🏛️ THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC)

📌 Introduction & Applicability

Objectives

• Maximize Asset Value
• Promote Entrepreneurship
• Availability of Credit
• Balance Stakeholder Interests
• NOT a Recovery Mechanism (Case: M/s Amsons Communication)

⚖️ Adjudicating Authority (AA)

• NCLT: For Companies, LLPs, PGs to CD
• NCLAT: Appellate Authority
• DRT/DRAT: For Individuals & Firms (Non-Corporate)

Key Pillars of the Code

• Adjudicating Authority - NCLT/NCLAT
• IBBI - Insolvency and Bankruptcy Board of India
• Insolvency Professionals
• Information Utility

Applicability (Sec 2)

• Companies (Companies Act 2013/Previous)
• LLPs
• Personal Guarantors (PGs) to Corporate Debtors (CD)
  • Case: Lalit Kumar Jain v UOI (2021)
• Partnership Firms & Proprietorships
• Individuals
• NBFC with asset size > 500 Crores as per latest audited FS
• EXCLUDES
  • Any Financial Service Provider unless notified by CG

Applicability of this part (Section 4)

• Amount of default is 1L (Or 1 Crore - Prescribed by CG)

🔑 Key Definitions (Sec 3 & 5)

Creditors

• Financial Creditor (FC): Debt disbursed against Time Value of Money (Interest).
  • Includes: Loans, Bonds, Derivatives.
  • Excludes: Subscription money for shares (ACPC Enterprises case).
  • Home Buyers: Are FCs (Sec 5(8)(f) Explanation).
• Operational Creditor (OC): Debt for Goods, Services, Employment, Govt Dues.
• Corporate Debtor (CD): Entity that owes debt.

💰 Default (Sec 3(12))

• Non-payment of debt (whole or part) when due.
• Minimum Threshold: ₹ 1 Crore (Raised from ₹ 1 Lakh via Notification 24-03-2020).
  • Note: Sec 10A suspended initiation for COVID defaults (25 Mar 2020 - 24 Mar 2021).

Relatives and Related Parties

• Relative
  • Spouse
  • 2 Steps up (Mom,Dad,Both Grand parents)
  • 1 step down (With spouse) - Viz Children
  • 1 step side (Bros and Sis) + Spouses
  • Extended-
    • Uncle and Aunts (Paternal and Maternal)
    • Nephew and Niece
• Related Party
  • Personal connection - Relatives
  • Partnerships/ LLP + Their Partners
  • 2% of shares in a company (Self + Relatives)
  • Control of appt of board - that company
  • Trusts for individual benefit

🚀 Initiation of CIRP (Sec 7, 9, 10)

Sec 7: Financial Creditor (FC)

• Applicant: FC itself or jointly.
• Constraint Min 100 creditors OR 10% of same class (whichever is less).
• Process:
  • File App to ⚖️ NCLT.
    • Persons who can file behalf
      • Guardian
      • Trustee/Executor
      • Person authorised by BOD
  • Furnish: Record of Default (IU) + Name of IRP.
  • ⏳ NCLT Timeline: Ascertain default within 14 Days.
    • Admit the application when
      • Default occurred
      • Application is complete
      • No pending proceedings exists against propesed IRP
    • Case: Surendra Trading: 14 days is directory, not mandatory.
  • Order: Admit (CIRP Starts) or Reject (7 days to rectify).

Sec 9: Operational Creditor (OC)

• Step 1: Demand Notice (Sec 8)
  • OC sends Demand Notice/Invoice to CD.
  • ⏳ CD Response: Within 10 Days.
    • Proof of Payment OR
    • Notice of Pre-existing Dispute.
• Step 2: File Application
  • If no payment/dispute notice received after 10 days.
  • ⚖️ NCLT admits/rejects within 14 days.
• Any appeal can be done by the CD within 30 days of the order

Sec 10: Corporate Applicant (CD)

• CD initiates self-insolvency.
• Requirement: Special Resolution (Shareholders) or 3/4th Partners approval.
• Exclusion: Cannot file if CIRP already pending/completed in last 12 months (Sec 11).

Section 11: Persons Not Entitled to File

1. Ongoing Process

• CD undergoing CIRP / PPIRP
  • Reason: Parallel proceedings allowed
• Creditor of a CD in PPIRP
  • Reason: Protect Pre-Pack process

2. 12-Month "Cool-Off"

• Completed CIRP (< 12 months)
  • Reason: Prevent Moratorium abuse
• Approved Pre-Pack Plan (< 12 months)
  • Reason: Must test the rescue plan

3. Bad Conduct

• Violated Resolution Plan
  • (Plan approved < 12 months ago)
  • Reason: "Clean Hands" doctrine

4. End of Road

• Liquidation Order Made
  • Reason: Company is dissolving

Clarification (Expl. 2)

• Asset Maximization
  • Bars filing against self, NOT against others

Section 11A: Priority of Applications (CIRP vs PPIRP)

1. Pre-Pack (54C) Already Pending

• Result: Dispose 54C (PPIRP) First

2. The "14-Day" Race

• 54C filed < 14 days of CIRP filing
  • Result: Dispose 54C (PPIRP) First
• 54C filed > 14 days of CIRP filing
  • Result: Dispose CIRP (7/9/10) First

3. Exception

• Old Pending Cases
  • (Pending before 2021 Ordinance)
  • Result: Section 11A does NOT apply

⚙️ CIRP Process Flow

1. Commencement (ICD)

• Insolvency Commencement Date = Date of Admission.
• Effect: Moratorium starts, IRP appointed.

2. Moratorium (Sec 14)

• Prohibited:
  • New/pending suits against CD.
  • Transfer/disposal of assets.
    • You can sell up to 10% of total admitted claims worth UNENCUMBERED ASSETS
  • Foreclosure of security (SARFAESI).
  • Recovery by owners/lessors.
• Allowed:
  • Going concern operations.
  • Supply of essential goods/services.
• Exceptions: Surety/Guarantors (Sec 14 doesn't apply to them).
• Moratorium Period
  • From start of IRP till end of resolution

3. IRP Appointment & Tenure (Sec 16)

• Tenure: From Insolvency Commencement Date(ICD) till RP is appointed.
• Appointment
  • FC/CD - They ask for the IRP
  • OC
    • They can appoint or
    • NCLT can ask IBBI to appoint
      • That should be within 10 days of receipt of the reference to IBBI
• Powers (Sec 17):
  • Management vests in IRP.
  • BoD/Partners powers suspended and comes to IRP.
  • Report to IRP: Officers/Managers.
  • Raise interim finance
    • No encumbered asset is to be touched
      • Exception: If the encumbered asset is 2x or more of the value of the debt, then touch it. No consent required
      • If you touch it below 2x, creditor consent is required
  • Shall take all steps necessary to make the CD continue as going concern
• IRP is here to NOT shut the company, he is here to continue the company/recover it
• Public Announcement (Sec 15): Immediately (within ⏳ 3 Days of IRP appointment ). Call for claims.
  • Creditors have to submit proof of claims within the dates mentioned in the public announcement
    • If fail, at least give within 90 days of start of insolvency process.
  • IRP verifies such claims within 7 days of such receipt and within 2 days of verification, sends to NCLTn

4. Committee of Creditors (CoC) (Sec 21)

• Constitution: By IRP after collating claims.
• Authorised Representative
  • Role:
    • Represents class of creditors
  • Selection
    • IRP offers 3 professionals from state having highest number of creditors of that class
    • Those classes vote to select one person
  • Voting rights
    • Attends the CoC Meetings
    • Must vote as per Prior instructions of the Creditors
    • If instruction not given, depending upon circumstances go by majority or abstain to vote
    • If financial debt is Security or Deposit, trustee acts as AR
• Composition: All Financial Creditors.
  • Exclude: Related Party FCs (No vote/participation).
  • If No FCs: 18 largest OCs + 1 Workmen Rep + 1 Employee Rep.
• Meeting (Sec 24):
  • 1st Meeting: Within ⏳ 7 days of constitution.
  • Quorum: 33% Voting Share.
    • Adjourned meeting is next day
  • Notice:
    • 5 Days (can be reduced to 24 hrs).
    • Serve to
      • Commitee Members
      • Suspended BOD
      • Operational Crs or their representative if their total dues is 10% or more of total debt (All dues incl employee dues)

5. Resolution Professional (RP) (Sec 22)

• Appointed in 1st CoC Meeting.
• Vote Required: 🗳️ 66% Voting Share.
• Can continue the IRP as RP or replace with any other professional.
• Written consent required for appointment of IRP as RP as well as new RP.
• If IBBI does not confirm the appointment of RP within 10 days, till appointment, IRP is the RP (Does not matter another RP was consented by CoC. Untill IBBI says, things do not change)
• ( Same applies to RC replaced by another RC.) - 66% + IBBI Approval + New RC Consent
• Eligibility of IRP
  • He is eligible for being appointed as Independent Director of the CD (If a company)
  • Not RP of the CD
  • Not Employee/Partner of CA/CS/CMA of past 3 year of that CD
  • Not consultant or its employee of a company which had earned more than 5% of its Gross TO from this entity for 3 years
• Resolution Applicant to get required data and information memorandum
  • Provided that
    • Laws relating to confidentiality and insider trading are complied
    • IP of Corporate Debtor is protected
    • Not share the info with 3rd parties untill they also comply with the above 2

⏳ Critical Timelines (Sec 12)

Duration

• Standard: 180 Days.
• Extension: One time max 90 Days (Req 🗳️ 66% CoC Vote).
• Mandatory Outer Limit: 330 Days (including litigation).

Withdrawal (Sec 12A)

• Before Application admitted by AA
  • Anytime withdraw
• After Application admitted by AA (Section 12A)
  • Before CoC Constitution
    • Apply to AA through IRP
  • After CoC but before invitation of EoI
    • CoC considers within 7 days + Approved by 90% of CoC (Voting share)
    • IRP submits the withdrawal application with commitee approval (within 3 days of such approval)
  • After CoC and EOI
    • Same as above, but with reason for withdrawal

🗳️ Voting Thresholds (Crucial)

66% Majority (Super Majority)

• Approve Resolution Plan.
• Extend CIRP period (up to 90 days).
• Replace RP.
• Liquidate CD (any time before Plan confirmation).

51% Majority

• Routine decisions.
• Appointment of Liquidator (Fee).

90% Majority

• Withdrawal of Application (Sec 12A).

📜 Resolution Plan (Sec 30)

Submission

• Resolution Applicant (RA): Submits plan to RP.
• Ineligibility (Sec 29A): 🚫 RA cannot be:
  • Undischarged Insolvent.
  • Wilful Defaulter (RBI guidelines).
  • NPA Account Holder (> 1 year overdue).
    • But if account is paid off completely with interest, he is eligible
  • Convicted (2+ yrs Schedule XII / 7+ yrs others).
    • Eligibility returns after 2 years cool off from Jail
  • Disqualified Director.
  • Prohibited by SEBI.
  • Connected Person to above or relation to above.

Approval Hierarchy

1. RP Check: Complies with Sec 30(2) (Payment of CIRP costs priority, OC debts min should be liquidation value).
2. CoC Vote: 🗳️ 66% Approval.
   • Evaluates feasibility & viability.
   • If 2 or more plans are there, maximum which gets vote, that gets approved.
3. NCLT Approval (Sec 31):
   • Checks legal compliance.
   • If approved -> Binding on ALL (Stakeholders, Govt, Guarantors).
   • Moratorium ceases.

🛡️ Clean Slate (Sec 32A)

🏢 Corporate Debtor (Company)

• Liability: CEASES for pre-CIRP offences
  • Only if the change in management or control of the CD.
• Prosecution: Stops upon Plan Approval
• Condition: Control must change to "Clean" person (Non-Promoter/Related Party)
• Still the cooperation for investigation etc shall be given

🏠 Property/Assets

• Action: No attachment/seizure for past crimes
• Scope: Assets in Plan or Liquidation Sale

👤 Individuals (No Immunity)

• Who: Officers in default, Designated Partners, Promoters
• Status: Prosecution CONTINUES personally
• Duty: Must assist/cooperate with investigators

Appeal against Approval of Resolution Plan

• Factors
  • Law contravention
  • Material Irregularity in excise of powers by RP
  • OC Payment not provided in the resolution
  • IRP costs not given in the RP
  • Any Other criteria not fulfilled

Reporting of ongoing process

• First time filing- T+3 days
• Subsequent Filing - T+30 days and each 30 days from that time onwards
• T_Day DefinedActionT_dayPublic Announcement not made withinT+3RP Not appointed withinT+30Info Memo not issued92 days of announcementCIRP not completedT+180
  • TDay is commencement date

🔚 Liquidation Process (Sec 33)

Triggers

• ⏳ No Plan within 180/270/330 days.
• 🚫 NCLT rejects Plan (Non-compliance).
• 🗳️ CoC votes for Liquidation (66%).
• 🚔 Contravention of approved Plan.

🌊 Distribution Waterfall (Sec 53)

1. CIRP & Liquidation Costs (paid in full).
2. Equal Rank:
   • Workmen's Dues (24 months preceding).
   • Secured Creditors (if security relinquished).
3. Employees' Wages (12 months preceding).
4. Unsecured Financial Creditors.
5. Equal Rank:
   • Govt Dues (2 years preceding).
   • Secured Creditors (unpaid balance if security enforced).
6. Preference Shareholders.
7. Equity Shareholders.

• Other nuance
  • Secured Creditor
    • Option 1: Give up the claim and join in first payment waiting list after CIRP Cost and Workmen dues
    • Option 2: Take the security, sell it
      • If excess, return to liquidator
      • If shortfall, come in unsecured creditors list

⚡ Other Mechanisms

Fast Track CIRP (Sec 55)

• Target: Small Companies / Startups / Unlisted (< 1 Cr Assets).
• Timeline: ⏳ 90 Days + Extn 45 Days (Total 135).

PPIRP (Pre-Packaged)

• For MSMEs.
• Hybrid process (Debtor-in-possession with Creditor oversight).

Voluntary Liquidation (Sec 59)

• Solvent Corporate Person (No Default).
• Declaration of Solvency by Directors.
• Shareholder Resolution.