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You know that introduction of Insolvency & Bankruptcy Code 2016 is a landmark judgment of government of India. Being a landmark piece of legislation that looks to entirely overhaul India’s insolvency and bankruptcy laws, and consolidate them under one umbrella.

The Code, 2016 has brought a paradigm shift in process by a slew of legislative amendments, establishment of regulatory bodies such as the Insolvency and Bankruptcy Board of India, issuance of regulations and model bye-laws that govern insolvency resolution process and the mechanisms for transfer of cases and insolvency matters from existing laws such as;

  1. The Companies act, 2013;
  2. The Sick Industrial Companies (Special Provisions) Act, 1985;
  3. The Recovery of Debt Due to banks and Financial Institutions Act, 1993;
  4. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

The above-mentioned laws are applicable to corporates during insolvency situation.

  1. The Provincial Insolvency Act,1920;
  2. The Presidency Towns Insolvency Act,1909;

The above laws are applicable to individuals during insolvency situation.

Some Facts related to Fast Track Insolvency Process

JOURNEY OF INSOLVENCY AND BANKRUPTCY CODE, 2016

The IBC Code, 2016 was introduced in Lok Sabha on 21st December 2015 and passed on 5th May 2016. The upper house of the Parliament passed it on 11th May 2016 and it got the President's assent on 28th May 2016.

Earlier introduction of IBC Code,2016 Liquidation matters was handled by the High courts and Bankruptcy proceedings were filed in District Courts or High Courts as the case may be. This process takes a lot of time and Banks or Financial Institutions are not able to recover their dues.

There was not single enactment or framework in India that deals with matters involving Insolvency and Bankruptcy before introduction of IBC Code, 2016.

OBJECTIVE OF IBC CODE, 2016

Is 'to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability. Of credit MD balance of interests of all stakeholders including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Board of India and for matters connected there with or incidental thereto.'

This is a consolidated piece of legislation dealing with Insolvency resolution process, liquidation and bankruptcy has been enacted with an objective to dealing with. Matters relating to insolvency and bankruptcy for all debtors in a time bound manner, to protect the value of assets of the insolvent/bankrupt for the benefit of all stakeholders.

COVERAGE

The Code is applicable all over India.

 

APPLICABILITY

The Code,2016 is applicable. To all companies, unlimited liability partnerships, LLPs, individuals and other entities (as may be notified by the Central Government) etc., details are as follows;

  1. Sole Proprietorship (where legal personality of the proprietorship is not different from the individual who owns it);
  2. Personal Guarantors;
  3. Consumer Finance Borrowers;
  4. Student Loan Borrowers;
  5. Credit cards;
  6. Farmers
  7. Micro-insurance borrowers; and
  8. Partnership Firms.

This code includes individuals in its amit otherwise before its implementation the insolvency process of an individual was covered by

  1. Bombay and Madras and the Provincial Insolvency Act,1920(whole India except Kolkata);
  2. The Presidency Towns Insolvency Act,1909(for people residing at Kolkata);

LET'S CONSIDER SOME DEFINITIONS

SECTION 3 OF IBC, CODE 2016 deals with definitions

Section 3(7) 'corporate person' means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

Section 3(8) 'corporate debtor' means a corporate person who owes a debt to any person;

Section 3(10) 'creditor' means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder;

Section 3(11) 'debt' means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

Section 3(12) 'default' means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not 1[paid] by the debtor or the corporate debtor, as the case may be;

Section 3(13) 'financial information ', in relation to a person, means one or more of the following categories of information, namely: -

(a) records of the debt of the person;
(b) records of liabilities when the person is solvent;
(c) records of assets of person over which security interest has been created;
(d) records, if any, of instances of default by the person against any debt;
(e) records of the balance sheet and cash-flow statements of the person; and
(f) such other information as may be specified.

Section 3(19) 'insolvency professional' means a person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207;

Section 3(20) 'insolvency professional agency' means any person registered with the Board under section 201 as an insolvency professional agency;

Section 3(21) 'information utility' means a person who is registered with the Board as an information utility under section 210;

Section 3(22) 'notification' means a notification published in the Official Gazette, and the terms 'notified' and 'notify' shall be construed accordingly;

Section3 (23) 'person' includes-

(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a trust;
(e) a partnership;
(f) a limited liability partnership; and
(g) any other entity established under a statute,
and includes a person resident outside India;

Section 3(31) 'security interest' means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person:

Provided that security interest shall not include a performance guarantee;

Section 3(19) of the Code,2016 defines 'Insolvency Professional' as a person enrolled as a member of an insolvency professional agency under Section 206 of the Code,2016 and registered with IBBI under Section 207 as an Insolvency Professional.

The Code,2016 introduced a new entity called an 'Insolvency Professional', who. Plays a major role in the management and administration of the entire insolvency resolution, liquidation and bankruptcy process.

'Insolvency Professional' is a highly skilled and licensed professional, who has given substantial powers to manage the insolvency and bankruptcy resolution process.

The IBBI through Notification No. IBBI/2016-17/GN//REG003 dates 23rd November, 2016 notified the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations,2016.

 

Section 4: APPLICABILITY OF PART II OF THE CODE,2016

(1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:

Provided that the Central Government may, by notification1, specify the minimum amount of default of higher value which shall not be more than one crore rupees.

2[Provided further that the Central Government may, by notification3, specify such minimum amount of default of higher value, which shall not be more than one crore rupees, for matters relating to the pre-packaged insolvency resolution process of corporate debtors under Chapter III-A.]

SECTION 5 OF IBC CODE,2016 defines some terms as follows

(5) 'CORPORATE APPLICANT' MEANS-

(a) corporate debtor; or

(b) a member or partner of the corporate debtor who is authorized to make an application for the corporate insolvency resolution process 1[or the pre-packaged insolvency resolution process, as the case may be,] under the constitutional document of the corporate debtor; or

(c) an individual who is in charge of managing the operations and resources of the corporate debtor; or

(d) a person who has the control and supervision over the financial affairs of the corporate debtor,

(5A) 'CORPORATE GUARANTOR' means a corporate person who is the surety in a contract of guarantee to a corporate debtor;]

(6) 'DISPUTE' INCLUDES A SUIT OR ARBITRATION PROCEEDINGS RELATING TO-

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;

(7) 'FINANCIAL CREDITOR' means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

(8) 'FINANCIAL DEBT' means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on nonrecourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

2[Explanation. -For the purposes of this sub-clause, -

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, 'allottee' and 'real estate project' shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;

(9) 'FINANCIAL POSITION ', in relation to any person, means the financial information of a person as on a certain date;

(10) 'INFORMATION MEMORANDUM' means a memorandum prepared by resolution professional under sub-section (1) of section 29;

(11) 'INITIATION DATE' means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process 1[or pre-packaged insolvency resolution process, as the case may be];

(12) 'INSOLVENCY COMMENCEMENT DATE' means the date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under sections 7, 9 or section 10, as the case may be;

(13) 'INSOLVENCY RESOLUTION PROCESS COSTS' means-

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;

(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;

(14) 'INSOLVENCY RESOLUTION PROCESS PERIOD' means the period of one hundred and eighty days beginning from the insolvency commencement date and ending on one hundred and eightieth day;

(15) 'INTERIM FINANCE' means any financial debt raised by the resolution professional during the insolvency resolution process period 1[or by the corporate debtor during the pre-packaged insolvency resolution process period, as the case may be,] 4[and such other debt as may be notified]4A;

(16) 'LIQUIDATION COST' means any cost incurred by the liquidator during the period of liquidation subject to such regulations, as may be specified by the Board;

(17) 'LIQUIDATION COMMENCEMENT DATE' means the date on which proceedings for liquidation commence in accordance with section 33 or section 59, as the case may be;

(18) 'LIQUIDATOR' means an insolvency professional appointed as a liquidator in accordance with the provisions of Chapter III or Chapter V of this Part, as the case may be;

(19) 'OFFICER' FOR THE PURPOSES of [Chapter VI and] Chapter VII of this Part, means an officer who is in default, as defined in clause (60) of section 2 of the Companies Act, 2013 or a designated partner as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008, as the case may be;

(20) '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;

(21) 'OPERATIONAL DEBT' means a claim in respect of the provision of goods or services including employment or a debt in respect of the 5[payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

(22) 'PERSONAL GUARANTOR' means an individual who is the surety in a contract of guarantee to a corporate debtor;

(23) 'PERSONNEL' includes the directors, managers, key managerial personnel, designated partners and employees, if any, of the corporate debtor;

(23A) 'PRELIMINARY INFORMATION MEMORANDUM' means a memorandum submitted by the corporate debtor under clause (b) of sub-section (1) of section 54G;

(23B) 'PRE-PACKAGED INSOLVENCY COMMENCEMENT DATE' means the date of admission of an application for initiating the pre-packaged insolvency resolution process by the Adjudicating Authority under clause (a) of sub-section (4) of section 54C;

(23C) 'PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS COSTS' means-

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional and any expenses incurred by him for conducting the pre-packaged insolvency resolution process during the pre-packaged insolvency resolution process period, subject to sub-section (6) of section 54F;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern pursuant to an order under sub-section (2) of section 54J;

(d) any costs incurred at the expense of the Government to facilitate the pre-packaged insolvency resolution process; and

(e) any other costs as may be specified;

(23D) 'PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS PERIOD' means the period beginning from the pre-packaged insolvency commencement date and ending on the date on which an order under sub-section (1) of section 54L, or sub-section (1) of section 54N, or sub-section (2) of section 54-O, as the case may be, is passed by the Adjudicating Authority;]

(24) 'RELATED PARTY ', in relation to a corporate debtor, means-

(a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor;

(b) key managerial personnel of the corporate debtor or a relative of key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner;

(d) a private company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two per cent. of its share capital;

(e) a public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent. of its paid-up share capital;

(f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

(g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

(h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act;

(i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;

(j) any person who controls more than twenty per cent. of voting rights in the corporate debtor on account of ownership or a voting agreement;

(k) any person in whom the corporate debtor controls more than twenty per cent. of voting rights on account of ownership or a voting agreement;

(l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor;

(m) any person who is associated with the corporate debtor on account of-

(i) participation in policy making processes of the corporate debtor; or

(ii) having more than two directors in common between the corporate debtor and such person; or

(iii) interchange of managerial personnel between the corporate debtor and such person; or

(iv) provision of essential technical information to, or from, the corporate debtor;

(24A) 'RELATED PARTY ', IN RELATION TO AN INDIVIDUAL, means-

(a) a person who is a relative of the individual or a relative of the spouse of the individual;

(b) a partner of a limited liability partnership, or a limited liability partnership or a partnership firm, in which the individual is a partner;

(c) a person who is a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms of the trust confers a power on the trustee which may be exercised for the benefit of the individual;

(d) a private company in which the individual is a director and holds along with his relatives, more than two per cent. of its share capital;

(e) a public company in which the individual is a director and holds along with relatives, more than two per cent. of its paid-up share capital;

(f) a body corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of the individual;

(g) a limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, act on the advice, directions or instructions of the individual;

(h) a person on whose advice, directions or instructions, the individual is accustomed to act;

(i) a company, where the individual or the individual along with its related party, own more than fifty per cent. of the share capital of the company or controls the appointment of the board of directors of the company.

Explanation. - For the purposes of this clause, -

(a) 'relative', with reference to any person, means anyone who is related to another, in the following manner, namely: -

(i) members of a Hindu Undivided Family,
(ii) husband,
(iii) wife,
(iv) father,
(v) mother,
(vi) son,
(vii) daughter,
(viii) son’s daughter and son,
(ix) daughter’s daughter and son,
(x) grandson’s daughter and son,
(xi) granddaughter’s daughter and son,
(xii) brother,
(xiii) sister,
(xiv) brother’s son and daughter,
(xv) sister’s son and daughter,
(xvi) father’s father and mother,
(xvii) mother’s father and mother,
(xviii) father’s brother and sister,
(xix) mother’s brother and sister, and

(b) wherever the relation is that of a son, daughter, sister or brother, their spouses shall also be included;]

(25) 'RESOLUTION APPLICANT' means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25 1[or pursuant to section 54K, as the case may be];]

(26) 'RESOLUTION PLAN' means a plan proposed by 7[resolution applicant] for insolvency resolution of the corporate debtor as a going concern in accordance with Part II;

Explanation. - For removal of doubts, it is hereby clarified that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger;

(27) 'RESOLUTION PROFESSIONAL ', for the purposes of this Part, means an insolvency professional appointed to conduct the corporate insolvency resolution process or the pre-packaged insolvency resolution process, as the case may be, and includes an interim resolution professional; and

(28) 'VOTING SHARE' means the share of the voting rights of a single financial creditor in the committee of creditors which is based on the proportion of the financial debt owed to such financial creditor in relation to the financial debt owed by the corporate debtor.

INITIATION OF CORPORATE INSOLVENCY RESOLUTION PROCESS

Below mentioned persons are eligible for initiation of CIR Process;

  1. Financial Creditor under Section 7 of IBC Code,2016;
  2. An Operational Creditor under Section 8 of IBC Code,2016;
  3. A Corporate Applicant (Corporate Debtor) under Section 10 of IBC Code,2016.

A Financial Creditor, Operational Debtor or a Corporate Applicant will file application under provisions of Sections 7, 8 and 10 according to process specified in Insolvency and Bankruptcy (Applications to Adjudicating Authority) Rules, 2016.

Once NCLT accepts application of initiation of CIRP ands the resolution process starts. In some cases, the resolution process will start on the date of appointment of Interim resolution Professional by NCLT or as proposed by Financial Creditor while filing application.

Once CIR Process starts a Resolution Professional gets a period of 180 from the date of commencement of process to complete the same and submit Resolution Plan. In case any extension required he has to apply NCTL for the same with the consent of Committee of Creditors and NCLT will allow a period of 90 days to complete the process. Please note that no further extension will be given and a CIR process will complete within a period of 270 days from the date of commencement.

FAST TRACK INSOLVENCY PROCESS

We know that the insolvency process under Chapter II, Part II is a time bound process that is required to complete CIR process within a period of 180 days (extended by further 90 days) , the Code,2016 also provides the option of a faster process for CIR under Chapter IV of Part II of the Code,2016,wherein time period is reduced to 90 days ( extended by further 45 days) from insolvency commencement date and requested by Resolution Professional on recommendation of Committee of Creditors and satisfied by NCLT.

In CIR Process the period involved to the extent of 270 days will be long period of waiting from Financial Creditors and Operations Creditors, when Corporate Debtor is of small-scale enterprises and there is not more than one or two financial creditors.

During CIR Process there will be a moratorium period during which no action can be taken against corporate debtor and financial institutions or operational creditors have to wait a long period to take any action to realize their debts. Even rights of Secured Creditors who are financial institutions such as Banks, NBFCs and Asset Reconstruction Companies are not allowed to enforce their security interests against the Corporate Debtor under provisions of SARFAESI Act,2002. In some cases, Corporate Debtor may file application to buy time or to avoid Insolvency Proceedings under other acts and through CIR Process they get a period of 270 days.

The Fast-Track Insolvency Resolution Process (in short FTIRP) suitably addresses the situation, and provides creditors an option of attempting to revive the Corporate Debtor as a viable going concern, while at the same time ensuring that their own vested interests of ultimately recovering debts from the Corporate Debtor are not jeopardized.

PROVISIONS INVOLVED

SECTION 55(1): Provides that any Corporate Insolvency Resolution Process (CIR Process) that is initiated and carried out in accordance with Chapter IV of Part II of the Code,2016 is known as Fast Track Corporate Insolvency Resolution Process (FTCIR Process).

SECTION 55(2): provides that Fast Track Corporate Insolvency Resolution Process can be initiated against the following Corporate Debtors;

  • A Corporate Debtor with assets and income below a level as may be notified by the Central Government;
  • A Corporate Debtor with such class of creditors or such amount of debt as may be notified by the Central Government;
  • Such category of corporate persons as may be notified by the Central Government.

TIME PERIOD FOR COMPLETION OF FAST TRACK PROCESS (SECTION 56)

  • SECTION 56(1): provides that Fast Track Corporate Insolvency Resolution Process is required to be completed within a period of 90(ninety) days from the Insolvency Commencement date.
  • SECTION 56(2): provides that the period of 90 days may be extended by the NCLT upon an application by the Resolution Professional, provided that the resolution professional has been instructed to seek an extension by way of a resolution of the Committee of Creditors of the Corporate Debtor supported by at least 75% of the creditors by voting share.
  • SECTION 56(3): the NCLT on being receipt of application for extension of time after satisfying that the Resolution Process cannot be completed within a period of 90 days may extend the period of by another 45 days. But note that no further extension will be given and Resolution Professional is required to complete the process within a period of 135 days from the date of commencement of CIR Profess under Fast Track Option.

WHO CAN INTITIATE FAST TRACK INSOLVENCY RESOLUTION PROCESS

SECTION 57(1): an application for initiation of Fast Track Corporate Insolvency Resolution Process may be filed with the NCLT by a Creditor or a Corporate Debtor along with the following details;

  • Proof of existence of default as evidenced by records available with an information utility or such other means as may be specified by the IBBI;
  • Such other information as may be specified by the IBBI to establish that the Corporate Debtor is eligible for the Fast-Track Corporate Insolvency Resolution Process.

SECTION 58; provides that the process for conducting a Corporate Insolvency Resolution Process under Chapter II of Part II of the Code, and the provisions relating to offences and penalties under Chapter VII of Part II of the Code,2016 shall apply to the Fast-Track Corporate Insolvency Resolution Process, as the context may require.

CONCLUSION

Enactment of Insolvency and Bankruptcy Code, 2016 is a paradigm change to solve insolvency and bankruptcy matters in India. A long process of legal battle through District and High Counts have been removed and Code ,2016 brought all Corporates, Partnerships, LLPs etc., as well as individuals in its ambit. Through IBC,2016 a time bound resolution process is established and a resolution must be completed within a period of 180(extended further 90 days) or 90(extended further by 45 days) in Fast Track Corporate Insolvency Resolution Process.

DISCLAIMER: The article produced here is only for knowledge and information of readers. It is advisable to consult with professional before acting on any part of this article. The article has been prepared on the basis of available details and information present at the time of preparation.

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