Applicability of Limitation Act 1963, in Insolvency and Bankruptcy Code, 2016.

Applicability of Limitation Act 1963, in Insolvency and Bankruptcy Code, 2016.

Introduction:

The Limitation Act, 1963 is the Act which governs the time period within which one can file a suit to sue another to get justice. If the suit is filed after the expiration of the time period as  specified in this act, thus, it will be barred by limitation. It also includes  provisions for condonation, delay etc.The first Limitation Law was established in 1859 which came into operation in 1862. The law of limitation developed in stages and finally took the form of Limitation Act in 1963. It was enacted on 5th October, 1953 and came into force from 1st January, 1964.

Inapplicability Of Limitation Act To Insolvency And Bankruptcy Code?

Objectives of The Limitation Act, 1963:

The main objective of The Limitation Act,1963 is to provide a specific time frame within which a person can file a suit in a court. If such legislation is not enacted then it will lead to never ending litigation as the person could file a suit for the  cause of action which was done many years back. In other words the law of limitation aims to protect the lengthy process of penalising a person indirectly without an offence. In N. Balakrishnan vs M. Krishnamurthy,it was held by the Hon’ble Supreme Court that the Limitation Act 1963 is based upon public policy which is used for fixing the lifespan of a legal remedy for the purpose of general welfare.

 

The Limitation Act, 1963 signifies that it does not make any racial or class distinction since both Hindu and Muslim Law are now available under the law of limitation as per the existing statute.The major purpose of the Act is not to destroy or infringe the rights of an aggrieved person but to serve the public in a better way and to save time.This statute is basically founded on the public policy for fixing a life span for the legal actions which are taking place and to seek remedy in time with the purpose of general welfare and moreover it helps in avoiding the unexplainable delay and latches in a suit.

 

The Insolvency & Bankruptcy Code 2016 (“IBC”), enacted to address the troubling shortcomings in existing staggered insolvency laws in India and to bring them under one umbrella, is set up to face a monumental challenge and equally monumental expectations.According to the data available with the World Bank in 2016, insolvency resolution in India takes around 4.3 years on average, compared with the United Kingdom (1 year), USA (1.5 years) and South Africa (2 years). India was ranked 135th/190 countries in the World Bank Ease of Doing Business Index 2015 on the ease of resolving insolvency. Thus it is apparent that the Code is perhaps one of the most critical legislations introduced in recent years impacting the ease of doing business in India. The Insolvency and Bankruptcy Code 2016, enacted to radically change the process of insolvency resolution in India, is keenly watched by economists and jurists as well as businessmen and investors, for the reason that each aspect of the implementation of law has the potential to critically impact the ease of doing business in India. For this reason, the Code is especially sensitive to interpretation and it is vital that the issues thrown up in its inaugural year of implementation be recognized and the judicial remark on the same be understood. The present article thus traces the emerging jurisprudence of the Code through judgments of the Supreme Court of India and the National Company Law Appellate Tribunal and Applicability of Limitation Act 1963 in The Insolvency & Bankruptcy Code 2016 (“IBC”).

 

Is the Limitation Act 1963 applicable to The Insolvency & Bankruptcy Code 2016 (“IBC”) ?

 

The Insolvency and Bankruptcy code 2016 was passed on Lok sabha on 5th May 2016 and Rajya sabha on 11th May 2016 and received assent of the President on 28.05.2016 and it has come into force from 5th of August 2016. But the code was initially silent on the aspect of limitation. Because the code was silent on this aspect, different interpretations from different quarters have emerged.  Since the code was silent on this aspect, National company law Appellate Tribunal  held that the limitation act1963, is not applicable to the Insolvency and Bankruptcy code 2016. This question was first came in the case of M/s Neelkanth Township and construction  Pvt ltd Vs Urban Infrastructure Trustees ltd wherein the Hon’ble National Company Law Appellate Tribunal has categorically held that Limitation Act 1963 is not applicable to the The Insolvency & Bankruptcy Code 2016 (“IBC”). The reason attributed by the appellate authority is that the code is not meant for recovery but it is meant for resolution of stressed assets. The aspect of recovery will commence only if the resolution process ends in failure. Hon’ble National Company Law Appellate Tribunal has held that application under section 7,9,10 of the IBC 2016 can be filed even after the limitation period is over. The same opinion was reaffirmed by the Hon’ble National Company Law Appellate Tribunal in the case of M/s Black Pearls Hotel Pvt ltd Vs Planet M Retail ltd. In this case the Operational creditor has filed an application under section 9 of Insolvency Bankruptcy Code, 2016. But the Adjudicating authority has dismissed the application on the ground that the application was barred by a period of limitation. On appeal against the order of Hon’ble National Company Law Tribunal, Hon’ble National Company Law Appellate Tribunal  has held that the code has come into force on 1st December 2016. Therefore the right to file an application under this code comes from 1st December 2016 and not before that date. Hon’ble National Company Law Appellate Tribunal went on to add that even if it is accepted that the Limitation Act 1963 is applicable to the code, then article 137 of the limitation Act is applicable. As per article 137, the time period for filing an application ,where no specific period is provided under other provisions of Limitation Act, the article provides a period of three years from the date in which the right to file the application accrues. Therefore the operational creditor will get the right to file an application under section 9 of the Insolvency Bankruptcy Code, 2016 with effect from 01.12.2016 for a period of three years. Since in this case the operational creditor has filed an application within three years from commencement of code. Hence Hon’ble National Company Law Appellate Tribunal has held that the order of Hon’ble National Company Law Tribunal is not in order and allowed the application. 

 

On careful analysis of the following provisions, the hope of applicability of Limitation Act 1963 to Insolvency and Bankruptcy 2016 arises.

Section 60(6) of Insolvency and Bankruptcy code 2016  lays down: 

 

“Notwithstanding anything contained in the Limitation Act or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded.”

 

Similarly as per provisions of Section 433 of the companies Act 2013, it says “The provisions of the Limitation Act 2013 shall as far as may be, apply to proceedings or appeals before the Tribunal or the appellate Tribunal as the case may be”.

 

Finally Insolvency & Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) settled uncertainty regarding the applicability of Limitation Act 1963 over proceeding under the Insolvency and Bankruptcy Code 2016 (“Code”). The Ordinance introduced a new section 238 A to the Code, which categorically states that provision of Limitation Act would be applicable to proceedings before the Adjudicating Authorities and Appellate Authorities under the Code.

 

In the case of M/s BK Educational Services Private Limited v Parag Gupta and Associates, a dispute regarding liability arose between Parag Gupta & Associates, chartered accountants (the financial creditors) and BK Educational Services Private Limited (the corporate debtor). The corporate debtor, while denying the financial liability, contended that all but one financial claim was false and that the records were tampered and manipulated by the relatives of the financial creditors. Further, the amounts claimed were time-barred and there was nothing on record that would extend the limitation to recover the amount since the period was between 2012 and 2013.The order was challenged before Hon’ble National Company Law Appellate Tribunal by the financial creditors and Hon’ble National Company Law Appellate Tribunal held that the Limitation Act provisions were not applicable for the commencement of the corporate insolvency resolution process under the IBC and further passed the order to accept the application for initiation.

 

On appeal, while setting aside the Hon’ble National Company Law Appellate Tribunal order, Hon’ble Supreme Court held that an application filed after the IBC came into force in 2016 cannot revive a debt which is no longer due as it is time-barred. The expression “debt due” in the definition sections of IBC means debts that are “due and payable” in law, i.e., the debts that are not time-barred. Since the Limitation Act is applicable to applications filed under sections 7 and 9 of the IBC from inception, article 137 of the Limitation Act is evoked, which provides the period of limitation in case of “any other application for which no period of limitation is provided elsewhere” as three years from the time when the right to apply accrues.

 

“The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under article 137 of the Limitation Act, save and except in those cases where, on the facts of the case, section 5 of the Limitation Act may be applied to condone the delay in filing such applications.

 

The present appeals are concerned with Section 238A of the Insolvency and Bankruptcy Code, 2016 (“Code”), which was inserted by the Insolvency and Bankruptcy Code (Second 1 Amendment) Act, 2018 with effect from 06.06.2018. The said Section is as follows: 

 

“238A. Limitation.—The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”

 

The question raised by the appellants in these appeals is as to whether the Limitation Act, 1963 will apply to applications that are made under Section 7 and/or Section 9 of the Code on and from its commencement on 01.12.2016 till 06.06.2018 i.e. since commencement of code and until new section 238 A was inserted. In all these cases, the Appellate Authority has held that the Limitation Act, 1963 does not so apply. Even on the assumption that Article 137 of the Limitation Act, 1963 is attracted to such applications, in any case, such applications being filed only on or after commencement of the Code on 01.12.2016, since three years have not elapsed since this date, all these applications, in any event, could be said to be within time. 

 

In view of the settled principle, while we hold that the Limitation Act, 1963 is not applicable for initiation of ‘Corporate Insolvency Resolution Process’, we further hold that the Doctrine of Limitation and Prescription is necessary to be looked into for determining the question whether the application under Section 7 or Section 9 can be entertained after long delay, amounting to laches(latches means that opposite party’s position will deteriorate due to delay in claiming the rightful remedy in a court of law within a reasonable period of time)  and thereby the person forfeited his claim. . If there is a delay of more than three years from the date of cause of action and no laches on the part of the Applicant, the Applicant can explain the delay. Where there is a continuing cause of action, the question of rejecting any application on the ground of delay does not arise.Therefore, if it comes to the notice of the Adjudicating Authority that the application for initiation of ‘Corporate Insolvency Resolution Process’ under section 7 or Section 9 has been filed after long delay, the Adjudicating Authority may give opportunity to the Applicant to explain the delay within a reasonable period to find out whether there are any laches on the part of the Applicant.The stale claim of dues without explaining delay, normally should not be entertained for triggering ‘Corporate Insolvency Resolution Process’ under Section 7 and 9 of the ‘I&B Code’. . However, the aforesaid principle for triggering an application under Section 10 of the ‘I&B Code’ cannot be made applicable as the ‘Corporate Applicant’ does not claim money but prays for initiation of ‘Corporate Insolvency Resolution Process’ against itself, having defaulted to pay the dues of creditors.By reason of this finding, the order of the Tribunal was set aside, and the matter was remanded for a hearing on all points other than the point of limitation. . Learned counsel appearing on behalf of the appellants have argued, relying upon the Report of the Insolvency Law Committee of March, 2018, that the object of the Amendment Act which introduced Section 238A into the Code was to clarify the law and, thus, Section 238A must be held to be retrospective.

 

They also referred to and relied upon the  definitions under Sections 3(11), 3(12), and Section 5(6) of the Code, which, when contrasted with Section 3(6), would show that though “claim” in Section 3(6) refers to a right to payment, the definitions of “debt” and “default” in Sections 3(11) and 3(12) respectively, refer to liability or obligation in respect of a claim which is “due” and this being the case, a time-barred debt cannot be said to be “due” so as to trigger the Code.The learned counsel further attacked the Appellate Tribunal judgment by stating that an application filed in 2017 under Section 7 or 9 of the Code, praying that the Code be triggered for a debt that has become time-barred long back, say in 2011, would lead to absurdity as it could never have been the intention of the legislature to resuscitate stale and dead claims leading to the drastic consequence of the taking away of the management of the corporate debtor, which may ultimately result in its corporate death.

 

Also, according to learned counsel for the appellants, if one were to read the definition of “Adjudicating Authority” in Section 5(1) of the Code, together with Sections 408, 424 and 433 of the Companies Act, 2013, it would become clear that proceedings before the Hon’ble National Company Law Tribunal (“NCLT”) arising under the Code would be covered by the Limitation Act via Section 433 of the Companies Act from the very inception or commencement of the Code. According to them, it is important to remember that the Eleventh Schedule to the Code, which made amendments in various Acts, did not introduce the limitation provision of the Companies Act so as to govern the Code as it was unnecessary, as Section 433 applied vide Section 5(1) of the Code read with Section 408 of the Companies Act.

 

In Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Ltd. Hon’ble Supreme Court held that the proceedings under section 7 of the IBC are “an application” and not “suits”; thus they would fall within the residuary article 137 of the Limitation Act 1963 and the right to apply will arise from the date of default. 

 

It was again reiterated by the Hon’ble Supreme Court in Jignesh Shah & Anr. vs. Union of India & Anr that the right to apply under the Insolvency & Bankruptcy Code 2016 will be from the date of default and not from the date of enactment of the IBC i.e. 01.12.2016.

 

Hon’ble National Company Law Appellate Tribunal considering the Babulal Vardharji Gurjar Vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. held that the period of three years from the date of the Account of Corporate Debtor is classified as NPA then it becomes impermissible to proceed with Section 7 Application as observed in the para 11 of the Judgment. All these lead to reiterate that the provisions of The Limitation Act, 1963 vide Section 238A of the I&B Code, 2016 will be applicable to all NPA cases provided they meet the criteria of Article 137 of the Schedule to The Limitation Act, 1963. The extension for the period of Limitation can only be done by way of application of Section 5 of The Limitation Act, 1963, if any case for the condonation of delay is made out.

 

Author: Adv. Sneh Purohit

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

 

Introduction

Under the Insolvency and Bankruptcy Code, 2016, the Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism made available to creditors (IBC). The concerned creditor or the corporate entity (the debtor) itself may commence CIRP if a corporate entity becomes insolvent (unable to repay debt).

Initiation of Insolvency

Chapter 2, section 6 of IBC, 2016 states that, “where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under the act”.

IBC: Getting your dues: Procedure for creditors to file under IBC - The Economic Times

Steps for CIRP (Process)

 

  • Initiation of Corporate Insolvency Resolution process by Financial Creditor

 

  • Section 5 (7) of IBC, 2016 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 transferred to.
  • Section 7 of IBC, 2016 mentions process for Initiation of Corporate Insolvency Resolution process by Financial Creditor –

Submission of Application

  1. When a default has occurred, a financial creditor may submit an application with the Adjudicating Authority to begin the corporate insolvency resolution procedure against a corporate debtor, either individually or collectively with other financial creditors.
  • Adjudicating Authority for the purposes of this act, means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013.
  1. The financial creditor shall make an application in such form and manner and accompanied with such fee as may be prescribed.
  2. The financial creditor shall, along with the application furnish –
  1. record of the default recorded with the information utility or such other record or evidence of default as may be specified,
  2. the name of the resolution professional proposed to act as an interim resolution professional,
  3. any other information as may be specified by the Board.
  1. The Adjudicating Authority shall, within 14 days of the receipt of the application, ascertain the existence of a default from the records of an information or on the basis of other evidence furnished by the financial creditor.
  2. The adjudicating authority must be satisfied that the application is proper and complete, that a default has occurred, and that no disciplinary proceeding against the proposed resolution professional is pending. If the adjudicating authority is not satisfied, the application may be rejected. If the application is not complete then, adjudicating authority shall give the applicant the timeline of 7 days to amend the application.
  3. The corporate insolvency resolution process shall commence from the date of admission of the application.
  4. The Adjudicating Authority shall communicate the order to the financial creditor and the corporate debtor within 7 days of admission or rejection of such application, as the case may be

Initiation of Corporate Insolvency resolution process by operational creditor

  • Section 5 (20) of IBC, 2016 defines “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.
  • Section 8 of IBC, 2016 mentions Insolvency resolution by operational creditor,

Delivery of Demand Notice

  1. On the occurrence of a default, an operational creditor may deliver to the corporate debtor a demand notice of unpaid operational debtor copy of an invoice seeking payment of the amount involved in the default in the form and manner authorised.
  2. It is the responsibility of the Corporate Debtor to respond to the Operational Creditor’s Demand Notice within 10 days of receiving it. To bring to the notice of the operational creditor—
  1. existence of a dispute, if any,
  2. the repayment of unpaid operational debt
  • A “demand notice” is a notification delivered by an operational creditor to the corporate debtor seeking repayment of the operational debt in respect of which the default has occurred for the purposes of this section.
  • Section 9 of IBC, 2016 provides Application for initiation of corporate insolvency resolution process by operational creditor –

Process after expiry of 10 days after delivering notice

  1. After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
  2. The application shall be filed in such form and manner and accompanied with such fee as may be prescribed.
  3. The operational creditor shall, along with the application furnish—
  1. a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
  2. an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
  3. a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and
  4. such other information as may be specified.
  1. An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.
  2. The Adjudicating Authority shall, within 14 days of the receipt of the application, by an order admit the application and communicate such decision to the operational creditor and the corporate debtor if it is satisfied that the application made is complete, there is no repayment of the unpaid operational debt, the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor, no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility and there is no disciplinary proceeding pending against any resolution professional. If the Adjudicating Authority is not satisfied it can reject the application.
  3. If the application is not complete then, adjudicating authority shall give the applicant the timeline of 7 days to amend the application.
  4. The corporate insolvency resolution process shall commence from the date of admission of the application.
  5.     Initiation of corporate insolvency resolution process by corporate applicant.
  • As per Section 10, a corporate applicant may file an application before adjudicating Authority for initiating CIRP against corporate debtor. The corporate applicant has been defined by the Code under Section 5 (5) which is reproduced here:
  1. corporate debtor; or
  2. a member or partner of the corporate debtor who is authorised to make an application for the corporate insolvency resolution process under the constitutional document of the corporate debtor; or
  3. an individual who is in charge of managing the operations and resources of the corporate debtor; or
  4. a person who has the control and supervision over the financial affairs of the corporate debtor;
  • Section 10, IBC 2016 provides Initiation of corporate insolvency resolution process by corporate applicant
  1. When a corporate debtor defaults, a corporate applicant may submit an application with the Adjudicating Authority to initiate the corporate insolvency resolution procedure.
  2. The application shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.
  3. The corporate applicant shall, along with the application furnish the information relating to
  1. its books of account and such other documents relating to such period as may be specified; and
  2. the resolution professional proposed to be appointed as an interim resolution professional.
  1. The application will be accepted or rejected by the Adjudicating Authority. If the application is rejected, the Adjudicating Authority shall allow the applicant a 7-day period from the date of receipt of the rejection notice to rectify or amend the application.
  2. The corporate insolvency resolution process shall commence from the date of admission of the application.

Fastrack CIRP

Chapter 4 of IBC, 2016 deals with FAST TRACK CORPORATE INSOLVENCY RESOLUTION PROCESS. The major goal of including the idea of fast track CIRP in the insolvency law was to enhance our country’s ease of doing business rating. The goal of fast track CIRP procedures is to reduce the unnecessary delay created by a small-scale company’s insolvency.

 

  • Fast track corporation insolvency resolution process.

 

As per section 55 of IBC, 2016 defines states that an application for initiation of Corporate Insolvency Process can be made only against these below-mentioned corporate debtors

  1. a corporate debtor with assets and income below a level as may be notified by the Central Government,
  2. corporate debtor with such class of creditors or such amount of debt as may be notified by the Central Government,
  3. such other categories of corporate persons as may be notified by the Central Government.

 

  • Time period for completion of fast-track corporate insolvency resolution process

 

As per Section 56,

  1. The fast-track corporate insolvency resolution process shall be completed within a period of 90 days from the insolvency commencement date.
  2. The resolution professional shall file an application to the Adjudicating Authority to extend the period of the fast-track corporate insolvency resolution process beyond 90 days if instructed to do so by a resolution passed at a meeting of the committee of creditors and supported by a vote of 75 percent of the voting share.
  3. On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that fast track corporate insolvency resolution process cannot be completed within a period of 90 days, it may, by order, extend the duration of such process beyond the said period of 90 days by such further period, as it thinks fit, but not exceeding 45 days: Provided that any extension of the fast track corporate insolvency resolution process under this section shall not be granted more than once.

Manner of initiating fast track corporate insolvency resolution process.

As per Section 57,

  1.  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
  2. 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
  3. 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. 

TRANSITION OF LAWS FROM SICA TO IBC

TRANSITION OF LAWS FROM SICA TO IBC

Introduction

The name Sick Industrial Companies Act itself connotes the reason for its existence. In the 1980s, India saw a wave of widespread industrial sickness, prompting the government to pass important legislation to address the problem. The SICA was adopted in 1985 with the goal of ensuring the timely detection of sick and potentially sick firms that own industrial undertakings, as well as the quick assessment by a panel of experts of the preventative, corrective, and other measures that must be done in their case. This was an action to free up investment in such industrial facilities that had been locked up and put to better use.

The Insolvency and Bankruptcy Code of 2016 is a legislation that consolidates and modifies the legislation governing reorganisation and insolvency resolution of Corporate Persons, Partnership Firms, Limited Liability Partnership and Individuals in a time-bound manner, for the purpose of maximising the value of such persons’ assets, promoting entrepreneurship, increasing credit availability, and balancing the interests of all stakeholders, including changing the order of priority of payment of Government dues, and establishing an insolvency and Bankruptcy Board of India, and for matters connected with or incidental thereto. Transition from SICA to IBC - Historical Analysis - iPleaders

PROBLEMS WITH SICA

The SICA’s main limitation was that it only applied to sick industrial enterprises, excluding enterprises engaged in trading, service, or other operations. However, the whole experience was unsatisfactory due to a number of variables, including SICA’s inapplicability to non-industrial and small/ancillary businesses. The Sick Industrial Companies (Special Provisions) Act was abolished and replaced by the Sick Industrial Companies (Special Provisions) Act of 2003, which diluted some of SICA’s provisions and filled in some loopholes. One of the most significant modifications in the new law was that it attempted to decrease the growing prevalence of occupational disorders by guaranteeing that firms do not utilise a medical certificate to avoid legal duties. The other reasons why SICA fell short are:

  1. The scope of SICA was defined by the terms “sickness” and “industrial nature.” Since the passage of SICA, there has been a discussion about the meaning and breadth of the term “sick industries” and what happens if a business that has been referred to BIFR and is currently under moratorium loses its industrial nature. Even after the Code’s enactment and repeal, the question remained unsolved.
  2. Only the Board of Directors, the Central Government, the RBI, state-level agencies, or scheduled banks might recommend a company to SICA. If a creditor is not a scheduled bank or just a vendor with a large quantity of past due payments, he or she cannot file for insolvency.
  3. The SICA did not set any deadlines for the BIFR to complete its investigation and issue an order requiring an operating agency to prepare a rehabilitation plan. Only once such an order was passed were deadlines set.
  • There was inadequate oversight of companies who exploited SICA to implement a moratorium and dodge lenders and the Board of Directors could utilise it for its own purposes. SICA gives the company an advantage over lenders because other lenders will be unable to pursue the company if it is referred to BIFR.
  • It was up to the discretion of the BIFR to appoint an operating agency for the sick industrial company referred to it, only in suitable cases. As a result, the SICA system was not standardised, and it did not guarantee that a company’s rehabilitation would be carried out in a prescribed manner.

Development of IBC

The Code is significantly influenced by other jurisdictions and was written to address the numerous flaws that existed in previous processes for corporate reconstruction and rehabilitation. The code in comparison is much simpler and effective as it involves an integrated “Corporate insolvency resolution process”. Upon default, any financial creditor, operational creditor, or the corporate debtor itself may file an application with the National Company Law Tribunal [“NCLT”) to begin the insolvency resolution process. The NCLT may accept the application if the existence of a default and non-payment of dues by the defaulter is established. The following elements of the Code make it a successful instrument for a company’s rehabilitation:

  1. Lenders participate actively in the decision-making process as members of a “committee of creditors.” Lenders also have the authority to determine which investment plans are acceptable. Under the SICA, the BIFR was in charge of receiving and deciding on creditors’ comments and objections. With the involvement of lenders, such commercial decisions become easier, and all stakeholders have a clear stake in the company’s recovery.
  2. The activities and routine business are continued and handled by the resolution professional with prior consent from the committee of creditors, despite the moratorium prohibiting any action by creditors or anyone against the defaulting company. As a result, the company is preserved as a going concern.
  3. For all parties involved in insolvency procedures, the Code has established distinct levels of accountability and responsibility. As a result, the creditors’ committee is responsible for the resolution professional’s activities and vice versa. In addition, the resolution professional must provide regular progress reports to the NCLTs to keep them informed of the insolvency’s progress.
  4. From the beginning to the finish of the procedure, timelines have been established. The entire insolvency resolution procedure is limited to 180 days; however it can be extended to 270 days if necessary thus making it a strictly time bound process.

Conclusion

Any corporate body, whether through service or sale agreements, loans from banks and financial institutions, judgments, or even interactions with the government, incurs a variety of obligations while operating. A corporate entity’s debt load can sometimes become so high that it endangers its continued existence and operation, while creditors risk losing their whole investment. It should be emphasised that a business’s liquidation or wind-up, as an alternative to insolvency procedures, would result in a complete wrap-up of the firm in such a way that it would no longer exist. When compared to insolvency processes, wind-up processes cause the economy to suffer a bigger loss. Therefore, The Code has revolutionized the process of insolvency resolution in India. IBC is, without a doubt, a comprehensive law with a swift and precise mechanism for dealing with insolvency issues. The time-bound aspect of IBC is a win-win situation since the Companies’ resources are deployed in the appropriate place at the appropriate time, whether it’s by paying creditors or winding up. The company does not continue to lose money indefinitely, inflicting a setback to the economy as whole and impacting individual debtors. Thus, the Code has established a new and improved framework for corporate insolvency resolution, which is far superior to the SICA regime.

Author: Aaditya Sharma

EditorAdv. Aditya Bhatt & Adv. Chandni Joshi

IBC and Admiralty Law

IBC and Admiralty Law

INTRODUCTION.

In rem admiralty proceedings and the insolvency of a ship owner is fraught with tension. The advantage of arresting a ship, which elevates a maritime claimant to the status of a secured creditor, sits uncomfortably with principles of insolvency law, which do not contemplate an action in rem and the peculiar consequences that follow from it.

Interaction Between Admiralty Courts And Company Courts: A Critical Analysis Of Raj Shipping Case

DETAIL ANALYSIS.

The conflict between these two special jurisdictions came to a head before the Bombay High Court, which in a recent judgement in Raj Shipping Agencies Vs Barge Madhwa and Anr, attempted to reconcile the irreconcilable.

FACTS OF THE CASE.

Arrest orders were passed by the Bombay High Court against vessels, whose owners were insolvent. The High Court issued a winding up order against one of the ship owners under the Companies Act, 1956 (“Companies Act”). In parallel, insolvency proceedings were commenced against another ship owner by the National Company Law Tribunal and a moratorium ordered against commencement or continuation of all proceedings against that owner and its assets under the Insolvency and Bankruptcy Code, 2016 (IBC).

The official liquidator in the winding up proceedings objected to the continuation of the admiralty actions without the leave of the Company Court under Section 446 of Companies Act, 1956. As regards the insolvency proceedings against the other vessel owner, the maritime claimants argued that the moratorium under the IBC would not prevent continuation of the admiralty actions in the Bombay High Court.

The questions of law that arose for consideration were: –

  1.   Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?
  2.   Whether leave under Section 446(1) of the Companies Act is required for continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed?

Issue 1: Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?

The Court after hearing elaborate submissions, observed that its endeavour would be to give effect to both statutes and their objectives so as to avoid conflict. The judgement proceeded to analyse the distinction between an action in rem under the Admiralty Act and an action in personam under IBC. The Court reasoned that an action in rem is not an action against the corporate debtor/owner of the ship or the assets of the corporate debtor/owner. It accordingly concluded that the moratorium under the IBC would not apply to an action in rem under the Admiralty Act for arrest of the ship and consequently would not prevent the commencement of admiralty proceedings.

However, with a view to avoiding a clash between the two jurisdictions, it ruled that an action in rem could be commenced but not continued, as this would defeat the moratorium and the very purpose of the insolvency process under the IBC. The Court held that a maritime claimant had a statutory right in rem that could not be subordinated to the IBC, which entitled it to arrest the ship, but not to continue proceedings, so as to give the corporate debtor the time and opportunity to be rescued/rehabilitated. Those maritime claimants who arrested the ship according to the Court, would be characterized as secured creditors for insolvency purposes.

According to the court, maritime claimants apart from being treated as secured creditors, should ordinarily be ascribed full value for their claim and the scheme of priorities under the Admiralty Act should be adopted in the resolution plan. The Court ruled that vessels arrested before the moratorium can only be released by the Admiralty Court, upon full payment of security.

The Court similarly reasoned that Section 33(5) of the IBC which bars the commencement or continuation of proceedings in liquidation, would not apply to an action in rem, as the claim is against the res and not against the corporate debtor.

Issue 2: Whether leave under Section 446(1) of the Companies Act is required for the continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed that owned the ship?

The Court observed that the Admiralty Act, 2017 is a consolidating enactment dealing with arrest of ships, maritime claims, judicial sale of ships and determination of priorities. The jurisdiction of the Admiralty Court was found to be special, unlike that of regular civil courts. A judicial sale of a ship by an Admiralty Court in a public auction is free from all prior claims, liens and encumbrances and the purchaser at the auction acquires a clean title free from any maritime liens, claims or encumbrances. This is unlike a sale of property conducted by the Company Court. The Court accordingly held that no leave of the Company court was required as the Admiralty Act, 2017 being a special enactment, would prevail over Companies Act, 1956.

 

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REMOVAL OF COMPANY LIQUIDATOR UNDER IBC

REMOVAL OF LIQUIDATOR

Under section 275 of the Companies Act, 2013 for the purposes of winding up of a company by the Tribunal, the Tribunal at the time of passing winding up order shall appoint an Official Liquidator or a liquidator from a panel maintained under sub-section (2) as the Company Liquidator. The sub-section (2) of section 275 was amended by the Insolvency Code, 2016, providing that the provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016. 

  1. Removal of the Liquidator:

The inherent powers of  NCLT – Rule 11 of the NCLT Rules, 2016 read with section 60 (5) C

  1. Rule 11 of the NCLT Rules is carefully worded
  2. Section 60 (5) C of Insolvency & Bankruptcy code 2016

 

An Overview of Liquidator under Companies Act, 2013

Section 60 (5) C

 Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—

 

(a)…

(b)…

(c) 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.

 

11. Inherent Powers. – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”

It is important to note that these rules are not specific to a particular act or do not derive their powers solely to be made applicable to a particular act. These are general rules that govern the Tribunal, while dealing with cases brought before it – by any and all acts that have appointed the Tribunal to adjudicate on certain disputes. Therefore, it would be improper to say that the Tribunal cannot use its inherent powers. Considering how the Bankruptcy Law Reforms Committee (BLRC) wished to use the existing infrastructure in place, it is clear that the Tribunal was to be utilised to meet the ends of justice in adjudicating Insolvency matters of corporate persons.

Two important terms in the Preamble of the Insolvency and Bankruptcy Code, 2016 are time bound manner for maximisation of value of assets and balance the interests of all the stakeholders Removal and replacement of a Liquidator is an act that NCLT must undertake for the purpose of value maximisation of assets and to balance the interests of all the stakeholders.

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 cannot be drawn into picture here since, in Rule 2 of the said Rules, it is clearly mentioned that these Rules would be applicable to matters relating to Corporate Insolvency Resolution Process. The same rules define Corporate Insolvency Resolution Process to mean the resolution process for corporate persons under Chapter II of Part II of the Code. However, liquidation squarely falls in Chapter III of Part II of the Code. Therefore, arguments limiting use of NCLT’s inherent powers cannot be taken.

Section 276. Removal and replacement of liquidator: [Effective from 15-12-2016]

  1.  The Tribunal may, on a reasonable cause being shown and for reasons to be recorded in writing, remove the provisional liquidator or the Company Liquidator , as the case may be, as liquidator of the company  on any of the following grounds, namely:—

 

  • Misconduct;
  • fraud or misfeasance;
  • professional incompetence or failure to exercise due care and diligence in performance of the powers and functions;
  • inability to act as provisional liquidator or as the case may be, Company Liquidator;
  • conflict of interest or lack of independence during the term of his appointment that would justify removal.

 

 

  • In the event of death, resignation or removal of the provisional liquidator or as the case may be, Company Liquidator, the Tribunal may transfer the work assigned to him or it to another Company Liquidator for reasons to be recorded in writing.
  • Where the Tribunal is of the opinion that any liquidator is responsible for causing any loss or damage to the company due to fraud or misfeasance or failure to exercise due care and diligence in the performance of his or its powers and functions, the Tribunal may recover or cause to be recovered such loss or damage from the liquidator and pass such other orders as it may think fit.
  • The Tribunal shall, before passing any order under this section, provide a reasonable opportunity of being heard to the provisional liquidator or, as the case may be, Company Liquidator.

 

According to the Black’s Dictionary term Misfeasance includes ,strictly is not doing a lawful act in a proper manner, omitting to do it as it should be done; while malfeasance is the doing an act wholly wrongful;  and nonfeasance is an omission to perform a duty or a total neglect of duty. But “misfeasance” is often carelessly used in the sense of “malfeasance.”


  1. Section 16 of the General Clauses Act, 1897

“Power to appoint to include power to suspend or dismiss. Where, by any [Central Act] or Regulation, a power to make any appointment is conferred, then, unless a different intention appears, the authority having [for the time being] power to make the appointment shall also have power to suspend or dismiss any person appointed [whether by itself or any other authority] in exercise of that power.”

This is an important provision in understanding how NCLT has the inherent power to remove a Liquidator who has been appointed.

According to Woodroffe’s Book on Receivers, it is said:

“The power to terminate flows naturally and as a necessary sequence from the power to create. The power of the Courts to remove or discharge a Receiver whom it has appointed may be exercised at any stage of the litigation. It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.”

It was also noted by the Federal Court in Kutoor Vengayil Rayarappan Nayanar v. Kutoor Vengayil Valia Madhavi Amma

“It seems because of this statutory rule based on the principles mentioned above that in Order XL Rule 1 of the Code of Civil Procedure no express mention was made of the power of the court in respect of the removal or suspension of a receiver. The General Clauses Act has been enacted so as to avoid superfluity of language in statutes wherever it is possible to do so. The legislature instead of saying in Order XL Rule 1, that the court will have power to appoint, suspend or remove a receiver, simply enacted that wherever convenient the court may appoint a receiver and it was implied within that language that it may also remove or suspend him. If Order XL Rule 1 of the Code of Civil Procedure is read along with the provisions above mentioned, then it follows by necessary implication that the order of removal falls within the ambit of that rule…”

To further drive home the point that such an exercise of power to remove a receiver, is exercised by the inherent powers of a court, it was noted that:

In M.K. Subramania Iyer v. Muthulakshmi Ammal, held that.

“It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, .that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.” I take it, therefore, that the present petition is put in for the exercise of the inherent powers of the Court, though it does not come under any particular section or rule in the Code.

The same reasoning was also used in  Chacko v. Jaya Varma

The inherent powers of the court under the Code of Civil Procedure (CPC) are found in various sections The relevant section similar to the current issue is Section 151 CPC which reads as follows, “Nothing in this Code shall be deemed to limit or otherwise affect the inherent powers of the Court to make such orders as may be necessary for the ends of the justice or to prevent abuse of the process of the court.” Rule 11 of the NCLT Rules and Section 151 CPC are similarly worded. Therefore, even in the absence of a specific provision, NCLT can exercise its inherent powers along with Section 16 of the General Clauses Act to remove a Liquidator.

INITIATION OF LIQUIDATION:

Liquidation may be initiated under Section 33 of the Code when Adjudicating Authority (“AA”) either does not receive the Resolution Plan under Section 30(6) of the Code or the maximum period prescibed for corporate insolvency resolution process expires or in case where AA rejects the resolution plan under Section 31 of the Code. Further, the Committee of Creditors (“CoC”) may also, with at least 66 % votes, decide to liquidate the Corporate Debtor (“CD”) under Section 33(2), any time before the resolution plan is approved and the Resolution Professional intimates AA of such decision. Also, if the CD contravenes any terms of an approved resolution plan, any person whose interest is prejudicially affected by such contravention may apply for liquidation of CD.

AA while passing the order of Liquidation of CD, shall direct issuance of public announcement under Section 33(1) of the Code that the CD is in liquidation and require that such order is also sent to registering authority of CD, such as Registrar of Companies in case of companies.

MORATORIUM:

As in the Corporate Insolvency Resolution Process, moratorium kicks in on passing of the order of liquidation also. No suit or legal proceedings shall be instituted by or against the CD. However, the liquidator may file such proceedings on behalf of CD, with prior approval of AA.

DIRECTORS AND EMPLOYEES:

All powers of the Board of Directors, Key Managerial Personnel and the Partners of the CD, as the case may be, shall cease to have effect and shall vest with the Liquidator.

Furthermore, an order for liquidation shall be deemed to be notice of discharge to all employees of the CD. However, they may be retained where business of CD is proposed to be continued during the liquidation process.

All persons viz. Officers, Directors, Partners, Auditors, and Resolution Professional as well as those holding properties of CD have a duty to assist and cooperate with the Liquidator in managing the affairs of CD.

The CD is also required to add the phrase ‘In Liquidation’ after its name in all correspondence.

LIQUIDATOR AND FEES:

While passing the order of liquidation, AA is required to name an Insolvency Professional (IP) as Liquidator. In case any IP is already appointed as Resolution Professional for Corporate Insolvency Resolution Process, he may be continued or another IP can be appointed, subject to his consent for appointment and independence etc. There are provisions for his replacement in certain circumstances as mentioned under Section 34(4) of the Code.

Fee payable shall be decided by CoC under Regulation 39D of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, where they do not approve the resolution plan. Financial creditors are also required to advance sums required for liquidation cost over liquid assets available, which would be refunded with interest out of proceeds of liquidation. In all other cases, fees would be on percentage basis on realizations and distribution to stakeholders, as prescribed under Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations).

POWERS AND DUTIES OF A LIQUIDATOR:

A liquidator is required to oversee the entire process of liquidation, right from the liquidation order to the dissolution of the CD. He has to take custody of all the assets, evaluate them properly and dispose them in a transparent manner keeping in mind the objectives of the Code. In the interim, he has to preserve and protect them. He has to invite claims and verify them for consolidation. Thereafter, he may admit or reject the claims. He has to defend any suit, prosecution or other legal proceedings, civil or criminal, in the name and on behalf of the CD.

A creditor may appeal to the AA, against the decision of the liquidator, accepting or rejecting the claims within fourteen days of the receipt of such decision.

Liquidator has the power to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities. Furthermore, in case any clarification is required, AA’s direction can be obtained.

ROLE OF COC IN THE PROCESS OF LIQUIDATION:

In Punjab National Bank vs. Kiran Shah, the liquidator of ORG Information Ltd.1 , National Company Law Appellate Tribunal (NCLAT) held that after Liquidation order is passed, CoC has no role to play and they are merely claimant. They cannot even seek replacement of liquidator in absence of any such provision in law.

A Creditors Consultation Committee is required to be formed, but the liquidator is not bound by their advice.

The liquidator has the power to consult any of the stakeholders entitled to a distribution of proceeds. Further, record of such consultation would be available to all stakeholders for the sake of transparency. The liquidator also has the power to access any information systems for the purpose of admission and proof of claims and identification of the assets relating to CD from any source, such as information utility, credit information systems regulated under any law for the time being in force, any agency of the Central, State or Local Government including any registration authorities, data bank maintained by the Insolvency and Bankruptcy Board of India.

REPORTS:

Liquidator must prepare and submit the following as per Regulation 5 of the Liquidation Regulations:

  1. A preliminary report within 75 days of liquidation commencement date;
  2. An asset memorandum;
  3. Progress reports on quarterly basis;
  4. Sale report;
  5. Minutes of consultation with stakeholders; and
  6. The final report prior to dissolution to the AA.

Liquidator should also get accounts completed and brought up to date, wherever they are found incomplete. He is also required to maintain cash book and ledgers and various registers for assets, security and investment. Further, the liquidator is required to preserve physical and electronic copy of reports and books for 8 years after dissolution.

DISSOLUTION OF CORPORATE DEBTOR:

Where the assets of the CD have been completely liquidated, the liquidator shall make an application to the AA for the dissolution of such CD under Section 54 of the Code. Early dissolution can be applied for under Regulation 14 of the Liquidation Regulations any time after preliminary report is prepared, where it appears to liquidator that there are insufficient realizable assets to cover the liquidation cost and no further investigation into affairs of CD is required. Once order of dissolution is passed, same is required to be filed with authority where CD is registered.

 

INDIVIDUAL INSOLVENCY: UNDER THE IBC

INDIVIDUAL INSOLVENCY: UNDER THE IBC

Introduction 

The Insolvency and Bankruptcy code is a landmark piece of legislation providing a facelift to the existing regime in the areas of restructuring and the insolvency and bankruptcy in India. The code provided the biggest missing piece in the existing jigsaw of laws by establishing a framework for time-bound resolution for defaulting debts. The journey of the code is long-lasting as the code will go a long way in bringing an element of certainty and predictability to commercial transactions in the country thereby providing Ease of Doing Business. 

Insolvency process: IBC to have provisions dealing with individual insolvency, says IBBI chairman - The Financial Express

 

What are individual insolvency laws?

Any debtor who is an individual, sole proprietorship or a partnership firm can be governed by individual insolvency laws, when such debtor is unable to meet its obligations to its creditors. These laws give debtors relief by allowing them to go to the court to either restructure their debts or avail discharge from their duty to repay their debts after liquidating their assets and distributing the proceeds to creditors. 

The individual insolvency law has a more social perspective, as it aims to save an individual from being pressured by creditors and criticized by society. The goal is to provide relief to the individual so that he can resume his peaceful life. Thus, personal insolvency laws seek to strike a balance between the rights of debtors (by enabling them to be free of debt burdens) and creditors (by ensuring repayments to the extent possible).

Before IBC made its mark, the corporate insolvency law in India too, drew inspiration from personal insolvency law. The personal insolvency law, in turn, was contained in two centenarian (even older!) laws, namely, Presidency Towns Insolvency Act 1909 (PTIA) and Provincial Insolvency act, 1920 (PIA). 

Although the new code, IBC contains specific provisions for individual insolvency resolution, it has only been notified of corporate insolvency so far. Individual insolvency provisions in the IBC have only been operationalized for people who have provided guarantees for loans taken out by companies, not for other individuals or businesses (operating as sole proprietorships or partnership firms). Thus, creating lacuna in existing laws and eliminating the possibility of population getting benefitted by the unnotified provisions. So far, the Central Government and IBBI has come up with draft rules and regulations.  (INSOLVENCY RESOLUTION PROCESS FOR INDIVIDUALS AND FIRMS) REGULATIONS, 2017 IBBI/2017-1  

Insolvency resolution and bankruptcy for individuals and partnership firms

Part III of the code deals with the insolvency resolution and bankruptcy for individuals and partnership firms, where the amount of default is not less than Rs.1,000. The adjudicating authority of insolvency resolution for the individual and partnership firms would be the Debt Recovery Tribunal (DRT). The Notification dated 15th November 2019 (hereinafter “Notification”) of the Central Government brought into force provisions of the Part III of the IBC, providing for insolvency and bankruptcy for individuals and partnership firms was the basis for the writ petitions filed before the High Courts. The Notification brought into force Section 78 and 79 of the IBC relating to applicability of the insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than Rs. 1000 and definitions under Part III of the IBC respectively. Further, the said notification brought into force Section 94 to 187 of the IBC providing the framework for the initiation of insolvency resolution process and bankruptcy proceedings of individuals and partnership firms. Section 179 of the IBC provides for the Debt Recovery Tribunal to be the adjudicating authority in relation to insolvency matters of individuals and firms.

Part III of the code provides two methods for resolving the insolvency of individuals i.e. 1) Fresh start process , 2) Insolvency resolution process and , they are as follows:- 

Fresh Start Process 

Fresh start is a once‐in‐life‐time opportunity granted to the individual, to seek moratorium, phasing out obligations, etc. so that the individual may start his life afresh.

It provides an opportunity to a debtor who is unable to pay his debts to clear off his debts in a time-bound manner on fulfilling the prescribed condition for the fresh start of his qualifying debts. The applicability of this option is greatly limited by the very narrow monetary limits laid –annual income of Rs 60,000, and assets of Rs 20,000.

Fresh start application may be made by the debtor himself, provided the income and asset criteria are within the thresholds referred to above, and the “qualifying debt” for which the individual seeks relief is limited to Rs 35000/‐ .

The application for insolvency resolution may be led by the creditor or the concerned debtor himself. Once an application is led with DRT for initiating insolvency proceedings a Resolution professional shall be appointed to carry forward and supervise the entire process as prescribed in this chapter.

The prerequisites that need to be complied prior to making an application are as follows:

  1. The debtor should not be an undischarged bankrupt;
  2. The debtor should be undergoing fresh start process in relation to his debts;
  3. No insolvency resolution proceedings should be in process in relation to the debts against the debtor;
  4. The debtor should not be undergoing bankruptcy proceedings
  5. No insolvency resolution proceedings should have been admitted during the preceding twelve months to be counted from the date on which a fresh application is led for invoking insolvency resolution process.

Once all the prerequisites are met, an application may be submitted either by the debtor himself or by the resolution professional on behalf of the debtor. Pursuant to this, the code provides for an evaluation of the application by resolution professional, followed by a decision on its acceptance or rejection by the Debt Recovery Tribunal within 14 days of receiving the resolution professional’s recommendations on the application. Where the application is accepted by the DRT, the code provides for legal protection from both current as well as future legal proceedings against the applicant/debtor for a period of 180 days from the date of admission of application. 

However, importantly the code provides the creditors in such a situation that bestows on them a right to object any of the facts/grounds listed in an accepted application for fresh start .Such objections shall be submitted by the creditors to the resolution professional who shall then evaluate the accuracy and the importance of such objections. During the process, the resolution professional shall act as the main point of communication between the parties involved (Debtor/Creditor) and DRT. In the event of any change in financial circumstances which could make DRT change its decision on whether to accept or reject the initial application, then it shall be the duty of resolution professionals to ensure that DRT is informed of the relevant change.

Finally after resolution professionals have reviewed all the qualifying debts and compiled a final list of these qualifying debts then the DRT shall pass an order to discharge the debtors from all of the obligations with respect to these debts. Once the order is passed, then the fresh start process shall ultimately come to end thereby providing much-needed relief to the small-time debtors.

Insolvency Resolution Process

The process flow along with the relevant provisions related to the insolvency of individuals and partnership firms are enshrined in chapter III of part III of the Code. The provisions of the insolvency resolution process for individuals & partnership are similar to that of the corporate insolvency resolution process for corporate persons. Only the insolvency application of individuals & partnership firms is filed with DRT. 

The application for insolvency resolution may be filed by the creditor or the concerned debtor himself. Once an application is filed with DRT for initiating insolvency proceedings a Resolution Professional (hereinafter, “RP”) shall be appointed to carry forward and supervise the entire process as prescribed in this chapter. 

The Adjudicating authority shall on the basis of the received report decide whether to admit or reject the application as was initially submitted to it by the debtor or creditor. Once insolvency proceedings are ordered to be initiated by the DRT, a moratorium period shall commence and thereafter cease to be in effect at the end of one 180 days.

The creditors register their claims with the RP, who in turn, prepares a list of creditors. The debtor prepares a repayment plan in consultation with the RP. The RP then prepares a report on the repayment plan for submission to the AA – also stating whether  there is a necessity of summoning a meeting of creditors. Where the meeting of creditors is not summoned, the AA passes an order on the repayment plan as per report prepared by the RP. However, when the meeting of creditors is summoned, the repayment plan has to be approved by the creditors, the AA passes an order on the repayment plan on the basis of the report of the meeting, prepared by the RP.

Bankruptcy Process

Where the attempts to provide an individual debtor either a “fresh start” or an “earned start” fail, the last recourse left is an application for bankruptcy. Under 3 specified circumstances the debtor or the creditor(s) is/are eligible to make an application for bankruptcy order – (1) a resolution application is not admitted, (2) a repayment plan is not approved by creditors or the adjudicating authority, or (3) a repayment plan fails prematurely.

From the bankruptcy commencement date till his discharge, the bankrupt is an “undischarged insolvent” or “undischarged bankrupt” and faces several disqualifications under the Code as well as other laws; his after‐acquired property is also liable to be vested in the trustee.

Once an application is filed, an interim‐moratorium commences. A bankruptcy trustee is appointed to manage the process. Within 14 days of appointment of a bankruptcy trustee, the adjudicating authority passes a “bankruptcy order”. This date becomes the bankruptcy commencement date. The bankrupt is required to submit a statement of financial position within 7 days of the commencement date.

On the bankruptcy order being passed-

  1. the estate of the bankrupt vests in the bankruptcy trustee, 
  2. the interim‐moratorium ceases and a fresh moratorium starts, and 
  3. the bankrupt submits a statement of financial position (if so required).

 

The Bankruptcy Trustee performs the process similar to RP and constitutes the “committee of creditors”. The bankruptcy trustee administers and distributes the estate of the bankrupt in accordance with the provisions of Chapter V of Part III. The trustee notifies creditors to prove their claims, and values claims. He makes payment of interim dividend, and before distributing the final dividend, puts up a notice once again, requiring creditors to have one final opportunity to prove their claims.

The bankruptcy trustee applies to the adjudicating authority for a discharge order once the approval of  the committee of creditors is obtained or on the expiry of 1 year from the date of bankruptcy order, whichever is earlier. After discharge, the once‐bankrupt is a free man.

Conclusion 

This article aimed at understanding the need of individual insolvency laws, the process of individual insolvency and the applicability of the said laws as per the IBBI draft rules.

Although much has been said about corporate insolvency in India, personal insolvency laws have received little consideration. Individual insolvency provisions in the IBC have only been notified for personal guarantors for loans taken out by companies, not for other individuals or partnership firms. This must improve in order to provide better solutions for individuals and small businesses struggling with debt. The central government and IBBI have issued draft  rules for individual insolvency as part III of IBC. However, they have not yet been notified. For the easement of debt resolution of non-corporate entities these rules need to come into effect as early as possible.  

 

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSOLVENCY RESOLUTION PROCESS FOR INDIVIDUALS AND FIRMS) REGULATIONS, 2017

Eligibility for resolution professional (Regulation 3)

  1. An insolvency professional shall be eligible to be appointed as a resolution professional for an insolvency resolution process if he and all partners and directors of the insolvency professional entity of which he is a partner or director, or the insolvency professional entity of which he is a partner or director, are not associates of the debtor.
  2. An insolvency professional shall not be eligible to be appointed as a resolution professional if he, or the insolvency professional entity of which he is a partner or director, is under a restraint order of the Board.
  3. An insolvency professional shall not continue as a resolution professional if the insolvency professional entity of which he is a director or a partner, or any other partner or director of such an insolvency professional entity represents any other stakeholder in the same insolvency resolution process.

 Chapter II Proof of claims of creditors 

  1. Regulation 5 provides that a proof of claim should be submitted by the creditor to resolution professionals in lieu of Form 1
  2. Regulation 6 provides that resolution professional shall commence the verification of each claim as soon as it is received, and prepare a list of creditors reflecting the name of the creditors, amount claimed, amount admitted, and security interest in respect of the claims, if any, within the time period stipulated in Section 104 (2). Further under sub regulation (2) of regulation 6, the resolution professional shall file a report certifying the constitution of a committee of creditors on the preparation of the list of creditors, to the Adjudicating Authority under sub-regulation (1).
  3. Regulation 7 provides that A committee of creditors formed under Regulation 6(2) shall consist of the following members:
  1. ten largest creditors by value;
  2. one representative elected by all workmen other than those workmen included in sub-clause (a), if applicable; and
  3. one representative elected by all employees other than those employees included in sub-clause (a), if applicable.
  1. Regulation 9 provides that the resolution professional should prepare a statement of affairs that should include the following information – 
  2. debtor’s assets and liabilities for the previous three years;
  3. details of the excluded assets and excluded debts of the debtor;
  4. secured and unsecured debts with names of the creditors, and all requisite details for the previous three years;
  5. particulars of debt owed by debtor to associates of the debtor for the previous three years;
  6. guarantees given in relation to any of the debts of the debtor, and whether any of the guarantors is an associate of the debtor;
  7. Details of the financial statements for the business owned by the debtor, or of the firm in which the debtor is a partner, as the case may be, for the previous three years, if applicable;
  8. Details of the wealth tax statements filed by the debtor, if any, for the previous five years.

Chapter V- Voting by Creditors 

  1. Regulation 19 provides the method for calculation of voting share for the meeting of creditors it says that 
  1. A member of the committee under Regulation 7(1) shall having voting share in proportion of the debt due to such creditor or debt represented by a representative, as the case may be, to the total debt.
  2. The debt due to any creditor shall be calculated as on the insolvency commencement date, on the basis of the claims admitted.
  3. For the purposes of Section 109(3), an unliquidated debt shall mean a debt to which a value cannot be assigned by the resolution professional.

Explanation: For the purposes of sub-regulation (1), total debt is the sum of –

  1. the amount of debt due to the creditors listed in Regulation 7(1)(a);
  2. the amount of the aggregate debt due to workmen under Regulation 7(1)(b), if applicable; and
  3. the amount of aggregate debt due to employees under Regulation 7(1)(c), if applicable.

Chapter VI- Repayment plan 

  1. Regulation 22 provides the contents of repayment plan i.e. – 

The matters under Section 105(3)(c) that shall be provided for in a repayment plan include the following –

  1. the duration of the repayment plan;
  2. implementation schedule for the repayment plan, including the proposed dates of distributions to creditors, with estimates of their amounts;
  3. source of funds for the insolvency resolution process costs and their payment in priority to all other payments under the repayment plan;
  4. a minimum budget for the survival of the debtor and immediate family for the duration of the repayment plan;
  5. if the debtor has any business, the manner in which it is proposed to be conducted during the course of the repayment plan, and the role of the resolution professional;
  6. the manner in which funds held for the purposes of the repayment plan are to be banked, invested or otherwise dealt with, pending distribution to creditors;
  7.  a comprehensive list of all the creditors of the debtor;
  8. the functions which are undertaken by the resolution professional, including supervision and implementation of the repayment plan;
  9. variation of the terms of a contract or transaction involving the debtor;
  10. that excluded assets will not be transferred or sold;
  11. financing required for the insolvency resolution process; and
  12. terms and conditions for the discharge of the debtor

  2)   further sub regulation (2) says that A repayment plan may provide for the following-

  1. transfer or sale of all or part of the assets of the debtor, including treatment of excluded assets whose actual value exceeds the prescribed threshold value for excluded assets;
  2. administration or disposal of any funds of the debtor;
  3. satisfaction or modification of any security interest;
  4. reduction in the amount payable to creditors;
  5. curing or waiving of any breach of a debt due from the debtor;
  6. modification in the terms of payment of any debt due from the debtor;
  7. amendment of the partnership deed, if applicable;
  8. part of the income of the debtor to be used in the repayment of the debt, and the manner of calculating the income of the debtor;
  9. ratification of insolvency resolution costs which do not require approval of the committee of creditors under Regulation 28;
  10. the manner in which funds held for the purpose of payment to creditors, and not so paid on the end of the repayment plan, are to be dealt with; and

(k)  such other matters as may be required by the committee of creditors.

2)   further sub regulation (2) says that A repayment plan may provide for the following-

  1. transfer or sale of all or part of the assets of the debtor, including treatment of excluded assets whose actual value exceeds the prescribed threshold value for excluded assets;
  2. administration or disposal of any funds of the debtor;
  3. satisfaction or modification of any security interest;
  4. reduction in the amount payable to creditors;
  5. curing or waiving of any breach of a debt due from the debtor;
  6. modification in the terms of payment of any debt due from the debtor;
  7. amendment of the partnership deed, if applicable;
  8. part of the income of the debtor to be used in the repayment of the debt, and the manner of calculating the income of the debtor;
  9. ratification of insolvency resolution costs which do not require approval of the committee of creditors under Regulation 28;
  10. the manner in which funds held for the purpose of payment to creditors, and not so paid on the end of the repayment plan, are to be dealt with; and

(k)  such other matters as may be required by the committee of creditors.

Completion of the repayment plan (Regulation 26) 

  1. A repayment plan shall be complete when, in the opinion of the resolution professional, the debtor has complied with all obligations under the repayment plan within the duration of the repayment plan, and a notice to that effect has been issued under section 117(1)(a).
  2. The resolution professional may issue a notice of completion under section 117(1)(a) if the debtor has substantially complied with all obligations under the repayment plan.
  3. The Adjudicating Authority shall consider the notice and the report under section 117(1) in passing the discharge order.

 

 

 

 

 

Author: Mohit Mathur

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Introduction – The Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 (“Code”) is a perfect platform that oversees and addresses the Corporate Insolvency Resolution Process (“CIRP”) and liquidation proceedings for individuals, firms, corporates and others. It seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy that will provide for resolution of insolvency in a speedy and time bound manner while simultaneously balancing the interest of all the stakeholders.

The ecosystem of the Code is dependent on four pillars namely, the Insolvency and Bankruptcy Board of India (IBBI), Information Utilities (IUs), Insolvency Professional Agencies (IPAs) and Insolvency Professionals (IPs).

This book attempts to cover the role of an Interim Resolution Professional (IRP) in the Corporate Insolvency Resolution Process. The role of an IRP commences from the day he/she is appointed as such by an order of the Adjudicating Authority (within fourteen days from the insolvency commencement date) and ends on the thirtieth day from the date of his appointment. During the tenure of thirty days, the IRP is provided with tasks of great responsibility and criticality that has the potential to hugely impact the implementation and success of the Code.

The IRP shall have the power of management of the corporate debtor and shall take control of the assets of the corporate debtor. The powers of the Board of Directors of the corporate debtor shall stand suspended. The IRP shall make a public announcement pertaining to his appointment and invites creditors for submission of proof of claims. On receipt of claims from various creditors, he is also entrusted with the task of verification of the claims, on the basis of which, he prepares the list of creditors. Once the list of creditors is prepared, the IRP shall constitute the Committee of Creditors (“Committee”) and file a report in this behalf with the Adjudicating Authority. Subsequently, the first meeting of the Committee is to be convened.

With the conclusion of the first meeting of the Committee, the role of the IRP also comes to an end. At the first meeting of the Committee, the role of the IRP comes to an end either by change of his role into a resolution professional, subject to approval of his appointment by a majority of seventy five percent of the voting share of the financial creditors in the Committee or by termination of his role as an IRP and appointment of another resolution professional, where his appointment is not approved by the Committee.

It is pertinent to note the importance of the IRPs under this Code, who are endowed with mammoth and pivotal tasks that needs to be undertaken within a prescribed time frame. It is their efficiency and management that provides the Code with the impetus to fulfil its objective of resolving insolvency and bankruptcy cases in a speedy and time bound manner.