IBC PRESENTATION

An overview to
Insolvency and
Bankruptcy Code
(IBC) 2016
Brijesh Kr. Gupta
Founder and CNO, Sri Panchtatva
Legals, India
www.sripanchtatva.com

What IBC 2016 is all about? / Need for
Insolvency and Bankruptcy Code 2016
 Insolvency Code is a study on the Corporate Bankruptcy legal framework in
India.
 It aims at providing a friendly legal framework for the Small and Micro Scale
Industries (SME) to enable easy exit.
 It systematically fills the vacuum that exits with regard to bankruptcy
situations in:
• Companies incorporated under the Company Act, 2013;
• Any Company governed by any Special Act for the time being in force;
• Any LLP incorporated under the Limited Liability Partnership Act, 2008;
• Partnership firms and individuals etc.

Recent Developments in the field of
Insolvency and Bankruptcy Code, 2016
 Insolvency and Bankruptcy Code: IBC Ordinance provides shelter to homebuyers, MSME:
The Union Cabinet has cleared a new ordinance to the Insolvency and Bankruptcy Code (IBC) to address the concerns of homebuyers,
MSMEs (micro, small and medium enterprises), lenders and other procedural issues that have cropped up as implementation gathers
speed. This is the latest addition in a string of tweaks being made to the IBC in an ongoing manner. While the details are awaited for the
new changes, pending the Presidential approval, new modifications are expected to have a long-term impact not only on the corporate
debtors undergoing insolvency, but also on the manner in which certain industries operate.
 SC Stays NCLAT Order That Said Limitation Act Doesn’t Apply To Proceedings Under IBC, 2018:
A bench of Justices Rohinton Fali Nariman and Navin Sinha stayed the November 7, 2017 in the matter of M/s Speculum Plast Private
Limited v. PTC Techno Private Limited order of NCLAT and issued notices in the matter of B K Educational Services Ltd V/s Parag
Gupta &amp Associates, on an appeal filed by B K Educational Services Ltd (Appellant). The appellant said the NCLAT order
erroneously held that any application before the Adjudicating Authority/NCLT cannot be rejected on the ground of limitation as the right
to apply accrues only from the date of coming into force of the IBC.

 Insolvency And Bankruptcy Rules May Be Amended To Include
Inherent Powers Allowing Settlement After Admission Of Case:
The Supreme Court suggested amendment so as to include such inherent
powers in the Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016, which will help to obviate unnecessary appeals being
filed before Court in matters where such agreement has been reached between
the parties, permitting settlement to be recorded by the Tribunal after
admission of case under the Insolvency and Bankruptcy Code, 2016 (IBC).
 Lawyer Can Issue Demand Notice Of Unpaid Operational Debt On
Behalf Of Operational Creditor:
The Supreme Court, in Macquarie Bank Limited vs Shilpi Cable Technologies
Ltd, has held that a lawyer on behalf of the operational creditor can issue a
demand notice of an unpaid operational debt. The court also held that the
provision contained in S 9(3)(c) of the Code is not mandatory for initiating
insolvency proceedings.

Who all are covered under IBC, 2016 ?
Sole
Proprietors
hip or
Individual
One
person
Company
Partner-
ship
Limited
Liability
Partnership
(LLP)
Public
Company
Private
Company

Key Features of Insolvency and Bankruptcy
Code, 2016
 (IBC) Code, 2016 has consolidated and amended the laws relating to
reorganization and insolvency of corporate persons, partnership firms and
individual firms.
 With regard to Corporate Insolvency Resolution Process, it has demarcated the
difference between an Operational Creditor and a Financial Creditor and also
between an Operational Debt and a Financial Debt.
 It establishes an Insolvency and Bankruptcy Board of India which monitors the
functions, Registration, obligations, conduct etc, of Insolvency Professionals,
Agencies and Information Utilities.
 As per the provision of section 234, the provisions of this code are applicable to
the agreements entered into between the Central Govt and the Foreign
Countries.
 As per Section 238 of the Code, Provisions of this Code overrides the provisions of
other laws.
 As per Section 231 of the Code, the jurisdiction of civil courts has been explicitly
barred in respect of matters in which adjudicating Authority is empowered to take
action.

Procedure Adopted under the Insolvency and
Bankruptcy code, 2016
 The Code has 5 parts in all, whereby PART II and PART III specifically
demarcate separate detailed Insolvency mechanism to be adopted with
regard to:
a. For Corporate Company;
b. For Individuals and Partnership Firms.
Two Demarcated
Insolvency Mechanisms as
provided by IB Code, 2016
Part II: Corporate
Insolvency Resolution
Process
Part III: Insolvency
Resolution and
Bankruptcy For
Individuals and
Partnership firms

Corporate Insolvency Resolution Process :
How effected (PART II of the IBC, 2016)
The Code proposes two independent stages in case of default of
outstanding dues to creditors, which are as follows:
Corporate
Insolvency
Resolution Process
Insolvency
Resolution
Process
Liquidation
Voluntary
Liquidation

•Insolvency Resolution Process
During this stage, the committee of creditors along with insolvency
professional assess whether the corporate debtor’s business is viable to
continue and the options for its rescue and resurrection; and
•Liquidation:
If the insolvency resolution process fails or committee of creditors decide to
windup or liquidate the company and distribute the assets of the debtor.
•Voluntary Liquidation
A Corporate person who intends to liquidate itself voluntarily and has not
committed any default may initiate voluntary liquidation proceedings under
the provisions of the code after meeting such conditions with regard to
furnishing declarations, documents and passing specified resolutions etc by
filing appropriate application before the appropriate adjudicating authority.

Technical Conditions for Invoking Corporate
Insolvency Resolution Process :
 When any CD commits a default (minimum amount of default is INR 100,000), a
financial creditor or operational creditor or the CD itself, may initiate corporate IRP by
making an application to the National Company Law Tribunal (NCLT).
 Existence of Financial debt or an Operational Debt;
 Existence of Corporate Debtor and Financial Creditor or Operational Creditor
Relationship;
 Absence of an existing Dispute;
 The debt has not been repaid within a period of 10 days of the receipt of the demand
notice or copy of invoice by the Corporate Debtor;
 Initiation of Insolvency Resolution Process by filling an application in Proper format as
required by Section 7 and 8 respectively, before the appropriate adjudicating authority.
 Appointment of Resolution Professional
 Approval of Insolvency resolution draft and its Execution.

 Stages involved in the process are as follows:
default by
corporate
debtor
Notice to
Corporate Debtor
under Section 8
application with
NCLT by
operational or
financial
creditor or
corporate
applicant appointment of
interim
resolution
professional
discharge of
duties &exercise
of power by
insolvency
professional
formation of
committee of
financial creditors
committee of
creditor, within 7
days either
confirms the
appointment of
interim resolution
professional as RP
or replace IRP with
another RP
resolution
professional to
prepare
information
memorandum
resolution plan
proposed by
resolution
professional to
creditors
resolution plan
approved/reject
ed by creditors
committee with
75% majority by
value
order by NCLT
approving
resolution plan or
else liquidation
of the corporate
debtor

Time Limit for Completion of Insolvency
Resolution Process:
 Completion of insolvency process within 180 days from the date the
application is admitted by the NCLT, one time extension by NCLT of 90 days
subject to resolution passed at a meeting of the committee of creditors by a
vote of 75 percent of the voting shares.
 In case of fast track insolvency resolution process the resolution process shall
be completed within 90 days after the process is initiated, with a maximum
one time extension of 45 days by NCLT.
MORATORIUM PERIOD: The Code further provides for a “moratorium” to be
declared by the adjudicating authority on the commencement of the IRP, i.e.,
no suits, proceedings, recovery or enforcement action can be taken against the
CD during this period

Difference Between An Operational
Creditor and a Financial Creditor
 The IBC has introduced new and distinct concepts of 'Financial Creditor' and 'Operational
Creditor' as opposed to the Companies Act, 2013 which merely introduced the term 'creditor',
without any classification thereof.
 In order to succeed in initiating corporate insolvency resolution process against a debtor, it is
sine qua non to prove that the creditor falls within the ambit and scope of the definition of
either 'Financial Creditor' under Section 5(7) or 'Operational Creditor' under Section 5(20) of
the IBC.
 A financial creditor is defined under Section 5(7) of the IBC to mean
"a person to whom a financial debt is owed and includes a person to whom such debt has
been legally assigned or transferred".
 In order to ascertain whether a person is a financial creditor, the debt owed to such a person
must fall within the ambit a 'Financial Debt' as under Section 5(8) of the IBC.
A financial debt is defined under Section 5(8) of the IBC to mean: "a debt along with
interest, if any, which is disbursed against the consideration for time value of money and
includes-

a. Money borrowed against payment of interest;
b. Any amount raised by acceptance under any acceptance credit facility or its
de-materialized equivalent;
c. Any amount raised pursuant to any note purchase facility or the issue of
bonds, notes, debentures, loan stock or any similar instrument;
d. The amount of any liability in respect of any lease or hire purchase contract
which is deemed as a finance or capital lease under the Indian Accounting
Standards or such other accounting standards as may be prescribed;
e. Receivable sold or discounted other than any receivable sold on non-recourse
basis;
f. Any amount raised under any other transaction, including, any forward sale
or purchase agreement, having the commercial effect of borrowing;
g. Any counter-indemnity obligation in respect of a guarantee, indemnity, bond,
documentary letter of credit or any other instrument issued by a bank or
financial institution;
h. The amount of any liability in respect of any of the guarantee or indemnity
for any of the items referred to in sub-clauses (a) to (h) of this clause"

 An operational creditor is defined under Section 5(20) of the IBC to mean
"any person to whom an operational debt is owed and includes any person to
whom such debt has been legally assigned or transferred".
 In order to ascertain whether a person would fall within the definition of an
operational creditor, the debt owed to such a person must fall within the
definition of an operational debt as defined under Section 5(21) of the IBC.
An operational debt is defined under section 5(21) of the IBC to mean: "a
claim in respect of the provisions 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".
 It be kept in mind that the law makers have chalked out distinct definitions of
'financial creditor' and 'operational creditor' and that they are not to be
interpreted as inclusive or exclusive of each other.

 Distinction between a financial creditor and operational creditor has been
drawn by the Bankruptcy Law Reforms Committee in para 5.2.1 of its final
report2. It states:
"Financial creditors are those whose relationship with the entity is a pure
financial contract, such as a loan or debt security. Operational creditor
are those whose liabilities from the entity comes from a transaction on
operations...The Code also provides for cases where a creditor has both a
solely financial transaction as well as an operational transaction with the
entity. In such a case, the creditor can be considered a financial creditor to
the extent of the financial debt and an operational creditor to the extent of
the operational debt."

 Existence of Corporate Debtor and Financial Creditor or Operational Creditor
Relationship:
Corporate Debtor Defined:
Section 5(5) of the Insolvency and Bankruptcy Code Defines "corporate applicant"
means--
(a) corporate debtor; or
(b) a member or partner of the corporate debtor who is authorized to make an
application for the corporate insolvency resolution process under the
constitutional document of the corporate debtor; or
(c) an individual who is in charge of managing the operations and resources of
the corporate debtor; or
(d) a person who has the control and supervision over the financial affairs of the
corporate debtor;

Operational Creditor Defined:
Section 5(20) of the Code provides that “operational creditor” means a person to
whom an operational debt is owed and includes any person to whom such debt
has been legally assigned or transferred.
 Service of Demand Notice by the Operational Creditor:
As per the mandate of Section 8 of the Code:
Under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as, the
"Code"), for operational creditors to initiate a corporate insolvency resolution
process (hereinafter referred to as "CIRP"), two steps are required to be
followed. The first step is that the creditor has to deliver a demand notice under
Section 8 of the Code to the Corporate Debtor regarding the non-payment of
dues and then subsequently if there is no dispute raised by the Corporate Debtor
or there is the absence of payment, the CIRP can be initiated under the
provisions of Section 9 of the Code.

 Absence of an existing Dispute:
Section 5 subclause (6) of the Insolvency and Bankruptcy Code defines "dispute"
includes a suit or arbitration proceedings relating to-
(a) the existence of the amount of debt;
(b) the quality of goods or service; or
(c) the breach of a representation or warranty;
In order to invoke action against the corporate Debtor under the Insolvency and
Bankruptcy Code, 2016, existence of a dispute in the nature of pendency of any
proceedings in any court of law or arbitration tribunal before Receipt of Notice
under section 8 of the code would bar/restrain the Operational Creditor from
raising/Commencing a proceeding under the Code with regard to any amount of
debt in question as well as the enforceability of the contract between the
parties.

Insolvency Resolution and Bankruptcy for
Individuals and Partnership firms: How
effected (PART II of the IBC, 2016)

Technical Conditions for Invoking Insolvency
Resolution and Bankruptcy for Individuals and
Partnership firms
 In relation to individuals and partnership firms, the Code is applicable where
the minimum amount of default is INR 1,000. However, the Central
Government may by notification increase the threshold to a minimum of INR
1,00,000;
 Established Relationship of a Debtor and a Creditor;
 Existence of Debt;
 The Debtor is either an Individual or a Partnership firm;
 Debt has not been repaid within a period of fourteen days of the service of
the notice of demand;
 Sufficient documents i.e proof of debt and service of notice receipt is
available with the creditor while making an Application under section 95 of
the IBC, 2016.

 Fresh Start Process:
A debtor, who is unable to pay his debt may apply, either personally or through a
resolution professional, for a fresh start, if;
(a) the gross annual income of the debtor does not exceed sixty thousand rupees;
(b) the aggregate value of the assets of the debtor does not exceed twenty
thousand rupees;
(c) the aggregate value of the qualifying debts does not exceed thirty-five
thousand rupees;
(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 twelve months of the date of the application for fresh start

 IRP: Under this process, the debtors or the creditors initiate the insolvency
resolution process by making an application to the Debt Recovery Tribunal
(DRT). The debtor is then required to formulate a repayment plan subject to
approval of the creditors. The repayment plan is then submitted to the DRT
for its approval. If the DRT approves the repayment plan, it becomes binding
on the debtors and the creditors.
 Bankruptcy: If the repayment plan is rejected by the DRT, the debtors and the
creditors are entitled to file an application for bankruptcy. The DRT then
appoints a bankruptcy trustee who is responsible to administer the estate of
the bankrupt after an order of bankruptcy is passed by the DRT.

Adjudicating and other Ancillary bodies
under the IB Code, 2016.
 Adjudicating Authorities
National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) having
territorial jurisdiction over the place where the registered office of the
corporate person/Debtor is located.
 Appellate Authorities
Any person aggrieved by order of NCLT or DRT, as the case may be, may file
appeal to National Company Law Appellate Tribunal (NCLAT) or Debt Recovery
Appellate Tribunal (DRAT) within 30 days of such order.
 Appeal to Supreme Court
Any person aggrieved by an order of the NCLAT may file an appeal to the
Supreme Court on a question of law arising out of such order under this Code
within 45 days from the date of receipt of such order.

 Insolvency and Bankruptcy Board of India (IBBI)- Ancillary Body
Under the Section 240 of the Code, the powers of the Insolvency and Bankruptcy
Board of India (hereinafter referred to as the 'Board') have been listed.
According to the Section, the Board may, by notification, make regulations
consistent with this Code and the rules made thereunder, to carry out the
provisions of the code as listed in Section 196 and Section 200, in regard with the
Insolvency Professional Agencies (IPA) and utilities (IU).
According to these regulations, the following categories of individuals are eligible
for registration as an insolvency professional:
(a) Advocates, Chartered Accountants, Company Secretaries and Cost
Accountants with 10 years' of post-membership experience (practice or
employment) or a Graduate with 15 years' of post-qualification managerial
experience, on passing the Limited Insolvency Examination.
(b) Any other individual on passing the National Insolvency Examination.
However, Advocates, Chartered Accountants, Company Secretaries and Cost
Accountants with more than 15 years' of practice experience may seek
registration, without any examination but by getting registered under the Code.

How IBC, 2016 has provided for a fastest
way to recover Money?
OLD FRAMEWORK:
 Reorganization and winding up were dealt with under separate laws.
 There was no surety of debt recovery under various laws (such as the Contract Act, Recovery of Debts Due to
Banks and Financial Institutions Act 1993, Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002).
 Besides, the firms’ recast under SICA (Sick Industrial Companies Act) or winding-up action under the
Companies Act 1956 wasn’t successful; laws dealing with individual insolvency were also a century-old.
 Primary onus to initiate a resolution process lied with the debtor, and creditor had to pursue separate actions
for recovery, security enforcement and debt restructuring.
 The time taken and costs involved in resolving disputes had crippled the entrepreneurial community in India.
Under Civil Laws, the issues remained unresolved for years.

NEW FRAMEWORK
 The Code makes a significant departure from the existing resolution regimen by
shifting the responsibility on the creditor to initiate the insolvency resolution
process against the corporate debtor.
 One-stop shop: Laws relating to insolvency consolidated into a single legislation;
time-bound resolution of insolvency via new framework
 Genuine business failures get a second chance.
 In the new dispensation, control shifts from shareholders/promoters to a committee
of creditors.
 Simplification of laws: the Government has, by ushering in the IBC, envisaged to
simplify the various laws and help resolve disputes in a time-bound manner.”
 IBC has identified the sustainability issue and this has now become the core. The
crux of the code is “taking timely decisions.”
 Under this code within 24 days of issue of demand notice creditor will come to
know that whether his petition admitted or not. It is less costly than the application
in the court as the fees for admission of application by the operational creditor is
Rs. 2,000/-.

Grey Areas/ Drawbacks under the IBC, 2016:
 There is no mechanism to prevent future buildup of bad loans.
 There are 33 DRTs at present, but this number was insufficient to handle the
number of cases.
 The Code is silent in how much time the Liquidator will complete its process
of liquidation. There is also no time frame within which the Liquidator will
report final verdict to Adjudicating Authority. The Code specifies time of 180
days which may extend to 270 days for resolution process but when Liquidator
is appointed, no such time frame is given within which he has to complete his
job.
 The Code has not prescribed any disqualification for corporate debtor
(Companies and LLPs and/or their Directors, Partners), in case the Corporate
debtor becomes bankrupt or insolvent. The Government should consider
introduction of some of the disqualifications for corporate debtors and its
directors, promoters in case the corporate debtor become insolvent or
bankrupt and not able to pay its debts like mentioned hereinabove in case of
individual bankruptcy.

 In case of individual/partnership firm, the minimum default is Rs.1000/- and
incase of corporate debtor it is Rs.100,000/- which is too low, hence there are
chances of being misused and multiplicity of litigation. The Government
should review these limits.
 There is no such framework for corporate debtors whose cases are already
registered with High Court or SICA or other agencies where Liquidator has
already been appointed, for transfer or for shifting of such cases under new
Code, no such option is given in the Code.

BIBLOGRAPHY
 Dr. D K Jain’s 2017 edition on Insolvency & Bankruptcy Code;
 Insolvency and Bankruptcy Code, 2016;
 Articles on Legally India;
 Live law news articles pertaining to:
 NCLAT On point of issuing notice to Corporate Debtor at the stage of Admission
 Articles published by Moondaq pertaining to the topic of:
 Difference between Operational Creditor and Financial Creditor;
 Service of Demand Notice to the Corporate Debtor;

Questions & Further Information!
 Sri Panchtatva Legals is a law firm with
office in New Delhi. The Firm’s partners
have decades of experience and
expertise and are often called upon to
advise on complex legal issues in
challenging business environments. As
trusted advisors, we have represented a
wide variety of commercial, industrial,
institutional and individual clients,
including banks, financial institutions,
large and mid-sized public sector as well
as private sector companies,
partnerships, business groups, and
emerging companies – nationally and
internationally.
This document has been prepared for general
guidance only. It does not contain definitive
advice; please contact Sri Panchtatva Legals,
if you would like more detailed information
on any item referred to.
Further Information
If you require further information, or wish to
discuss any of the above, you can contact:
Brijesh Kr. Gupta
Founder & CNO
T +91 (11) 40159881
M +91 8506092366
E : info@sripanchtatva.com,
brijeshkgupta2016@gmail.com

Thank You for being a patient
listener!

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