulations, circulars, notifications and guidelines,

www.ibbi.gov.in may be referred.


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Chapter 6:Major Mechanisms Envisaged Under the Code

Machan

isms under the

Code

For Companies,

LLP, Body Corp

Resolution

CIRP

FT‐ IRP

LiquidationLiquidation Process

Voluntary Liquidation

For Individuals and

Partnerships

Resolution

Fresh Start Process

Individual IRPBankruptcy

If Resolution Fails

If Resolution Fails


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Chapter 7: Insolvency Resolution Mechanisms for Companies, LLPs & Body Corporate

7.1. Corporate Insolvency Resolution Process (CIRP)

The provisions relating to the insolvency resolution of the corporate person are contained in

Chapter II of Part II of the Code. The said chapter read withIBBI (Insolvency Resolution

Process for Corporate Person) Regulation, 2016 and the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016 gives a complete view of the process

and steps involved in the CIRP.

The Initiation:When a corporate debtor commits a default of more than one lakh rupees, the

insolvency resolution process can be initiated by the Financial Creditor, Operational Creditor

or the Corporate debtor itself, by filing an application in this regard to the Adjudicating

Authority i.e. The National Company Law Tribunal (NCLT)) in accordance with rules 20, 21,

22, 23, 24 and 26 of Part III of the National Company Law Tribunal Rules, 2016.

Application by Financial Creditor

Financial Creditor i.e.person who owes financial debt2 can file the application either by itself

or jointly with other financial creditors, or any other person on behalf of the financial

creditor, as may be notified by the Central Government. The application has to be made in

Form 1 as specified in the Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016 and accompanied by the filing fees of Rs. 25000. It has to be

accompanied by following documents:

Record of the default recorded with the information utility or such other record or

evidence of default

The name of the resolution professional proposed to act as an interim resolution

professional

Documents claiming debt outstanding

Proof of occurrence of default and such other information as maybe necessary.

Where the applicant is an assignee or transferee of a financial contract, the application

shall be accompanied with a copy of the assignment or transfer agreement;

In case the application is made jointly by financial creditors, they may nominate one

amongst them to act on their behalf.

2 Defined in section 5(8) of the Code


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The applicant shall dispatch forthwith, a copy of the application filed with the Adjudicating

Authority, by registered post or speed post to the registered office of the corporate debtor.

It should be noted herein that the allottee under a real estate project would be regarded as

financial creditor and will be eligible to initiate CIRP proceedings u/s 7 and to file claim as

financial creditor and have representation and right to vote in Committee of Creditors when

constituted. The expressions, “allottee” and “real estate project” shall have the meanings

respectively assigned to them in the Real Estate (Regulation and Development) Act, 2016.

Application by Operational Creditors

As per Section 8 & 9 of the Code read with I&B (Application to Adjudicating Authority)

Rules, 2016, an operational creditor can make an application for initiating the corporate

insolvency resolution process against a corporate debtor in Form 5 with a fee of Rs 2000.

However, atleast 10 days before such application, operational creditor has to deliver a

demand notice in Form 3and a copy of an invoice attached with a notice in Form 4at the

registered office of the corporate debtor or by electronic mail service to a whole-time director

or designated partner or key managerial personnel. A copy of demand notice or invoice

demanding payment should also be filled with the information utilities. If the debt is not

cleared or a dispute is notbrought to notice within 10 days of the notice, the operational

creditor may file an application before the Adjudicating Authority to initiate the corporate

insolvency resolution process and send a copy of such application to the corporate debtor.

Application by Corporate Applicant

As per the section 10 of the Code r/w I&B (Application to AdjudicatingAuthority) Rules,

2016, a corporate applicant (who can be corporate debtor, partner/member, manger or person

who has control or supervision over financial affairs of CD) can initiate CIRP by filling an

application to NCLT in Form 6 along with a filing fee of Rs, 25,000. Besides other things,

such application should be accompanied by information relating to its books of account, IRP

to be appointed, and a special resolution passed by the shareholders of the corporate debtor or

the resolution passed by at least three-fourth of the total number of partners of the corporate

debtorsapproving filing of the application.

However, u/s 11, following person are not entitled to initiate a CIRP:

a corporate debtor undergoing a CIRP; or

a corporate debtor having completed CIRP twelve months preceding the date of

making of the application; or


21

a corporate debtor or a financial creditor who has violated any of the terms of

resolution plan which was approved twelve months before the date of making of an

application; or

a corporate debtor in respect of whom a liquidation order has been made.

Withdrawal of Application [Section 12A3]

The application once made, can be withdrawn by the applicant before it has been admitted,

with the permission of the NCLT.An application for withdrawal of an application after its

admission by the NCLT, may be submitted to the IRP or the RP, in Form FA, before issue of

invitation for expression of interest, along with a bank guarantee towards estimated cost

incurred for IRP cost and RP costs under the process. The committee of creditors (CoC) shall

consider the application within seven days of its constitution or seven days of receipt of the

application, whichever is later. If the application is approved by the CoC with 90% voting

share, the resolution professional shall submit the application to the NCLT, within three days

of such approval. The Adjudicating Authority may, by order, approve the application.

NCLT on Receipt of Application

Once the application for initiation of CIRP is received, the NCLT shall within 14 days, by an

order, either accept the application, if it is complete in all aspects or reject it. But before

rejection of the application, it shall give a notice to the applicant to rectify the defects in the

application, within seven days from the date of receipt of such notice.Once the application for

insolvency resolution is admitted, NCLT (Adjudicating Authority) shall declare moratorium,

appoint an interim resolution professional (IRP) within 14 days from the insolvency

commencement date.

Insolvency Commencement Date

Normally as per section 5(12) of the Code,“insolvency commencement date” means the date

of admission of an application for initiating corporate insolvency resolution process by the

Adjudicating Authority under sections 7, 9 or section 10, as the case may be. Besides a

proviso has been inserted by IBC (Second Amendment) Act, 2018 according to which, where

the interim resolution professional is not appointed in the order admitting application under

3 Inserted by Section 6 of the IBS (Amendment) Ordinance, 2018 w.e.f 6/6/2018


22

section 7, 9 or section 10, the insolvency commencement date shall be the date on which such

interim resolution professional is appointed by the Adjudicating Authority.

Moratorium

On the insolvency commencement date, the NCLT by order declare moratorium for

prohibiting -

a) the institution of suits or continuation of pending suits or proceedings against the

corporate debtor including execution of any judgment, decree or order in any court of

law, tribunal, arbitration panel or other authority;

b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its

assets or any legal right or beneficial interest therein;

c) any action to foreclose, recover or enforce any security interest created by the

corporate debtor in respect of its property including any action under the SARFAESI

Act, 2002;

d) the recovery of any property by an owner or lessor where such property is occupied

by or in the possession of the corporate debtor.

However, as per the newly substituted subsection (3) of section 14, the above provisions will

not apply to such transactions as may be notified by the Central Government and to a surety

in a contract of guarantee to a corporate debtor4. The supply of essential goods or services i.e.

electricity, water, telecommunication services and information technology services to the

corporate debtor shall not be terminated or suspended or interrupted during moratorium

period. The moratorium shall have effect from the date of such order till the end of the CIRP.

Appointment of IRP

The interim resolution professional shall be appointed as per the suggestion of the applicant

or by the recommendation of the Board, on the request from NCLT within 14 days of

application for CIRP. On his appointment, all the powers of the management will rest with

the IRP and he shall strive to keep the business of the corporate debtor as going concern. He

shall be responsible for complying with the requirements under any law for the time being in

force on behalf of the corporate debtor. Interim resolution professional is principally

responsible to constitute a committee of creditors and receive and to collate all the claims

submitted by creditors to him. The term of IRP shall continue till the appointment of the

Resolution Professional (RP).

4 Section 10 of the IBC (Amendment) Ordinance, 2018


23

Public Announcement

The IRP shall cause a public announcement of the initiation of CIRPin Form A of the

Schedule of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

and call for the submission of claim not later than 3 days of his appointment. The cost of such

announcement shall be borne by the Applicant.

Public Announcement shall be published in one English and one regional language

newspaper with wide circulation at the location of the registered office and principal office, if

any, of the corporate debtor and any other location where in the opinion of the IRP, the

corporate debtor conducts material business operation, along with on the website, if any, of

the corporate debtor and on the website, if any, designated by the Board for the purpose.

The public announcement should clearly spell the last date for submission of claim which

shall be 14 days from appointment of IRP. Wherever the corporate debtor has classes of

creditors having at least ten creditors in the class, the IRP shall offer a choice of three eligible

insolvency professionals, in the public announcement to act as the authorised representative

of creditors in each class. Such insolvency professionals should be eligible to be RP, should

neither be relative or related parties of IRP and should have expressed their consent in Form

AB to act as AR. A creditor in a class may indicate its choice of an insolvency professional,

from amongst the three choices provided by the interim resolution professional, to act as its

authorised representative. The insolvency professional, who is the choice of the highest

number of creditors in the class, shall be appointed as the authorised representative of the

creditors of the respective class.

Submission of Claims

All Creditors must submit their claims within the time prescribed in public announcement.

The financial creditors can submit their claims only by electronic means. The other creditors

can submit their claims either in person or by post or electronic means. The table below briefs

the form and evidences for different types of creditors for submission of claimsin case of

CIRP.

Claims by Form Proof of Claim Is Collective Claim possible?

Workmen and

Employees5

D Records with IU/notice

demanding payment/

Yes, in form E by AR

5 Rule 9 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016


24

court order

Other Operational

Creditors6

B Records with

IU/contract for supply

of G&S/ notice

demanding payment/

court order/ financial

accounts

No such provision

Financial Creditors7 C Records with IU/

financial contract with

financial statements/

evidence of drawing of

facility/ court order/

financial statement

evidencing debt due

No such Provision

Other Creditors8 F Records with IU/

documentary evidence

demanding satisfaction

of the claim/bank

statements evidencing

claim/order of court

No such Provision

A person claiming to be

a creditor in a class

where IRP make

application for

appointment of

Authorised

Representative

CA Records with IU/

agreement for sale/

letter of allotment/

receipt of payment

made/ any other

document, evidencing

existence of debt.

Creditor may indicate its

choice of an insolvency

professional to act as AR,

from amongst 3 choices

provided by IRP

Collation of Claims

6 Rule 7 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 7Rule 8 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 8Rule 10 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 inserted w.e.f. 16/8/2017


25

Within 14 days of his appointment, the IRP shall collect the claims of the creditors. A

creditor who fails to submit the proof of claim within the stipulated time, may submit such

proof to the interim resolution professional or the resolution professional, on or before the

ninetieth day of the insolvency commencement date.

On the receipt of the claims, the IRP shall verify the same within 7 days of last receipt of

claim. IRP/ RP may call for such other evidence or clarification as he deems fit from a

creditor for substantiating the whole or part of its claim. In case amount claimed by a creditor

is not precise due to any contingency or other reason, IRP/ RP shall make the best estimate

based on the information available. Claim amount can be revised later when additional

information warranting such revision. The claims denominated in foreign currency shall be

valued in Indian currency at the official exchange rate as on the insolvency commencement

date. The onus and cost of proving the debt due, is on the creditor.

Once the claims are verified, the IRP shall make a list of Creditors with all the relevant

details. Such list shall be –

(a) available for inspection by the persons who submitted proofs of claim;

(b) available for inspection by members, partners, directors and guarantors of the corporate

debtor;

(c) displayed on the website, if any, of the corporate debtor;

(d) filed with the Adjudicating Authority; and

(e) presented at the first meeting of the committee

Constitution of Committee of Creditors (CoC)

A Committee of Creditors shall be constituted by the IRP, after the collation of the claims

received and determination of the financial position of the corporate debtor. The IRP shall

file a report certifying constitution of the committee to the Adjudicating Authority within two

days of the verification of claims. The Committee shall comprise of all the financial creditors

of the corporate debtor, and only they will have the voting rights (except for such financial

creditors who are related party of corporate debtor), unless all the creditors of the corporate

debtor are operational creditors. In case there are no financial creditors eligible to form CoC,

the CoC shall consist of all operational creditors/ eighteen largest operational creditors by

value whichever is less and one representative each of workmen and employees.

The financial creditors may themselves attend the meetings or prefer to be represented by

authorised representatives. Where a financial debt is owed to a class of creditors exceeding


26

10 financial creditors, the IRP shall select the insolvency professional, who is the choice of

the highest number of financial creditors in the class in Form CA received within time

stipulated in public announcement to make claim. The IRP shall make an application to the

Adjudicating Authority along with the list of all financial creditors, containing the name of

insolvency professional so selected to act as their authorised representative within 2 days of

verification of claims. Adjudicating Authority shall appoint authorised representative prior to

the first meeting of the committee of creditors, though any delay in appointment of the

authorised representative for any class of creditors shall not affect the validity of any decision

taken by the committee.

Meeting of CoC

Once the committee is formed, the first meeting shall be held within 7 days of filling of report

of constitution of CoC with the NCLT. A meeting of the committee shall be called by giving

not less thanfive days’ noticeby hand or by post at the address it has provided to the RP,and

in any event, be served on every participant by electronic means. Participants here includes

members of CoC or their authorised representatives appointed on application by IRP,

suspended Board of Directors or the partners, operational creditors or their representatives if

the amount of their aggregate dues is 10% or more of the debt. The committee may reduce

the notice period from five days to such other period of not less than twenty-four hours, as it

deems fit: Provided that the committee may reduce the period to such other period of not less

than forty-eight hours if there is any authorised representative. Notice shall inform the

participants of the venue, the time, date of the meeting, attending option like through video

conferencing or through authorised Representative (AR) and agenda of the meeting. It should

be accompanied with copies of all documents relevant to the matters to be discussed and the

issues to be voted upon at the meeting and details of electronic voting means. A meeting of

the committee shall be quorate if members of the committee representing at least 33% of the

voting rights are present either in person or by video conferencing or other audio and visual

means. The IRP/RP shall act as the chairperson of the meeting of the committee.

Voting at meeting of CoC

Voting is assigned on the basis of share of debt of financial creditor to the total debt of the

corporate debtor.Where rate of interest has not been agreed to between the parties in case of

creditors in a class, the voting share of such a creditor shall be in proportion to the financial

debt that includes an interest at the rate of eight per cent per annum. A member of the


27

committee with only operational creditors shall have voting rights in proportion of the debt

due to such creditor or debt represented by such representative, as the case may be, to the

total debt. Routine decisions of the CoC, other than those specifically provided for in the

Code or regulations thereof,can be taken by a vote of not less than 51% of voting share of

financial creditors. The RP should circulate the minutes of the meeting by electronic means to

all members of the committee within forty-eight hours of the conclusion of the meeting and

seek a vote of the members who did not vote at the meeting on the matters listed for voting,

by electronic voting system where the voting shall be kept open for twenty-four hours from

the circulation of the minutes.

As per section 25A9, Authorised representatives shall have the right to participate and vote in

meetings of the CoC on behalf of the financial creditor he represents in accordance with the

prior voting instructions of such creditors obtained through physical or electronic means. In

case several financial creditors, are represented by him, then he shall cast his vote in respect

of each financial creditor in accordance with instructions received from each financial

creditor, to the extent of his voting share.

The authorised representative shall circulate the agenda to creditors in a class and announce

the voting window at least twenty-four hours before the window opens for voting instructions

and keep the voting window open for at least twelve hours.

The authorised representative of creditors in a class shall be entitled to receive fee for every

meeting of the committee attended by him as specified in regulations, varying from 15,000 to

25,000 depending upon number of creditors in class he represents. Such fee along with out of

pocket expense will form part of Insolvency resolution process cost.

Appointment of Resolution Professional (RP)

A person will be eligible to be appointed as RP for CIRP if he, and all partners and directors

of the insolvency professional entity of which he is a partner or director, are independent of

the corporate debtor. A person shall be considered independent if:

is eligible to be appointed as an independent director on the board of the corporate

debtor

is not a related party of the corporate debtor; or

is not an employee, proprietor or a partner of a firm of auditors, secretarial auditors,

cost auditors, or of a legal or a consulting firm, that has or had any transaction with

9 Inserted by Section 6 of IBC (amendment) Ordinance, 2018


28

the corporate debtor amounting to 5% or more of the gross turnover of such firm in

the last three financial years.

RP should be appointed in the first meeting of the CoC. Where the appointment of RP is

delayed, the IRP shall perform the functions of the resolution professional from the fortieth

day of the insolvency commencement date till a resolution professional is appointed. In the

first meeting of CoC, the committee by a vote of 66% either resolve to appoint the IRP as the

resolution professional (RP) or replace the IRP by other resolution professional. Where the

appointment of resolution professional is delayed, the interim resolution professional shall

perform the functions of the resolution professional from the fortieth day of the insolvency

commencement date till a resolution professional is appointed. If IRP is continued as RP,

CoC will communicate its decision to the IRP, the corporate debtor and the Adjudicating

Authority. The CoC can replace the resolution professional at any time during the insolvency

resolution proceedings, by following appropriate procedure. To replace the IRP/ RP, it shall

file an application before the Adjudicating Authority for the appointment of the proposed RP

along with a written consent from the proposed resolution professional. Adjudicating

Authority after confirmation from IBBI will appoint proposed RP or in case IBBI does not

confirm the name of the proposed RP within ten days, direct the IRP to continue to function

as the RP until such time as the Board confirms the appointment of the proposed RP.

Where the committee decides to appoint the IRP as RP or replace the IRP or RP, it shall

obtain the written consent of the proposed RP in Form AA of the Schedule to IBBI

(Insolvency Resolution Process for Corporate Persons), 2018 as introduced by third

amendment to the regulation w.e.f. 3rd July, 2018.

Duties of Resolution Professional [Section 25]

The resolution professional shall undertake the following actions:

a. take immediate custody and control of all the assets of the corporate debtor, including

the business records of the corporate debtor;

b. represent and act on behalf of the corporate debtor with third parties, exercise rights

for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration

proceedings;

c. raise interim finances subject to the approval of the committee of creditors;

d. appoint accountants, legal or other professionals in the manner as specified by Board;

e. maintain an updated list of claims;

f. convene and attend all meetings of the committee of creditors;


29

g. prepare the information memorandum;

h. invite prospective resolution applicants, who fulfil such criteria as may be laid down

by him with the approval of committee of creditors, having regard to the complexity

and scale of operations of the business of the corporate debtor and such other

conditions as may be specified by the Board, to submit a resolution plan or plans

(amended under the Insolvency and Bankruptcy Code (Amendment) Act, 2018);

i. present all resolution plans at the meetings of the committee of creditors;

j. file application for avoidance of transactions, if any;

k. may with approval of CoC by a vote of 66% per cent of voting share of the members,

sell unencumbered assets of the corporate debtor not exceeding 10% in value of

claims admitted, other than in the ordinary course of business, if he is of the opinion

that such a sale is necessary for a better realisation of value;

l. Appoint two registered valuers to determine the fair value and the liquidation value of

the corporate debtor within seven days of his appointment but not later than forty-

seventh day from the insolvency commencement date; and

m. such other actions as may be specified by the Board.

As per the newly inserted Regulation 35A, on or before the 75th day of the insolvency

commencement date, the RP shall form an opinion whether the corporate debtor has been

subjected to any preferential transaction, undervalued transactions, extortionate credit

transaction or fraudulent transaction as dealt in Section 43, 45, 50 & 66 of the Code. In case

he is convinced that such a transaction has taken place, he shall make a determination on or

before the 115th day of the insolvency commencement date, under intimation to the Board

and apply to the Adjudicating Authority for appropriate relief on or before the 135th day.

Besides, as per the IBC (Second Amendment) Act, 2018, a proviso to section 31(4) has been

inserted with effect that where the resolution plan contains a provision for combination as

referred to in section 5 of the Competition Act, 2002, the resolution applicant shall obtain the

approval of the Competition Commission of India under that Act prior to the approval of such

resolution plan by the committee of creditors.

Information Memorandum[Section 29 of the Code r/w Regulation 36 of IBBI (Insolvency

Resolution Process of Corporate Person) Regulation, 2016]

The RP shall prepare an information memorandum and submit in electronic form to each

member of the committee within two weeks of his appointment and to each prospective


30

resolution applicant latest by the date of invitation of expression of interest after receiving an

undertaking from a member of the committee or a prospective resolution applicant to the

effect that such member or resolution applicant shall maintain confidentiality of the

information and shall not use such information to cause an undue gain or undue loss.

The information memorandum shall contain the following details of the corporate debtor-

a) assets and liabilities, with such description, as on the insolvency commencement date,

as are generally necessary for ascertaining their values;

b) the latest annual financial statements;

c) audited financial statements of the corporate debtor for the last two financial years

and provisional financial statements for the current financial year made up to a date

not earlier than fourteen days from the date of the application;

d) a list of creditors containing the names of creditors, the amounts claimed by them, the

amount of their claims admitted and the security interest, if any, in respect of such

claims;

e) particulars of a debt due from or to the corporate debtor with respect to related parties;

f) details of guarantees that have been given in relation to the debts of the corporate

debtor by other persons, specifying which of the guarantors is a related party;

g) the names and addresses of the members or partners holding at least one per cent

stake in the corporate debtor along with the size of stake;

h) details of all material litigation and an ongoing investigation or proceeding initiated

by Government and statutory authorities;

i) the number of workers and employees and liabilities of the corporate debtor towards

them; and

j) other information, which the resolution professional deems relevant to the committee.

Resolution Applicant

Section 5(25) of the Code defines Resolution Applicant as a person, who individually or

jointly with any other person, submits a resolution plan to the resolution professional

pursuant to the invitation made u/s 25(2)(h).Section 29A was inserted by the

IBC(Amendment) Act, 2018 w.e.f. 23 November, 2017. Consequently, a person shall not be

eligible to submit a resolution plan, if such person, or any other person acting jointly or in

concert with such person—

(a) is an undischarged insolvent;


31

(b) is a wilful defaulter;

(c) except for financial entity who is not a related party to the corporate debtor, if such

applicant or a corporate in which he is promoter or has control over management, has

an account which has been classified as NPA for at least one year at time of

submission of resolution plan. However, such prohibition will not apply to a financial

entity which has become related party of the corporate debtor solely on account of

conversion or substitution of debt into equity shares or instruments convertible into

equity shares, prior to the insolvency commencement date. It will also not apply to a

resolution applicant, if such NPA account was acquired pursuant to a prior resolution

plan approved under this Code for three years from the date of approval of such

resolution plan.

(d) has been convicted for any offence punishable with imprisonment for at least two

years under any Act specified under the Twelfth Schedule or for at least sevenyears

under any law for the time being in force;

(e) is disqualified to act as a director under the Companies Act, 2013;

(f) is prohibited by the SEBI from trading in securities or accessing the securities

markets;

(g) has been a promoter or in the management or control of a corporate debtor in which a

preferential transaction, undervalued transaction, extortionate credit transaction or

fraudulent transaction has taken place;

(h) has executed a guaranteewhich has been invoked by the creditor of a corporate debtor

under the Code and such guarantee remains unpaid in full or part;

(i) has any of the ineligibility mentioned in any other country;

(j) has a connected person not eligible under above clauses.

Here the term connected person would mean:

Any person who is the promoter or in the management or control of the resolution

applicant;

Any person who shall be the promoter or in management or control of the business of

the corporate debtor during the implementation of the resolution plan; or

Holding company, Subsidiary company, Associate company or a related party of a

person referred to above.

The term 'Person acting in concert' has not been defined under Code. The definition of the

term person acting in concert may however be borrowed from the SEBI (Substantial


32

Acquisition of Shares and Takeovers) Regulations, 2011, which defines Person Acting in

Concert as persons who have the common objective/purpose of acquisition of shares/ voting

rights in/exercising control over a company pursuant to an agreement or understanding,

formal or informal, directly or indirectly co-operate for acquisition of shares/voting rights in/

exercise of control of the company.

On a substantive reading of Section 29A it becomes clear that ineligibility is multi folded as it

applies to all of the following:

where person himself is ineligible;

where connected person is ineligible;

where related party is ineligible, and

where person acting jointly/in concert with any person mentioned above is ineligible.

To provide some relief from rigorous provisions of section 29 A to micro, small and medium

enterprises (MSMEs), the IBC (Second Amendment) Act, 2018 inserted a new section 240A.

As per this newly inserted Section 240A, the provisions of clauses (c) and (h) of section 29A

shall not apply to the resolution applicant in respect of CIRP of any MSMEs. It also provides

that the Central Government may in public interest, by notification may direct that any of the

provisions of this Code shall not apply to MSMEs or apply with such modifications as maybe

specified in notification.

Note to qualify under this exemption, the enterprise must be registered as an MSME the

Micro, Small and Medium Enterprises Development Act, 2006. As per section 2(e) of the

MSMED Act “enterprise” means an industrial undertaking or a business concern or any

other establishment, by whatever name called, engaged in the manufacture or production of

goods, in any manner, pertaining to any industry specified in the First Schedule to the

Industries (Development and Regulation) Act, 1951 (65 of 1951) or engaged in providing or

rendering of any service or services.

Section 2(g), 2(h) and 2(m) refers to section 7(1) for the definition of medium, micro and

small enterprises respectively. Section 7(1) of the Act which deals with the classificationof

the enterprise as micro, medium and small is reproduced below:

7. Classification of enterprises.—

7(1) Notwithstanding anything contained in section 11B of the Industries (Development and

Regulation) Act, 1951 (65 of 1951), the Central Government may, for the purposes of this

Act, by notification and having regard to the provisions of sub-sections (4) and (5), classify

any class or classes of enterprises, whether proprietorship, Hindu undivided family,


33

association of persons, co-operative society, partnership firm, company or undertaking, by

whatever name called,—

in the case of the enterprises engaged in the manufacture or production of goods

pertaining to any industry specified in the First Schedule to the Industries

(Development and Regulation) Act, 1951 (65 of 1951), as—

(i) a micro enterprise, where the investment in plant and machinery does not exceed twenty-

five lakh rupees;

(ii) a small enterprise, where the investment in plant and machinery is more than twenty-five

lakh rupees but does not exceed five crore rupees; or

(iii) a medium enterprise, where the investment in plant and machinery is more than five

crore rupees but does not exceed ten crore rupees;

in the case of the enterprises engaged in providing or rendering of services, as—

(i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;

(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but

does not exceed two crore rupees; or

(iii) a medium enterprise, where the investment in equipment is more than two crore rupees

but does not exceed five crore rupees. Explanation 1.—For the removal of doubts, it is hereby

clarified that in calculating the investment in plant and machinery, the cost of pollution

control, research and development, industrial safety devices and such other items as may be

specified, by notification, shall be excluded. Explanation 2.—It is clarified that the provisions

of section 29B of the Industries (Development and Regulation) Act, 1951 (65 of 1951), shall

be applicable to the enterprises specified in sub-clauses (i) and (ii) of clause (a) of sub-

section (1) of this section.

There is a Bill pending in parliament which proposes to change the definition of MSME. If

approved, the classification will be on the basis of annual turnover and not on basis of

investment in plant machinery or equipment as presently done. Accordingly, all enterprises

irrespective of being in manufacturing activity or service provider, will be classified as micro

if annual turnover is less than Rs. 5 Crores, as small if turnover is between Rs.5 and 75

Crores and as Medium enterprise if turnover exceed Rs 75 crore but is less than 150 crores.

Expression of Interest (EoI)


34

The RP shall publish brief particulars of the invitation for EoI in Form G of the Schedule at

the earliest, not later than 75th day from the insolvency commencement date, in one English

and one regional language newspaper with wide circulation at the location of the registered

office, principal office and any other location, the corporate debtor conducts material

business operations and on website of corporate debtor and IBBI. Besides other details of

corporate debtor, Form G must contain leads to the detailed invitation for EoI and last date

for submission of EoI which should be at least 15 days from date of invitation.

The detailed EoI must specify the criteria specified by CoC and ineligibility norms for

prospective resolution applicants and basic information about the corporate debtor. A

prospective resolution applicant, who meet the requirements, may submit EoI within the time

specified accompanied by the following:

an undertaking by the prospective resolution applicant that it meets the criteria and

evidence thereof

an undertaking that it does not suffer from any ineligibility (u/s 29A) and evidence

thereof

an undertaking by the prospective resolution applicant that every information and

records provided in expression of interest is true and correct

an undertaking of confidentiality and no misuse of information.

On receiving EoI, RP shall conduct due diligence of meeting all conditions and for purpose

may seek any clarification or additional information or document from the prospective

resolution applicant. The RP shall issue a provisional list of eligible prospective resolution

applicants within 10 days of the last date for submission of expression of interest to the

committee and to all prospective resolution applicants who submitted the expression of

interest. Any objection to inclusion or exclusion of a prospective resolution applicant may be

made with supporting documents within 5 days from the date of issue of the provisional list.

The RP shall issue the final list of prospective resolution applicants within 10 days of the last

date for receipt of objections, to the CoC.

Resolution Plan [Section 30, 31 & 32 of the Code r/w Regulation 36B,37, 38 & 39 of the

IBBI (Insolvency Resolution Process of Corporate Person) Regulation, 2016]

The resolution professional shall issue the information memorandum, evaluation matrix and a

request for resolution plans, within five days of the date of issue of the provisional list to

every prospective resolution applicant in the provisional list and every prospective resolution


35

applicant who has contested the decision of the resolution professional against its non-

inclusion in the provisional list. The request for resolution plan must detail each step in the

process, and the manner and purposes of interaction between the resolution professional and

the prospective resolution applicant, along with corresponding timelines. It should allow

prospective resolution applicants a minimum of thirty days to submit the resolution plan. RP

may modify invitation or evaluation matrix and also extend time for submission of resolution

plan with prior approval of CoC. Any modification in the request for resolution plan or the

evaluation matrix shall be deemed to be a fresh issue.

A resolution applicant may submit a resolution plan along with an affidavit stating that he is

eligible under section 29A to the RP. Resolution plan shall provide for the measures, as may

be necessary, for insolvency resolution of the corporate debtor for maximization of value of

its assets. It must contain the following:

(a) a statement as to how it has dealt with the interests of all stakeholders, including

financial creditors and operational creditors, of the corporate debtor.

(b) identify specific sources of funds that will be used to pay:

the insolvency resolution process costs in priority to any other creditor;

liquidation value due to operational creditors which is to be made before the

expiry of thirty days after the approval of a resolution plan by the

Adjudicating Authority; and

liquidation value due to dissenting financial creditors which is to made before

any recoveries are made by the financial creditors who voted in favour of the

resolution plan.

(c) Details like the term of the plan and its implementation schedule, management and

control during the term and means of supervision of its execution.

A resolution plan shall demonstrate that –

(a) it addresses the cause of default;

(b) it is feasible and viable;

(c) it has provisions for its effective implementation;

(d) it has provisions for approvals required and the timeline for the same; and

(e) the resolution applicant has the capability to implement the resolution plan.

RP after inspecting all resolution plans, submit to the committee all resolution plans which

comply with the requirements of the Code, along with the details of preferential, undervalued,


36

fraudulent and extortionate credit transactions, if any, and orders of adjudicating authority in

respect thereof.

The committee of creditors shall evaluate the resolution plans received strictly as per the

evaluation matrix to identify the best resolution plan. It may approve a resolution plan by a

vote of not less than 66% of voting share of the financial creditors, after considering its

feasibility and viability and fulfilment of requirement under the Code and related regulations.

The resolution applicant may attend such meeting where resolution plan is being considered.

The committee may approve any resolution plan with such modifications as it deems fit.

However, it shall record the reasons for approving or rejecting a resolution plan. The

committee specify the amounts payable from resources under the resolution plan for

liquidation cost, dues to operational creditors and dissenting financial creditors. RP shall

submit the resolution plan as approved by the committee of creditors to the Adjudicating

Authority at least fifteen days before the expiry of 180 days (or 270 days in case it is

extended) period along with a compliance certificate in Form H of the Schedule.

If resolution plan approved by the CoC has provisions for its effective implementation and

meets all the requirements of law, Adjudicating Authority may by order approve the plan.

The resolution professional shall continue to manage the operations of the corporate debtor

after the expiry of the corporate insolvency resolution process period until an order is passed

by the NCLT. Once approved, the resolution plan which shall be binding on the corporate

debtor and its employees, members, creditors, guarantors and other stakeholders involved in

the resolution plan, after which moratorium will cease and RP shall forward all records

relating to the conduct of the CIRP and the resolution plan to the Board. The resolution

applicant must obtain the necessary approval required under any law for the time being in

force within a period of one year from the date of approval of the resolution plan.

A person in charge of the management or control of the business and operations of the

corporate debtor after a resolution plan is approved by the Adjudicating Authority, may make

an application to the Adjudicating Authority for an order seeking the assistance of the local

district administration in implementing the terms of a resolution plan.

Any appeal from an order approving the resolution plan may be made to NCLAT within 30

days of the order of the NCLT, on the following grounds, namely: –

resolution plan is in contravention of the provisions of any law in force;

there has been material irregularity in exercise of the powers by the RP during CIRP;


37

liquidation cost or the debts owed to operational creditors of the corporate debtor have

not been provided for in the resolution plan in the manner specified by the Board; or

the resolution plan does not comply with any other criteria specified by the Board.

Time Limit for CIRP [section 12]

The CIRP must be completed within 180 days from the date of admission of the application.

This can be extended by 90 days, by making an application to the NCLT on approval of the

committee by a vote of 66%,but such extension can only be granted once. The amended

regulationprovides model time-line for CIRPon the assumption that the interim resolution

professional is appointed on the date of commencement of the process and the time available

is hundred and eighty days:

Section /

Regulation

Description of Activity Norm Latest Timeline

Section 16(1) Commencement of CIRP and

appointment of IRP

…. T

Regulation 6(1) Public announcement inviting

claims

Within 3 Days of

Appointment of

IRP

T+3

Section 15(1)(c) /

Regulations 6(2)(c)

and 12 (1)

Submission of claims For 14 Days from

Appointment of

IRP

T+14

Regulation 12(2) Submission of claims Up to 90th day of

commencement

T+90

Regulation 13(1) Verification of claims

received under regulation

12(1)

Within 7 days from

the receipt of the

claim

T+21

Regulation 13(2) Verification of claims

received under regulation

12(2)

Within 7 days from

the receipt of the

claim

T+97

Section 21(6A) (b)

/ Regulation 16A

Application for appointment

of AR

Within 2 days from

verification of

claims received

T+23

Regulation 17(1) Report certifying constitution T+23


38

of CoC under regulation

12(1)

Section 22(1) /

Regulation 19(1)

1st meeting of the CoC Within 7 days of

the constitution of

the CoC, but with

seven days’ notice

T+30

Section 22(2) Resolution to appoint RP by

the CoC

In the first meeting

of the CoC

T+30

Section 16(5) Appointment of RP On approval by the

AA

……

Regulation 17(3) IRP performs the functions of

RP till the RP is appointed.

If RP is not

appointed by 40th

day of

commencement

T+40

Regulation 27 Appointment of valuer Within 7 days of

appointment of RP,

but not later than

40th day of

commencement

T+47

Section 12(A) /

Regulation 30A

Submission of application for

withdrawal of application

admitted

Before issue of EoI W

CoC to dispose of the

application

Within 7 days of its

receipt or 7 days of

constitution of

CoC, whichever is

later.

W+7

Filing application of

withdrawal, if approved by

CoC with 90% majority

voting, by RP to AA

Within 3 days of

approval by CoC

W+10

Regulation 35A RP to form an opinion on

preferential and other

Within 57 days of

the commencement

T+75


39

transactions

RP to make a determination

on preferential and other

transactions

Within 115 days of

commencement

T+115

RP to file applications to AA

for appropriate relief

Within 135 days of

commencement

T+135

Regulation 36 (1) Submission of IM to CoC Within 2 weeks of

appointment of RP,

but not later than

54th day of

commencement

T+54

Regulation 36A Publish Form G Within 75 days of

commencement

T+75

Invitation of EoI

Submission of EoI At least 15 days

from issue of EoI

(Assume 15 days)

T+90

Provisional List of RAs by RP Within 10 days

from the last day

of receipt of EoI

T+100

Submission of objections to

provisional list

For 5 days from

the date of

provisional list

T+105

Final List of RAs by RP Within 10 days of

the receipt of

objections

T+115

Regulation 36B

Issue of RFRP, including

Evaluation Matrix and IM

Within 5 days of

the issue of the

provisional list

T+105

Receipt of Resolution Plans At least 30 days

from issue of

RFRP (Assume 30

days)

T+135


40

Regulation 39(4) Submission of CoC approved

Resolution Plan to AA

As soon as

approved by the

CoC

T+165

Section 31(1)

Approval of resolution plan

by AA

T=180

7.2. FAST TRACK CORPORATE INSOLVENCY RESOLUTION PROCESS (Fast

Track CIRP)

Besides the CIRP discussed above, Chapter IV of the Part II (Sections 55 to 58) of the Code

prescribes a sort of abridged method of resolution name Fast Track CIRP. The said chapter

was enforced from 14th June, 2017 when Insolvency and Bankruptcy Board of India (Fast

Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 were notified

by the IBBI.

Applicability of Fast Track CIRP

Corporate debtors who can make application for fast track corporate insolvency resolution

process-

a small company, i.e. a company (other than Public Company) whose paid up capital does

not exceed Rs. 50 lacs and turnover as per last profit and loss account does not exceed

Rs. 2 crores [Section 2(85) Companies Act, 2013].

a start-up (other than the partnership firm), An entity is regarded as start-up if not formed

by splitting up or reconstruction of a business already in existence:

a. if it is incorporated as a Pvt. Ltd. Co or registered as a partnership firm or LLP in

India; and

b. up to 7 years from the date of its incorporation/ registration or 10 years for

biotechnology sector; and

c. if its turnover for any of the financial years since incorporation/ registration has not

exceeded Rs. 25 crores; and


41

d. if it is working towards innovation, development or improvement of products or

processes or services, or if it is a scalable business model with a high potential of

employment generation or wealth creation. [GOI notification number G.S.R. 501(E),

dated the 23rd May, 2017]

an unlisted company with total assets as reported in the financial statement of the

immediately preceding financial year, not exceeding Rs.1 crore

Initiating Fast Track CIRP [Section 57]

An application for fast track corporate insolvency resolution process may be filed by a

creditor or corporate debtor as the case may be, along with-

the proof of the existence of default as evidenced by records available with an

information utility or such other means as may be specified by the Board; and

such other information as may be specified by the Board to establish that the

corporate debtor is eligible for fast track corporate insolvency resolution process.

Time Limit for completion of FTIP: [Section 56]

This process shall be completed in 90 days from the insolvency commencement

date.Resolution professional may apply to the Adjudicating Authority for extension for a

period of maximum 45 days. This application shall be supported by resolution passed by

committee of creditor by 66% voting share.Only one such grant for extension is allowed.

Other Procedure

The process for conducting a corporate insolvency resolution process under Chapter II and

the provisions relating to offences and penalties under Chapter VII shall apply to this Chapter

as the context may require. The process is briefly presented in flow chart below:


42

Process Flowchart

Difference between CIRP and FT-CIRP

Besides applicability, initiation and time limits applicable to CIRP, the following notable

differences exist between normal CIRP and FT CIRP under the Code:

Regulation 17(2) of IBBI (FT-CIRP) Regulations, 2017 stipulates that if the IRP is of the

opinion that the fast track process is not applicable to the corporate debtor as per

notifications under section 55(2), he shall file an application to the Adjudicating

Authority along with the report in sub-regulation (1), to pass an order converting the fast

track process to corporate insolvency resolution process under Chapter II of Part II of the

Code.

Regulation 17(3) stipulates that if the Adjudicating Authority passes an order converting

Fast Track to CIRP then the Insolvency resolution process shall be carried on in

accordance with Chapter II of Part II.

Regulation 34 requires IRP to appoint only one registered valuer in the case of FTIP as

against two registered valuers to be appointed in CIRP

Unlike in normal CIRP regulations, Regulation 30 defining Fast Track Process costs

specifically covers

o Amount of any interim finance and costs incurred in raising such finance

Application for FT‐CIRP by debtor/creditor

Acceptance by NCLT

Appointment of Inerim RP, Declaration of

Monotorium & public Notice

Receipt , verification and determination of claims by Interim RP

Constitution & meeting of CoC

Appointment of RP

Apointment of registered valuer for

Liquiation Value

Invitation of Resolution Plan with evalution matrix

Receipt of Resolution Plans

Verification of Resolution Plans by RP

Fair value and Liquidation Value conveyed to CoC

CoC meeting on Resolution Plan

Approval of Resolution Plan by CoC

Acceptance by NCLT

Implementation of Plan


43

o Any costs incurred at the expense of Government to facilitate the process (such a

specific inclusion is not to be found in CIRP)

7.3. LIQUIDATION PROCESS FOR CORPORATES

The provisions relating to Liquidation Process are contained in Chapter III of Part II of the

Code. It consists of sections 33-54. The Insolvency and Bankruptcy Board of India

(Liquidation Process) Regulations, 2016, as amended on March 27, 2018 are applicable to

this part of the Code.The regulation is divided into 7 chapters containing 46 regulations and 3

Schedules. The second schedule consists of 7 forms.

Initiation of Liquidation Process

The order of liquidation can be passed by the NCLT, if,

NCLT before the expiry of the insolvency resolution process period or the maximum

period permitted for completion of the CIRP or the Fast Track CIRP, does not receive a

resolution plan.

NCLT rejects the resolution plan for the non-compliance of the requirements specified by

the Code.

Where the resolution professional, at any time during the CIRP but before confirmation of

resolution plan, intimates the Adjudicating Authority of the decision of the CoCapproved

by at least 66% of voting share to liquidate the corporate debtor.

Where the resolution plan approved by the NCLT is contravened by the concerned

corporate debtor, any person other than the corporate debtor, whose interests are

prejudicially affected by such contravention, may make an application to the Adjudicating

Authority for a liquidation order.

On happening of above circumstances, Adjudicating Authority shall:

i. pass an order requiring the corporate debtor to be liquidated;

ii. issue a public announcement stating that the corporate debtor is in liquidation; and

iii. require such order to be sent to the authority with which the corporate debtor is

registered.

When a liquidation order has been passed, no suit or other legal proceeding shall be instituted

by or against the corporate debtor except where a suit or other legal proceeding is instituted

by the liquidator, on behalf of the corporate debtor, with the prior approval of the


44

Adjudicating Authority. However, such provisions shall not apply to legal proceedings in

relation to such transactions as may be notified by the Central Government in consultation

with any financial sector regulator.

The order for liquidation is deemed to be a notice of discharge to the officers, employees and

workmen of the corporate debtor, except when the business of the corporate debtor is

continued during the liquidation process by the liquidator.

Liquidator

The resolution professional appointed for the CIRP under Chapter II, subject to submission

of a written consent by the resolution professional to the Adjudicatory Authority in specified

form, shall act as the liquidator for the purposes of liquidation unless replaced by the

NCLT.All powers of the board of directors, key managerial personnel and the partners of the

corporate debtor, as the case may be, shall cease to have effect and shall be vested in the

liquidator.

The NCLT may replace the resolution professional, if the resolution plan submitted by him

was rejected for failure to meet the requirements of the Code or the Board recommends to do

so, or the resolution professional fails to give his written consent.

Liquidator’s fee which is apart of the liquidation cost, shall be approved by the CoC, if order

of liquidation is passed on the grounds of non-receipt of resolution plan within time specified

or approval of liquidation by the committee of creditors. In all other cases, the liquidator shall

be entitled to a fee as a percentage of the amount realized net of other liquidation costs, and

of the amount distributed, as under

Amount of

Realization /

Distribution (In

rupees)

Percentage of fee on the amount realized / distributed

in the first six

months

in the next six

months

in the next one

year

Thereafter

Amount of Realization (exclusive of liquidation costs)

On the first 1

crore

5.00 3.75 2.50 1.88

On the next 9

crores

3.75 2.80 1.88 1.41

On the next 40 2.50 1.88 1.25 0.94


45

crores

On the next 50

crores

1.25 0.94 0.68 0.51

On further sums

realized

0.25 0.19 0.13 0.10

Amount Distributed to Stakeholders

On the first 1

crore

2.50 1.88 1.25 0.94

On the next 9

crores

1.88 1.40 0.94 0.71

On the next 40

crores

1.25 0.94 0.63 0.47

On the next 50

crores

0.63 0.48 0.34 0.25

On further sums

distributed

0.13 0.10 0.06 0.05

The liquidator shall be entitled to receive half of the fee payable on realization only after such

realized amount is distributed.

Process of Liquidation

A public announcement in Form B of Schedule II of the Insolvency and Bankruptcy Board of

India (Liquidation Process) Regulations, 2016, will be made by the liquidator within 5 days

of his appointment, stating that the corporate debtor is in liquidation.

The public announcement will also invite proof of claims from the stakeholders of the

corporate debtor, within 30 days from the start of the liquidation process.

Submission of Claims and Proofs thereof

The financial creditors shall submit their proof of claims by electronic means only. All other

stakeholders may submit the proof of claims in person, by post or by electronic means in

following forms of Schedule II of the IBBI (Liquidation Process) Regulations, 2016.

Form C: Claims by Operational creditors

Form D: Claims by Financial Creditors


46

Form E: Claims by Workmen and Employees

Form F: Claims by an authorised representative of Workmen and Employees

Form G: Claims by other stakeholders

The documentary evidences to be submitted along with the respective forms to prove the

claims are similar to those for the CIRP process. The liquidator may call for such other

evidence or clarification as he deems fit from a claimant for substantiating the whole or part

of its claim. The existence of a security interest may be proved by a secured creditor on the

basis of-

a) the records available in an information utility, if any;

b) certificate of registration of charge issued by the Registrar of Companies; or

c) proof of registration of charge with the Central Registry of Securitisation Asset

Reconstruction and Security Interest of India.

Where a person seeks to prove a debt in respect of a bill of exchange, promissory note or

other negotiable instrument or security of a like nature for which the corporate debtor is

liable, such bill of exchange, note, instrument or security, shall be produced before the

liquidator before the claim is admitted.

Verification of Claims

Liquidator may come across some of the following typical types of claims which should be

dealt as follows:

Where the amount claimed by a claimant is not precise due to any contingency or any

other reason, the liquidator shall make the best estimate of the amount of the claim based

on the information available with him.

The claims denominated in foreign currency shall be valued in Indian currency at the

official exchange rate as on the liquidation commencement date.

In the case of rent, interest and such other payments of a periodical nature, a person may

claim only for any amounts due and unpaid up to the liquidation commencement date.

Where a stakeholder has proved for a claim, and the debt has not fallen due before

distribution, he is entitled to distribution of the admitted claim discounted on the basis of

yield of government securities for period between the date of distribution and date it is to

fall due.


47

Where there are mutual dealings between the corporate debtor and another party, the

sums due from one party shall be set off against the sums due from the other to arrive at

the net amount payable to the corporate debtor or to the other party.

A claimant shall bear the cost of proving its claim. Costs incurred by the liquidator for

verification and determination of a claim shall form part of liquidation cost. However, in case

of false claim the verification costs can be recovered from claimant.

The liquidator shall verify the claims submitted within thirty days from the last date for

receipt of claims and may either admit or reject the claim, in whole or in part. Where the

liquidator rejects a claim, he shall record in writing the reasons for such rejection. The

liquidator shall communicate his decision of admission or rejection of claims to the creditor

and corporate debtor within seven days of such admission or rejection of claims.

Stakeholders List

The liquidator shall prepare a list of stakeholders, category-wise, on the basis of proofs of

claims submitted and accepted and file it with Adjudicating Authority within 45 days from

the last date for receipt of claims, and the filing of the list shall be announced to the public.

The liquidator may apply to the Adjudicating Authority to modify an entry in the list of

stakeholders filed with the Adjudicating Authority, when he comes across additional

information warranting such modification, and shall modify the entry in the manner directed

by the Adjudicating Authority. The list of stakeholders, as modified from time to time, shall

be-

a) available for inspection by the persons who submitted proofs of claim;

b) available for inspection by members, partners, directors and guarantors of the

corporate debtor;

c) displayed on the website, if any, of the corporate debtor.

A creditor may appeal to the NCLT against the decision of the liquidator accepting or

rejecting the claims within 14 days of the receipt of such decision.

Formation of Liquidation Estate [Section 36]

Liquidator shall form an estate comprising of all the moveable, immoveable, tangible,

intangible assets, rights, interests of corporate which will be called the liquidation estate in

relation to the corporate debtor. Liquidation Estate will also include any assets or their value


48

recovered through proceedings for avoidance of transactions, assets in respect of which a

secured creditor has relinquished security interest and all proceeds of liquidation as and when

they are realised. The liquidator shall hold the liquidation estate as a fiduciary for the benefit

of all the creditors. However, the following shall not be included in the liquidation estate

assets:

assets owned by a third party which are in possession of the corporate debtor;

assets in security collateral held by financial services providers and are subject to

netting and set-off in multi-lateral trading or clearing transactions;

personal assets of any shareholder or partner of a corporate debtor;

assets of any Indian or foreign subsidiary of the corporate debtor;

any other assets as may be specified by the Board.

Powers and Duties of Liquidator [Section 35]

Liquidator shall have following powers and duties

to obtain and verify claims of all the creditors;

to take into his custody or control all the assets, property, effects and actionable

claims of the corporate debtor;

to evaluate the assets and property of the corporate debtor and prepare a report;

to protect and preserve the assets and properties of the corporate debtor;

to carry on the business of the corporate debtor for its beneficial liquidation;

to sell the immovable and movable property and actionable claims of the corporate

debtor in liquidation by public auction or private contract, with power to transfer such

property to any person or body corporate eligible to be resolution applicant;

to draw, accept, make and endorse any negotiable instruments including bill of

exchange, hundi or promissory note in the name and on behalf of the corporate debtor

to institute or defend any suit, prosecution or other legal proceedings, civil or

criminal, in the name of on behalf of the corporate debtor;

to investigate the financial affairs of the corporate debtor to determine undervalued or

preferential transactions;

to take all such actions, steps, or to sign, execute and verify any paper, deed, receipt

document, application, petition, affidavit, bond or instrument and for such purpose to


49

use the common seal, if any, as may be necessary for liquidation, distribution of assets

and in discharge of his duties and obligations and functions as liquidator;

to apply to the Adjudicating Authority for such orders or directions as may be

necessary for the liquidation of the corporate debtor.

to consult any of the stakeholders entitled to a distribution of proceeds.

to access any information systems for the purpose of admission and proof of claims

and identification of the liquidation estate assets relating to the corporate debtor from

information utility, credit information systems, any agency of the Central, State or

Local Government including any registration authorities; information systems for

financial and non-financial liabilities; information systems for securities and assets

posted as security interest; any database maintained by the Board.

The liquidator shall provide information about corporate debtor, when required by

creditors within 7 days of request.

Reports by Liquidator

The liquidator shall prepare and submit following reports to NCLT:

(a) a preliminary report within 75 days of liquidation commencement date comprising of

capital structure, asset and liabilities of corporate debtor etc. Liquidator may apply for early

liquidation if he feels that assets of liquidator are not sufficient to meet liquidation costs.

(b) an asset memorandum within seventy-five days from the liquidation commencement date

providing in case of each asset

value of the asset;

intended manner and mode of sale/ realization, and reasons for the same;

expected amount of realization;

value of set of assets or assets in parcels or assets in a slump sale; and

any other information that may be relevant for the sale/ realization of the asset;

(c) progress report within 15 days of every quarter giving

appointment, tenure of appointment and cessation of appointment of professionals;

a statement indicating progress in liquidation;

details of fee or remuneration;

developments in any material litigation, by or against the corporate debtor;

filing of, and developments in applications for avoidance of transactions;

changes, if any, in estimated liquidation costs,


50

account maintained by the liquidator

a statement indicating any material change in expected realization of any property

proposed to be sold, along with the basis for such change

The Progress Report for the fourth quarter of the financial year shall enclose audited

accounts of the liquidator’s receipts and payments for the financial year.

(d) Asset sale reporton sale of asset to be enclosed with the Progress Reports, containing the

realization value, person to whom sold, cost of realization, manner and mode of sale, if the

value realized is less than the value in the asset memorandum, the reasons for the same, etc.

(e) minutes of consultation with stakeholders; and

(f) the final report on liquidation as part of the application for the dissolution of the corporate

debtor to the Adjudicating Authority giving account of the liquidation, showing how it has

been conducted and how the corporate debtor’s assets have been liquidated. If the liquidation

cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator

shall explain the reasons for the same.

Special Transactions

Preferential Transaction [Section 43 &44]

A corporate debtor shall be deemed to have given a preference, if there is a transfer of

property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety

or a guarantor for or on account of an antecedent financial debt or operational debt or other

liabilities owed by the corporate debtor which has the effect of putting the recipient in a

beneficial position than it would have been in the event of a distribution of assets being made.

Such transaction should have taken place during the period of one year preceding the

insolvency commencement date and in case recipient is related party during the period of two

years preceding the insolvency commencement date.

The Adjudicating Authority, may on application of RP or liquidator, give appropriate order to

reverse the effect of preference so given as far as possible.

Undervalued Transactions [Section 45]

A transaction shall be considered undervalued where the corporate debtor makes a gift to a

person orenters into a transaction with a person which involves the transfer of one or more

assets, not in ordinary course of business, for a consideration the value of which is

significantly less than the value of the consideration provided by the corporate debtor.


51

Such transaction should have taken place during the period of one year preceding the

insolvency commencement date and in case recipient is related party during the period of two

years preceding the insolvency commencement date.

The Adjudicating Authority, may on application of RP or liquidator, give appropriate order to

reverse the effect of such transaction.

Where an undervalued transaction or preferential transaction has taken place and the

liquidator/ RP has not reported it, theAdjudicating Authority shall pass an order restoring the

position as it existed before such transactions and reversing the effects thereof in the manner

of avoiding preferential transaction and undervalued transactions and require the Board to

initiate disciplinary proceedings against the liquidator/RP.

Extortionate credit transactions [Section 50 r.w. Regulation 11 of IBBI (Liquidation Process)

Regulations, 2016]

A transaction shall be considered an extortionate credit transaction where the termsrequire the

corporate debtor to make exorbitant payments in respect of the credit provided orare

unconscionable under the principles of law relating to contracts. Where the corporate debtor

has been a party to an extortionate credit transaction involving the receipt of financial or

operational debt during the period within two years preceding the insolvency commencement

date, the liquidator/RP may make an application for avoidance of such transaction to the

Adjudicating Authority. Where the Adjudicating Authority after examining the application

made is satisfied that the terms of a credit transaction required exorbitant payments to be

made by the corporate debtor, it shall, by an order-

a) restore the position as it existed prior to such transaction;

b) set aside the whole or part of the debt created on account of the extortionate credit

transaction;

c) modify the terms of the transaction;

d) require any person who is, or was, a party to the transaction to repay any amount

received by such person; or

e) require any security interest that was created as part of the extortionate credit

transaction to be relinquished in favour of the liquidator or the resolution professional,

as the case may be.

Secured creditor in liquidation proceedings [Section 52]


52

Secured creditor in the liquidation proceedings may—

a) relinquish its security interest to the liquidation estate and receive proceeds from the

sale of assets by the liquidator; or

b) realise its security interest in the manner specified in this section.

Where the secured creditor realises security interest specified below, he shall inform the

liquidator of such security interest and identify the asset and the price at which he proposes to

realize its secured asset subject to such security interest to be realised. If the liquidator

informs the secured creditor within 21days of receipt of the intimation, about any person

willing to buy the secured asset before the expiry of 30 days from the date of intimation, at a

price higher than the price intimated and secured creditor shall sell the asset to such person.

Otherwise, the secured creditor may realize the secured asset in the manner it deems fit, but at

least at the price intimated. The amount of insolvency resolution process costs, due from

secured creditors who realise their security interests, shall be deducted from the proceeds of

any realisation by such secured creditors, and they shall transfer such amounts to the

liquidator to be included in the liquidation estate. Where the proceeds of the realization of the

secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts

of such secured creditor shall be paid by the liquidator.

Valuation of Assets [Regulation 35]

The liquidator shall appoint at least two registered valuers to value the assets who shall

independently submit to the liquidator the estimates of the realizable value of the asset(s)

computed in accordance with internationally accepted valuation standards. The average of the

estimates received shall be considered the value of the assets.

Realisation of Assets [Regulation 32 & 33]

The liquidator may

a. sell an asset on a standalone basis; or

b. sell

the assets in a slump sale,

a set of assets collectively,

the assets in parcels

c. sell the corporate debtor as going concern.


53

The liquidator may sell asset in auction or in case of perishable assets with deteriorating

value, in private sale. Provided such private sale cannot be affected to his related party or that

of corporate debtor or to any professional appointed by him without approval of NCLT.

Liquidation Proceed and Distribution of Asset [Regulation 41 & 42]

The liquidator shall open a bank account in the name of the corporate debtor followed by the

words ‘in liquidation’, in a scheduled bank where he shall deposit all moneys, including

cheques and demand drafts received by him as the liquidator. The liquidator may maintain a

cash of one lakh rupees or such higher amount as may be permitted by the Adjudicating

Authority to meet liquidation costs. All payments out of the account by the liquidator above

five thousand rupees shall be made by cheques drawn or online banking transactions against

the bank account. The liquidator shall distribute the proceeds from realization within six

months from the receipt of the amount to the stakeholders. The insolvency resolution process

costs, if any, and the liquidation costs shall be deducted before such distribution is made. The

liquidator shall not commence distribution before the list of stakeholders and the asset

memorandum has been filed with the Adjudicating Authority.

Clearly defined distribution priority also referred to as waterfall mechanism is stated in

section 53 of the Code which is as follows:

1. the insolvency resolution process costs and the liquidation costs paid in full;

2. the following debts which shall rank equally between and among the following: -

i. workmen's dues for the period of twenty-four months preceding the

liquidation commencement date; and

ii. debts owed to a secured creditor in the event such secured creditor has

relinquished security;

3. wages and any unpaid dues owed to employees other than workmen for the period of

twelve months preceding the liquidation commencement date;

4. financial debts owed to unsecured creditors;

5. the following dues shall rank equally between and among the following: -

i. any amount due to the Central Government and the State Government

including the amount to be received on account of the Consolidated Fund of

India and the Consolidated Fund of a State, if any, in respect of the whole or

any part of the period of two years preceding the liquidation commencement

date;


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ii. debts owed to a secured creditor for any amount unpaid following the

enforcement of security interest;

6. any remaining debts and dues;

7. preference shareholders, if any; and

8. equity shareholders or partners, as the case may be.

Dissolution of Corporate Debtor

Where the assets of the corporate debtor have been completely liquidated, the liquidator shall

make an application to the Adjudicating Authority for the dissolution of such corporate

debtor. The Adjudicating Authority shall on application filed by the liquidator order that the

corporate debtor shall be dissolved from the date of that order and the corporate debtor shall

be dissolved accordingly. A copy of an order for dissolution shall within seven days from the

date of such order, be forwarded to the authority with which the corporate debtor is

registered.

7.4. VOLUNTARY LIQUIDATION OF CORPORATE PERSONS

A corporate person who intends to liquidate itself voluntarily and has not committed any

default may initiate voluntary liquidation proceedings. Chapter V of the Part II of the Code

consisting of sole section 59, which became effective from 1st April, 2017, deals with the

voluntary liquidation of corporate person. IBBI (Voluntary Liquidation Process) Regulations,

2017 were notified on 31st March, 2017 for enabling enforcement of this part of the code. The

regulation is divided into VII Chapters, covering 41 regulations and 2 schedules. Schedule

one consists of 6 forms related to public announcement and proofs of claims by various

stakeholders, whereas schedule two provides formats of various books and registers to be

maintained by the liquidator as per Regulation 10. These formats are indicative and can be

changed as per the requirements and information available during the liquidation process.

Initiation of Voluntary Liquidation

Voluntary liquidation of a company shall commence from passing of resolution by members

and that of a corporate person other than a company shall be deemed to have commenced

from the date of passing of the resolution by the partners or contributories. The company

shall notify the Registrar of Companies and the Board about the resolution passed by


55

members to liquidate the company within seven days of such resolution and in case corporate

owes money to creditors after such resolution is approved by atleast two third of the creditors.

Conditions for voluntary liquidation

A declaration from

majority of

the designated partners, if a corporate person is a LLP,

individuals constituting the governing body in case of other

corporate persons, as the case may be,

The declaration shall list each debt of the corporate person as on

that date and state that the corporate person will be able to pay all

its debts in full from the proceeds of assets to be sold in the

liquidation

Affidavit they have made a full inquiry into the affairs of the

corporate person and they have formed an opinion that

either the corporate person has no debt or that it will be able

to pay its debts in full from the proceeds of assets to be sold

in the liquidation; and

the corporate person is not being liquidated to defraud any

person

Documents to be

accompanied

audited financial statements and record of business

operations of the corporate person for the previous two

years or for the period since its incorporation, whichever is

later;

a report of the valuation of the assets of the corporate

person, if any prepared by a registered valuer;

Within 4 weeks of

declaration

Resolution passed by special majority of partners or

contributories, of the corporate person requiring the

corporate person to be liquidated and appointing an

insolvency professional to act as the liquidator; or

a resolution of the partners or contributories, as the case

may be, requiring the corporate person to be liquidated as a


56

result of expiry of the period of its duration, if any, fixed by

its constitutional documents or on the occurrence of any

event in respect of which the constitutional documents

provide that the corporate person shall be dissolved, as the

case may be, and appointing an insolvency professional to

act as the liquidator

If the corporate person owes any debt to any person, creditors

representing two-thirds in value of the debt of the corporate person

shall approve the resolution within seven days of such resolution.

Even though the corporate state of corporate person continues till dissolution, the corporate

person shall from the voluntary liquidation commencement date cease to carry on its business

except as far as required for the beneficial winding up of its business.

The detailed procedure of Voluntary liquidation is similar to that of liquidation discussed

above.

Completion of liquidation

The liquidator shall endeavour to complete the liquidation process of the corporate person

within twelve months from the liquidation commencement date. If it continues for more than

one year, the liquidator shall

a. call a meeting of the contributories of the corporate person within 15 days from the

end of the year in which he is appointed, and at the end of each succeeding year; and

b. shall present a Status Report indicating progress in liquidation, including-

i. settlement of list of stakeholders,

ii. details of any property that remain to be sold and realized,

iii. distribution made to the stakeholders, and

iv. distribution of unsold property made to the stakeholders;

v. developments in any material litigation, by or against the corporate person;

and

vi. filing of, and developments in applications for avoidance of transactions in

accordance with Chapter III of Part II of the Code.


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The Status Report shall enclose an audited account of the voluntary liquidation showing the

receipts and payments pertaining to liquidation since the liquidation commencement date.

Once the affairs of the company have been completely wound up and its assets fully

liquidated, an application shall be made by the liquidator to the NCLT for its dissolution

along with a final report and audited liquidation accounts and statements demonstrating

details of the disposed assets and their manner of sale, and also statements that all debt has

been discharged and sufficient provision has been made in case of any adverse outcome of a

pending litigation. This final report should be filed with Board and with the resigning

authority of the corporate person. In response to this application by the liquidator, the NCLT

shall pass an order for dissolution and the entity shall stand dissolved from the date of

NCLT’s order. A copy of this order needs to be forwarded with Registering authority within

14 days of passing such order.

Final Report by the Liquidator

A Final Report shall be sent to the Board and the Registrar on completion of the liquidation

process, consisting of:

a) audited accounts of the liquidation, showing receipts and payments pertaining to

liquidation since the liquidation commencement date; and

b) a statement demonstrating that –

the assets of the corporate person have been disposed of;

the debt of the corporate person has been discharged to the satisfaction of the

creditors;

no litigation is pending against the corporate person or sufficient provision has

been made to meet the obligations arising from any pending litigation.

c) a sale statement in respect of all assets containing –

the realized value;

cost of realization, if any;

the manner and mode of sale;


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an explanation for the shortfall, if the value realized is less than the value

assigned by the registered valuer in the report of the valuation of assets under

section 59(3)(b)(ii) or Regulation 3(1)(b)(ii), as the case may be;

the person to whom the sale is made; and

any other relevant details of the sale.

Unclaimed proceeds of liquidation or undistributed assets

Before dissolution order is passed, liquidator shall apply to the Adjudicating Authority for an

order to pay into the Companies Liquidation Account in the Public Account of India any

unclaimed proceeds of liquidation or undistributed assets or any other balance payable to the

stakeholders in his hands on the date of the order of dissolution. In case if liquidator retains

any money, that shall have been paid into Companies Liquidation Account shall pay interest

on the amount retained at the rate of 12% p.a., and also pay such penalty as may be

determined by the Board.

While making payment, the liquidator shall furnish a statement

o to the Registrar and the Board, setting forth the nature of the sums included,

o the names and last known addresses of the stakeholders entitled to participate

therein,

o the amount to which each is entitled to and the nature of their claim.

He shall also receive money from the RBI for any money paid to it and such receipt shall be

an effectual discharge of the liquidator in respect thereof. A person claiming to be entitled to

any money paid into the Companies Liquidation Account may apply to the Board for an order

for payment of the money claimed; which may, if satisfied that such person is entitled to the

whole or any part of the money claimed, make an order for the payment to that person of the

sum due to him, after taking such security from him as it may think fit. Any money paid into

the Companies Liquidation which remains unclaimed thereafter for a period of 15 years shall

be transferred to the general revenue account of the Central Government.It should be noted

that this part has not been notified. Though the draft regulations pertaining to this part

were open for comment, there has been no final notification yet.


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Chapter 8: Insolvency Resolution and Bankruptcy for Individuals and Partnership

Firms

Part III of the Code apply to matters relating to fresh start, insolvency and bankruptcy of

individuals and partnership firms where the amount of the default is not less than one

thousand rupees. Except in case of personal guarantor of corporate debtor, the Adjudicating

Authority, in relation to insolvency matters of individuals and firms shall be the Debt

Recovery Tribunal (DRT) having territorial jurisdiction over the place where the individual

debtor actually and voluntarily resides or carries on business or personally works for gain and

can entertain an application under this Code regarding such person[Section 179].

Important Terms

1. Section 79(3): "bankrupt" means-

a. a debtor who has been adjudged as bankrupt by a bankruptcy order under

section 126;

b. each of the partners of a firm, where a bankruptcy order under section 126 has

been made against a firm; or

c. any person adjudged as an undischarged insolvent.

2. Section 79(4): "bankruptcy" means the state of being bankrupt.

3. Section 79(5): "bankruptcy debt", in relation to a bankrupt, means

a. any debt owed by him as on the bankruptcy commencement date;

b. any debt for which he may become liable after bankruptcy commencement

date but before his discharge by reason of any transaction entered into before

the bankruptcy commencement date; and

c. any interest which a part of the debt under section 171.

4. Section 79(6): "bankruptcy commencement date" means the date on which a

bankruptcy order is passed by the Adjudicating Authority under section 126.

5. Section 79(9): "bankruptcy trustee" means the insolvency professional appointed as a

trustee for the estate of the bankrupt under section 125

6. Section 79(13): "discharge order" means an order passed by the Adjudicating

Authority discharging the debtor under sections 92, 119 and section 138, as the case

may be.

7. Section 79(14): (14) "excluded assets" for the purposes of this part includes-


60

a. unencumbered tools, books, vehicles and other equipment as are necessary to

the debtor or bankrupt for his personal use or for the purpose of his

employment, business or vocation,

b. unencumbered furniture, household equipment and provisions as are necessary

for satisfying the basic domestic needs of the bankrupt and his immediate

family;

c. any unencumbered personal ornaments of such value, as may be prescribed, of

the debtor or his immediate family which cannot be parted with, in accordance

with religious usage;

d. any unencumbered life insurance policy or pension plan taken in the name of

debtor or his immediate family; and

e. an unencumbered single dwelling unit owned by the debtor of such value as

may be prescribed.

8. Section 79(15): "excluded debt" means-

a. liability to pay fine imposed by a court or tribunal;

b. liability to pay damages for negligence, nuisance or breach of a statutory,

contractual or other legal obligation;

c. liability to pay maintenance to any person under any law for the time being in

force;

d. liability in relation to a student loan; and

e. any other debt as may be prescribed.

9. Section 79(18): "partnership debt" means a debt for which all the partners in a firm

are jointly liable.

10. Section 79(19): "qualifying debt" means amount due, which includes interest or any

other sum due in respect of the amounts owed under any contract, by the debtor for a

liquidated sum either immediately or at certain future time and does not include-

a. an excluded debt;

b. a debt to the extent it is secured; and

c. any debt which has been incurred three months prior to the date of the

application for fresh start process.

11. Section 79(20): "repayment plan" means a plan prepared by the debtor in consultation

with the resolution professional under section 105 containing a proposal to the

committee of creditors for restructuring of his debts or affairs.


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8.1. FRESH START PROCESS

Chapter II of the Part III of the Code consisting of sections 80 to 93, deals with the process of

fresh start for very low amount of dues.

Initiation of the Process

A debtor, who is unable to pay his debt, may apply, either personally or through a resolution

professional, for a fresh start in respect of his qualifying debts to the Adjudicating Authority

if-

(a) the gross annual income of the debtor does not exceed Rs. 60,000

(b) the aggregate value of the assets of the debtor does not exceed Rs 20,000;

(c) the aggregate value of the qualifying debts does not exceed Rs. 35,000;

(d) he is not an undischarged bankrupt;

(e) he does not own a dwelling unit, irrespective of whether it is encumbered or not;

(f) a fresh start process, insolvency resolution process or bankruptcy process is not

subsisting against him; and

(g) no previous fresh start order under this Chapter has been made in relation to him in

the preceding 12 months of the date of the application for fresh start.

Effect of filing an application [Section 81]

Application shall be in such form and manner and accompanied by such fee, as may be

prescribed.

The application shall contain the following information supported by an affidavit, namely: -

(a) a list of all debts owed by the debtor as on the date of the said application along with

details relating to the amount of each debt, interest payable thereon and the names of

the creditors to whom each debt is owed;

(b) the interest payable on the debts and the rate thereof stipulated in the contract;

(c) a list of security held in respect of any of the debts;

(d) the financial information of the debtor and his immediate family up to two years prior

to the date of the application;

(e) the particulars of the debtor's personal details, as may be prescribed;

(f) the reasons for making the application;


62

(g) the particulars of any legal proceedings which, to the debtor's knowledge has been

commenced against him;

(h) the confirmation that no previous fresh start order under this Chapter has been made

in respect of the qualifying debts of the debtor in the preceding twelve months of the

date of the application.

On filing of an application, an interim moratorium shall commence and shall have effect till

the admission or rejection of the application.

During the interim-moratorium period all legal action or legal proceeding pending in respect

of any of his debts shall be deemed to have been stayed andno creditor shall initiate any legal

action or proceedings in respect of such debt.

Appointment of Resolution Professional (RP): [Section 82]

If Application is filed by RP, the Adjudicating Authority shall within seven days thereof, seek

confirmation from the Board that there are no disciplinary proceedings against the RP who

has submitted such application. The Board shall in writing either confirm or reject the

appointment of the RP who filed an application. In case it rejects the appointment,it will

nominate a RP suitable for the fresh start process.The Adjudicating Authority shall by order

appoint the RP recommended or nominated by the Board.A RP appointed by the

Adjudicating Authority shall be provided a copy of the application for fresh start.If an

application for fresh start process is filed by debtor himself the Adjudicating Authority shall

direct the Board within seven days of the date of the receipt of an application to nominate a

RP for the fresh start process.The Board shall nominate a RP within ten days of receiving the

direction issued by the Adjudicating Authority. The Adjudicating Authority shall by order

appoint the RP recommended or nominated by the Board.

Replacement of RP [Section 89]

Where the debtor or the creditor is of the opinion that the RP is required to be replaced, he

may apply to the Adjudicating Authority for the replacement of such RP. The Adjudicating

Authority shall within 7 days of the receipt of the application for replacement of RP make a

reference to the Board for replacement of the RP. The Board shall, within 10 days of the

receipt of a reference from the Adjudicating Authority, recommend the name of an

insolvency professional to the Adjudicating Authority against whom no disciplinary


63

proceedings are pending. The Adjudicating Authority shall appoint another RP for the

purposes of the fresh start process on the basis of the recommendation by the Board.

Examination of Application

The RP shall examine the application within 10 days of his appointment, and submit a report

to the Adjudicating Authority, either recommending acceptance or rejection of the

application.The report shall contain the details of the amounts mentioned in the application

which in the opinion of the resolution professional are-

(a) qualifying debts; and

(b) liabilities eligible for discharge under sub-section (3) of section 92.

The RP may call for such further information or explanation in connection with the

application as may be required from the debtor or any other person who, in the opinion of the

RP, may provide such information and debtor or any other person, as the case may be, shall

furnish such information or explanation within seven days of receipt of the request.

Grounds for rejection of application by RP

(a) the debtor does not satisfy the conditions for eligibility to file an application for fresh

start process; or

(b) the debts disclosed in the application by the debtor are not qualifying debts; or

(c) the debtor has deliberately made a false representation or omission in the application

or with respect to the documents or information submitted.

The Adjudicating Authority may within 14 days from the date of submission of the report by

the RP, pass an order either admitting or rejecting the application for fresh start process.

On Admission of Application

On the date of admission of the application, the moratorium period shall commence in respect

of all the debts.During the moratorium period-

(a) any pending legal action or legal proceeding in respect of any debt shall be deemed to

have been stayed; and

(b) subject to the provisions of section 86, the creditors shall not initiate any legal action

or proceedings in respect of any debt.

During the moratorium period, the debtor shall-


64

(a) not act as a director of any company, or directly or indirectly take part in or be

concerned in the promotion, formation or management of a company;

(b) not dispose of or alienate any of his assets;

(c) inform his business partners that he is undergoing a fresh start process;

(d) be required to inform prior to entering into any financial or commercial transaction of

such value as may be notified by the Central Government, either individually or

jointly, that he is undergoing a fresh start process;

(e) disclose the name under which he enters into business transactions, if it is different

from the name in the application admitted under section 84;

(f) not travel outside India except with the permission of the Adjudicating Authority.

The moratorium ceases to have effect at the end of the period of 18-days beginning with the

date of admission unless the order admitting the application is revoked.

Objections by creditors [Section 86]

Any creditor mentioned in the order of the Adjudicating Authority of accepting the

application for fresh start process to whom a qualifying debt is owed may, within a period of

10 days from the date of receipt of the order, object only on the following grounds, namely:

(a) inclusion of a debt as a qualifying debt; or

(b) incorrectness of the details of the qualifying debt specified in the order.

A creditor may file an objection by way of an application to the RP which shall be supported

by such information and documents as may be prescribed.The RP shall after examination

either accept or reject the objections, within 10 days of the date of the application.

On the basis of the examination, the RP shall-

(a) prepare an amended list of qualifying debts for the purpose of the discharge order;

(b) make an application to the Adjudicating Authority for directions; or

(c) take such other steps as he considers necessary in relation to the debtor.

Application against decision of RP[Section 87]

The debtor or the creditor who is aggrieved by the action taken by the RP may, within 10

days of such decision, make an application to the Adjudicating Authority challenging such

action on any of the following grounds, namely: -


65

(a) that the RP has not given an opportunity to the debtor or the creditor to make a

representation; or

(b) that the RP colluded with the other party in arriving at the decision; or

(c) that the RP has not complied with the requirements of examination of objections

prescribed in section 86.

The Adjudicating Authority shall decide the application within 14 days of such application

and make an order as it deems fit.Where the application has been allowed by the

Adjudicating Authority, it shall forward its order to the Board and the Board may take such

action as may be required against the RP.

General duties of debtor [Section 88]

The debtor shall-

(a) make available to the RP all information relating to his affairs, attend meetings and

comply with the requests of the RP in relation to the fresh start process.

(b) inform the RP as soon as reasonably possible of-

(i) any material error or omission in relation to the information or document

supplied to the RP; or

(ii) any change in financial circumstances after the date of application, where such

change has an impact on the fresh start process.

Revocation of order [Section 91]

The RP may submit an application to the AdjudicatingAuthority seeking revocation of its

order accepting application for fresh start on the following grounds, namely:

(a) if due to any change in the financial circumstances of the debtor, the debtor is

ineligible for a fresh start process; or

(b) non-compliance by the debtor of the restrictions on debtor during moratorium period;

or

(c) if the debtor has acted in a mala fide manner and has wilfully failed to comply with

the provisions.

The Adjudicating Authority shall, within 14 days of the receipt of the application, may admit

or reject the application. If accepted, the moratorium and the fresh start process shall cease to


66

have effect.A copy of the order passed by the Adjudicating Authority shall be provided to the

Board for the purpose of recording.

Discharge order [Section 92]

The RP shall prepare a final list of qualifying debts and submit such list to the Adjudicating

Authority at least 7 days before the moratorium period comes to an end.The Adjudicating

Authority shall pass a discharge order at the end of the moratorium period for discharge of

the debtor from the qualifying debts.The Adjudicating Authority shall discharge the debtor

from the following liabilities, namely:

(a) penalties in respect of the qualifying debts from the date of application till the date of

the discharge order;

(b) interest including penal interest in respect of the qualifying debts from the date of

application till the date of the discharge order; and

(c) any other sums owed under any contract in respect of the qualifying debts from the

date of application till the date of the discharge order.

A discharge order shall not discharge any other person from any liability in respect of the

qualifying debts.

8.2. INSOLVENCY RESOLUTION PROCESS (NON-CORPORATE PERSONS)

Chapter III of Part III of the Code covering Section 94-120, deals with the insolvency

resolution process for individuals and partnership firms.Unlike, fresh start process,

application for insolvency resolution process may be filed by any individual or partnership

firm who has committed default.

Initiation of the Insolvency Resolution Process

The Insolvency Resolution Process for individuals and partnership firms can be initiated by a

creditor or debtor himself.

Application by debtor [Section 94]

A debtor who commits a default may apply, either personally or through a RP, to the

Adjudicating Authority for initiating the insolvency resolution process, by submitting an

application in prescribed form with prescribed fees. In case of partnership firm all or a

majority of the partners of the firm should file the application jointly.An application shall be


67

submitted only in respect of debts which are not excluded debts. However, debtor is not

eligible to make an application under following circumstances:

(a) Debtor is an undischarged bankrupt;

(b) Debtor is undergoing a fresh start process;

(c) Debtor is undergoing an insolvency resolution process; or

(d) Debtor is undergoing a bankruptcy process;

(e) If an application under this Chapter has been admitted in respect of the debtor during

the period of twelve months preceding the date of submission of the application under

this section.

Application by Creditor[Section 95]

A creditor may either by himself, or jointly with other creditors, or through a RP apply to the

Adjudicating Authority for initiating an insolvency resolution processby submitting an

application in prescribed form and fees. In case of partnership debt owed to him he may

apply against any one or more partners of the firm or the firm itself. Where an application has

been made against one partner in a firm, any other application against another partner in the

same firm shall be presented in or transferred to the Adjudicating Authority in which the first

mentioned application is pending for adjudication and such Adjudicating Authority may give

such directions for consolidating the proceedings under the applications as it thinks just.

Interim moratorium [Section 96]

When an application is filed by debtor or creditor an interim-moratorium shall commence on

the date of the application in relation to all the debts and shall cease to have effect on the date

of admission of such application.

During the interim-moratorium period all legal action or proceeding pending in respect of any

debt shall be deemed to have been stayed andthe creditors of the debtor shall not initiate any

legal action or proceedings in respect of any debt.

Appointment of RP [Section 97]

If Application is filed by RP:

The Adjudicating Authority shall direct the Board within 7 days of the date of receipt of the

application and shall seek confirmation from the Board that there are no disciplinary

proceedings against the RP who has submitted such application.The Board shall confirm or


68

reject the appointment of the RP who filed an application and communicate to the

Adjudicating Authority in writing. In case it rejects, board will nominate a RP suitable for the

insolvency resolution process.The Adjudicating Authority shall by order appoint the RP

recommended or nominated by the Board.

Replacement of RP [Section 98]

Where the debtor or the creditor is of the opinion that the RP is required to be replaced, he

may apply to the Adjudicating Authority for the replacement of such RP.The Adjudicating

Authority shall within 7 days of the receipt of the application for replacement of RP make a

reference to the Board for replacement of the RP and the Board shall, within 10 days of the

receipt of a reference, recommend the name of an insolvency professional to the Adjudicating

Authority against whom no disciplinary proceedings are pending.The Adjudicating Authority

may give directions to the RP replaced to share all information and co-operate with the new

RP in respect of insolvency resolution process.

Submission of Report by RP [Section 99]

The RP shall examine the application by debtor or creditor, as the case may be, within 10

days of his appointment, and submit a report to the Adjudicating Authority recommending for

approval or rejection of the application.Where the application has been filed by creditor, the

RP may require the debtor to prove repayment of the debt claimed as unpaid by the creditor

by furnishing-

(a) evidence of electronic transfer of the unpaid amount from the bank account of the

debtor;

(b) evidence of encashment of a cheque issued by the debtor; or

(c) a signed acknowledgment by the creditor accepting receipt of dues.

The RP shall examine the application and ascertain that—

(a) the application satisfies the requirements for creditor;

(b) the applicant has provided information and given explanation sought by the RP.

After examination of the application, he may recommend acceptance or rejection of the

application in his report.

Consideration of Application by Adjudicating Authority [Section 100]


69

The Adjudicating Authority shall, within 14days from the date of submission of the report by

RP pass an order either admitting or rejecting the application by debtor or creditor, as the

case may be.

Commencement of Moratorium Period [Section 101]

When the application is admitted by the Adjudicating Authority, a moratorium shall

commence in relation to all the debts and shall cease to have effect at the end of the period of

180 days beginning with the date of admission of the application or on the date the

Adjudicating Authority passes an order on the repayment plan, whichever is earlier.

Public notice and Claims of Creditors [Section 102]

The Adjudicating Authority shall issue a public notice within 7 days of passing the order for

accepting the application inviting claims from all creditors within 21 days of such issue.

The notice shall include

(a) details of the order admitting the application;

(b) particulars of the RP with whom the claims are to be registered; and

(c) the last date for submission of claims.

The notice shall be-

(a) published in at least one English and one vernacular newspaper which is in circulation

in the state where the debtor resides;

(b) affixed in the premises of the Adjudicating Authority; and

(c) placed on the website of the Adjudicating Authority.

Registering of claims by creditors [Section 103]

The creditors shall register claims with the RP by sending details of the claims by way of

electronic communications or through courier, speed post or registered letter.In addition to

the claims, the creditor shall provide to the RP, personal information and such particulars as

may be prescribed.

Preparation of list of creditors [ Section 104]

The RP shall prepare a list of creditors on the basis of-

(a) the information disclosed in the application filed by the debtor or creditor, as the case

may be;


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(b) claims received by the RP after issuance of public notice.

The RP shall prepare the list within 30 days from the date of the notice.

Preparation of Repayment Plan [Section 105]

The debtor shall prepare, in consultation with the RP, a repayment plan containing a proposal

to the creditors for restructuring of his debts or affairs.

The repayment plan may authorise or require the RP to-

(a) carry on the debtor's business or trade on his behalf or in his name; or

(b) realise the assets of the debtor; or

(c) administer or dispose of any funds of the debtor.

The repayment plan shall include the following, namely:

(a) justification for preparation of such repayment plan and reasons on the basis of which

the creditors may agree upon the plan;

(b) provision for payment of fee to the RP;

(c) such other matters as may be specified.

Submission of Repayment Planalong with Report [ Section 106]

The RP shall submit the repayment plan along with his report on such plan to the

Adjudicating Authority within a period of 21 days from the last date of submission of claims.

Report of RP shall include:

(a) the repayment plan is in compliance with the provisions of any law for the time being

in force;

(b) the repayment plan has a reasonable prospect of being approved and implemented;

and

(c) there is a necessity of summoning a meeting of the creditors, if required, to consider

the repayment plan.

The date on which the meeting is to be held shall be not less than 14 days and not more than

28 days from the date of submission of report.

Meeting of Committee of Creditors [Section 107 &108]


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The RP shall issue a notice to the list of creditors calling the meeting of the creditors at least

14 days before the date fixed for such meeting.The notice sent shall state the address of the

Adjudicating Authority to which the repayment plan and report of the RP on the repayment

plan has been submitted and shall be accompanied by-

(a) a copy of the repayment plan;

(b) a copy of the statement of affairs of the debtor;

(c) a copy of the said report of the RP; and

(d) forms for proxy voting.

The proxy voting, including electronic proxy voting shall take place in such manner and form

as may be specified.

In the meeting of the creditors, the creditors may decide to approve, modify or reject the

repayment plan and ensure that if modifications are suggested by the creditors, consent of the

debtor shall be obtained for each modification.

Rights of Secured Creditors [Section 110]

Secured creditors shall be entitled to participate and vote in the meetings of the creditors.A

secured creditor participating in the meetings of the creditors and voting in relation to the

repayment plan shall forfeit his right to enforce the security during the period of the

repayment plan in accordance with the terms of the repayment plan.Where a secured creditor

does not forfeit his right to enforce security, he shall submit an affidavit to the RP at the

meeting of the creditors stating-

(a) that the right to vote exercised by the secured creditor is only in respect of the

unsecured part of the debt; and

(b) the estimated value of the unsecured part of the debt.

In case a secured creditor participates in the voting on the repayment plan by submitting an

affidavit, the secured and unsecured parts of the debt shall be treated as separate debts.The

concurrence of the secured creditor shall be obtained if he does not participate in the voting

on repayment plan but provision of the repayment plan affects his right to enforce security.

Approval of Repayment Plan by Committee [Section 111, 112 & 113]

The repayment plan or any modification to the repayment plan shall be approved by a

majority of more than three-fourth in value of the creditors present in person or by proxy and


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voting on the resolution in a meeting of the creditors.The RP shall prepare a report of the

meeting of the creditors on repayment plan containing:

(a) whether the repayment plan was approved or rejected and if approved, the list the

modifications, if any;

(b) the resolutions which were proposed at the meeting and the decision on such

resolutions;

(c) list of the creditors who were present or represented at the meeting, and the voting

records of each creditor for all meetings of the creditors; and

(d) such other information as the RP thinks appropriate to make known to the

Adjudicating Authority.

The RP shall provide a copy of the report of the meeting to

(a) the debtor;

(b) the creditors, including those who were not present at the meeting; and

(c) the Adjudicating Authority.

Consideration of resolution plan by Adjudicating Authority [Section 114]

Adjudicating Authority may, by order approve or reject the resolution plan on the basis of the

report of the meeting of the creditors submitted by the RP.Adjudicating Authority if, is of the

opinion that the repayment plan requires modification, it may direct the RP to re-convene a

meeting of the creditors for reconsidering the repayment plan.The order of the Adjudicating

Authority approving the repayment plan may also provide for directions for implementing the

repayment plan.Where a meeting of creditors is not summoned, the Adjudicating Authority

shall pass an order on the basis of the report prepared by the RP.

Effect of order [Section 115]

If Adjudicating Authority has approved the repayment plan, such repayment plan shall-

(a) take effect as if proposed by the debtor in the meeting; and

(b) be binding on creditors mentioned in the repayment plan and the debtor.

Where the Adjudicating Authority rejects the repayment plan, the debtor and the creditors

shall be entitled to file an application for bankruptcy. A copy of the order passed by the

Adjudicating Authority shall be provided to the Board, for the purpose of recording.

Implementation and Supervision of Repayment Plan [Section 116, 117 & 118]


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The RP shall supervise the implementation of the repayment plan.The RP may apply to the

Adjudicating Authority for directions, in relation to any particular matter arising under the

repayment plan.The Adjudicating Authority may issue directions to the RP on the basis of an

application by RP.

The RP shall within 14 days of the completion of the repayment plan, forward to the persons

who are bound by the repayment plan and the Adjudicating Authority, the following

documents, namely: -

(a) a notice that the repayment plan has been fully implemented; and

(b) a copy of a report by the RP summarizing all receipts and payments made in

pursuance of the repayment plan and extent of the implementation of such plan as

compared with the repayment plan approved by the meeting of the creditors.

The RP may apply to the Adjudicating Authority to extend the time for such further period

not exceeding 7 days.

A repayment plan shall be deemed to have come to an end prematurely if it has not been fully

implemented in respect of all persons bound by it within the period as mentioned in the

repayment plan.

Where a repayment plan comes to an end prematurely under this section, the RP shall submit

a report to the Adjudicating Authority which shall state-

(a) the receipts and payments made in pursuance of the repayment plan;

(b) the reasons for premature end of the repayment plan; and

(c) the details of the creditors whose claims have not been fully satisfied.

The Adjudicating Authority shall pass an order on the basis of the report submitted by the RP

that the repayment plan has not been completely implemented.The debtor or the creditor,

whose claims under repayment plan have not been fully satisfied, shall be entitled to apply

for a bankruptcy order. The Adjudicating Authority shall forward to the persons bound by the

repayment plan, a copy of the-

(a) report submitted by the RP to the Adjudicating; and

(b) order passed by the Adjudicating Authority.

The Adjudicating Authority shall forward a copy of the order passed to the Board, for the

purpose of recording entries in the register.


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Discharge Order [Section 119]

On the basis of the repayment plan, the RP shall apply to the Adjudicating Authority for a

discharge order in relation to the debts mentioned in the repayment plan and the Adjudicating

Authority may pass such discharge order.The repayment plan may provide for-

(a) early discharge; or

(b) discharge on complete implementation of the repayment plan.

The discharge order shall be forwarded to the Board, for the purpose of recording entries in

the register.The discharge order shall not discharge any other person from any liability in

respect of his debt.

8.3. BANKRUPTCY ORDER FOR INDIVIDUALS AND PARTNERSHIP FIRMS

Chapter IV and V of Part III covering Sections 121-148 and Sections 149 to 178 of the IBC

deals with the bankruptcy proceeding of individual and partnership firm and Administration

and Distribution of the Estate of the Bankrupt, respectively.

Grounds on which application may be filed for bankruptcy: [Section 121]

An application for bankruptcy of a debtor may be made, by a creditor individually or jointly

with other creditors or by a debtor, to the Adjudicating Authority in the following

circumstances, namely:

(a) where an order has been passed for rejection of application for insolvency resolution

process on account of the conclusion that the application was made with the intention

to defraud his creditors or the RP; or

(b) where an order for rejection of repayment plan has been passed by an Adjudicating

Authority; or

(c) where an order has been passed by an Adjudicating Authority on an application by RP

on premature end of repayment plan.

An application for bankruptcy shall be filed within a period of three months of the date of the

order passed by the Adjudicating Authority.Where the debtor is a firm, the application may

be filed by any of its partners.

Application for bankruptcy

Application by debtor [Section 122]


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The application for bankruptcy by the debtor shall be accompanied by-

(a) the records of insolvency resolution process undertaken;

(b) the statement of affairs of the debtor in such form and manner as may be prescribed,

on the date of the application for bankruptcy; and

(c) a copy of the order passed by the Adjudicating Authority permitting the debtor to

apply for bankruptcy.

Application by creditor [Section 123]

The application for bankruptcy by the creditor shall be accompanied by-

(a) the records of insolvency resolution process undertaken;

(b) a copy of the order passed by the Adjudicating Authority permitting the creditor to

apply for bankruptcy;

(c) details of the debts owed by the debtor to the creditor as on the date of the application

for bankruptcy; and

(d) such other information as may be prescribed.

An application made in respect of a debt which is secured, shall be accompanied with-

(a) a statement by the creditor having the right to enforce the security that he shall, in the

event of a bankruptcy order being made, give up his security for the benefit of all the

creditors of the bankrupt; or

(b) a statement by the creditor stating-

(i) that the application for bankruptcy is only in respect of the unsecured part of

the debt; and

(ii) an estimated value of the unsecured part of the debt.

If a secured creditor makes an application for bankruptcy and submits a statement, the

secured and unsecured parts of the debt shall be treated as separate debts.The creditor may

propose an insolvency professional as the bankruptcy trustee in the application for

bankruptcy.An application for bankruptcy, in case of a deceased debtor, may be filed against

his legal representatives.

Effect of Application [Section 124]


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When an application for bankruptcy is filed, an interim-moratorium shall commence on the

date of the making of the application on all actions against the properties of the debtor in

respect of his debts and such moratorium shall cease to have effect on the bankruptcy

commencement date.

Bankruptcy Trustee [Section 125, 148, 151 & 152]

If insolvency professional is proposed in the application for bankruptcy, the Adjudicating

Authority shall direct the Board within 7 days of receiving the application for bankruptcy to

confirm that there are no disciplinary proceedings pending against such professional.The

Board shall within 10 days of the receipt of the direction either confirm the appointment or if

it rejectsit and nominate another bankruptcy trustee for the bankruptcy process.The

bankruptcy trustee confirmed or nominated under this section shall be appointed as the

bankruptcy trustee by the Adjudicating Authority in the bankruptcy order.

The bankruptcy trustee shall perform the following functions:

(a) investigate the affairs of the bankrupt;

(b) realise the estate of the bankrupt; and

(c) distribute the estate of the bankrupt.

The bankruptcy trustee may, by his official name-

(a) hold property of every description;

(b) make contracts;

(c) sue and be sued;

(d) enter into engagements in respect of the estate of the bankrupt;

(e) employ persons to assist him;

(f) execute any power of attorney, deed or another instrument;

(g) sell any part of the estate of the bankrupt;

(h) give receipts for any money received by him;

(i) prove, rank, claim and draw a dividend in respect of such debts due to the bankrupt as

are comprised in his estate;

(j) where any property comprised in the estate of the bankrupt is held by any person by

way of pledge or hypothecation, exercise the right of redemption in respect of any

such property subject to the relevant contract by giving notice to the said person;


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(k) where any part of the estate of the bankrupt consists of securities in a company or any

other property which is transferable in the books of a person, exercise the right to

transfer the property to the same extent as the bankrupt might have exercised it if he

had not become bankrupt;

(l) deal with any property comprised in the estate of the bankrupt to which the bankrupt

is beneficially entitled in the same manner as he might have dealt with it

(m) do any other act which is necessary or expedient for the purposes of or in connection

with the exercise of his rights; and

Duties of Bankrupt [Section 150]

The bankrupt shall assist the bankruptcy trustee in carrying out his functions-

(a) giving to the bankruptcy trustee the information of his affairs;

(b) attending on the bankruptcy trustee at such times as may be required;

(c) giving notice to the bankruptcy trustee of any of the following events which have

occurred after the bankruptcy commencement date, -

(i) acquisition of any property by the bankrupt;

(ii) devolution of any property upon the bankrupt;

(iii)increase in the income of the bankrupt;

(iv) doing all other things as may be prescribed.

Bankruptcy order [Section 126, 127 & 128]

The Adjudicating Authority shall pass a bankruptcy order within 14 days of receiving the

confirmation or nomination of the bankruptcy trustee by the Board.The Adjudicating

Authority shall provide copies of the application for bankruptcy and bankruptcy order to the

bankrupt, creditors and the bankruptcy trustee within 7 days of the passing of the bankruptcy

order. The bankruptcy order passed by the Adjudicating Authority shall continue to have

effect till the debtor is discharged.

On the passing of the bankruptcy orderthe estate of the bankrupt shall vest in the bankruptcy

trustee to be divided among his creditors anda creditor of the bankrupt indebted in respect of

any debt claimed as a bankruptcy debt shall notinitiate any action against the property of the

bankrupt in respect of such debt or commence any suit or other legal proceedings except with

the leave of the Adjudicating Authority and on such terms as the Adjudicating Authority may

impose. However, the bankruptcy order shall not affect the right of any secured creditor to


78

realise or otherwise deal with his security interest in the same manner as he would have been

entitled if the bankruptcy order had not been passed.

Statement of Financial Position [Section 129]

Where a bankruptcy order is passed on the application for bankruptcy by a creditor, the

bankrupt shall submit his statement of financial position to the bankruptcy trustee within 7

days from the bankruptcy commencement date in prescribed form and manner. Where the

bankrupt is a firm, its partners on the date of the order shall submit a joint statement of

financial position of the firm, and each partner of the firm shall submit a statement of his

financial position.

Public notice [Section 130]

Public notice inviting claims of creditor shall be-

(a) published in leading newspapers, one in English and another in vernacular having

sufficient circulation where the bankrupt resides;

(b) affixed on the premises of the Adjudicating Authority; and

(c) placed on the website of the Adjudicating Authority.

The Adjudicating Authority shall send notices within 10 days of the bankruptcy

commencement date.

Registration of Claims [Section 131& 132]

The creditors shall register claims with the bankruptcy trustee within 7 days of the

publication of the public notice, by sending details of the claims to the bankruptcy trustee

pursuant to which the bankruptcy trustee shall, within fourteen days from the bankruptcy

commencement date, prepare a list of creditors of the bankrupt on the basis ofthe information

disclosed by the bankrupt in the application or the statement of affairs filed and the claims

received.

Meeting of Creditors [Section 133, 134, 135]

The bankruptcy trustee shall, within 21 days from the bankruptcy commencement date, issue

a notice for calling a meeting of the creditors, to every creditor of the bankrupt. The notice

shall-


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(a) state the date of the meeting of the creditors, which shall not be later than 21 days

from the bankruptcy commencement date;

(b) be accompanied with forms of proxy voting;

(c) specify the form and manner in which the proxy voting may take place.

The RP shall determine the voting share to be assigned to each creditor in the manner

specified by the Board.A creditor shall not be entitled to vote in respect of a debt for an

unliquidated amount. However, creditors who are associates of the bankrupt will not be

allowed to vote.

The bankruptcy trustee shall be the convener of the meeting of the creditors and shall decide

the quorum for the meeting of the creditors and conduct the meeting only if the quorum is

present. In the first meeting a committee of creditors is established any other business that the

bankruptcy trustee thinks fit to be transacted is undertaken.

Estate of Bankrupt [Section 155, 156, 157]

The estate of the bankrupt shall include-

(a) all property belonging to or vested in the bankrupt at the bankruptcy commencement

date;

(b) the capacity to exercise and to initiate proceedings for exercising all such powers in or

over or in respect of property as might have been exercised by the bankrupt for his

own benefit at the bankruptcy commencement date or before the date of the discharge

order; and

(c) all property is comprised in the estate because of bankruptcy proceedings

The estate of the bankrupt shall not include-

(a) excluded assets;

(b) property held by the bankrupt on trust for any other person;

(c) all sums due to any workman or employee from the provident fund, the pension fund

and the gratuity fund; and

(d) such assets as may be notified by the Central Government in consultation with any

financial sector regulator.

Administration of Estate of bankrupt [Section 156, 157]


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The bankrupt, his banker or agent or any other person having possession of any property,

books, papers or other records which bankruptcy trustee is required to take possession for the

purposes of the bankruptcy process shall deliver the said property and documents to the

bankruptcy trustee.The bankruptcy trustee shall take possession and control of all property,

books, papers and other records relating to the estate of the bankrupt or affairs of the

bankrupt which belong to him or are in his possession or under his control.

Any disposition of property made by the debtor, during the period between the date of filing

of the application for bankruptcy and the bankruptcy commencement date shall be void. The

bankruptcy trustee shall be entitled to claim for the estate of the bankrupt, any property which

has been acquired by or has devolved upon the bankrupt after the bankruptcy commencement

date by giving a notice to the bankruptwithin 15 days from the day on which the acquisition

or devolution of the after-acquired property comes to the knowledge of the bankruptcy

trustee. However, no notice shall be served in respect of excluded assets or any property

which is acquired by or devolves upon the bankrupt after a discharge order is passed.

Onerous property of Bankrupt [Section 160, 161, 162 & 163]

"Onerous property" means-

(i) any unprofitable contract; and

(ii) any other property comprised in the estate of the bankrupt which is unsaleable or not

readily saleable or is such that it may give rise to a claim.

The bankruptcy trustee may, by giving notice to the bankrupt or any person interested in the

onerous property, disclaim any onerous property which forms a part of the estate of the

bankrupt.A notice of disclaimer shall-

(a) determine, as from the date of such notice, the rights, interests and liabilities of the

bankrupt in respect of the onerous property disclaimed;

(b) discharge the bankruptcy trustee from all personal liability in respect of the onerous

property as from the date of appointment of the bankruptcy trustee.

A notice of disclaimer shall not be given in respect of the property which has been claimed

for the estate of the bankrupt without the permission of the committee of creditors. Also, the

bankruptcy trustee shall not be entitled to disclaim any leasehold interest, unless a notice of

disclaimer has been served on every interested person and either no application objecting to

the disclaimer has been filed within 14 days of thedate ofnotice or where the application


81

objecting to the disclaimer has been filed andthe Adjudicating Authority has directed the

disclaimer shall take effect.

An application challenging the disclaimer may be made by the following persons under this

section to the Adjudicating Authority-

(a) any person who claims an interest in the disclaimed property; or

(b) any person who is under any liability in respect of the disclaimed property; or

(c) where the disclaimed property is a dwelling house, any person who on the date of

application for bankruptcy was in occupation of or entitled to occupy that dwelling

house.

The Adjudicating Authority may on an application make an order for the vesting of the

disclaimed property in or for its delivery to any of the persons where it appears to the

Adjudicating Authority that it would be just to do so for the purpose of compensating the

person.

Undervalued Transaction [Section 164]

Bankrupt enters into an undervalued transaction with any person if-

(a) he makes a gift to that person;

(b) no consideration has been received by that person from the bankrupt;

(c) it is in consideration of marriage; or

(d) it is for a consideration, the value of which in money or money's worth is significantly

less than the value in money or money's worth of the consideration provided by the

bankrupt.

The undervalued transaction should have—

(a) been entered into during the period of two years ending on the filing of the application

for bankruptcy; and

(b) caused bankruptcy process to be triggered.

The bankruptcy trustee may apply to the Adjudicating Authority for an order in respect of an

undervalued transaction between a bankrupt and any person and Adjudicating Authority may

-

(a) pass an order declaring an undervalued transaction void;


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(b) pass an order requiring any property transferred as a part of an undervalued

transaction to be vested with the bankruptcy trustee as a part of the estate of the

bankrupt; and

(c) pass any other order it thinks fit for restoring the position to what it would have been

if the bankrupt had not entered into the undervalued transaction.

Preference Transactions [Section 165]

A bankrupt shall be deemed to have entered into a transaction giving preference to any

person if-

(a) the person is the creditor or surety or guarantor for any debt of the bankrupt; and

(b) the bankrupt does anything or suffers anything to be done which has the effect of

putting that person into a position which, in the event of the debtor becoming a

bankrupt, will be better than the position he would have been in, if that thing had not

been done.

The transaction giving preference to an associate of the bankrupt should have been entered

into by the bankrupt with the associate during the period of two years ending on the date of

the application for bankruptcy.

On the application of the bankruptcy trustee the Adjudicating Authority may-

(a) pass an order declaring a transaction giving preference void;

(b) pass an order requiring any property transferred in respect of a transaction giving

preference to be vested with the bankruptcy trustee as a part of the estate of the

bankrupt; and

(c) pass any other order it thinks fit for restoring the position to what it would have been

if the bankrupt had not entered into the transaction giving preference.

Effect of order [Section 166]

An order passed by the Adjudicating Authority in respect to an undervalued transaction or a

transaction giving preference shall not:

(a) give rise to a right against a person interested in the property which was such

transaction, whether or not he is the person with whom the bankrupt entered into the

transaction; and


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(b) require any person to pay a sum to the bankruptcy trustee in respect of the benefit

received from such transaction, whether or not he is the person with whom the

bankrupt entered into the transaction.

Effect of order shall not be in place if the interest was acquired or the benefit was received-

(a) in good faith;

(b) for value;

(c) without notice that the bankrupt entered into the transaction at an undervalue or for

giving preference;

(d) without notice that the bankrupt has filed an application for bankruptcy or a

bankruptcy order has been passed; and

(e) by any person who at the time of acquiring the interest or receiving the benefit was

not an associate of the bankrupt.

Extortionate Credit Transactions [Section 167]

On an application by the bankruptcy trustee, the Adjudicating Authority may make an order

in respect of extortionate credit transactions entered into by the bankrupt during the period of

two years ending on the bankruptcy commencement date, which may:

(a) set aside the whole or part of any debt created by the transaction;

(b) vary the terms of the transaction or vary the terms on which any security for the

purposes of the transaction is held;

(c) require any person who has been paid by the bankrupt under any transaction, to pay a

sum to the bankruptcy trustee;

(d) require any person to surrender to the bankruptcy trustee any property of the bankrupt

held as security for the purposes of the transaction.

Any debt extended by a person regulated for the provision of financial services in compliance

with the law in force in relation to such debt, shall not be considered as an extortionate credit

transaction.

Contracts entered before the bankruptcy commencement date [Section 168]

Any party to a contract entered into by the bankrupt with a person before the bankruptcy

commencement date, other than the bankrupt, may apply to the Adjudicating Authority for-


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(a) an order discharging the obligations of the applicant or the bankrupt under the

contract; and

(b) payment of damages by the party or the bankrupt, for non-performance of the contract

or otherwise.

Any damages payable by the bankrupt by virtue of an order shall be provable as bankruptcy

debt.

Estate of a Deceased Bankrupt: [Section 169 & 170]

If a bankrupt die, the bankruptcy proceedings shall, continue as if he were alive.

While administering the estate of a deceased bankrupt, the bankruptcy trustee shall have

regard to the claims by the legal representatives of the deceased bankrupt to payment of the

proper funeral and testamentary expenses incurred by them.

Proof of debt [Section 171, 172& 173]

The bankruptcy trustee shall give notice to each of the creditors to submit proof of debt

within 14 days of preparing the list of creditors.The proof of debt shall-

(a) require the creditor to give full particulars of debt, including the date on which the

debt was contracted and the value at which that person assesses it;

(b) require the creditor to give full particulars of the security, including the date on which

the security was given and the value at which that person assesses it;

(c) be in such form and manner as may be prescribed.

Where a secured creditor realises his security, he may produce proof of the balance due to

him.Where a secured creditor surrenders his security to the bankruptcy trustee for the general

benefit of the creditors, he may produce proof of his whole claim.

Where before the bankruptcy commencement date, there have been mutual dealings between

the bankrupt and any creditor, the bankruptcy trustee shall-

(a) take an account of what is due from each party to the other in respect of the mutual

dealings and the sums due from one party shall be set-off against the sums due from

the other; and

(b) only the balance shall be provable as a bankruptcy debt or as the amount payable to

the bankruptcy trustee as part of the estate of the bankrupt.


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Sums due from the bankrupt to another party shall not be included in the account taken by the

bankruptcy trustee, if that other party had notice at the time they became due that an

application for bankruptcy relating to the bankrupt was pending.

A creditor who has not proved his debt before the declaration of any dividend is not entitled

to disturb, by reason that he has not participated in it, the distribution of that dividend or any

other dividend declared before his debt was proved, but-

(a) when he has proved the debt, he shall be entitled to be paid any dividend or dividends

which he has failed to receive, out of any money for the time being available for the

payment of any further dividend; and

(b) any dividend or dividends payable to him shall be paid before that money is applied to

the payment of any such further dividend.

No action shall lie against the bankruptcy trustee for a dividend, but if the bankruptcy trustee

refuses to pay a dividend payable, the Adjudicating Authority may order him to-

(a) pay the dividend; and

(b) pay, out of his own money-

(i) interest on the dividend; and

(ii) the costs of the proceedings in which the order to pay has been made.

Distribution of Interim Dividend[Section 174]

Bankruptcy trustee may declare and distribute interim dividend among the creditors in respect

of the bankruptcy debts which they have respectively proved, whenever he has sufficient

funds in his hand.In the calculation and distribution of the interim dividend, the bankruptcy

trustee shall make provision for-

(a) any bankruptcy debts which appear to him to be due to persons who, by reason of the

distance of their place of residence, may not have had sufficient time to tender and

establish their debts; and

(b) any bankruptcy debts which are subject of claims which have not yet been

determined;

(c) disputed proofs and claims; and

(d) expenses necessary for the administration of the estate of the bankrupt.

Distribution of Property: [Section 175]


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The bankruptcy trustee may, with the approval of the committee of creditors, divide in its

existing form amongst the creditors, according to its estimated value, any property, which

from its peculiar nature or other special circumstances cannot be readily or advantageously

sold.

Final dividend: [Section 176]

Where the bankruptcy trustee has realised the entire estate of the bankrupt or so much of it as

could be realised in the opinion of the bankruptcy trustee, he shall give notice-

(a) of his intention to declare a final dividend; or

(b) that no dividend or further dividend shall be declared.

The notice under this section shall contain such particulars as may be prescribed and shall

require all claims against the estate of the bankrupt to be established by a final date specified

in the notice.The Adjudicating Authority may, on the application of any person interested in

the administration of the estate of the bankrupt, postpone the final date.After the final date,

the bankruptcy trustee shall-

(a) defray any outstanding expenses of the bankruptcy out of the estate of the bankrupt;

and

(b) if he intends to declare a final dividend, declare and distribute that dividend among

the creditors who have proved their debts, without regard to the claims of any other

persons.

If a surplus remains after payment in full with interest to all the creditors of the bankrupt and

the payment of the expenses of the bankruptcy, the bankrupt shall be entitled to the surplus.

Priority of payment of debts [Section 178]

(a) firstly, the costs and expenses incurred by the bankruptcy trustee for the bankruptcy

process in full;

(b) secondly, -

(i) the workmen's dues for the period of twenty-four months preceding the

bankruptcy commencement date; and

(ii) debts owed to secured creditors;


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(c) thirdly, wages and any unpaid dues owed to employees, other than workmen, of the

bankrupt for the period of twelve months preceding the bankruptcy commencement

date;

(d) fourthly, any amount due to the Central Government and the State Government

including the amount to be received on account of Consolidated Fund of India and the

Consolidated Fund of a State, if any, in respect of the whole or any part of the period

of two years preceding the bankruptcy commencement date;

(e) lastly, all other debts and dues owed by the bankrupt including unsecured debts.

Administration and Distribution of Estate of Bankrupt [ Section 136]

The bankruptcy trustee shall convene a meeting of the committee of creditors on completion

of the administration and distribution of the estate of the bankrupt. The bankruptcy trustee

shall provide the committee of creditors with a report of the administration of the estate of the

bankrupt in the meeting of the said committee.The committee of creditors shall approve the

report submitted by the bankruptcy trustee within 7 days of the receipt of the report and

determine whether the bankruptcy trustee should be released.

Discharge order [Section 138& 139]

The bankruptcy trustee shall apply to the Adjudicating Authority for a discharge order-

(a) on the expiry of one year from the bankruptcy commencement date; or

(b) within 7 days of the approval of the committee of creditors of the completion of

administration of the estates of the bankrupt.

The Adjudicating Authority shall pass a discharge order on an application by the bankruptcy

trustee.However, the discharge shall not-

(a) affect the functions of the bankruptcy trustee; or

(b) affect the operation of the provisions of Chapters IV and V of Part III; or

(c) release the bankrupt from any debt incurred by means of fraud or breach of trust to

which he was a party; or

(d) discharge the bankrupt from any excluded debt.

Disqualification of Bankrupt [Section 140]

In addition to any disqualification under any other law for the time being in force, a bankrupt

shall be disqualified from-


88

(a) being appointed or acting as a trustee or representative in respect of any trust, estate or

settlement;

(b) being appointed or acting as a public servant;

(c) being elected to any public office where the appointment to such office is by election;

and

(d) being elected or sitting or voting as a member of any local authority.

Any disqualification to which a bankrupt may be subject under this section shall cease to

have effect, if-

(a) the bankruptcy order against him is modified or recalled; or

(b) he is discharged.

Restrictions on Bankrupt [Section 141]

A bankrupt, from the bankruptcy commencement date, shall-

(a) not act as a director of any company, or directly or indirectly take part in or be

concerned in the promotion, formation or management of a company;

(b) without the previous sanction of the bankruptcy trustee, be prohibited from creating

any charge on his estate or taking any further debt;

(c) be required to inform his business partners that he is undergoing a bankruptcy

process;

(d) prior to entering into any financial or commercial transaction of such value as may be

prescribed, either individually or jointly, inform all the parties involved in such

transaction that he is undergoing a bankruptcy process;

(e) without the previous sanction of the Adjudicating Authority, be incompetent to

maintain any legal action or proceedings in relation to the bankruptcy debts; and

(f) not be permitted to travel overseas without the permission of the Adjudicating

Authority.

Modification or recall of Bankruptcy order [Section 142]

The Adjudicating Authority may, on an application or suomoto, modify or recall a

bankruptcy order, whether or not the bankrupt is discharged, if it appears to the Adjudicating

Authority that-

(a) there exists an error apparent on the face of such order; or


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(b) both the bankruptcy debts and the expenses of the bankruptcy have, after the making

of the bankruptcy order, either been paid for or secured to the satisfaction of the

Adjudicating Authority.

Fees of bankruptcy trustee [ Section 144]

A bankruptcy trustee appointed for conducting the bankruptcy process shall charge such fees

as may be specified in proportion to the value of the estate of the bankrupt. The fees for the

conduct of the bankruptcy process shall be paid to the bankruptcy trustee from the

distribution of the estate of the bankrupt.

Replacement of bankruptcy trustee: [Section 145]

Where Committee of creditors is of the opinion that at any time during the bankruptcy

process, a bankruptcy trustee is required to be replaced, it may replace him with another

bankruptcy trustee by a vote of seventy-five per cent of voting share.

The Committee of creditors may apply to the Adjudicating Authority for the replacement of

the bankruptcy trustee.

The Adjudicating Authority shall within seven days of the receipt of the application direct the

Board to recommend for replacement of bankruptcy trustee.

The Board shall, within ten days of the direction of the Adjudicating Authority, recommend a

bankruptcy trustee for replacement against whom no disciplinary proceedings are pending.

The Adjudicating Authority shall, by an order, appoint the bankruptcy trustee as

recommended by the Board within fourteen days of receiving such recommendation.

Resignation by bankruptcy trustee: [Section 146]

A bankruptcy trustee may resign if-

(a) he intends to cease practicing as an insolvency professional; or

(b) there is conflict of interest or change of personal circumstances which preclude the

further discharge of his duties as a bankruptcy trustee.

Filing of vacancy of bankruptcy trustee reasons other than resignation and replacement:

[Section 147]


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Where office of bankruptcy trustee, gets vacated due to any other reason than resignation and

replacement, the Adjudicating Authority shall direct the Board for replacement of a

bankruptcy trustee.

The Board shall, within ten days of the direction of the Adjudicating Authority, recommend

bankruptcy trustee as a replacement.

Release of bankruptcy trustee: [Section 148]

A bankruptcy trustee shall be released from his office with effect from the date on which the

Adjudicating Authority passes an order appointing a new bankruptcy trustee in the event of

replacement, resignation or occurrence of vacancy, as the case may be.

Appeal

An appeal from an order of the Debt Recovery Tribunal under this Code shall be filed within

thirty days [extendable by 15 days] before the Debt Recovery Appellate Tribunal. Any person

aggrieved by an order of the Debt Recovery Appellate Tribunal may file an appeal to the

Supreme Court on a question of law arising out of such order under this Code within forty-

five days [extendable by 15 days] from the date of receipt of such order.


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Chapter 9: Offences and Penalties

9.1. Offences and Penalties in CIRP and Liquidation Processes

Chapter VII of Part II of the IBC, 2016 deals with the provision relating to offences and

penalties in the corporate insolvency resolution and liquidation processes. This chapter is

constituted by 10 sections from section 68-77.

Section Offence Applicable to Penalty

68 Concealment of

property

Officer of the

corporate debtor

Imprisonment for a term of minimum 3

years but may extent to 5 years or fine of

minimum Rs. 1 lakh which may extend to

Rs. 1 crore or both.

69 Transactions

defrauding creditors

Officer of corporate

debtor


year but may extent to 5 years or fine of



70 Misconduct in

course of CIRP

Officer of corporate

debtor





70 Misconduct in

course of CIRP

Insolvency

Professional

Imprisonment for a term which may

extend to six months or fine of minimum

Rs. 1 lakh which may extend to Rs. 5

lakhs or both.

71 Falsification of

books of corporate

debtor

Any person Imprisonment for a term of minimum 3




72 Wilful and material

omissions from

statements relating

to affairs of

corporate debtor

Officer of the

corporate debtor





73 False representations Officer of corporate Imprisonment for a term of minimum 3


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to creditors debtor years but may extent to 5 years or fine of



74(1) Contravention of the

moratorium

Corporate debtor or

any of its officers






moratorium

Creditors of the

corporate debtor






resolution plan

Corporate debtor or

any of its officers or

creditors or any

person on whom the

approved resolution

plan is binding





75 False information

furnished in

application

Any person

furnishing false

information in

application under

section 7

Fine of minimum Rs. 1 lakh which may

extend to Rs. 1 crore or both.

76 Non-disclosure of

dispute or payment

of debt by

operational creditor

An operational

creditor or any other

person who

knowingly and

wilfully authorised

such concealment





77 False information in

application made by

corporate debtor

A corporate debtor

or any other person

who knowingly and

wilfully authorised

furnishing of such






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information

9.2. Offences and penalties in insolvency resolution and bankruptcy processes of

Individuals and Firms

Chapter VII of Part III of the IBC, 2016 deals with the provision relating to offences and

penalties in the insolvency resolution and bankruptcy processes of individuals and firms.

This chapter is constituted by 4 sections from section 184-187.

Section Offence Applicable to Penalty

184(1) False information

etc. by creditor in

insolvency

resolution process

Creditor or debtor Imprisonment for a term upto 1 year or

fine upto Rs. 5 lakhs or both.

184(2) False information

etc., by creditor in

insolvency

resolution process

Creditor Imprisonment for a term upto 2 years or

fine upto three times the amount or its

equivalent of such money, property or

security accepted by the creditor, or both.

185 Contravention of

provisions

Insolvency

professional

Imprisonment for a term upto 6 months,

or fine of minimum Rs. 1 lakh upto Rs. 5

lakhs, or with both.

186(a) False information,

concealment, etc.

by bankrupt

Bankrupt Imprisonment for a term upto 6 months

or fine upto Rs. 5 lakhs or both.

186(b) False information,

concealment, etc.

by bankrupt

Bankrupt Imprisonment for a term upto 1 year or


186(c) Contravention of

provisions of the

Code



186(d) Failed to deliver

possession of

property



186(e) Failed to account Bankrupt Imprisonment for a term upto 2 years or


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for any loss

incurred

fine upto three times the value of loss or

both.

186(f) Absconded or

attempts to abscond

Bankrupt Imprisonment for a term upto 1 year or


187 Punishment for

certain actions

Bankruptcy trustee Imprisonment for a term upto 3 years or

fine not less than three times the amount

of loss caused.


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Chapter 10: Recent Development under the Code

Insolvency and Bankruptcy Code, 2016, which is not even fully implemented as part III of

the Code pertaining to Individual Insolvency has not yet been notified, has been witnessing

ups and downs ever since its inception. In just a time frame of 10 months Code has been

amended twice by Ordinance and twice the amendment through Parliamentary approved Act.

Besides, various regulations (especially those pertaining to CIRP and FT_CIRP) have been

amended time and again.

One of the most discussed changes were those brought in by IBC (Second Amendment) Act,

2018. Main changes brought in by this amendment are as follows:

The allottee under a real estate project to be recognised as financial creditors. The

expressions, “allottee” and “real estate project” shall have the meanings respectively

assigned to them in the Real Estate (Regulation and Development) Act, 2016.

The promoter of micro, small and medium enterprise (MSME) is not to be

disqualified from bidding for his MSME undergoing Corporate Insolvency Resolution

Process (CIRP), provided he is not a wilful defaulter and does not attract other

disqualifications not related to default

The IBC (SecondAmendment) Act, 2018 lays down strict procedure if an applicant

wants to withdraw a case after its admission under the Code. Such withdrawal would

be permissible only with the approval of the Committee of Creditors with 90 percent

of the voting share. Further, there can be no withdrawal, once the commercial process

of inviting Expressions of Interest (EoI) and bids commences.

The IBC (Second Amendment) Act, 2018, provides a mechanism to allow

participation of security holders, deposit holders and all other classes of creditors that

are or exceed10 in numbers of such creditor through authorised representative, in the

meetings of the Committee of Creditors.

Section 29A has been fine-tuned to exempt pure play financial entities from being

disqualified from submitting resolution plan, on account of NPA. Also, NPA acquired

under the Code shall not disqualify an entity from bidding for the next three years.

Due to the wide range of disqualifications contained in Section 29A of the Code, IBC

(Second Amendment) Act, 2018, provides that the Resolution Applicant shall submit

an affidavit certifying its eligibility to bid. This places the primary onus on the

resolution applicant to certify its eligibility.


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It provides for a minimum one-year grace period for the successful resolution

applicant to fulfil various statutory obligations required under different laws.

It also stipulates non-applicability of moratorium period to enforcement of guarantee.

It necessitates special resolution by shareholders for corporate debtors to themselves

trigger insolvency resolution under the section 10 of the Code.

The minimum threshold for decisions at CoC reduced to 66% from earlier threshold

of 75% for major decisions like approval of resolution plan, change of IRP/RP, etc.

Further, to facilitate the corporate debtor to continue as a going concern during the

CIRP, the voting threshold for routine decisions has been reduced to 51%.

Grammatical changes made to imply that pendency of suit or arbitration proceeding

not precondition for claiming existence of ‘dispute’ to counter the initiation of CIRP

by operational creditors.

To harmonize criteria explicit for CIRP filings under section 7 and section 9 with that

of section 10, pendency of disciplinary proceedings against the proposed interim

resolution professional inserted as a ground for rejection of application under section

10.

Change in section 16 to provide that the interim resolution professional shall continue

in office till the appointment of resolution professional.

Proviso inserted in section 23 so as to allow and facilitate continuation of resolution

professional in office post the closure of corporate insolvency resolution process

period and until an order is passed by the adjudicating authority under section 31.

Section 42 modified to explicitly provide for appeals against acceptance of claims by

the Liquidator.

New section 238A inserted to state that the provisions of the Limitation Act, 1963

will apply to proceedings or appeals under the Code before the NCLT or the NCLAT,

as the case may be.

Many changes have also been made in the IBBI(Insolvency Resolution Process for Corporate

Person) Regulations, 2016 to implement the changes in the Code like following:

The amended regulations now provide that wherever the corporate debtor has classes

of creditors having at least ten creditors in the class, the IRP shall offer a choice of

three insolvency professionals in the public announcement to act as the authorised


97

representative of creditors in each class. A creditor in a class may indicate its choice

of an insolvency professional, from amongst the three choices provided. The

insolvency professional, who is the choice of the highest number of creditors in the

class, should be appointed as the authorised representative of the creditors of the

respective class.

An application for withdrawal of an application may be submitted to the IRP/RP

before issue of invitation for expression of interest, along with a bank guarantee

towards estimated cost incurred for certain purposes under the process. The CoC shall

consider the application within 7 days of its constitution or 7 days of receipt of the

application, whichever is later. Only if the application is approved by the CoC with

90% voting share, the IRP/RP shall submit the application to the Adjudicating

Authority on behalf of the applicant, within three days of such approval.

Where rate of interest has not been agreed to between the parties in case of creditors

in a class, the voting share of such a creditor shall be in proportion to the financial

debt that includes an interest at the rate of 8% p.a.

Where the appointment of RP is delayed, the IRP shall perform the functions of the

RP from the fortieth day of the insolvency commencement date till a RP is appointed.

A meeting of the CoC can now be called by giving not less than 5 days’ notice in

writing to every participant. The CoC may, however, reduce the notice period from

five days to at least 48 hrs where there is any authorised representative and to 24

hours in all other cases. The authorised representative shall circulate the agenda to

creditors in a class and announce the voting window at least 24 hours before the

window opens for voting instructions and keep the voting window open for at least 12

hours.

The RP should form an opinion whether the corporate debtor has been subjected to

preferential transactions, undervalued transactions, extortionate transactions or

fraudulent transactions by 75th day of the insolvency commencement date, make a

determination of the same by 115th day and apply to the Adjudicating Authority for

appropriate relief before 135th day.

The RP must publish an invitation for expression of interest (EoI) by the 75th day

from the insolvency commencement date, specifying the criteria, ineligibility, the last

date for submission of EoI and other details without requiring payment of non-

refundable deposit.


98

The RP should conduct due diligence based on material on record and issue a

provisional list of prospective resolution applicants within 10 days of the last date of

submission of EoI. On considering objections to the provisional list, the RP should

issue the final list of prospective resolution applicants, within 10 days of the last date

for receipt of objections.

The RP must issue the information memorandum, the evaluation matrix and the

request for resolution plans, within five days of issue of the provisional list to the

prospective resolution applicants and allow at least 30 days for submission of

resolution plans. The amendment also details minimum requirement of resolution plan

and request for resolution plan.

The CoC should evaluate the resolution plan strictly as per the evaluation matrix to

identify the best resolution plan. After approval, the RP should endeavour to submit

the resolution plan to the Adjudicating Authority at least 15 days before the end of

180 days period along with a compliance certificate.

The amended regulations also provide for a model timeline of the CIRP.

The amended regulation prescribes following new forms:

o Form CA Submission of Claims by Financial creditors in a Class

o Form FA Application for withdrawal of CIRP

o Form G Invitation for Expression of Interest

o Form H Compliance Certificate.

IBC and Income Tax Act, 1961 (amendments in Budget 2018)

The Finance Bill 2018 introduced two changes in the income tax law to provide relief to the

companies undergoing proceedings under IBC. Firstly, was amendment of Section 79 to

provide for the exclusion of companies whose resolution plans have been approved under the

IBC from its ambit. Section 79 of the Income-tax Act, 1961 (Act) provides that losses cannot

be carried forward if ownership of majority shareholding in a company changes hands. For

losses to be allowed to be carried forward, there must be continuity of ownership (more than

50% of the voting power) between the year in which loss was incurred and the year in which

loss is being allowed to be carried forward and/or set-off. Since companies

in bankruptcy have significantly brought forward losses, in the event of a change of

ownership as part of the plan of revival under the IBC, they would have lost out by not being

able to set-off these losses against future profits.


99

Secondly, an amendment has been made in Section 115JB which provides for the benefit of

set-off of brought forward losses and depreciation against the book profits for companies

against whom applications for resolution process has been admitted under the IBC by the

Adjudicating Authority. Any waiver of loan or interest in a resolution plan must be credited

to the statement of profit and loss of the companies under the accounting standards, which

may lead to the incidence of MAT on the book profits. The amendment does not provide for

the exclusion of waiver amount from the book profits but a set-off for brought forward losses

and depreciation against the amount credited as income on account of waiver as book

profits. Thus, reducing the instances of MAT profit as taxing distressed companies struggling

to come out of insolvency is neither desirable nor intended.

Other Important events in relation to IBC Code

IBBI circular dated 10/8/18 requires notice of meeting of COC to require that Financial

Creditor must be represented in the CoC or in any meeting of the CoC by such persons

who are competent and are authorised to take decisions on the spot and without deferring

decisions for want of any internal approval from the financial creditors.

Constitution of NCLT Jaipur branch to come into force on the 1st day of July, 2018.

As per claims Rupees 830 billion dues has been cleared by companies on fear of losing

control under the Code.

MCA has proposed UNICITRAL Law Based Cross Border Insolvency regime. Draft

regulations have been posted for comment.

IBBI issued discussion paper on discharge of responsibility as Interim Resolution

Professional under IBC.

India has been recognised as jurisdiction which improved its restructuring and insolvency

regime the most over the last year and wins the Global Restructuring Review (GRR)

Award for the Most Improved Jurisdiction.


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Chapter 11: Important Recent Decisions

Orders by Supreme Court of India

1. Supreme Court in SC in SBI Vs V. Ramakrishnan

Section 14 of IBC, which provides for a moratorium for limited period mentioned in Code,

on admission of an insolvency petition, would not apply to a personal guarantor of a

corporate debtor. This is in line with the amendments made by IBC (Second Amendment)

Act, 2018

2. Supreme Court in Chitra Sharma v. Union of India

In a proceedings initiated before Supreme Court to protect interest of home buyers in projects

floated by Jaypee group, Supreme Court directed that CIRP (Company Insolvency Resolution

Process) would be initiated and CoC(Committee of Creditors) would be constituted in

accordance with provisions of Insolvency and Bankruptcy (Amendment) Ordinance, 2018,

more particularly amended definition of expression "financial creditors" by including home

buyers and promoters of Jaypee group would be ineligible to participate in CIRP by virtue of

provisions of Section 29A. Other key take away from the decisions are:

Fresh initiation of CIRP 180 days period further extendable by 90 days of JIL

Afresh CoC to be constituted

JIL/JAL and their promoters shall be ineligible to participate in the CIRP

IRP to invite fresh expressions of interest in addition to existing bids

RBI allowed to Initiate CIRP against holding co JAL

Amount of Rs 750 cr deposited so for to be transferred to NCLT

3. Supreme Court in Shivam Water Treaters Pvt. Ltd. Vs. Union of India &Ors. [SLP (C)

No. 1740/2018]

The honourable Supreme Court, apprehending the large scale incidences of cases been filled

to challenge the constitutional validity of the Code or constitution of NCLT, advised the High

Court of Gujarat in its order dated January 25, 2018, not to enter into the debate around the

constitutional validity of the IBC. The Supreme Court observed that, “The High Court is

requested not to enter into the debate pertaining to the validity of the Insolvency and

Bankruptcy Code, 2016 or the constitutional validity of the National Company Law

Tribunal.”


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Orders by High Court

1. Leo Edibles and Fats Limited v. TRO, Writ Petition No 8560 of 2018Telangana HC

In this case the petitioner had purchased certain property of a Leo Edibles and Fats Ltd, a

company undergoing liquidation under the IBC in an e-auction. The registrar refused to

register the transfer in favour of the petitioner due to the attachment notice issued by the tax

authorities which was issued prior to initiation of commencement of the liquidation

proceeding before the National Company Law Tribunal. HC held that the income tax

authorities are not at par with ‘secured creditors’ under the IBC and cannot claim any priority

merely on the ground that the order of attachment issued by it was prior to the appointment of

the liquidator under the IBC. The Court also observed that section 178 of the IT Act has been

amended to provide that the provisions of the IBC shall prevail over the provisions of section

178 of the IT Act. The High Court, thus, allowed the petition and directed the registrar to

register the transfer in favour of the petitioner.

Orders by NCLAT

1. Shah Bro. Ispat (P.) Ltd. v. P. Mohanraj. NCLAT New Delhi

NCLAT by reversing the order of NCLT, Chennai Bench, held that moratorium will not

extend to proceedings under section 138 of Negotiable Instruments Act, 1881. The

proceedings under section 138 are criminal in nature and all proceedings which are criminal

in nature are outside the purview of Moratorium. Further, it has taken a view that action taken

under section 138 of the NI Act, 1881 is not a proceeding or judgment or decree of money

claim.

2. Gaja Trustee Co. (P.) Ltd. v. Haldia Coke & Chemicals (P.) Ltd. NCLAT, New Delhi

NCLAT dismissed initiation of CIRP under section 10 of the Code (i.e by the Corporate

Debtor itself), on claim of appellant shareholder that the CIRP was initiated without

affirmative shareholder approval despite the fact Articles of Associations of the Company

required such mandate for initiation for such proceedings. All orders passed by Adjudicating

Authority pursuant to impugned order was also to be set aside.


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3. Dinesh Kumar Bhasinv. Batliboi Impex Ltd. NCLAT New Delhi

A CIRP proceeding was initiated on application by Operational Creditor. Appellant, a

shareholder of corporate debtor, had challenged impugned order on ground that said order of

admission was passed without hearing corporate debtor in violation of principle of natural

justice and if hearing would have been given, corporate debtor could have settled dispute.

NCLAT held that Order passed by Adjudicating Authority without hearing corporate debtor

was in violation of principle of natural justice and set aside the order admitting the CIRP. The

Operational Creditor was asked to pay Rs. 1.5 Lakhs to IRP.

4. Dr. H.N. Nagaraj v. Edelweiss Asset Reconstruction Company Ltd. NCLAT: N Delhi

CIRP initiated by financial creditor under section 7 and accepted by Adjudicating Authority,

was challenged by Corporate Debtor claiming that that though there was 'debt' but there was

no 'default' as in terms of restructured agreement, debt had to be paid in instalments after

selling various immovable properties but financial creditor obtained injunction order from a

Court. However, It was undisputed that appellant/corporate debtor failed to pay instalments in

terms of schedule annexed to restructured 'agreement'. NCLAT held that AA is only

supposed to see whether application is complete or not and whether there is any 'debt' or

'default' and, therefore, reason for default of payment cannot be a ground to reject application

filed under section 7.

5. Devendra Padamchand Jain v. Sandhya Prakash NCLAT: N Delhi

The Insolvency resolution professional (IRP) has filled as application with AA seeking

direction to tenents pay the rent and for direction to the police to give the protection to

take charge of the assets. AA held that is entitled to recover rent from the tenants. He can

also approach the District Administration in discharge of its duties, if necessary.

However, he cannot remove the tenant. IRP appealed against the order of AA. NCLAT

dismissing the application held that an IRP cannot remove a tenant if he is not paying

rent, however, it is open to IRP to move before appropriate forum for possession of

assets of corporate debtor.

6. V. V. Nagarajan v. Vishnusudha Textiles: NCLAT N Delhi

Where corporate debtor failed to demonstrate that he had within period of 10 days of receipt

of demand notice under section 8 brought to notice of operational creditor existence of


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dispute or had repaid outstanding operational debt, application under section 9 was to be

admitted.

7. VelamurVaradan Anand v. Union Bank of India: NCLAT N. Delhi

In this case the application for intiation of CIRP was admitted. However, IRP took over

charges after 30 days of admission of such application. Question arose that whether above

period of 30 days was to be excluded for purpose of counting period of 180 days for

completing CIRP. NCLAT held that said period of delay was to be excluded for counting

period of completing CIRP.

Orders Passed by NCLT

1. Mahavir Traders v. Ajay Knitwears& Fabrics (P.) Ltd. NCLT: Chandigarh

An application for initiation of CIRP was made by the Operational Creditor. Existence of

trades payable in name of operational creditor in balance sheet of operational debtor was

accepted. However, the debtor's contention that no goods were supplied by operational

creditor and its financial statement relied upon by operational creditor had been made in

connivance with ex-employee of debtor, But the contention of debtor was not supported by

any proof. NCLT Chandigarh admitted the petition filed by operational creditor under section

9 on the ground of lack of proof.

Similar ruling in Topsgrup Services Ltd. v. BLS IT-Services (P.) Ltd. NCLT: N Delhi

2. AVI Polymers Ltd. v. Hindustan Cable Ltd.: NCLT Kolkata

An Operational creditor filed application to initiate CIRPs claiming that Rs. 4.50 crores was

due from corporate debtor which included interest, though there was no contractual liability

to pay interest by corporate debtor. The application was rejected being incorrect and

misleading.

3. Tek Chand v. Premia Projects Ltd. NCT: New Delhi

Corporate debtor had entered into sale/purchase MOU with petitioner for sale/purchase of

constructed space. The petitioner disbursed total sale consideration under the MOU and opted

for the assured returns plan under the said MOU according to which the corporate debtor was


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to pay a monthly sum to the petitioner until 50 months or offer of possession whichever was

later. Corporate debtor failed to pay assured returns to petitioner under MOU for

sale/purchase of constructed space. The application for CIRP under section 7 was admitted as

default had occurred and petition filed under section 7(2) by petitioner being complete.

4. Daya Engineering Works (P.) Ltd. v. UIC Udyog Ltd. NCLT: Kolkata

Applicant placed a purchase order on respondent for supply of goods and paid an amount in

advance. However, there was a short supply and thus the applicant demanded the refund. It

filled for initiation of CIRP as operational creditor. NCLT held that refund of advances in

case of short supply of goods wouldn't fall within definition of operation debt and hence the

application was not admitted.

5. Equipment Conductors & Cables Ltd. v. Transmission Corporation of Andhra Pradesh

Ltd NCLT: Hyderabad

In this case dispute was held to have existed where there was difference in amount of due

claimed by operational creditor differed from amount accepted by the corporate debtor.

Operational creditor's claim towards outstanding debt was for Rs. 3.79 crores. In its reply

Corporate debtor submitted that, matter was pending before District Court wherein, liability

was determined at Rs. 24.5 lakhs and corporate debtor was directed to deposit 75 per cent of

said amount. The Corporate debtor claimed that, 75 per cent of amount was deposited and

same was withdrawn by operational creditor and hence dues are of only Rs 7 lakhs and not

Rs. 3.79 crores as claimed bu operational creditor. The honourable NCLT (Hyderabad

Bench) held, it was a clear dispute in existence in regards to quantum of liability, therefore,

operational creditor's petition to initiate CIRP against corporate debtor was to be rejected.

Others

1. Re Rakesh Wadhwa: IBBI

Where IRP: Mr Rakesh Wadhwa, continued over 30 days, and held first meeting of CoC

with less than 7 days notice and did not consider claim of one financial creditor/Bank,

same was in contravention of code of conduct and his registration was suspended

2. Re: Mr Dinkar T. Venkatasubramanium: IBBI Disciplinary Committee


105

Where IRP Mr Dinkar T. Venkatasubramanium, allowed Ernst & Young LLP to raise

invoices for fees and out of pocket expense for services rendered by him as IRP, a case was

registered against him stating it was unlawful and illegal. Disciplinary Committee agreed that

E & Y LLP cannot raise invoices on behalf of IRP despite agreement between IRP and E &Y

LLP. However, this being first case as IRP by Mr Dinkar T. Venkatasubramanium,

Disciplinary Committee decided to take a lenient view and let go with a monetary fine of Rs.

1 Lakh.

3. Re: Mukesh Mohan IRP: IBBI Disciplinary Committee

Disciplinary Committee has found insolvency professional Mr. Mukesh Mohan guilty of

contravening the provisions of the Code, in four proceeding he had undertaken under the

Code as IRP/RP, also guilty of not abiding to the directions of Adjudicating Authority. His

registration has been cancelled and he has been debarred from taking further assignment and

registration as insolvency professional for 10 years.


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Chapter 12:IBC an Opportunity for Real Estate SectorCompanies and Investors

IBC, 2016 is going to impact the overall credit money market and recovery mechanism in a

big way. Real Estate being a sector, where the demand and supply both heavily depend on

availability of credit will definitely be affected in more than one ways by this new insolvency

regime specially since according to a report published in 2015, non-performing assets (NPAs)

in real estate were worth ₹60 billion. This has directly affected the share of bank lending for

organised funding to real estate sector which has dropped from over 68 percent in 2013, to 17

percent in 2016, which has further gravened the problem as due to lack of funds various

uncompleted projects are laying as such. The problem is cyclic as due to lack of funds the

projects are remaining uncompleted and due to non completions the units are not being sold

thus there is no realization. Here, IBC can play a big role by providing a path to resolution of

this problem. For instance, with 43 real estate projects in various stages of construction, Amrapali Group is unable to deliver homes to about 42,000 buyers in a time-bound manner in light of the financial crisis. It cites land acquisition issues in Greater Noida during 2011-15 and demand slowdown in the property market in the last several years, as the reason for

delay in project delivery.The Apex court has now brought in the state‐owned National

Buildings Construction Corporation Ltd (NBCC) to complete 16 Amrapali

projects and directed it to prepare a comprehensive plan for completion of the

same.

Due to delays in handing over the apartments, buyers who have resorted to home loans to

fund their initial payments, failing to bear the twin burden of paying rent of their existing

residences and interest on the loan taken, end up being defaulter to banks. This furthers the

NPA problem of banks from the perspective of home loan segment. The amended Code now

provides enough arms to resolve the issue with the defaulting developers in a time bound

manner. Thus, IBC can be boon to both developer who wish to come out of debt trap and to

investor or allotee in real estate who has invested his/her hard-earned money into the project.

IBC and Real Estate Sector

Initially in part II of the Code, that deals with the insolvency resolution and liquidation for

Corporate Debtors, the Code identified two kinds of creditors, Financial Creditor and

Operational Creditor. Section 5(7) defines financial creditor as ‘any person to whom a

financial debt is owed and includes a person to whom such debt has been legally assigned or


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transferred to’. Financial Debt has been defined in subsequent subsection as ‘a debt along

with interest, if any, which is disbursed against the consideration for the time value of money

and includes....’. On the other hand, subsection (20) of Section 5 defined operational creditors

as “a person to whom an operational debt is owed and includes any person to whom such

debt has been legally assigned or transferred”and operational debt is subsequently defined as

‘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’. No other

kind of creditors were conceptualised besides these two and all 3 IBBI regulations10

pertaining to Insolvency Resolution and liquidation Process for Corporate Persons were also

prepared keeping only these two kinds of creditors and accordingly prescribed forms for

submitting claims by them.

Soon after the part II of the Code was notified, issue arose in case of large builder like JP

Infratech and AMR Infrastructures, where the Flat buyers pending allotment were not sure

whether to file their claim as operational creditor or financial creditor. NCLT in Mukesh

Kumar vs. AMR Infrastructures11 had held that a flat purchaser cannot be treated as

‘Operational Creditor’ within the meaning of Section 5(20) of the Code as the debt incurred

by the Developer Company has not arisen out of provisions of goods, services or

employment. It also ruled that flat buyers cannot be treated as ‘financial creditors’ within the

meaning of Sec.5(8) of the Code since such debts are not disbursed against the consideration

of the time, value of money. These rulings resulted in an outcry against the Code despite

assurance by the NCLT that interest of the home buyers will be taken care of.

To handle the issue, the IBBI on 16 August, 2017 amended the IBBI (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016, and the Insolvency and Bankruptcy Board

of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017

and introduced a form (Form F) for submission of claims by creditors other than financial and

operational creditors to the interim resolution professional. Regulation 9A was also inserted

under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 that

carved out a detailed provision for filing and proving claims by other creditors. This resulted

in recognition of third kind of creditors beside operational and financial creditors. However,

10IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, IBBI (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 and IBBI (Liquidation Process) Regulation, 2017 11C.P. NO. (IB)-30(PB)/2017


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these creditors could neither initiate CIRP process nor had right to participate in meetings of

Committee of Creditors. There was no assurance of receiving liquidation value as well. In

most cases the amount of money given by home buyers as advances for their purchase is

usually very high, and frequent delays in delivery of possession may thus, have a huge

impact. For instance, in Chitra Sharma v. Union of India12 despite the fact that the amount of

debts owed to home buyers, was claimed to be Rupees Fifteen Thousand Crore, which was

significantly more than what was due to banks, banks were in a more favourable position

under the Code since they were financial creditors. As a result, in some of the cases like

Chitra Sharma v. Union of India and Bikram Chatterji v. Union of India13, the Hon’ble

Supreme Court had to safeguarding the rights of home buyers beyond the stipulations of the

Code.

On 16 November, 2017, the Government constituted a formal committee known as the

Insolvency Law Committee, for the purpose of evaluating the law and ascertain the key

practical challenges in the implementation of the Code. Rights of the property buyers was one

such issue that called for immediate attention. While deliberating on this issue, the

Committee placed reliance on Nikhil Mehta & Sons v. AMR Infrastructure Ltd14. in which the

home buyers were held to be financial creditors as the arrangement between the home buyers

and the seller of the apartments was such that the latter had committed to pay assured returns

to the former till the possession of the property was handed over. A similar judgment was

given in Anil Mahindroo&Anr v. Earth Organics Infrastructure15. The Committee noted that

the general practice is that these contracts are structured unilaterally by construction

companies with little or no say of the home buyers. A denial of the right of a class of

creditors based on technicalities within a contract that such creditor may not have had the

power to negotiate, may not be aligned with the spirit of the Code.

Requisite Amendment in Code

Here it would be pertinent to revisit the definition of financial debt. As per section 5(8) of

the Code, the term ‘financial debt’ has an inclusive definition with clauses (a) to (e) enlisting

certain specific scenarios under which debt is to be considered as financial debt, and clause

(f) reading as follows ‘any amount raised under any other transaction, including any forward

12 Writ Petition(s) (Civil) No.744 of 2017, Supreme Court of India 13 Writ Petition(s) (Civil) No.940 of 2017, Supreme Court of India. 14 NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 07/2017, Date of decision – 21 July, 2017. 15 NCLAT New Delhi, Company Appeal (AT) (Insolvency) No. 74/2017, Date of decision – 02 September, 2017.


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sale or purchase agreement, having the commercial effect of a borrowing’. It is argued that

as per financial terms of agreements between home buyers and builders, it is evident that the

agreement is for disbursement of money by the home buyer for the delivery of a building to

be constructed in the future. The disbursement of money is made in relation to a future asset,

and the contracts usually span a period of 4-5 years or more. Further, as regards the manner

of utilisation of the disbursements made by home buyers to the builders, the amounts so

raised are used as a means of financing the real estate project, and are thus in effect a tool for

raising finance, and on failure of the project, money is repaid based on time value of money.

Section 5(8)(f), is a residuary clause to cover debt transactions not covered under any other

clause, and the essence of the clause is that “amount should have been raised under a

transaction having the commercial effect of a borrowing.” Therefore, it was felt that the

existing definition of ‘financial debt’ was sufficient to include the amounts raised from

allottees under a real estate project. However, given the confusion and multiple

interpretations being taken, it was felt it would be prudent to explicitly clarify that such

creditors fall within the definition of financial creditor, by inserting an explanation to section

5(8)(f) of the Code which was initially inserted by the Section 3 of the Insolvency and

Bankruptcy (Amendment) Ordinance, 2018 effective from 6th June, 2018 and later

regularised by Insolvency and Bankruptcy (Second Amendment) Act, 2018 effective from

17th August, 2018. The newly inserted explanation reads as follows:

For the purposes of this sub-clause,-

(i) any amount raised from an allottee under a real estate project shall be deemed to be

an amount having the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall have the meanings

respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate

(Regulation and Development) Act, 2016 (16 of 2016).

It is pertinent to note that, though the term ‘home buyer’ has been used in media coverage,

committee report and even in the preamble of the Ordinance, the actual amendment is in case

of much larger section of real estate investor as the term allottee u/s 2(d) of RERA, 2016 is

very wide. As per section 2(d) "allottee" in relation to a real estate project, means the

person to whom a plot, apartment or building, as the case may be, has been allotted, sold

(whether as freehold or leasehold) or otherwise transferred by the promoter, and includes the


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person who subsequently acquires the said allotment through sale, transfer or otherwise but

does not include a person to whom such plot, apartment or building, as the case may be, is

given on rent. To comprehend the definition, it is also essential to check the definition of term

‘apartment’ as stated in section 2(e) which is reproduced below:

"apartment" whether called block, chamber, dwelling unit, flat, office, show room, shop,

godown, premises, suit, tenement, unit or by any other name, means a separate and self-

contained part of any immovable property, including one or more rooms or enclosed spaces,

located on one or more floors or any part thereof, in a building or on a plot of land, used or

intended to be used for any residential or commercial use such as residence, office, shop

showroom or godown or for carrying on any business, occupation, profession or trade or for

any other type of use ancillary to the purpose specified.

And finally, as per section 2(n) of the RERA, 2016 "real estate project" means the

development of a building or a building consisting of apartments, or converting an existing

building or a part thereof into apartments, or the development of land into plots or

apartment, as the case may be, for the purpose of selling all or some of the said apartments

or plots or building, as the case may be, and includes the common areas, the development

works, all improvements and structures thereon, and all easement, rights and appurtenances

belonging thereto.

Besides the insertion of the new explanation, further essential amendments were required to

handle the implementation issues that would inadvertently crop up as the number of allotees

in real estate projects can be huge and their representation in the meeting of CoC can be a

challenging task. Therefore, changes has also been made in Section 21 by insertion of sub

section 6(A) and 6 (B), to effect that the class of creditors has been permitted to be

represented by a qualified insolvency professional if the Insolvency Resolution Professional

(IRP) of corporate debtors makes an application to the Adjudicating Authority and such

insolvency professional who becomes authorized representative of a class of creditors is also

to be paid remuneration jointly by financial creditors. Further, amendment of subsection (7)

of Section 21 clarified that the Board may specify the manner of voting and the determining

of the voting share in respect of financial debts covered under sub-sections (6) and (6A).

.

Amendments in IBBI (Insolvency Resolution Process for Corporate Persons)

Regulations, 2016


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After the Ordinance, IBBI promptly came up with amended IBBI (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016, on 4th July, 2018. Clause (aa) has been

inserted in Regulation 2(1) which defines “class of creditors” as a class with at least ten

financial creditors under clause (b) of sub-section (6A) of section 21 and the expression,

“creditors in a class” shall be construed accordingly.

Therefore, if there are 10 or more allotees under a real estate project, whose debts are due,

they will be regarded as ‘creditor in a class’. Further, Regulation 4A was inserted, which

required that IRP should ascertain the class/classes of creditors and identify three insolvency

professionals (after taking their consent) for representation of creditors in a class. The IRP is

to offer these choices in Public Announcement made by him/ her as per newly inserted clause

(bb) to Regulation 6(2).

Regulation 8A has been inserted to provide that, Allotee in real estate project can submit

claim to the IRP in electronic form in Form CA, with proof evidenced by either of the

following:

the records available with an information utility

other relevant documents like agreement for sale, letter of allotment, receipt of

payment made, or any other document, evidencing existence of debt.

A creditor in a class may indicate its choice of an insolvency professional, from amongst the

three choices provided by the IRP, to act as its authorised representative (AR).

Further, Regulation 16A has been inserted which details the selection of most popular AR

based on the choices received. Such selected AR will be provided with the list of creditors in

the class he has to represent and will be provided electronic means of communication

between the AR and the creditors in the class. The AR shall circulate the agenda to creditors

in a class and announce the voting window at least 24 hours before the window opens for

voting instructions and keep the voting window open for at least 12 hours. The voting share

of a creditor in a class shall be in proportion to the financial debt which includes an interest at

the rate of 8% p.a unless a different rate has been agreed to between the parties. The

regulation also details the fees to be paid to such AR for each meeting of committee based on

number of creditors in a class.

There may arise a situation where the corporate debtor say a builder has only creditors in a

class and no other financial creditor eligible to join the committee, the committee shall

consist of only the ARs.


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Effect of the amendment

The classification of allotees under real estate projects as financial creditors will significantly

affect the rights of such allotees where the projects are delayed and sum due is over Rs.

1,00,000. As per a report16, delay in completion of under construction apartments has become

a common phenomenon and the records indicate that out of 782 construction projects in India

monitored by the Ministry of Statistics and Programme Implementation, Government of

India, a total of 215 projects are delayed with the time over-run ranging from 1 to 261

months. After the amendment, the following positive changes have emerged as right of such

investors:

In case of delays where advance paid is over Rs. 1,00,000, an allottee of real estate

project can initiate a Corporate Insolvency Resolution Process (CIRP) against the

defaulting builder under section 7 of the Code.

During CIRP, allottees of real estate project will have right of representation in

meeting of Committee of Creditors (CoC) where they can voice their concern.

Allottees of real estate project will also have right to vote for resolution plan which is more

beneficial to them.

After the amendments to bring homebuyers on par with financial creditors, Surjendu Sekhar

Kuila and Pooja Bhatnagar, an allotee in real estate transaction, have moved to the National

Company Law Tribunal, Delhi, seeking to initiate corporate insolvency resolution process in

respect of M/s Granite Gate Properties Private Limited, a company which not only failed to

handover possession of residential unit even after five years of promised date of possession

but also did not refund the money paid by the allotees.

Also in Chitra Sharma v. Union of India, proceedings initiated before Supreme Court to

protect interest of home buyers in projects floated by Jaypee group, Supreme Court directed

that fresh CIRP would be initiated and newly constituted Committee of Creditors would be

constituted including allottees in real estate as financial creditors in accordance with

provisions of amended Code.

The amendments are made to uphold the stake of the aggrieved property buyers. However,

there still exist certain open questions, which are likely to result in further litigation. One

such issue is whether such real estate investors would be regarded as secured or unsecured

financial creditor as this classification can immensely change the amount of realisation if the

16 Khyati Rathod and Niharika Dhall, ‘India: Delays in Construction Projects’, (Mondaq, 24 January,2017)


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builder company goes for liquidation. Also, there may also be situations where the real estate

allottee may actually be at a disadvantageous position because of their classification as

financial creditors. Unsecured financial creditors, get the amount left over after meeting all

liquidation expenses (which is usually very high), operational creditors and secured financial

creditors. Therefore, they may be left with amount which is significantly lower than their

investment. Besides, there may also be implementation issues for Authorised Representatives

in case of large number allottees, as the whole process of distribution of agenda and voting

has to be done in a very short time band. Considering the above, we can expect certain

changes in IBBI (Liquidation Process) Regulation 2017 clarifying the position of such

investor in waterfall mechanism contained in Section 53 of the Code.

Chapter 13: Project Sashakt

Accumulated NPA, especially in public sector banks (PSBs) are adversely affecting credit

disbursement. The ever growing NPA has taken mammoth proportions as it breached Rs 10

Lakh Crores mark as per reports in March’2018. This is expected to increase further with

stricter provisioning norms. The former governor of RBI, Raghuram Rajan, has been

instrumental in identifying the lacuna which has led to this situation of Indian banking. Ever

since the clear picture of NPA has come to the fore front, the present government is leaving

no stone unturned to deal with the problem. The enactment of Insolvency and Bankruptcy

Code, 2016 (IBC, 2016) to enable time bound resolution of insolvency proceedings, reference

of initial 12 big loans by RBI for the process and later 28 other big accounts and now the

proposal for new mechanism of debt resolution through Asset Management Companies or

Inter creditor arrangements are some of the steps worth mentioning.

Before, dwelling deeper into this new mechanism, it is essential to identify two important

areas where the overall efforts need to be focused to revive the banking system out of the

clutches of daunting NPA menace. Two essential components in resolving the NPA

problem would be firstly, the immediate task of resolving the current accumulation in

the PSBs, and the more important long-term task of ensuring that NPAs do not

accumulate again to this proportion. The second problem will hopefully be addressed to

great extent by the IBC, 2016, which provides for initiation of insolvency proceedings if

there is a default in case of corporate entity and limited liability partnerships (LLP) and

also requires completion of insolvency resolution proceeding within time-bound manner


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of 180 days (extendable at most by 90 days). However, initial experience of resolution

of large loans reveals that practically, it has not been easy to dispose-off the cases due

to lack of market for stressed asset. Also, since most of the companies currently facing

Insolvency proceeding under the IBC have been bearing burden of stressed loan since

years, the realization on resolution/liquidation is low and has resulted in massive

haircuts. Therefore, a committee of bankers, led by Punjab National Bank chairman Sunil

Mehta, came out with a report to help fix Indian banks’ bad loan problem with a Scheme

titled Sashakt, which after some deliberation has hit a cord with the existing government.

Project Sashakt

Project Sashakt aims to strengthen the credit capacity, credit culture and credit portfolio of

public sector banks. Under this project, loans will be bifurcated as per the Loan amounts of

upto Rs. 50 crore, Rs. 50crore to Rs. 500 crore and those over Rs. 500 crore. Accordingly,

bad loans of up to Rs. 50 crore will be managed at the bank level, with a deadline of 90 days

as such loans are mostly availed by Small and Medium Enterprises (SMEs) which are

important sector in terms of employment generation and national GDP contribution. A Bank

Led Resolution Approach (BLRA) for loans between Rs 50 crore& Rs 500 crore. Under this

approach, financial institutions will enter into an inter-creditor agreement to authorise the

lead bank to implement a resolution plan in 180 days or refer the asset to National Company

Law Tribunal (NCLT). For loans above Rs. 500 crore, the panel recommended an

independent Asset Management Company (AMC), supported by institutional funding through

the Alternate Investment Fund (AIF).

AMC/AIF Model [For loans above Rs. 500 crore]

According to the committee, banks will have to set up an AMC under which there will be

multiple sector-specific AIFs. These funds will invest in the stressed assets bought by

existing ARCs. The ARCs will use the funds to redeem security receipts issued to banks

against the bad loans. Other AMC-AIFs and ARCs will be allowed to bid for these assets, and

match the pricing offered by ARCIL or the national AMC. The AMC will be responsible for

the operational turnaround of the asset.

The ARC after buying the asset from lenders will transfer ownership to the AIF. The new

owner, the AMC-AIF, will hold a stake of at least 76%. The moment banks sell it to asset

reconstruction companies and these ARCs will in turn transfer the ownership of asset to the


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Alternate Investment Fund (AIF). The AIF then becomes the effective owner because the

intent is that the promoter if at all he is there becomes the minority. His control goes below

24%. The new owner which is the ARC and AIF are the ones that controls the asset and

hence their stake will be 76% and above. No one, even the promoter, should have blocking

rights.

The Mehta panel suggested that the bidding process follow a market-led approach, inviting

bids from AMCs, ARCs and AIFs. Existing players, such as ARCIL and the national AMC,

will be allowed to set the floor price for the bad assets, while other players will be asked to

either match the price or better it.

Once the asset moves to the ARC, it gets restructured at the ARC level. Then it goes into the

AMC – AIF, then the AIF subscribes and buys it and then takes the asset over and runs the

asset. The AIF subscribes to those Debentures which were issued when the asset was under

ARC. The proceeds of that the ARC goes to repay the bank. ARC becomes cash-neutral

because the AMC has bought it over and banks get paid out within 60 days. The asset could

issue optionally convertible debentures or debt rated debentures.

Setting up National level AMC

The total quantum of bad loans worth ₹500 crore or more is estimated at Rs. 3 trillion.

Therefore, it is estimated that the AMC will require funds of Rs. 1.2 trillion, assuming a 40%

loan recovery. Of this, 60-70% is expected to come from domestic institutions and banks,

including SBI, and the remaining 30-35% from foreign investors. The AMC will require

funding for 6 to 24 months.

Inter Credit Arrangements (For Loans in range of 50 Cr to 500 Cr)

Inter Credit arrangements (ICA) will be applicable to all corporate borrowers who have

availed loans and financial assistance for amount of more than Rs. 50 crore but less than Rs.

500 crore under consortium lending or multiple banking arrangements. Under it, lead lender

i.e. the one having highest exposure, will be authorised to formulate resolution plan for

operational turnaround of assets. The plan formulated under ICA should comply with RBI

norms and all other applicable laws and guidelines. Each resolution plan will be submitted by

lead lender to Overseeing Committee for their approval. Resolution plan is believed to be

approved if 66% of the banks in the group agree to it. The lead lender will have the right but

not the obligation to arrange for buy-out of the facilities of the dissenting lenders at a value


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that is equal to 85 per cent of the lower of liquidation value or resolution value. The

dissenting lenders can exercise such right of buy-out in respect of the entire facilities held by

other relevant lenders. Lead bank will get 180 days to implement resolution plan.

RBI in its guidelines dated 12 February, 2018, required that for accounts where the aggregate

exposure of the lenders is Rs.2000 crore or more on or after 1 March, 2018, the resolution

plan shall be implemented within a period of 180 days from March 1, 2018 or the date of

default, as the case may be. If such plan is not implemented as per timelines, the lenders

should file insolvency application, jointly or singly, under the Code within 15 days from the

expiry of the said timeline. Asthe time limit for existing loans is to expire on 27 August,

many banks are keen to enter into inter credit arrangement even though the detailed

mechanism is yet not officially announced. As per a news report dated August 21, 2018, as

many as 32 banks and financial institutionshave signed the inter creditor agreement

representing 85% of the credit exposure.

How it is different from current structure?

Even prior to withdrawal of various loan restructuring programmes such as the Corporate

Debt Restructuring (CDR), Sustainable Structuring of Stressed Assets (S4A), Strategic Debt

Restructuring (SDR), and disbandment of Joint Lenders Forum (JLF) by RBI in February,

2018, the banks had somewhat similar mechanisms where banks soldassets to ARC or

restructured loans jointly under Joint JLF. However, under the proposed arrangement when

banks sell these assets, it will be through open bidding, through inviting expression of

interest. Under the suggested mechanism, in an inter-creditor agreement, the banks will take a

uniform approach. So, if an asset is to be sold, it will be sold to a single ARC. So that even at

an ARC level the asset gets consolidated. Otherwise today even at the ARC level an asset can

be sold to a different ARC with different banks. Second, the ARC should be paying the banks

within 60 days and the security receipts have to be redeemed. If that has to happen, an ARC

would need a backing from the fund. And when they invest they have an AMC. So, it is a

combination of three. The key difference is that three things—AMC, AIF and ARC—are

moving in coordination and the sellers, the banks, are also moving in coordination and when

asset gets consolidated at one entity level, one fund, one AMC, then obviously the decision-

making will be much faster.


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Chapter 14: IBC a Ray of Hope for Debt Ridden Power Sector

The economic survey 2016-17 highlighted the twin balance sheet challenge in which the

companies are not earning enough to pay interest on loans from Banks and results in these

loans become NPAs necessitating banks to make substantial provisions in their balance

sheets. Consequently, the companies are reluctant to invest in new capacities and banks

crippled by bad loans are hesitant to lend. Power sector, specially thermal powers sector, is

one of the sectors that has contributed the most to the NPAs.

The Standing Committee on Energy of Ministry of Power, in its 37th report on Stressed /Non-

performing Assets in Electricity Sector presented on 07 March, 2018, in which it identified

34 coal based thermal power plants which have been categorised as financially ‘stressed’. As

per report, the segment wise position of NPA’s in electricity is as follows.

The report also detailed the capacity wise data of identified 34 stressed power projects which

is as follows:

Causes of Distress in Power Sector

It is difficult to identify a single factor that lead to such distress in power sector. Reasons for

financial stress in these thermal power projects are diverse and mostly not in the control of

the borrowing companies and include: (i) non-availability of fuel (coal), (ii) lack of enough

power purchase agreements (PPAs) by states, (iii) inability of the promoter to infuse equity


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and working capital, (iv) tariff related disputes, (v) issues related to banks, and (vi) delays in

project implementation leading to cost overruns.

Non-availability of fuel: coal availability is critical in several plants of the National

Thermal Power Corporation. Under the new coal linkage allocation policy, SHAKTI, coal

linkages are awarded on auction basis. Eligibility for such auction is determined on the basis

of Letters of Assurance (LOAs) recommended by the Ministry of Power. The Committee

noted that in the case of the 34 stressed assets, despite allocation of the coal linkage, LOAs

have not been issued even after three months, delaying the availability of coal to eligible

promoters. Coal India, for one, supplies only 60 per cent of what is required under a long

term PPA. Additional procurement of coal under e-auction is not compensated.

Lack of enough power purchase agreements (PPAs) by states: Discoms have shied off

power purchase agreements (PPAs)—the last one was in 2016 in Uttar Pradesh for 3,800

megawatt power, only to be cancelled later. They have preferred to buy power through short-

term contracts or the open market, given subdued offtake and prices, and significant capacity

addition in the past five years.

Consequently, many generators have been selling electricity at throwaway prices or have

switched off plants, leading to defaults on financial covenants. And with the increasing thrust

on renewable energy and clean energy, the procurement of thermal power has tapered.

Delays in project implementation: Development in the power sector has not been balanced.

While delicensing generation helped increased generation activities, the other segments

(transmission and distribution) have not been given much attention.

Tariff related disputes: In comparison to the tariff of previous years, there has been a steady

decrease of 17%. The following graph shall make this clearer:


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Issues related to banks: Banks did not conduct proper due diligence before imparting loans.

Moreover, resolution mechanism like SDR, S4A were not good enough to resolve the sector

out of it woes. They failed to address core sector issue leading to value erosion in long term.

Time lag between Supply and payment by distribution companies: Power developers

have to pay in advance for coal procurement, its transportation to the generating unit and

transmission of power. While payment from distribution companies takes four to five months.

This leads to increased working capital financing needs.

IBC and Power Sector NPA

RBI’S Circular Revising Framework for Resolution of Stressed Asset

A turmoil started among power companies when RBI through a circular on Resolution of

Stressed Assets – Revised Framework dated 12th February, 2018, rolled back all extant

instructions on resolution of stressed assets such as Framework for Revitalising Distressed

Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term

Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside

SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) and the Joint

Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts was

discontinued. RBI tightened the norms by requiring banks to identify accounts with even

single day default. RBI issued strong directives to all banks requiring them to put in place

Board-approved policies for resolution of stressed assets, including the timelines for


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resolution. Further, in respect of accounts with aggregate exposure of the lenders at ₹ 20

billion and above, on or after March 1, 2018 (‘reference date’), including accounts where

resolution may have been initiated under any of the existing schemes, Resolution plan to be

implemented as per the following timelines:

If in default as on the reference date, then 180 days from the reference date.

If in default after the reference date, then 180 days from the date of first such default.

If lenders fail in submitting plans within time frame, which ended on 27th August, for already

existing defaults as on reference date, the lenders would be mandatorily required to refer the

companies to National Company Law Tribunal (NCLT) for initiating proceedings under the

Insolvency and Bankruptcy Code, 2018 within 15 days of expiry of this period of 180 days.

This circular lead to turmoil in India INC at large, and even Government was opposed to such

directive of RBI. Power Sector is once sector which felt the jerk heavily. The Association

of Power Producers, through a letter to RBI said that the new guidelines majorly dis-

incentivise any loan restructuring in the segment. These, instead, push for sale and change of

control for an entity in some difficulty on loan payment, raising the risk for developers and

equity investors. Thus, they requested RBI to revise the circular asked that where these had

already been invoked, the provisions be allowed to be carried over, at least for 12-18 months

and also provision to implement an already prepared resolution plan if approved by 75% of

the lenders by value.

R K Singh, Minister of State for Power and New & Renewable Energy, had called the RBI

resolution for bad loans “impractical” and demanded changes. Failing to have impact on RBI,

representatives of the power sector asked the central government to consider the time frame

needed for any reform plan for stressed assets. The Union power ministry had earlier urged

the RBI to provide extension to the sector but RBI did not soften its stand on stressed assets.

Petition in Allahabad High Court

Independent Power Producers Association of India (IPPAI), filled a writ petitioned in the

Allahabad High Court against the RBI February circular. On 31st May, the Allahabad High

Court as an interim relief put on hold action against the power sector under the RBI’s stressed

assets framework. The court further directed the finance secretary to hold a meeting with his


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counterparts in the power, petroleum and coal ministries along with representatives of the

RBI and the Insolvency and Bankruptcy Board of India in June and see if any solution

outside the RBI’s resolution process is possible.

In response a meeting was held on June 21, where RBI stick to its stance and indicated that

its February 12 circular provides enough space for resolution of bad loans in the power

sector. It maintained that the circular does not stop the restructuring. Even if there is default

the restructuring is possible within the time frame available.

Constitution of High Level Empowered Committee

On July 29 the Government set up a high level empowered committee headed by cabinet

secretary P K Sinha and representation from the ministries of railways, finance, power, coal

and banks having major exposure to the power sector to revive stressed thermal power

projects. The committee focussed on 34 coal-based thermal power plants which are

categorised as stressed due to non-availability of fuel, lack of PPAs, inability of promoters to

infuse equity, contractual disputes and delays in project implementation leading to cost over-

runs.

Allahabad High Court’s order of 27th August

The Allahabad High Court declined to give private power companies any interim relief on

the RBI’s circular. It observed that itshall not curtail the rights/powers of a financial creditor

under Section 7 of the IBC or even of the RBI in issuing directions in specific case(s) under

Section 35AA of BR Act to initiate corporate insolvency resolution process under Chapter II

of Part II of IBC, in any given case and hence has mandated insolvency proceedings by

lenders against defaulting power projects within timeframe suggested by RBI.

However, the court also suggested the government could use a special dispensationunder

Section 7 of the RBI Act, to give directions to the central bank though this has never been

used before to give directions to the central bank. The court has also asked the high-level

empowered committee to decide within two months of its constitution i.e. by 29th September,

on resolution in consultation with the RBI.


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What lies ahead?

Banksare deliberating on project Shashakt which prescribes three different restructuring

mechanism depending on size of stressed asset.

The banks have finalised an inter-creditor agreement and were working on the five-pronged

strategy which is SME (small and medium enterprises) resolution approach for loans up to Rs

50 crore; bank-led resolution approach for loans between Rs 50-500 crore; resolution

approach led by ARC, Asset Management Company (AMC) and an Alternative Investment

Fund (AIF) for resolution of loans above Rs 500 crore, the NCLT/IBC approach, and an

asset-trading platform (a platform for trading performing and non-performing loans).

The banks have already referred 18 power sector accounts to the bankruptcy court since they

were unable to find a resolution for them. As a result of decision of Allahabad High Court,

insolvency proceeding in respect to 5 more power companies will start soon. A silver lining

can be drawn from the case of Prayagraj power which has a 1,980 MW super critical coal-

based power project, which has received bids from JSW energy and Resurgent Power (a joint

venture between Tata Power Co. Ltd). After Tata Power announced that Resurgent Power

received a letter of intent from creditors of Uttar Pradesh-based Prayagraj to acquire 75.01%

stake in the firm, JSW Energy has submitted a revised bid of Rs. 6,200 crore in place of its

earlier bid of Rs. 5,900 crore. As on 31 October 2017, Prayagraj’s total debt stood at ₹11,086

crore.