Insolvency and Bankruptcy Code, 2016 – CA Final Law Study Material

Insolvency and Bankruptcy Code, 2016 – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Insolvency and Bankruptcy Code, 2016 – CA Final Law Study Material

Introductory Topics of IBC, 2016

Question 1.
Discuss the Principles on the basis of which the Insolvency Professional Agency (IPA) is enrolled and regulate insolvency professionals as its members in accordance with the fwB Code, 2016. [MTP-Aug. 18]
Answer:
Principles on the basis of which the Insolvency Professional Agency (IPA) is enrolled and regulate insolvency professionals:
As per Sec. 200, the Board shall have regard to the following principles while registering the insolvency professional agencies under this Code, namely:

(a) to promote the professional development of and regulation of insolvency professionals;
(b) to promote the services of competent insolvency professionals to cater to the needs of debtors, creditors and such other persons as may be specified;
(c) to promote good professional and ethical conduct amongst insolvency professionals;
(d) to protect the interests of debtors, creditors and such other persons as may be specified;
(e) to promote the growth of insolvency professional agencies for the effective resolution of insolvency and bankruptcy processes under this Code.

Structure of IBC, 2016, its applicability and definitions

Question 2.
When will the provisions of insolvency and liquidation of corporate persons be applicable on a corporate person?
Answer:
Applicability of Provisions of Insolvency and Liquidation: –

As per Sec. 4 of IBC, 2016, provisions relating to the insolvency and liquidation of corporate debtors shall be applicable only when the amount of the default is ₹ 1 Lac or more.
However, C.G. may, by notification, specify the minimum amount of default of higher value which shall not be more than ₹ 1 crore.

Question 3.
The financial creditor, Mr. Raman, was an investor and a debenture holder of ‘Optionally Convertible Debenture Bond (OPDB)’ payable on maturity, was issued by the M/s Asset Ltd. (corporate debtor). The zero interest OCD bonds amounted to 2 Cr. matured in 2019. The liability to redeem the debentures on maturity along with a redemption premium lay on the debtor, which was not made. Mr. Raman filed the Corporate Insolvency resolution process before the NCLT. Advise in the light of the given facts, the following situations:

State whether Mr. Raman is eligible for filing of application for initiation of CIRP?
Do the redemption of debenture payable on the maturity date amounts to debt? [RTP-May 19]

Answer:
Eligibility to file application for CIRP:
As per Sec. 5(7] of the IBC, 2016, the term 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.

As per Sec. 5(8) of the IBC, 2016 the term financial debt means a debt along with interest, if any which is disbursed against the consideration for the time value of money and includes any amount raised pursuant to the issue of bonds, notes, debentures, loan stock or any similar instrument.

In the present case, Mr. Raman, was an investor and a debenture holder of ‘Optionally Convertible Debenture Bond (OPDB)’ issued by the Asset Ltd. Debentures are issued against consideration for the time value of the money and hence debentures on maturity will come under that purview of Section 5(8).

Conclusion: Since Mr. Raman is a person to whom a financial debt is owed, he will come within the definition of Financial creditor. Hence, Mr. Raman is entitled to file an application to initiate CIRP against the M/s Asset Ltd.

Debentures are issued against consideration for the time value of the money and hence debentures on maturity will be covered within definition of financial debt.

Question 4.
MF Capital Private Limited accepted inter-corporate deposits from JS financial Services Private Limited. MF Capital Private Limited is a Non-banking financial company which has obtained a certificate from the Reserve Bank of India for carrying on the business of providing financial services. As there was a default in repayment of deposits. JS Financial Services Private Limited filed an application with the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016. Examine the validity of the Application. [May 19 – Old Syllabus (4 Marks)]
Answer:
Validity of application for CIRP against a financial service provider:
As per Sec. 3(7) of the IBC, 2016, the term Corporate Person means
(a) a company as defined u/s 2(20) of the Companies Act, 2013;
(b) a LLP as defined u/s 2(l)(n) of Limited Liability Partnership Act, 2008; or,
(c) any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.

It was held in case ofJindaiSaxena Financial Services Vs. Mayfair Capital, NBFC which has obtained a certificate from the Reserve Bank of India will be considered as a financial service provider.

In the present case, MF Capital Private Limited is a NBFC carrying on the business of providing financial services.

Conclusion: Application filed u/s 7 will be treated as invalid as IBC does not cover Bank, Financial Institutions, Insurance Company, AssetReeonstruction Company, Mutual Funds, Collective Investment Schemes or Pension Funds.

Corporate Insolvency Resolution Process (Sec. 6 – Sec. 32)

Question 5.
Who may initiate corporate insolvency process against a corporate person?
Answer:
Persons who may initiate corporate insolvency resolution Process (CIRP) :
As per Sec. 6 of IBC, 2016, where any corporate debtor commits a default, following persons:
(a) a financial creditor (any person to whom a financial debt is owed & includes a person to whom such debt legally assigned or transferred);.
(b) an operational creditor (a person to whom an operation debt is owed & includes any person to whom such debt legally assigned or transferred); or
(c) the corporate debtor itself, may initiate corporate insolvency resolution process in respect of such corporate debt.

Question 6.
State the manner of initiation of corporate insolvency resolution process (CIRP) by financial creditor under the Insolvency and Bankruptcy Code, 2016. [MTP-March 18]
Or
What is the Insolvency Resolution Process for financial creditors? [RTP-Nov. 18]
Answer:
Initiation of corporate insolvency resolution process by financial creditor:
Sec. 7 of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to initiation of CIRP by financial creditor. Accordingly, a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority (NCLT) when a default has occurred.

The financial creditor shall, along with the application furnish
(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as an interim resolution professional; and
(c) any other information as may be specified by the Board.

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 utility or on the basis of other evidence furnished by the financial creditor. Adjudicating Authority if, satisfied that a default has occurred and complying with other requirements of the section, it may, by order, admit such application; or if, default has not occurred, it may, by order, reject such application.

The CIRP shall commence from the date of admission of the application. The Adjudicating Authority shall communicate the order to the financial creditor within seven days of admission or rejection of such application and to the corporate debtor.

Question 7.
State the manner of initiation of corporate insolvency resolution process by operational creditor under the Insolvency and Bankruptcy Code, 2016.
Answer:
Initiation of corporate insolvency resolution process by Operational creditor:
Secs. 8 & 9 of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to initiation of CIRP by operational creditor. Accordingly,

An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

The corporate debtor shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor
(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

(b) the payment of unpaid operational debt.
After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment u/s 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute u/s 8, the operational creditor may file an application before the Adjudicating Authority for initiating a C1RR

The Adjudicating Authority shall within fourteen days of receipt of the application, admit or reject the application. However, before rejecting the application, an opportunity shall be given to the applicant to rectify the defect within seven days of receipt of rejection.

Question 8.
What is the procedure of Insolvency Resolution Process for a Corporate Applicant?
Answer:
Procedure of Insolvency Resolution Process for a Corporate Applicant:
Sec. 10 of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to initiation of CIRP by corporate applicant. Accordingly,

Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating CIRP with the Adjudicating Authority.
The corporate applicant shall, along with the application, furnish-

(a) the information relating to its books of account and such other documents for such period as may be specified;
(b) the information relating to the resolution proposed to be appointed as an interim resolution professional; and
(c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.

Question 9.
State the circumstances when persons are not entitled to make an application to initiate corporate insolvency resolution process.
Suppose a corporate debtor has committed a default and is undergoing a corporate insolvency resolution process. A corporate applicant Mr. X thereof files an application for initiating corporate insolvency resolution process with an Adjudicating Authority. State whether he (Mr. X) is entitled to make an application to initiate corporate insolvency resolution process?
Answer:
Persons not entitled to make an application to initiate CIRP:
As per Sec. 11 of IBC, 2016, the following persons shall not be entitled to make an application to initiate CIRP under this Chapter, namely:

(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed CIRP, 12 months preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved 12 months before the date of making of an application; or
(d) a corporate debtor in respect of whom a liquidation order has been made.

Entitlement of Mr. X to make an application for CIRP:
As per the facts Mr. X seems to be a separate individual and not a corporate applicant in respect of such corporate debtor who is undergoing a corporate insolvency resolution process. So, he shall not be entitled to make an application to initiate corporate insolvency resolution process.

Question 10.
Is there any time limit for completion of the Insolvency Resolution Process?
Or
Explain in the light of the Insolvency and Bankruptcy Code, 2016, time limit for completion of the Corporate Insolvency Resolution Process? [MTP-Oct. 18]
Answer:
Time Limit for Completion of Insolvency Resolution Process:
As per Sec. 12 of the IBC, 2016, CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate the process.

The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond 180 days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of 66% of the voting shares.

On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that CIRP cannot be completed within 180 days, it may by order extend the duration of such process beyond 180 days by such further period as it thinks fit, but not exceeding 90 days.

Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once.

Provided further that the CIRP shall mandatorily be completed within a period of330 days from the insolvency commencement date, including any extension of the period ofCIRPgranted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:

Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of 90 days from the date of commencement of the IBC Code (Amendment) Act, 2019, i.e. 16.08.2019.

Question 11.
Wisdom Ltd. commits a default against the debts taken from the financial creditors. Mr. F, a financial creditor initiated the corporate insolvency resolution process (CIRP) against the Wisdom Ltd. Mr. X, another financial creditor, thereof files an application for initiating corporate insolvency resolution process with the Adjudicating. Authority. Examine with reference to the validity as to the filing of an application by Mr. X for initiation of corporate insolvency resolution process? [RTP-May 18, MTP-Oct. 19]
Answer:
Corporate Insolvency Resolution Process:
As per Sec. 6 of the IBC, 2016, where any corporate debtor commits a default, a financial creditor, Operational creditor or the Corporate debtor itself may initiate C1RP against such corporate debtor.

As per Section 13 of the Code, once an application is admitted by the Adjudicating authority, it shall by an order
(a) declare a moratorium for the purposes referred to in Sec. 14.
(b) causes a public announcement of the initiation of CIRP by IRP and call for the submission of claims under Sec. 15 and
(c) appoint an Interim Resolution Professional in the manner as laid down in Sec.

Public announcement lays down all the relevant information related to the CIRP. So that the all creditors entitled under the law can raise their claim in this case.

In the given problem, on commission of default by the Wisdom Ltd., Mr. F filed an application for initiating CIRP before adjudicating authority. Further, Mr. X another financial creditor moved an application for initiation of CIRP against the Wisdom Ltd.

Conclusion: Application for initiation of CIRP cannot be initiated by Mr. X., however he is entitled under the law to raise his claim against the Wisdom Ltd.

Question 12.
What is the effect of order of moratorium?
Answer:
Effect of Moratorium:
Sec. 14 of the Insolvency and Bankruptcy Code, 2016, deals with the provisions relating to Moratorium. In accordance with Sec. 14, On the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:
(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the SARFAESI Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

Question 13.
Mr. Madhyam, was appointed as an Interim resolution professional during the Corporate Insolvency Resolution Process. What are the duties to be performed by Mr. Madhyam in the given capacity?
Answer:
Duties of Interim Resolution Professional (IRP):
As per Sec. 18 of the IBC, 2016, the IRP shall perform the following duties, namely:
(a) collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor.

(b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;

(d) monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;

(e) file information collected with the information utility, if necessary;

(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets; and

(g) to perform such other duties as may be specified by the Board.

Question 14.
Nature India Limited filed a petition under the Insolvency and Bankruptcy Code, 2016 with National Company Law Tribunal (NCLT) against Tulip Limited and the petition was admitted. After that, Nature India Limited wanted to withdraw the petition based on a settlement arrived between the parties. Whether it is permissible to withdraw the petition after it has been admitted? Decide.
Also explain the rules relating to the admission and rejection of application by an adjudicating authority under the Insolvency and Bankruptcy Code, 2016. [Nov. 17 (6 Marks)]
Answer:
Withdrawal of Application/Petition:
As per Sec. 12A of IBC, 2016, the Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of 90% voting share of the committee of creditors, in such manner as may be specified.

In the given instance, Nature India Limited wanted to withdraw the petition after it was admitted by the adjudication authority.

Conclusion: Petition may be withdrawn subject to compliance of conditions as stated in Sec. 12A.
Rules relating to admission and rejection of application:
As per Sec. 9 of the IBC, 2016, the Adjudicating Authority shall, within 14 days of the receipt of the application, by an order:
(a) admit the application and communicate such decision to the operational creditor and the corporate debtor if:

the application made is complete;
there is no payment 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 (RP) proposed, if any.

(b) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

the application made is incomplete;
there has been payment of the unpaid operational debt;
the creditor has not delivered the invoice or notice for payment to the corporate debtor;
notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or
any disciplinary proceeding is pending against any proposed RP.

Question 15.
Standard International Ltd. who is a foreign trade creditor having its office in Hong Kong wanted to file a petition under Insolvency and Bankruptcy Code, 2016 on default of the debtor in India. It moved a petition under section 9 of the code seeking commencement of insolvency process. The foreign company was not having any office or bank account in India. Because of this, it couldn’t submit a “certificate from financial institution” as required under the code. Examine whether the petition is permissible under the Insolvency & Bankruptcy Code, 2016? [Nov. 17 (4 Marks), RTP-May 18]
Answer:
Validity of Petition filed without Certificate from Financial Institution:
As per Sec. 3(10) of the Insolvency and Bankruptcy Code, 2016, a 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.

As per Sec. 9 of the Code, operational creditor shall along with application furnish certain documents to the Adjudicating authority. Among other documents, 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 need to be submitted, if available

In the present case, Standard International Ltd. who is a foreign trade creditor having its office in Hong Kong wanted to file a petition under Insolvency and Bankruptcy Code, 2016 on default of the debtor in India. Standard International Ltd. was not having any office or bank account in India.

The requirement of the certificate from the financial institution is subject to availability.
Conclusion: Petition u/s 9 of the IBC, 2016 is permissible, as furnishing of certificate from financial institution is not mandatory.

Question 16.
M/s TAS Constructions Private Limited, an operational creditor on 2nd April, 2019 being the default date issued a demand notice through speed post to M/s Dheeraj Constructions Private Limited, ail unpaid operational/corporate debtor demanding payment of its invoice dated 19th March, 2019 for ₹ 5,60,000 (15 days payment terms) towards supply of certain works contract services as per the provisions of section 8(1) of the insolvency and Bankruptcy Code, 2016 and rules framed there under/s.

Dheeraj Constructions Private Limited on receipt of the demand notice informed the operational creditor, that vide their e-mail dated 30tli March, 2019, addressed to the company and all its directors, they have disputed the invoice on the quality of the services rendered and were withholding payment till the dispute is settled but without initiating any legal proceedings under any law for the time being in force.

The operational creditor on expiry of the period of 10 days from the date of delivery of the demand notice and non-payment of its dues approached the Adjudicating Authority for the initiation of the corporate insolvency resolution process under section 9(1) insolvency and Bankruptcy Code, 2016. Will the application of the operational creditor filed u/s 9(1) of the read with section 8(2)(a) of the insolvency and Bankruptcy Code, 2016 be permitted? [May 18 – Old Syllabus (4 Marks)]
Answer:
Application for initiation of Corporate Insolvency Resolution Process by Operational Creditor:
Sec. 8 of the Insolvency and Bankruptcy Code, 2016 provides that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed. The corporate debtor shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor—

(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
(b) the payment of unpaid operational debt.

Sec. 9 of the Insolvency and Bankruptcy Code, 2016 provides the provisions relating to application for Corporate Insolvency Resolution Process. Accordingly, 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 corporate insolvency resolution process.

In the present case, Dheeraj Constructions Private Limited on receipt of the demand notice, informed M/s TAS Constructions Private Limited (Operational Creditor) that through e-mail dated 30th March, 2019, addressed the company and all its directors, of the dispute on the invoice and withholding of the payment till the settlement of the dispute.

Conclusion: Application filed by TAS Constructions Private Limited, operational creditor is not maintainable due to existence of dispute.

Question 17.
Rose Garden Ltd. was incurring continuous losses and its financial position went bad to worse. Black Stone (Private) Ltd., a trade creditor, issued notice under section 271 of the Companies Act, 2013 for winding up of Rose Garden Ltd. on the ground that Rose Garden Ltd. was unable to pay its debts. After some time, Black Stone (Private) Ltd. being an operational creditor filed a petition before the Adjudicating Authority to initiate insolvency process under the insolvency and Bank! ruptcy Code, 2016.

Demand Notice and copy of invoice were not served to Rose Garden Ltd. since a . notice was earlier issued for winding up. All other formalities were complied with. The adjudicating authority initiated insolvency resolution process by admitting the application and appointed resolution professional. After complying required formalities, the adjudicating authority issued orders for moratorium and other relief within the stipulated time. Being aggrieved by the order of Adjudicating Authority, Rose Garden Ltd. (Corporate debtor) filed an appeal before NCLAT under the insolvency and bankruptcy Code, 2016. Determine will the company succeed in its appeal? [May 18 – New Syllabus (6 Marks), MTP – April 19]
Answer:
Insolvency Resolution by Operational Creditor:
Section 8 of IBC, 2 016 provides that, an operational creditor may, on the occurrence of a default, deliver a demand notice or copy of the invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

The corporate debtor shall, within a period of 10’days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor
(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
(b) the payment of unpaid operational debt.

For this purpose, “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

Sec. 9 of IBC, 2016 provides that after the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment u/s 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute u/s 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

In the present case, demand Notice and copy of invoice were not served to Rose Garden Ltd. on the ground that a notice was earlier issued for winding up. Notice issued earlier for winding up cannot be treated as demand notice u/s 8 of IBC, 2016.

Conclusion: As demand notice and copy of invoice was not served, orders issued by adjudicating authority does not seems proper. Hence it may be concluded that Rose Garden Ltd. will succeed in its appeal.

Question 18.
M/s Systemtek India Private Limited (Appellant-Corporate Debtor) has challenged the order dated 3rd July, 2019 passed by the Adjudicating Authority (National Company Law Tribunal) Mumbai Bench, Mumbai, in the National Company Law Appellate Tribunal (NCLAT).

NCLT had admitted the application preferred by appellant under Section 10 of the Insolvency and Bankruptcy Code, 2016 and an order of Moratorium was passed and Insolvency Resolution Professional was ordered to be appointed by the Ld. Adjudicating Authority (NCLT).

The only grievance of the appellant in its challenge is that the movable and immovable property of Guarantor (promotor) has been attached pursuant to a Corporate Insolvency Resolution Process initiated u/s 10 against the Appellant by the Ld. Adjudicating Authority (NCLT) which is violative of section 14(l)(c) of the Insolvency and Bankruptcy Code, 2016 though the Code prescribes a Moratorium for certain types of transactions. Decide: [May 18 – Old Syllabus (4 Marks)]
Answer:
Validity of Moratorium w.r.t. attachment of promoter property:
Section 14(1)(c) of IBC, 2016 provides moratorium in its respect of any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the SARFAESI Act, 2002.

In the present case, NCLT has passed an order for Moratorium and appointment of Insolvency Resolution Professional. Pursuant to Insolvency Resolution Process initiated u/s 10, movable and immovable property of Guarantor (promotor) has been attached, which is challenged before NCLAT on the grounds of Moratorium.

Facts of this case are similar to the case of Schweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. & Ors., wherein NClAT dismiss the appeal on the ground that Moratorium u/s 14(1) (c) is not extended to promoter properties. Effect of Moratorium is limited to the properties of corporate debtor, not its promoter.

Conclusion: Appellant will not succeed as moratorium u/s 14(1)(c) of IBC, 2016 is limited to properties of corporate debtor, not its promoters.

Question 19.
You are appointed as Interim resolution professional in XYZ company Ltd. under the Insolvency and Bankruptcy Code, 2016. State the time limit to make public announcement? Also state the protocol for issuance of public notice. Who shall bear the expenses of public announcement? [May 18 – New Syllabus (4 Marks)]
Answer:
Public Announcement:
Regulation 6 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides the provisions related to public announcement. Accordingly,

(i) Time Limit to make public announcement: Interim Resolution Professional shall make the Public Announcement immediately after his appointment. “Immediately” refers to not more than 3 days from the date of appointment of the Interim Resolution Professional.

(ii) Protocol of Public Announcement: The public announcement shall:
(a) be in Form A of the Schedule to the Regulations;
(b) be published:
(i) in one English and one regional language newspaper with wide circulation at the location of the registered office and principal office, if any, of the corporate debtor and any other location where in the opinion of the IRP, the corporate debtor conducts material business operations;
(ii) on the website, if any, of the corporate debtor; and
(iii) on the website, if any, designated by the Board for the purpose,
(ba) state where claim forms can be downloaded or obtained from, as the case may be
(bb) offer choice of three insolvency professionals identified under regulation 4A to act as the authorised representative of creditors in each class
(c) provide the last date for submission of proofs of claim, which shall be fourteen days from the date of appointment of the interim resolution professional.

(iii) Expenses of Public Announcement: The expenses of public announcement shall be borne by the applicant which may be reimbursed by the Committee of Creditors, to the extent, it ratifies them.

Note: Answer given in suggested answer of ICAI w.r.t. Protocol of Public Announcement differs from the answer given above. Suggested Answer of ICAI covers the requirements of public announcement as per Section 15.

Question 20.
Mr. Ramlal, an Insolvency professional was appointed as a resolution professional for a corporate insolvency process initiated against the corporate debtor, Monotech Ltd. Mr. Ramlal is a partner of consulting firm M/s supervision and company which is entity recognized under the IBBI. It was discovered that M/s supervision and company had a transaction with the Monotech Ltd. amounting to 11% of its gross turnover in the last financial year 2018-2019.

Analyse the given situation as per the Insolvency and Bankruptcy Code, 2016, and advise on the validity of appointment of Mr. Ramlal as resolution professional against Monotecli Ltd.
What if, the creditor of the Monotech Ltd. opines that the resolution professional appointed is required to be replaced. „ [MTP-Aug. 18]
Answer:
Eligibility for Resolution Professional:
As per Regulation 3 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulation, 2016, an insolvency professional shall be eligible for appointment as a resolution professional for a corporate insolvency process if he and all partners and directors of the insolvency professional entity of which he is partner or director are independent of the corporate debtor.

A person shall be considered independent of the corporate debtor, if he is not an employee or proprietor or a partner:
(i) of a firm of auditors or secretarial auditors in practice or cost auditors of the corporate debtor; or
(ii) of a legal or a consulting firm, that has or had any transaction with the corporate debtor amounting to 5% or more of the gross turnover of such firm, in the last 3 financial years, subject to compliance of other requirements.

In the instant case, Mr. Ramlal, was appointed as Resolution professional for a corporate insolvency process initiated against the Monotech Ltd. During the process, it was discovered that Mr. Ramlal is a partner of a consultant firm M/s supervision and company, which has made transaction of 11% of the gross turnover of the firm in the financial year 2018-2019 with Monotech Ltd.

Conclusion: Mr. Ramlal being a partner of the Firm had made a transaction of more than 5% of the gross turnover of the firm in the previous financial year 2 018-2 019. So, his appointment as resolution professional against Monotech Ltd for initiation of CIRP, is not valid.

Replacement of Resolution Professional:
Section 27 of IBC, 2016 deals with the provisions relating to replacement of Resolution Professional by Committee of Creditors (CoC). Accordingly,

Where, at any time during the corporate insolvency resolution process, the CoC is of the opinion that a RP appointed u/s 22 is required to be replaced, it may replace him with another RP in the manner provided under this section.
The CoC may, at a meeting, by a vote of 66% of voting shares, resolve to replace the RP appointed u/s22 with another RP, subject to a written consent from the proposed resolution professional in the specified form.
The CoC shall forward the name of the insolvency professional proposed by them to the Adjudicating Authority.
The Adjudicating Authority shall forward the name of the proposed RP to the Board for its confirmation and a RP shall be appointed in the same manner as laid down in Sec. 16.
Where any disciplinary proceedings are pending against the proposed RP, the RP appointed u/s 22 shall continue till the appointment of another RP under this section.

Question 21.
Best bank, a financial creditor sent a demand notice for a claim of ₹ 10.2 crores on XYZ Ltd., a corporate debtor on 6th February, 2019. When the petition was filed before NCLT under Insolvency and Bankruptcy Code, 2016, Best Bank claimed that the XYZ limited has defaulted ₹ 29.8 crores instead of original amount of ₹ 10.2 crores. NCLT appointed an interim insolvency resolution professional. XYZ Limited made an appeal with NCLAT demanding that the Best Bank’s claim is Not maintainable as there is a difference in the amount mentioned in the demand notice and the application filled under the Code. Decide whether the contention of XYZ Limited is correct. Also, state who can file : Corporate Insolvency Resolution process under the code. [Nov. 18-Old Syllabus (6 Marks)]
Answer:
Requirement of demand notice in case of financial creditor:
Sec. 7 of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to initiation of CIRP by financial creditor. Accordingly, a financial creditor either by itself or jointly with other financial creditors, of any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority (NCLT] when a default has occurred.

A default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

There is no requirement under the provisions of Sec. 7 to deliver demand notice by financial creditor.
Conclusion: Contention of XYZ Limited is not correct as there is no requirement of demand notice in case of financial creditor.

Persons who may initiate Corporate Insolvency Resolution Process (CIRP)
As per Sec. 6 of IBC, 2016, where any corporate debtor commits a default, following persons:
(a) a financial creditor (any person to whom a financial debt is owed & includes a person to whom such debt legally assigned or transferred);
(b) an operational creditor (a person to whom an operation debt is owed & includes any person to whom such debt legally assigned or transferred); or
(c) the corporate debtor itself, may initiate corporate insolvency resolution process in respect of such corporate debt.

Question 22.
Mr. SP booked office space with Elegant Construction Limited. At the time of booking ₹ 136 lakhs was paid. Remaining amount of ₹ 710 lakhs was paid at the time of taking delivery. He entered into a Memorandum of Understanding (MoU) with the company having various terms and conditions of the sale/allotment. According to the MoU, Elegant Construction Limited was required to build and deliver the possession of the unit within 2 years from the date of execution of the MoU. It also stipulated payment of an assured return of ₹ 4,82,000 per month (subject to TDS u/s 194A of IT Act, 1961) till possession of the unit was delivered to MR. SP. Elegant Construction Limited failed to pay the assured return. Thereafter, Mr. SP filed an application for initiating insolvency resolution process. Decide about the validity of the said application on view of the provisions of Insolvency and Bankruptcy Code, 2016 as regards the definition of a “Financial Creditor” under Section 5(7) read with Section 5(8) of the Code. [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Determination of validity of application filed in capacity of financial debtor:
As per Sec. 5(7) of the IBC, 2016, the term 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.

As per Sec. 5(8) of the IBC, 2016 the term financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.

In the given case, Mr. SP booked office space with Elegant Construction Limited. He entered into MoU with the condition stating to build and deliver the possession of the unit within 2 years from the date of execution of MoU. MoU also stipulated payment of an assured return of ₹ 82,000 per month till possession of the unit was delivered. Elegant Construction Limited failed to pay the assured sum. Mr. SP filed an application for initiating insolvency resolution process against the Elegant Construction Limited.

As per Sec. 7 of the IBC, 2016, a financial creditor by itself, may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority when a default has occurred. A default includes a default in respect of a financial debt owed to the applicant financial creditor of the corporate debtor.

Conclusion: Assured returns are regular payment and qualify as financial debt as promise to pay the assured return of ₹ 1,15,68,000 (i.e. 4,82,000 × 24 months) by Elegant Construction Limited to Mr. SP makes the Mr. SP (applicant) as Financial creditor.

Question 23.
XY Ltd. filed a petition under Insolvency and Bankruptcy Code, 2016 with NCLT against DF Ltd. (Corporate Debtor) and the petition was admitted. There were only three financial creditors including XY Ltd. During the corporate insolvency Resolution process, the Corporate Debtor settled the claims of all the 3 financial creditors. Whether such settlement agreement could be termed as a valid resolution plan? Also discuss whether a financial creditor in respect of whom there is no default can file an application before Adjudicating Authority (NCLT) for initiating corporate insolvency resolution process. Discuss. [Nov. 18-New Syllabus (6 Marks)]
Answer:
Corporate Insolvency Resolution Process:
As per Clause 26 of Sec. 5 of IBC, 2016, a resolution plan means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II.

Hence, it appears that the settlement agreement cannot be termed as a valid resolution plan and Resolution Professional has to follow the process prescribed under the Code.

Application for initiating CIRP by financial creditor:
Sec. 7 of the IBC, 2016 provides that a financial creditor either by itself or jointly with other financial creditors or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority when a default has occurred.

Explanation to Sec. 7 provides that a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

Hence, a financial creditor in respect of whom there is no default can file an application before Adjudicating Authority (NCLT) for initiating corporate insolvency resolution process.

Note: Answer as given in Suggested Answers issued by ICAI is different stating that a financial creditor in respect of whom there is no default, cannot file an application for initiating insolvency resolution process.

Question 24.
Mr. IP was proposed to be appointed as a resolution professional for the insolvency resolution process initiated against BMR Ltd. Mr. R, a relative of director of BMR Ltd. is a partner in the insolvency professional entity in which Mr. IP is partner. In the light of the given facts, examine the nature of the proposal of the appointment of Mr. IP for the conduct of the CIRP as per the Insolvency and Bankruptcy Code, 2016. [MTP-March 19, May 20; RTP-May 20]
Answer:
Eligibility for resolution professional:
As per Regulation 3 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, an insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.

A person shall be considered independent ofthe corporate debtor, if he:
(a) is eligible to be appointed as an independent director on the board of the corporate debtor u/s 149 ofthe Companies Act, 2013, where the corporate debtor is a company;
(b) is not a related party of the corporate debtor; or
(c) is not an employee or proprietor or a partner:

of a firm of auditors or secretarial auditors in practice or cost auditors ofthe corporate debtor; or
of a legal or a consulting firm, that has or had any transaction with the corporate debtor amounting to 5% or more of the gross turnover of such firm, in the last 3 financial years.

In the instant case, Mr. IP was proposed to be appointed as a resolution professional for the insolvency resolution process initiated against BMR Ltd. Whereas, Mr. R, a relative of director of BMR Ltd. is a partner in the insolvency professional entity in which Mr. IP is partner.

Conclusion: As Mr. R is a partner in IP Entity in which Mr. IP is also a partner, so Mr. IP is not eligible for appointment as Resolution Professional as he is not independent of the corporate debtor.

Question 25.
Mr. Ram, an operational creditor tiled an application for corporate insolvency resolution process. He does not proposed for appointment of an interim resolution professional in the application. State the provisions given by the Code in the given situation. State the period of IRP holding the said office. [MTP-March 19, May 20]
Answer:
Appointment of IRP:
As per Sec. 16 of IBC, 2016 where the application for corporate insolvency resolution process is made by an operational creditor and no proposal for an interim resolution professional is made, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional.

The Board shall, within 10 days of the receipt of a reference from the Adjudicating Authority, recommend the name of an insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending. Period of appointment of IRP: The term of the interim resolution professional shall continue till the date of appointment of the resolution professional u/s 22 of the IBC, 2016.

Question 26.
Mr. Atul was appointed as the Insolvency Resolution Professional for XYZ Ltd. An application to replace the Insolvency resolution professional was filed before the Adjudicating Authority by some Financial Creditors. The Financial Creditors propose to appoint Mr. K as the insolvency professional instead of Mr. Atul. Referring to the relevant provisions of the Insolvency and Bankruptcy Code, 2016, decide whether Mr. Atul can be replaced and if so, state the procedure to be followed to appoint another IRP in place of existing one. [May 19 – Old Syllabus (4 Marks)]
Answer:
Replacement of Resolution Professional
Sec. 27 of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to replacement of Insolvency professional. Accordingly,
(1) Where, at any time during the corporate insolvency resolution process, the committee of creditors (comprising all financial creditors of the corporate debtor) is of the opinion that a resolution professional appointed under section 22 is required to be replaced, it may replace him with another resolution professional.

(2) The committee of creditors [COC] may, at a meeting, by a vote of sixty-six per cent of voting shares, resolve to replace the resolution professional appointed under section 22 with another resolution professional, subject to a written consent from the proposed resolution professional in the specified form.

(3) The committee of creditors shall forward the name of the insolvency professional proposed by them to the Adjudicating Authority.

(4) The Adjudicating Authority shall forward the name of the proposed resolution professional to the Board for its confirmation and a resolution professional shall be appointed in the same manner as laid down in section 16.

(5) Where any disciplinary proceedings are pending against the proposed resolution professional, the resolution professional appointed under section 22 shall continue till the appointment of another resolution professional under this Section.

Conclusion : Mr. Atul can be replaced by the COC comprising of financial creditors of corporate debtors, by following the procedure as stated above.

Question 27.
Continental Rubber Limited is a supplier of raw materials to Smooth Latex Limited. It filed a petition before the NCLT for the recovery of ₹ 10,00,000 from Smooth Latex Limited. Smooth Latex Limited, the Corporate Debtor, has other financial creditors to the extent of ₹ 1,50,00,000 and they also joined together and filed petitions to NCLT. The Corporate Debtor has a total of 40 financial creditors and 2 operational creditors. Further, all the financial creditors are having equal voting rights/shares.

Notice was issued on 1^st August, 2019 for the conduct of the first meeting to be held of 5^th August, 2019 at a common venue. The meeting was attended by all 40 financial creditors and 2 operational creditors. A resolution was passed to appoint Mr. TK as a Resolution Professional. 2 5 of the financial creditors voted in favour of the resolution and 10 voted against the resolution and 5 financial creditors and 2 operational creditors abstained from voting. Decide whether the resolution passed is valid? In the light of the provisions of Insolvency and Bankruptcy Code, 2016 read with rules framed thereunder, explain the requirements of issue of notice and quorum for the conduct of the meeting. [May 19 – New Syllabus (3 Marks), RTP-Nov. 20]
Answer:
Appointment of Resolution Professional:
As per Sec. 22 of IBC, 2016, the committee of creditors, may, in the first meeting, by a majority vote of not less than 66% of the voting share of the financial creditors, either resolve to appoint the Interim Resolution Professional (IRP) as a Resolution Professional (RP) or to replace the IRP by another RP.

It is not specified in Sec. 22 that 66% of voting share required for passing a resolution is of all financial creditors or financial creditors present and voting. The age old practice for corporate meetings have been that only “present and voted” is counted for the purpose of drawing conclusion for any agenda item. The reason for the same is that the ones who were present and still chose to abstain from voting were unable to make up their mind to either go for the resolution or against, hence they choose to remain with the majority.

Conclusion: In the given case, out of 35 votes, 25 votes are in favour, resolution is considered to be passed as votes cast in favour are more than 66%.

Requirements for Issue of Notice and Quorum:
As per Regulation 19 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a meeting of the committee shall be called by giving not less than 5 days’ notice in writing to every participant, at the address it has provided to the resolution professional and such notice may be sent by hand delivery, or by post but in any event, be served on every participant by electronic means in accordance with Regulation 20.

The committee may reduce the notice period from 5 days to such other period of not less than 24 hours, as it deems fit.

As per Regulation 22 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a meeting of the committee shall be quorate if members of the committee representing at least 33% of the voting rights are present either in person or by video conferencing or other audio and visual means.

Question 28.
Rose Garden Limited filed its financial statements for the year ending 31stMarch, 2019 with Registrar of Companies, Chennai which disclosed that the liabilities amounted to $ 3.87 crores as against the assets of ₹ 1.37 crores. On the basis of the scrutiny of the financial statements, the Registrar filed an application for Corporate Insolvency Resolution Process under Insolvency & Bankruptcy Code, 2016 against the company that the company is unable to pay its debts on the ground that the value of liabilities far exceeded the value of assets. Examine whether the company has any case to defend against the application filed by the Registrar. [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Initiation of CIRP by Registrar:
As per Sec. 6 of IBC, 2016, where any corporate debtor commits a default, below mentioned persons may initiate corporate insolvency resolution process in respect of such corporate debt:
(a) a financial creditor (any person to whom a financial debt is owed & includes a person to whom such debt legally assigned or transferred);

(b) an operational creditor (a person to whom an operation debt is owed & includes any person to whom such debt legally assigned or transferred); or

Application for CIRP can be filed only where corporate debtor commits a default. As per Sec. 3(12)ofIBC,2016, 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 paid by the debtor or the corporate debtor, as the case may be.

In the present case, Registrar filed an application for CIRP under IBC, 2016 against the company that the company is unable to pay its debts on the ground that the value of liabilities far exceeded the value of assets.

Conclusion: Registrar cannot initiate CIRP as he is not authorised under Sec. 6 to file an application for CIRP and further there is no default within the meaning of Sec. 3(12).

Hence, Rose Garden Ltd., on the basis of grounds as stated above can defend the application filed by the Registrar.

Question 29.
Venus Limited owes a sum of 12,00,000 to Mr. Khan, who assigns this debt to his two creditors Viz., Mr. Joseph – to an extent of 4,00,000 and Mr. Pratap to an extent of 8,00,000. Mr. Pratap makes a demand for his money from the company by giving a legal notice. The company could not meet Mr. Pratap’s demand or otherwise satisfy him till the expiry of four weeks from the date of notice. Mr. Pratap, therefore, moves to NCLT with an application for initiation of insolvency of the company. Referring to the provisions of the Insolvency and Bankruptcy Code, 2016, decide whether Mr. Pratap’s application can be accepted by the NCLT. [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Assignment of Financial Debt:
As per Sec. 7 of IBC, 2016, a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority (NCLT) when a default has occurred.

As per Sec. 5(7) of IBC, 2016, a 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.

In the present case, Venus Limited owes a sum of 12,00,000 to Mr. Khan, who assigns this debt to his two creditors Viz., Mr. Joseph – to an extent of 4,00,000 and-Mr. Pratap to an extent of 8,00,000. Mr. Pratap makes a demand for his money from the company by giving a legal notice. The company could not meet Mr. Pratap’s demand or otherwise satisfy him till the expiry of four weeks from the date of notice. Mr. Pratap, therefore, moves to NCLT with an application for initiation of insolvency of the company.

Conclusion: Application of Mr. Pratap can be accepted by NCLT if company fails to pay debt within stipulated time. Application should be supported with a copy of the assignment or transfer agreement and other relevant documents as may be required to demonstrate the assignment or transfer.

Note: It is assumed that debt owed is financial debt. Alternatively, answer may be based on assumption of operational debt.

Question 30.
In view of the deep recession prevailing in the market for the past three years, M/s. Infra Limited (Corporate Debtor), which was facing he brunt of financial crisis, could not pay salaries and wages to its workmen and employees for the past 6 months. The workmen and the employees, who are the members of a recognized Trade Union “Infra Labour Federation”, made a complaint in this regard.

Thereafter, the Trade Union approached and urged the Management of the Company in person and through representations in writing to settle the arrears of wages and salaries due to its members. The Corporate Debtor neither disputed nor took any actions to settle the amount. Under the circumstances, Infra Labour Federation filed an application before the Adjudicating Authority i.e. with the National Company Law Tribunal for initiating a Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016.

In the light of the provisions of the Insolvency and Bankruptcy Code, 2016, examine the following:
(i) Validity of the Application.
(ii) What will be the “Initiation date” for initiating the Corporate Insolvency Resolution Process? [Nov. 19 – New Syllabus (6 Marks)]
Answer:
Application for C1RP by Trade Union:
As per Sec. 5(20) of IBC, 2016, an 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.

As per Sec. 5(21) of IBC, 2016, an operational debt means a claim in respect of the provision of goods or services including employment or a debt in respect of the 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.

As per Sec. 3(23) of IBC, 2016, the term “person” includes “any other entity established under any statute”. A trade union, when registered under the Trade Union Act, 1926 would come within the purview of any other entity “established” under the statute.

As per Sec. 8 of IBC, 2016, an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

The corporate debtor shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor—
(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings , filed before the receipt of such notice or invoice in relation to such dispute;
(b) the payment of unpaid operational debt.

As per Sec. 9 of IBC, 2016, After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment u/s 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute u/s 8, the operational creditor may file an application before the Adjudicating Authority for initiating a CIRP.

In the present case, application for CIRP is filed by a recognized Trade Union. Facts of this case are similar to case of J.K. Jute Mill Mazdoor Marcha v. Juggilal Kamlapat Jute Mills Company Ltd & Others wherein it was held by the Supreme Court that a trade union is an operational creditor for the purpose of initiating the CIRP.

Conclusion: Application made by the Trade Union “Infra Labour Federation” is valid.

Initiation date: As per Sec. 5(11) of the IBC, 2016, 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.

Question 31.
The Committee of Creditors of M/s XYZ Limited proposes to appoint Mr. Ajit, an Insolvency Professional, as Insolvency Resolution Professional in the matter of corporate insolvency process of M/s XYZ Limited. Mr. Ajit was a promoter of M/s ABC Limited which is a holding company of M/s XYZ Limited. Examine and decide whether Mr. Ajit is eligible for appointment as an Insolvency Resolution Professional under the Provisions of Insolvency and Bankruptcy Code, 2016. [Nov. 19 – New Syllabus (3 Marks)]
Answer:
Eligibility to be appointed as Insolvency Resolution Professional:
As per Regulation 3 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, an insolvency professional shall be eligible to be appointed as a resolution professional for a CIRP of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.

A person shall be considered independent of the corporate debtor, if he is eligible to be appointed as an independent director on the board of the corporate debtor u/s 149 of the Companies Act, 2013, where the corporate debtor is a company.

As per Sec. 149 (6) of Companies Act, 2 013, a person is not eligible to be appointed as independent director in a company if he is a promoter of the company or its holding company or its subsidiary company or its associate company.

In the present case, the Committee of Creditors of M/s XYZ Limited proposes to appoint Mr. Ajit, an Insolvency Professional, as Insolvency Resolution Professional in the matter of corporate insolvency process of M/s XYZ Limited. Mr. Ajit was a promoter of M/s ABC Limited which is a holding company of M/s XYZ Limited.

Conclusion: Mr. Ajit is not eligible for appointment as an Insolvency Resolution Professional as he cannot be considered as independent of the corporate debtor.

Question 32.
NYM Garments Limited was incorporated under the Companies Act, 1956. Now, the company is under the Insolvency proceedings and the application is pending before the Adjudicating Authority. AVR ; Fabrics Limited is the supplier to NYM Garments Limited and a sum of 10,00,000 is outstanding as on 31st January, 2020. A notice was issued by the advocate of AVR Fabrics Limited to NYM Garments on 1st February, 2020 to make the payments. The notice was delivered at the registered office of NYM Garments Limited on 4th February, 2020. AVR Fabrics Limited has not received any payment or reply from the corporate debtor, NYM Garments Limited till 13th February, 2020. The Corporate Creditor, AVR Fabrics Limited, seeks your advice regarding the admission of application by NCLT on the following issues:

The procedure for filing the application and the documents submitted to the Tribunal.
If the Cqrporate Debtor, NYM Garments Limited, disputed the amount of claim by a reply -on 25th February, 2020, stating the amount outstanding was 8,00,000 only and not Rs. 10,00,000 as claimed by AVR Fabrics Limited.
If the Corporate Debtor, NYM Garments Limited, has paid an amount of Rs. 7,00,000 in full settlement of the outstanding due. [Nov. 20 – Old Syllabus (6 Marks)]

Answer:
Insolvency Resolution by Operational creditor:
(i) Procedure for filing the application and the documents submitted to the Tribunal:
Secs. 8 & 9 of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to initiation of CIRP by operational creditor. Accordingly,

The corporate debtor shall, within a period of 10 days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor-
(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
(b) the payment of unpaid operational debt.

After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment u/s 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute u/s 8, the operational creditor may file an application before the Adjudicating Authority for initiating a CIRP.

Documents to be filed with the Application:
The operational creditor shall, along with the application furnish-
(a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

(c) 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, if available;

(d) a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and

(e) any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.

(ii) If the Corporate Debtor, NYM Garments Limited, disputed the amount of claim by a reply on 25th February, 2020, stating the amount outstanding was 8,00,000 only and not Rs. 10,00,000 as claimed by AVR Fabrics Limited, application for CIRP can be admitted as dispute was raised after the specified period.

(iii) If the Corporate Debtor, NYM Garments Limited, has paid an amount of ₹ 7,00,000 in full settlement of the outstanding due, application will not be admitted as full settlement taken place.
Note: Alternate answers possible with different assumptions.

Question 33.
Abhi Limited entered into an agreement with Atuiya Gas Limited for purchase of natural gas, which is not specified as an essential supply. On failure of Abhi Limited to make payments, Atuiya Gas Limited issued notice to Abhi Limited that further supply of gas would be stopped if payments are not made immediately. On further non-payment, Atuiya Gas Limited filed a petition before NCLT for initiating Corporate insolvency Resolution process against Abhi Limited. On 15th March, 2020 the petition was admitted. On 30th April, 2020, Atuiya Gas Limited disconnected gas supply to Abhi Limited for non-payment. As a result of disconnection of gas supply, operations of Abhi Limited came to a halt. The Resolution professional filed a petition to NCLT seeking Atuiya Gas Limited to resume the supply of natural gas, as natural gas was an important material for production of electricity by Abhi Limited.

Referring to the provisions of Insolvency and Bankruptcy Code, 2016, answer the following:
(i) When the moratorium period will expire in this case?
(ii) Whether Resolution Professional will be successful in his petition filed with NCLT? [Nov. 20 – New Syllabus (3 Marks)]
Answer:
Provisions related with the Moratorium:
Sec. 14 of IBC, 2016 deals with the provisions relating to Moratorium. Accordingly,
(i) The order of moratorium shall have effect from the date of such order till the completion of the CIRP:
Provided that where at any time during the CIRP, if the Adjudicating Authority approves the resolution plan u/s 31(1) or passes an order for liquidation of corporate debtor u/s 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

(ii) It is provided in Sec. 14 that the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

Where the resolution professional considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period.

In the given case, Atulya Gas Limited disconnected gas supply to Abhi Limited for non-payment. As per agreement, natural gas is not specified as an essential supply.

Conclusion: Resolution Professional will not succeed as corporate debtor has not paid dues arising from the supply during the moratorium period.

Liquidation Process

Question 34.
Mr. X, a Resolution professional in a liquidation process, on an examination of sale of property of Corporate debtor finds that a transaction was made by the corporate debtor to his relative within 6 months preceding the Insolvency Commencement date, was undervalued. Give the following answers in reference to the above situation:

(a) State the validity of the conduct of such transaction by corporate debtor to his relative.
(b) What will be the consequences when resolution professional determines such transactions undervalue and fails to report that same to NCLT?
(c) What order NCLT shall pass when Corporate Debtor entered into an undervalued transaction? [MTP-April 18]
Answer:
(a) Validity of the conduct of undervalued transaction:
As per Sec. 45 of the IBC, 2 016, if the liquidator or the Resolution Professional, on an examination of the transactions of the Corporate Debtor, determines that certain transactions were made by Corporate Debtor with a related party, within the period of 2 years preceding the insolvency commencement date, which were undervalued, he, shall make an application to the NCLT to declare such transactions as void and reverse the effect of such undervalued transaction and requiring the person who benefits from such transaction to pay back any gains he may have made as a result of such transaction.

Hence the conduct of such transaction by corporate debtor to his relative is not valid.

(b) Consequences of failure to report to NCLT of undervalued transactions:
As per Sec. 47 of the Insolvency and Bankruptcy Code, where an undervalued transaction has taken place and the liquidator or the Resolution Professional has not reported it to the NCLT, a creditor, member ora partner of a Corporate Debtor, as the case may be, may make an application to the NCLT to declare such transactions void and reverse their effect in accordance with the relevant provisions of this Code.

(c) Order of NCLT:
Where the NCLT, after examination of the application, is satisfied that undervalued transactions had occurred and the Resolution Professional after having sufficient information or opportunity to avail information of such transactions did not report such transaction, there it shall pass an order of —

restoring the position as it existed before such transactions and reversing the effects thereof. As per Sec. 48, the order of the Adjudicating Authority may provide for the following:
- require any property transferred as part of the transaction, to be vested in the corporate debtor;
- release or discharge (in whole or in part) any security interest granted by the corporate debtor
- require any person to pay such sums, in respect of benefits received by such person, to the Mr. X (RP), as the Adjudicating Authority may direct; or
- require the payment of such consideration for the transaction as may be determined by an independent expert.
requiring the Board (IBBI) to initiate disciplinary proceedings against Mr. X.

Question 35.
The following particulars relate to Big Rammy (Private) Ltd. which has gone into Corporate Insolvency Resolution Plan (CIRP)

Sr. No.	Particulars	Amount in ₹
1	Amount realized from the sale of liquidation of assets	14,00,000
2	Secured creditor who has relinquished the security	5,00,000
3	Unsecured financial creditors	4,00,000
4	Income-tax payable within a period of 2 years preceding the liquidation commencement date	50,000
5	Cess payable to state government within a period of one year preceding the liquidation commencement date	20,000
6	Fees payable to resolution professional	75,000
7	Expenses incurred by the resolution professional in running the business of the Big Rammy (Private) Ltd. on going concern	25,000
8	Workmen salary payable for a period of 30 months preceding the liquidation commencement date. The workmen salary is equal p.m.	3,00,000
9	Equity shareholders	10,00,000

State the priority order in which the liquidator .shall distribute the proceeds under the Insolvency and Bankruptcy Code. [MTP-Oct. 18]
Answer:
Distribution of Assets:
As per Sec. 53 of the IBC, 2016, the proceeds from the sale of liquidation assets shall be distributed in the following order of priority:

S.No.	Particulars	Amount
(i)	Fees payable to Resolution Professional in full	75,000
(ii)	Expenses incurred by the Resolution professional in running the business on going concern.	25,000
(iii)	Workmen salary outstanding for a period of 24 months (proportionate to 24 months only). The balance ₹ 60,000 is considered as remaining debts and dues and will be settled before preference shareholder/equity shareholder.	2,40,000
(iv)	Secured creditor who has relinquished the security	5,00,000
(v)	Unsecured Financial Creditors	4,00,000
(vi)	Income- tax payable within the period 2 years	50,000
(vii)	Cess to State Government payable with in a period of one year	20,000
(viii)	Balance amount in workmen salary	60,000
Total distribution		13,70,000
Amount realized from the sale of liquidation of assets		14,00,000
Balance available to Equity shareholder on pro rata basis		30,000

Question 36.
The following particulars relate to M/S. Star House (P) Limited which has gone into Corporate Insolvency Resolution Process (CIRP):

S. No.	Particulars	Amount (₹)
1.	Amount realized from the sale of liquidation of Assets	7,00,000
2.	Secured Creditors who has relinquished the security	2,50,000
3.	Unsecured Financial Creditors	2,00,000
4.	Income Tax Payable within a period of two years preceding the liquidation commencement date.	25,000
5.	Cess Payable to State Government within a period of one year preceding the liquidation commencement date.	10,000
6.	Fees payable to resolution professional	37,500
7.	Expenses incurred by the resolution professional in running the business of M/s. Star House (P) Limited on going concern.	17,500
8.	Workmen salary payable for a period of thirty months preceding the liquidation commencement date. The workmen salary is equal per month.	1,50,000
9.	Equity Shareholders	5,00,000

State the priority order in which the liquidator shall distribute the proceeds under the Insolvency & Bankruptcy Code, 2016. [May 19 – New Syllabus (6 Marks), MTP-Oct. 20]
Answer:
Distribution of Assets:
As per Sec. 53 of the IBC, 2016, the proceeds from the sale of liquidation assets shall be distributed in the following order of priority:

S.No.	Particulars	Amount
(i)	Fees payable to Resolution Professional in full	37,500
(ii)	Expenses incurred by the Resolution professional in running the business on going concern.	17,500
(iii)	Workmen salary outstanding for a period of 24 months (proportionate to 24 months only). The balance Rs. 30,000 is considered as remaining debts and dues and will be settled before preference shareholder/equity shareholder.	1,20,000
(iv)	Secured creditor who has relinquished the security	2,50,000
(v)	Unsecured Financial Creditors	2,00,000
(vi)	Income- tax payable with in the period 2 years	25,000
(vii)	Cess to State Government payable with in a period of one year	10,000
(viii)	Balance amount in workmen salary	30,000
Total distribution		6,90,000
Amount realized from the sale of liquidation of assets		7,00,000
Balance available to Equity shareholder on pro rata basis		10,000

Question 37.
Pursuant to Section 33 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) a liquidation order was passed against Luci Soya Limited (LSL) (Corporate Debtor) by the Adjudicating Authority (NCLT). Mr. Solanki, was appointed as the liquidator by the NCLT. Upon resuming his mantle, Mr. Solanki started collecting claims from all the creditors within the time frame as prescribed in the IBC, 2016. While initiating the liquidation process as per provisions of the IBC, 2016, Mr. Solanki proposed to include the equity shares of one of its subsidiary as part of the liquidation estate in relation to the corporate debtor. Besides this, one of the unsecured financial creditor demanded that, at the time of distribution of liquidation proceeds, his dues may he paid before the government dues are paid. Mr. Solanki also observed that pending legal proceedings against the corporate debtor, A Ltd., an operational creditor, has filed a case with the Arbitral Tribunal praying for an arbitral award against LSL.

On the basis of the above information and in the light of the Insolvency and Bankruptcy Code, 2016, answer the following:

Whether the proposal of Mr. Solanki to include the equity shares of the subsidiary Company of LSL as part of liquidation estate tenable?
How should Mr. Solanki deal with the demand of the unsecured financial creditor?
Whether A’ Ltd. will succeed in its prayer for an arbitral award against LSL? [Nov. 20 – New Syllabus (6 Marks)]

Answer:
Misc. provisions of IBC, 2016
(i) Liquidation Estate:
As per Sec. 36 of IBC, 2016, for the purposes of liquidation, the liquidator shall form an estate of the assets, which will be called the liquidation estate in relation to the corporate debtor. The liquidation estate shall comprise all liquidation estate assets which shall include any assets over which the corporate debtor has ownership rights, including shares held in any subsidiary of the corporate debtor.

Conclusion: Proposal to include the equity shares of the subsidiary Company of LSL as part of liquidation estate is tenable.

(ii) Distribution of Assets:
As per Sec. 53 of IBC, 2016, proceeds from the sale of the liquidation assets shall be distributed in the order specified in that section. In accordance with the priority set by Sec. 53, dues of unsecured financial creditor will be paid before the payment of government dues.

(iii) Status of Arbitral Award:
As per Sec. 14 of IBC, 2016, on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.

Conclusion: A Ltd. will not succeed due to effect of declaration of Moratorium.

Fast Track Corporate Insolvency Resolution Process

Question 38.
As on March 31, 2019, the audited balance sheet of M/s Sharp Industries Limited, revealed total assets of ₹ 1 crore. M/s Sharp Industries Limited, in the capacity of a Corporate Debtor, filed an application on July 1, 2019 with the Adjudicating Authority for initiating a fast track corporate insolvency resolution process. Explain under the provisions of Insolvency and Bankruptcy Code, 2016 the following:

Whether the application made by M/s Sharp Industries Ltd. for initiating a fast track corporate insolvency resolution process is admissible?
The time period including the extension of time period, if any, within which the fast track corporate insolvency resolution process shall be completed? [Nov. 18-New Syllabus (4 Marks)]

Answer:
Fast Track Corporate Insolvency Resolution Process:
As per Sec. 55 of Insolvency and Bankruptcy Code, 2016, an application for fast track corporate insolvency resolution process may be made in respect of the following corporate debtors, namely:

(a) a small company as defined u/s 2(85) of Companies Act, 2013; or
(b) a Startup (other than the partnership firm); or
(c) an unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding ₹ 1 crore.

Conclusion: Based on the provisions as stated above, M/s. Sharp Industries Ltd. can initiate a fast track corporate insolvency resolution process as its total asset as reported in the financial statement of the immediately preceding financial year, not exceeding ₹ 1 crore.

Time period for completion of fast track corporate insolvency resolution process: Sec. 56 of Insolvency and Bankruptcy Code, 2016 provides the following:
Fast track corporate insolvency resolution process shall be completed within a period of 90 days from the insolvency commencement date.

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% of the voting share.

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.

Question 39.
ABZ Ltd. an unlisted company with total assets of ₹ 1 crore as per financial statement as on 31st March, 2018, defaulted in the payment of the financial debt against the financial creditor X. X filed an application for initiation of insolvency process against ABZ Ltd. under the fast track C1RP on 31st May 2019. Discuss the relevancy for disposal through the mechanism of the fast track CIRP and the legal position of holding of fast track CIRP by X in the term of the IBC, 2016. Compute the time period for completion of fast track process in the said situation. [RTP-May 20]
Answer:
Fast Track Corporate Insolvency Resolution Process:
As per Sec. 55 of Insolvency and Bankruptcy Code, 2016, an application for fast track corporate insolvency resolution process may be made in respect of the following corporate debtors, namely:
(a) a corporate debtor with assets and income below a level as may be notified by the C.G.; or
(b) a corporate debtor with such class of creditors or such amount of debt as may be notified by the C.G.; or
(c) such other category of corporate persons as may be notified by the C.G.

Central Government notifies that an application for fasttrack corporate insolvency resolution process may be made in respect of the following corporate debtors, namely:

a small company as defined u/s 2(85) of Companies Act, 2013; or
a Startup (other than the partnership firm); or
an unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding ₹ 1 crore.

Conclusion: As per the provisions states above, fast track CIRP shall be completed by 29.08.2019. It can be further extended until by 13.10.2019.

Voluntary Liquidation of Corporate Persons – Sec. 59

Question 40.
X Ltd. was intending to initiate voluntarily liquidation proceedings. A declaration was made on affidavit of the some of the directors of the X Ltd. verifying full inquiry of the affairs of the company. They gave the opinion that the company will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation.

Analysing the given situation, comment whether X Ltd. can initiate voluntary liquidation proceeding I in compliance with the conditions given in the Insolvency and Bankruptcy Code, 2016. What are the required documents to be accompanied with the declaration? .

Also, state the consequences, where if the articles fixed the period of duration for which company may be carried and that period expires. [MTP-March 18]
Answer:
Voluntary Liquidation of Corporate Persons:
Section 59 of the Insolvency & Bankruptcy Code, 2016 deals with the provisions relating to voluntary liquidation proceedings. Accordingly, a corporate person who intends to liquidate itself voluntarily and has not committed any default, may initiate voluntary liquidation proceedings under the provisions of this Code.

Conditions for Voluntary Liquidation:
Any corporate person registered as a company shall meet the following conditions to initiate a voluntary liquidation process:
(a) A declaration from majority of the directors of the company verified by an affidavit stating that
they have made a full inquiry into the affairs of the company and have formed an opinion that either the company has no debts or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and

the company is not being liquidated to defraud any person.

(b) declaration shall be accompanied with the following documents, namely:

audited financial statements and a record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later;
a report of the valuation of the assets of the company, if any, prepared by a registered valuer.

(c) After making the declaration the corporate debtor shall within four weeks –
pass a special resolution at a general meeting stating that the company should be liquidated voluntarily and insolvency professional to act as the liquidator may be appointed.

pass a resolution at a general meeting stating that the company be liquidated voluntarily as a result of expiry of the period of its duration (fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, if any) and appointing an insolvency professional to act as the liquidator.

In the present case, a declaration was made on affidavit of the some of the directors of the X Ltd. verifying full inquiry of the affairs of the company, is not in compliance as the majority was the requirement for initiation of the voluntary liquidation proceedings.

Consequences if the articles fixed the period of duration for which company may be carried and that period expires:
If the articles fixed the period of duration of continuation and that period expires, X Ltd. after making declaration, shall within 4 weeks pass a resolution at a general meeting stating that the company be liquidated voluntarily as a result of expiry of the period of its duration as fixed by its articles and appointing an insolvency professional to act as the liquidator.

Question 41.
BDLK Limited decided to go for voluntary winding up and accordingly the Board of Directors at a meeting of the Board arc about to take the necessary steps to initiate the winding up proceedings. The Board of Directors of the company approached you for guidance in this regard. Please list out the steps required under the Insolvency & Bankruptcy Code, 2016 before approval of such liquidation proposal with specific reference to meetings and actions of relevant stakeholders. [May 18 – Old Syllabus (4 Marks)]
Answer:
Conditions for Voluntary Liquidations:
Section 59 of the Insolvency and Bankruptcy Code, 2016 prescribes that the voluntary liquidation
proceedings of a corporate person registered as a company shall meet the following conditions, namely:
(a) a declaration from majority of the directors of the company verified by an affidavit stating that-

they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and
the company is not being liquidated to defraud any person;

(b) the declaration under sub-clause (a) shall be accompanied with the following documents,
namely:

audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later;
a report of the valuation of the assets of the company, if any prepared by a registered valuer;

(c) within four weeks of a declaration under sub-clause (a), there shall be –
(i) a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or

(ii) a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator:

Provided that the company owes any debt to any person, creditors representing 2/3rd in value of the debt of the company shall approve the resolution passed within 7 days of such resolution.

Insolvency and Bankruptcy Code, 2016 – CA Final Law Study Material

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