Insolvency – CS Professional Study Material

Chapter 14 Insolvency – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.

Insolvency – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material

Question 1.
What are the legal challenges and complexities faced while dealing with insolvency? (Dec 2014, 10 marks)
Answer:
While dealing with Insolvency, the following Challenges and Complexities encountered:

1. The present law encourages the dishonest borrowers to misuse the law by prolonging the proceedings to many years and allows them to siphon away the funds which otherwise belong to the creditors;
2. Insolvency courts which handle the insolvency cases have mostly worked with such number of benches which have been highly inadequate to dispose off the same in time;
3. Lack of clarity in law about the priority of various debts due to contradiction of Federal and State Enactments and also due to conflicting interpretation of the said law by different courts.
4. Lack of decision making or delay in decision making on the part of the secured creditors which mostly are state owned banks about the restructuring compromise of their debt;
5. With the growth of economy and increased business uncertainties, the number of insolvency cases is likely to increase and therefore the insolvency mechanism needs to be made efficient effective and expeditious to take care of the increasing insolvency cases.

Question 2.
In relation to insolvency laws, mention four reforms carried out in India in 21^st Century. (Dec 2015, 5 marks)
Answer:
The most relevant laws at present, governing corporate insolvency and bankruptcy in India are:

1. The Companies Act of 2013.
2. The Sick Industrial Companies (Special Provisions) Act, 1985 (SiCA).
3. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESIA).

Over the last two decades, the Indian Financial System has undergone tremendous transformation. Various financial sector reforms have been initiated aimed at promoting an efficient, well-diversified and competitive financial system with the ultimate objective of improving the allocative efficiency of resources so as to accelerate economic development.

Justice Eradi Committee: To examine and make recommendations with regard to the desirability of changes in existing law relating to winding-up of companies so as to achieve more transparency and avoid delays in the final liquidation of the companies.

Dr. J J Irani Expert Committee on Company Law: To recommend a new company law as a part of the on-going legal and financial sector reform process in the country.

Provisions of Companies Bill 2012 Relating to Insolvency Administrators: It includes provisions on:

• Appointment as interim administrator
• Company Liquidators
• Professional assistance to Company Liquidator

Insolvency and Bankruptcy Code 2016:
To overcome the issues for sick companies, their revival and/or liquidation and for the consolidation of multiple laws and adjudicating authorities dealing with insolvency, bankruptcy, revival and/or liquidation of various entities including individual, partnership firms, corporate entities etc.

Question 3.
In relation to insolvency laws, mention any five reforms carried out in India in 21^st century. (June 2016, 5 marks)
Answer:
1. Tiwari Committee: Due to the incidence of industrial sickness which was resulting in loss of production, government revenue and employment and blockage of funds advanced by the banks, etc. A committee was constituted under the chairmanship of Shri T Tiwari, Chairman if IRCI to look into the causes of industrial sickness and suggest remedial measures.

2. N L Mitra Committee: A standing committee on International Financial Standards and codes has been set up by Governor, RBI on December 1999 with the objectives of identifying and monitoring developments in global standards and codes pertaining to various segments of the financial system, considering all aspects of applicability of such standards and codes of the Indian financial system, chalking out the desirable road map for aligning India’s standards and practices in the light of evolving international practices.

3. Justice Eradi Committee: In the year 1999, the Indian Government set, up a High level Committee by Justice V.B. Eradi to examine and make recommendations with regard to the desirability of changes in existing law relating to the winding up of the companies so as to achieve more transparency and avoid delays in the final liquidation of the company.

4. Dr. JJ Irani Expert Committee on Company law: It was set up by the government to recommend a new company law as a part of the on going legal and financial sector reform process in the country. It submitted its report to the government of India on 31 May 2005. It proposed significant changes in the law to make the restructuring and liquidation process speedy, efficient and effective. Recommendations are directed at restoring the eroded confidence of key stakeholders in the insolvency system while balancing their interest.

5. Banking Law reforms committee: Bankruptcy law reforms committee was headed by Dr. T.K. Viswanathan and it submitted its report to finance ministry on November 4, 2015.

The main objectives of the committee were to resolve insolvency with: lesser time involved; lesser loss in recovery and higher levels of debt financing across instruments. This committee has presented its report in two part: Volume 1 with its rationale and design for legislation and Volume 2 with the Draft Insolvency and Bankruptcy Bill.

Question 4.
Explain the different functions of Insolvency professionals. (June 2017, 6 marks)
Answer:
Different functions of insolvency professional
Every Insolvency Professional has following functions to perform:

• To take reasonable care and diligence while performing his duties.
• To comply with all requirements and terms and conditions specified in the bye-laws of the Insolvency professional agency of which he is a member.
• To allow the insolvency professional agency to inspect his records.
• To submit a copy of the records of every proceedings before the adjudicating authority to the board as well as to the Insolvency professional agency of which he is a member.
• To perform his function in such manner and subject to such conditions as may be prescribed.
• others:
  • Verifying the claims of the creditors
  • Constituting creditors committee
  • running the debtor’s business during the moratorium period and
  • helping the creditors in reaching a consensus for a revival plan
  • In liquidation, the insolvency professional acts as a liquidator and bankruptcy trustee.

Question 5.
What were the reasons that prompted enactment of Insolvency and Bankruptcy Code, 2016? How does Corporate Insolvency Resolution Process differ with revival plans under repealed SICA or liquidation under Company Law? (Dec 2017, 5 marks)
Answer:
There was multiplicity of laws and enactments like Sick industrial Companies (Special Provisions) Act, 1986, Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (since renamed as ‘Recovery of Debt and Bankruptcy Act as per section 249 of Insolvency and Bankruptcy Code, 2016), Securitisation and Reconstruction of Financial Assets and Enforcement of Security interest Act, 2002 and Companies Act, 2013 in cases of companies or corporate persons and for individuals and partnership firms there were Presidency Towns Insolvency Act, 1909 (applicable to presidency towns – Bombay, Calcutta and Madras) and Provincial Insolvency Act, 1920 (rest of India).

Plethora of legislations and enactments imposed pressure on Courts, Tribunals and other adjudicating authorities such as BFIR, AAFIR. There were no timelines of dispose of litigations resulting in mountainous pendency, if even time limit was fixed, they were twisted to further complicate legislations.

Moreover, there is a conspicuous departure from the earlier SICA, State Relief Undertaking enactments, liquidations under Company Law that were Debtor oriented whereas IBS Code provides Creditor oriented management during insolvency process. Under the Code, Board of Directors is suspended from the date of admission of petition till Liquidation and Resolution Professional does day – to- day management subjected to Committee of Creditors.

Question 6.
“Insolvency and Bankruptcy Code, 2016 as on date is an offshoot of reports by several committees established to make Indian economy free from industrial sickness resulting in loss of production and to boost the economy.” Explain the evolvement of Insolvency and Bankruptcy Code, 2016 through recommendations from various committees with consequent reforms made in India over a period of time. (Dec 2017, 5 marks)
Answer:
Every nation strives to avoid industrial sickness in order to have continuous production, distribution with boosting economy. In order to achieve this noble objective, in India several committees were constituted, out of which, Tiwari Committee, N L Mitra Committee, Justice Eradi Committee, J J Irani Committee and Banking Laws Reforms Committee are worth mentioning.

(a) On recommendation of Tiwari Committee, Sick Companies (Special Provisions) Act, 1986 was framed to bring together creditors for debt restructuring for revival of sick units.

(b) N L Mitra Committee tried to identify the deficiency in Indian laws in respect of cross border insolvency and suggested reforms.

(c) Justice Eradi Committee was formed to examine and to recommend measures for desirable changes in existing law relating to winding-up of companies so as to achieve transparency or fast dissolution.

(d) J J Irani Committee proposed changes in the law to make speedy restructuring and liquidation process that culminated to re-codified Companies Act, 2013.

(e) Bankruptcy Law Reforms Committee headed by Dr. T K Viswanatnan had objectives regarding insolvency law with lesser time involved, lesser loss in recovery and higher levels of debt financing across instruments. As on date, Insolvency and Bankruptcy Code 2016 assures revival as a last chance within 180 or 270 days, failing liquidation in further 12 months.

Question 7.
“Default by debtor was a crime punishable with imprisonment or death”. This forgotten perception with respect to the laws of bankruptcy has now got transformed giving opportunity to a bankrupt or insolvent for revival. Express the views in the current context of evolution of Insolvency Laws in Britain and U.S.A. and now even in India. (June 2018, 5 marks)
Answer:
1. The Evolution of U.S. Bankruptcy Law – a time line :

• 1787- The U.S. Constitution authorizes Congress to establish uniform bankruptcy laws throughout the nation.
• Bankruptcy Act of 1800, the first federal bankruptcy law, the Act authorizes district Tribunal judges to appoint non judicial commissioners to oversee and help administer bankruptcy proceedings.
• 1803- Congress repeals the Act of 1800.
• Bankruptcy Act Of 1841 grants district courts “jurisdiction in all matters and proceedings in bankruptcy”.
• 1843 – 1841 Act’s repealed
• Bankruptcy Act of 1867 – marks the first timeCongress refers to district courts as “constituted courts of bankruptcy” with original jurisdiction in all bankruptcy matters.
• 1874 Congress amends the 1867 Act so that debtors can create a plan for distributing assets among creditors as a way to settle a case.
• 1878 – Congress repeals the Acts of 1867 and 1874.
• Bankruptcy Act of 1898 – ¡s the first long-term bankruptcy legIslation. The Act establishes the position of referee to oversee administration of bankruptcy cases.
• Bankruptcy Reform Act of 1978- superseding the 1898 Act, establishes bankruptcy courts in each district and allows for separate bankruptcy judges
• Bankruptcy Reform Act of 1994.
• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

2. Historical development of Insolvency Laws in India :

• The law of insolvency in India owes its origin to English law.
• The Presidency Towns insolvency Act, 1909 and Provisional Insolvency Act, 1920 are two major enactments that deal with personal insolvency.

3. Regulatory framework for corporate insolvency in India :

• The Companies Act, 2013.
• The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
• The Secuntisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESIA).

Question 8.
Progress of enforcement of Insolvency and Bankruptcy Code, 2016 depends on four pillars apart from the adjudicating authorities. State briefly the role of such pillars. (June 2018, 5 marks)
Answer:
The Code provides for setting up of the following institutions to ensure effective governance and implementation of the provisions of the law.
1. The Insolvency and Bankruptcy Board of India

• Regulating all matters related to insolvency and bankruptcy process.
• Setting out eligibility requirements of insolvency intermediaries i.e., Insolvency Professionals, Insolvency Professional Agencies and Information Utilities.
• Regulating entry, registration and exit of insolvency intermediaries.
• Making model bye laws for Insolvency Professional Agencies.
• Setting out regulatory standards for insolvency Professionals.
• Specifying the manners in which Information Utilities can collect and store data.

2. Information Utilities
Obligations of Information Utilities are as follows:

• Collect, collate, authenticate and disseminate financial information of debtors in a universally accessible format with in a centralised electronic databases.
• Get the information received from various persons authenticated by all concerned parties before storing such information.
• Provide access to the financial information stored by it to any person who intends to access such information.
• Have the ability to operate with other information utilities.

3. Insolvency Professional Agencies
The Duties of Resolution Professional inter alia includes:

• Conducting Resolution process.
• Conducting Meeting of Creditors
• Management of Operations of Corporate debtor as going concern
• Preparation of Information Memorandum
• Submission of resolution plan
• Conducting of Liquidation process under the order of Adjudicating Authority if the resolution plan is not accepted or approved etc.

4. Insolvency Professional
Every Insolvency Professional shall abide by the following code of conduct:

• To take reasonable care and diligence while performing his duties.
• To comply with all requirements and terms and conditions specified in the bye laws of the Insolvency professional agency of which he is a member.
• To allow the insolvency professional agency to inspect his records.
• To submit a copy of the records of every proceedings before the adjudicating authority to the board as well as to the Insolvency professional agency of which he is a member.
• To perform his function in such manner and subject to such conditions as may be prescribed.

Question 9.
Explain the concept “Ease of doing business includes easy exit by investors and creditors that prompts national policy makers’ constant endeavour to reform law relating to Insolvency or Bankruptcy”. (Dec 2018, 5 marks)
Answer:
The objective of the Insolvency and Bankruptcy Code 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 and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto.

An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.

Question 10.
Terms “Insolvency” and “Bankruptcy” are synonymous .n result but practically refer to different situations and consequences – Briefly explain. (June 2019, 5 marks)
Answer:
The terms ‘Insolvency’ and ‘Bankruptcy’ are generally used interchangeably in common parlance but there is a marked distinction between the two. Insolvency and bankruptcy are not synonymous.

The term ‘insolvency’ denotes the state of one whose assets are insufficient to pay his debts; or his general inability to pay his debts. The term ‘insolvency’ is used in a restricted sense to express the inability of a person or an entity to pay his debts as they become due in the ordinary course of business.

‘Bankruptcy’ is a legal status of a person or an entity who cannot repay debts to creditors. The bankruptcy process begins with filing of a petition in a court or before an appropriate authority designated for this purpose. The debtor’s assets are then evaluated and used to pay the creditors in accordance with law.

Thus insolvency is a state and bankruptcy is the conclusion. The term insolvency is used for individuals as well as organisations/ corporates. If insolvency is not resolved, it leads to bankruptcy in case of individuals and liquidation in case of corporates.

Question 11.
While adjudication was available for each kind of insolvency and bankruptcy, do you feel the necessity of a single code in the name of Insolvency and Bankruptcy Code, 2016 – Discuss with relevant background. (June 2019, 5 marks)
Answer:
Before the enactment of the insolvency and Bankruptcy Code, there were multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India. The framework for insolvency and bankruptcy was inadequate, ineffective and resulted in undue delays in resolution. The legal and institutional framework did not aid lenders in effective and timely recovery or restructuring of defaulted assets and causes undue strain on the Indian credit system.

Prior to the enactment of the Insolvency and Bankruptcy Code, the provisions relating to insolvency and bankruptcy for companies were made in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013.

These statutes provided for creation of multiple fora such as Board of Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and their respective Appellate Tribunals. Liquidation of companies was handled by the High Courts. Individual bankruptcy and insolvency was dealt with under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920.

The liquidation of companies was handled under various laws and different authorities such as High Court and Debt Recovery Tribunal had overlapping jurisdiction which was adversely affecting the debt recovery process.

The objective of the Insolvency and Bankruptcy Code 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. An effective legal framework for timely resolution of insolvency and bankruptcy will not only encourage entrepreneurship but will also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.

Question 12.
On or after promulgation of Insolvency and Bankruptcy Code, 2016 only the qualified person can be appointed as a Resolution Professional or a Liquidator of a Corporate Body – Discuss briefly. (June 2019, 3 marks)
Answer:
As per Section 206 of the Insolvency and Bankruptcy Code, 2016 no one can render services of an Insolvency Professional (IP) without being enrolled as a member of an Insolvency Professional Agency (I PA) and registered with Insolvency and Bankruptcy Board of India (IBBI).

Thus, only persons with requisite qualifications and registered as Insolvency Professional can take-up the roles of Resolution Professional or Liquidator including Voluntary Liquidation. IBBI (Insolvency Professionals) Regulations, 2016 require a person to complete a pre-registration educational course, as may be required by the Board, from an insolvency professional agency after his enrolment as a professional member. Section 207(2) of the Code empowers the IBBI to state eligibility criteria for the persons having exposure in finance, law, management, insolvency or such other field, as it deems fit.

Question 13.
Debt for Equity swaps can be used as a tool not only for 230-231 of Companies Act, 2013 but for resolution plans formulated under Insolvency and Bankruptcy Code, 2016 – Present your views briefly. (June 2019, 3 marks)
Answer: .
Regulation 37 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that a resolution plan shall provide for the measures for maximisation of value of assets.

Thus, one of the best methods of corporate debt restructuring is debt-equity swap where specified shareholders shall have right to exchange stock for a predetermined amount of debt in the same company. In debt-equity swap debt/bonds are exchanged with shares/stock of the company. However, the resolution plan needs to be placed before Committee of Creditors for approval before the same is placed for sanction by the NCLT.

Question 14.
Define “bankrupt” under Insolvency and Bankruptcy Code, 2016. (June 2019, 3 marks)
Answer:
Section 79(4) of the Insolvency and Bankruptcy Code, 2016 defines the term ‘bankruptcy’ as the state of being bankrupt.

According to section 79(3) of the Insolvency and Bankruptcy Code, 2016 bankrupt’ means:
(a) a debtor who has been adjudged as bankrupt by a bankruptcy order under section 126;
(b) each of the partners of a firm, where a bankruptcy order under section 126 has been made against a firm; or
(c) any person adjudged as an undischarged insolvent.

Question 15.
In a case of Individual Insolvency, creditors resolved to replace the Resolution Professional and approached you for an advice. Offer your views for replacing the Resolution Professional. (June 2019, 3 marks)
Answer:
Section 98 of the Insolvency and Bankruptcy Code, 2016 provides for the grounds and the manner in which a resolution professional can be replaced with another resolution professional in an insolvency resolution process initiated under Section 94 of the Code on an application by the debtor or under Section 95 of the Code if applied for by a creditor.

The debtor or creditor may apply to Adjudicating Authority for such replacement. Within seven days, the Adjudicating Authority shall make a reference to Insolvency and Bankruptcy Board of India (IBBI) for replacement. IBBI in turn within ten days shall recommend the name of Resolution Professional against whom no disciplinary proceedings are pending.

Question 16.
“The Insolvency and Bankruptcy Code makes significant changes in the priority of claims for distribution of liquidation proceeds”. Comment. (June 2019, 5 marks)
Answer:
Section 53 of the Insolvency and Bankruptcy Code, 2016 deals with distribution of assets in liquidation. The Insolvency and Bankruptcy Code, 2016 makes significant changes in the priority of claims for distribution of liquidation proceeds.

In case of liquidation, the assets will be distributed in the following order:

1. fees of insolvency professional and costs related to the resolution process;
2. workmen’s dues for the preceding 24 months and secured creditors;
3. employee wages;
4. unsecured creditors;
5. government dues and remaining secured creditors (any remaining debt if they enforce their collateral);
6. any remaining debts and dues
7. preference shareholders, if any; and
8. equity shareholders or partners, as the case may be.

Before the enactment of the Code, the government dues were immediately below the claims of secured creditors and workmen in order of priority. Now, the Central and State Government’s dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors.

Question 17.
‘Insolvency and Bankruptcy Code, 2016 cast upon certain obligations on Information Utilities’ Justify with your views. (Aug 2021, 5 marks)
Answer:
Section 3(21) of the Insolvency and Bankruptcy Code, 2016 defines an “information utility” as a person who is registered with the Board as an information utility under section 210.

Obligation of Information Utilities are created pursuant to Section 214 of the Insolvency and Bankruptcy Code, 2016. Accordingly, the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 have been framed.

In short, Information Utility is a depository to create and store financial information through electronic means from financial or operational creditors on payment of prescribed fee. Section 215 made it obligatory for financial creditor and optional for operational creditor to submit the details to Information Utility.

All prescribed precautions are taken before storing information that is accessible to anyone on payment of fee. Further it is obliged to publish statistical data as required by Regulations. There needs to be inter-operability with other information Utilities so that the person accessing the data make sure as to authenticity. Section 216 enables the person who has fed original data to approach with reasons the Information Utility to update or modify the information.

Question 18.
“The Insolvency and Bankruptcy Code, 2016 is one of the biggest economic reforms which provides a uniform and comprehensive insolvency legislation”. Enumerate applicability of the Code as per Insolvency and Bankruptcy Code (Amendment) Act, 2018. What is the existing limit to initiate an insolvency process for corporate debtors ? (Dec 2021, 5 marks)
Answer:
Section 2 of the Insolvency and Bankruptcy Code, 2016 as amended vide the Insolvency and Bankruptcy Code (Amendment) Act, 2018 provides that the provisions of the Code shall apply to-

1. any company incorporated under the Companies Act, 2013 or under any previous company law,
2. any other company governed by any special Act for the time being in fprce, except in so far as the said provisions are inconsistent with the provisions of such special Act,
3. any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008,
4. such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf,
5. personal guarantors to corporate debtors,
6. partnership firms and proprietorship firms, and
7. individuals, other than persons referred to in clause (e)

in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.

To initiate an insolvency process for corporate debtors, the default should be at least INR 1,00,00,000. This limit was increased from INR 1,00,000 to INR 1,00,00,000 vide MCA notification dated 24th March, 2020.

Question 19.
What to do you mean by ‘Excluded Debt’ ? (Dec 2021, 3 marks)
Answer:
According to Section 79(15) of the Insolvency and Bankruptcy Code, 2016, an “Excluded debt” means –

1. liability to pay fine imposed by a court or tribunal;
2. liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;
3. liability to pay maintenance to any person under any law for the time being in force;
4. liability in relation to a student loan; and
5. any other debt as may be prescribed.

Question 20.
“The word ‘Insolvency’ and ‘Bankruptcy’ are generally used interchangeably in common parlance, but there is marked difference between the two.” Explain. (June 2022, 3 marks)

Question 21.
What does the ‘Insolvency Resolution Process Costs’ mean under the Insolvency and Bankruptcy Code, 2016 ? Elaborate. (June 2022, 3 marks)

Question 22.
“Insolvency codes are not applicable to financial services.” Examine this statement. (June 2022, 3 marks)

Question 23.
What is Insolvency and Bankruptcy Code, 2016?
Answer:
Insolvency and Bankruptcy Code, 2016 is a consolidated legation providing for insolvency resolution process of individuals, partnership firms, Limited Liability Partnerships and Corporate. The Code offers a uniform, comprehensive insolvency legislation encompassing ail companies, partnerships and individuals. NCLT and Debt Recovery Tribunal play a vital role as an Adjudicating Authority. The code facilitates time-bound process for insolvency resolution and liquidation. It proposes to repeal and amend a number of legislations.

Question 24.
Briefly describe the powers and role of Insolvency and Bankruptcy Board of India?
Answer:
Insolvency and Bankruptcy Board of India means the Insolvency and Bankruptcy Board of India established under sub-section (1) of Section 188.

Powers of the Board
The Board has the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:-

1. The discovery and production of books of account and other documents, at such place and such time as may be specified by the Board;
2. Summoning and enforcing the attendance of persons and examining them on oath;
3. Inspection of any books, registers and other documents of any person at any place;
4. Issuing of commissions for the examination of witnesses or documents.

Role of the Board

1. Regulating all matters related to insolvency and bankruptcy process.
2. Setting out eligibility requirements of insolvency intermediaries i.e., Insolvency Professionals, Insolvency Professional Agencies and Information Utilities.
3. Regulating entry, registration and exit of insolvency intermediaries.
4. Making model bye laws for Insolvency Professional Agencies.
5. Setting out regulatory standards for Insolvency Professionals.
6. Specifying the manners in which Information Utilities can collect and store data.

Question 25.
What do you mean by Insolvency professional agency?
Answer: .
Insolvency professional agency means any person registered with the Board under section 201 as an insolvency professional agency These agencies are required to get registered and obtain certificate of registration from the Board.

Question 26.
What are the duties of Resolution Professional/Insolvency Professional?
Answer:
The Duties of Resolution Professional inter alia includes:-

1. Conducting Resolution process.
2. Conducting Meeting of Creditors
3. Management of Operations of Corporate debtor as going concern
4. Preparation of Information Memorandum
5. Submission of resolution plan
6. Conducting of Liquidation process under the order of Adjudicating Authority if the resolution plan is not accepted or approved etc.

Question 27.
What do you mean by “Interim Finance”
Answer:
“Interim Finance” means any financial debt raised by the resolution professional during the insolvency resolution process period and such other debt as may be notified [Section 5(15)].

Insolvency Notes

Concept of Insolvency, Bankruptcy and Liquidation
The term “insolvency” notes the state of one whose assets are insufficient to pay his debts; or his general inability to pay his debts. The term “insolvency” is used in a restricted sense to express the inability of a party to pay his debts as they become due in the ordinary course of business. The word “bankruptcy” the condition of insolvency. It is a legal status of a person or an entity who cannot repay debts to creditors. The bankruptcy process begins with filing of a petition in a court or before an appropriate authority designated for this purpose. The debtor’s assets are then evaluated and used to pay the creditors in accordance with law.

Therefore, while insolvency is the inability of debtors to repay their debts, the bankruptcy, on the other hand, is a formal declaration of insolvency in accordance with law of the land. Insolvency describes a situation where the debtor is unable to meet his/her obligations and bankruptcy occurs when a court determines insolvency, and gives legal orders for it to be resolved. Thus insolvency is a state and bankruptcy is the conclusion.

The term insolvency is used’for individuals as well as organisations/ corporates. If insolvency is not resolved, it leads to bankruptcy in case of individuals and liquidation in case of corporates.

Historical developments of Insolvency Laws in India
In India, the earliest provisions relating to insolvency can be traced to sections 23 and 24 of the Government of India Act, 1800. These sections conferred insolvency jurisdiction on Supreme Court at Fort Williams (Calcutta), Madras and Recorder’s Court at Bombay as the need for an insolvency law was first felt in Presidency Towns of Calcutta, Bombay and Madras where the British majorly carried on their trade. These Courts were empowered to make rules and grant relief to insolvent debtors.

• Later insolvency courts were established in the Presidency-towns when Statute 9 (Geo. IV c. 73) was passed in 1828. This Act of 1828 marks the beginning of special insolvency legislation in India.
• The Provisions of the Indian Insolvency Act was passed in 1848 and remained in force until the enactment of the Presidency Towns Insolvency Act, 1909.
• Later Provisional Insolvency Act was passed in 1920
• The Insolvency and Bankruptcy Code, 2016 has repealed both the Presidency Towns Insolvency Act, 1909 and the Provisional Insolvency Act, 1920.

Before the enactment of the Insolvency and Bankruptcy Code, 2016 the following Acts dealt with insolvency and Bankruptcy in India:

• The Presidency Towns Insolvency Act, 1909 .
• Provisional Insolvency Act, 1920
• Indian Partnership Act, 1932
• The Companies Act, 1956
• The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
• The Recovery of Debts due to Banks and Financial Institutions Act, 1893 (RDDBFI Act)
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFESI Act, 2002)
• The Companies Act, 2013

Government committees on bankruptcy reforms

• Third Law Commission
• Tiwari Committee
• Narasimham Committee I
• Narasimham Committee II
• Justice Eradi Committee
• N L Mitra Committee
• J Jlrani Committee ‘
• RaghuramRajan Committee
• Financial Sector Legislative Reforms Commission
• Bankruptcy Law Reforms committee (BLRC)

Need for a New Law

• Before the enactment of the Insolvency and Bankruptcy Code, there was no single law in the country to deal with insolvency and bankruptcy
• There were multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India
• The objective of the Insolvency and Bankruptcy Code 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.

Key Objectives of the Insolvency and Bankruptcy Code, 2016

• To consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals
• To provide for a time bound insolvency resolution mechanism
• To ensure maximisation of value of assets,
• To promote entrepreneurship,
• To increase availability of credit
• To balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and
• To establish an Insolvency and Bankruptcy Board of India as a regulatory body
• To provide procedure for connected and incidental matters.

Various parts of the Insolvency and Bankruptcy Code, 2016

• PART I Preliminary
• Part II Insolvency Resolution and Liquidation for Corporate Persons
• Part III Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms
• Part IV Regulation of Insolvency Professionals, Agencies and Information Utilities
• Part V Miscellaneous

Salient Features of the Insolvency and Bankruptcy Code, 2016

• The Insolvency and bankruptcy Code, 2016 offers a uniform, comprehensive insolvency legislation covering all companies, partnerships and individuals.
• To ensure a formal and time bound insolvency resolution process
• The Code provides for Insolvency Professionals (IPs), a class of regulated but private professionals having minimum standards of professional and ethical conduct, to act as intermediary in the insolvency resolution process.
• The Insolvency Professionals control the assets of the debtor during the insolvency resolution process. The insolvency professional verifies the claims of the creditors, constitutes a committee of creditors, runs the debtor’s business during the moratorium period and assists the creditors in finalising the revival plan.
• While the Insolvency professionals assist in the insolvency resolution proceedings envisaged in the Code, the Information Utilities, on the other hand, collect, collate, authenticate and disseminate financial information.
• The Code provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (IBBI).
• The Code proposes two tribunals to adjudicate insolvency resolution cases. In the case of insolvency of companies and Limited Liability Partnerships (LLPs), the adjudication authority is the.National Company Law Tribunal (NCLT), while the cases involving individuals and limited liability partnerships are handled by the Debts Recovery Tribunals (DRTs).
• To initiate an insolvency process for corporate debtors, the default should be at least INR 1,00,00,000.
• In resolution process for corporate persons, the Code proposes two independent stages: Insolvency Resolution Process and Liquidation
• The Code envisages two distinct processes in case of Insolvency Resolution Process (IRP) for Individuals/Unlimited Partnerships – Automatic Fresh Start & Insolvency Resolution

• A financial creditor (for a defaulted financial debt) or an operational creditor (for an unpaid operational debt) can initiate an Insolvency Resolution Process (IRP) against a corporate debtor.
• The defaulting corporate debtor, its shareholders or employees, may also initiate voluntary insolvency proceedings.
• The Code provides for a time bound Insolvency Resolution Process for companies and individuals, which is required to be completed within 180 days (subject to a one-time extension by 90 days).
• The Code makes significant changes in the priority of claims for distribution of liquidation proceeds.

In case of liquidation, the assets will be distributed in the following order, in case of liquidation: (i) fees of insolvency professional and costs related to the resolution process, (ii) workmen’s dues for the preceding 24 months and secured creditors, (iii) employee wages, (iv) unsecured creditors, (v) government dues and remaining secured creditors (any remaining debt if they enforce their collateral), (vi) any remaining debt, and (vii) shareholders.

• Before the enactment of the Insolvency and Bankruptcy Code, the Government dues were immediately below the claims of secured creditors and workmen in order of priority. Now the Central and State Government’s dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors.
• The Code provides for the creation of Insolvency and Bankruptcy Fund
• The Code specifies stringent penalties for certain offences such as concealing property in case of corporate insolvency.

Pillars of insolvency and bankruptcy code, 2016
(A) Insolvency and Bankruptcy Board of India (IBBI)
(B) Insolvency Professionals (IPs)
(C) Insolvency Professional Agencies (IPA)
(D) Adjudicating Authority (AA)
(E) Information Utility (IU)

Insolvency and Bankruptcy Board of India (IBBI)

• The Insolvency and Bankruptcy Code, 2016 provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (IBBI).
• Its role includes overseeing the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities.
• The Board is responsible for implementation of the Code that consolidates and amends the laws relating to insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.

Powers and Functions of the Board

• Register insolvency professional agencies, insolvency professionals and information utilities promote the development of, and regulate, the working and practices of, insolvency professionals, insolvency professional agencies and information utilities
• Specify the minimum eligibility requirements for registration of insolvency professional agencies, insolvency professionals and information utilities.
• Levy fee or other charges for carrying out the purposes of this Code, including fee for registration and renewal of insolvency professional agencies, insolvency professionals and information utilities.
• Specify by regulations standards for the functioning of insolvency professional agencies, insolvency professionals and information utilities.
• Lay down by regulations the minimum curriculum for the examination of the insolvency professionals for their enrolment as members of the insolvency professional agencies.
• Carry out inspections and investigations on insolvency professional agencies, insolvency professionals and information utilities and pass such orders as may be required
• Monitor the performance of insolvency professional agencies, insolvency professionals and information utilities
• Call for any information and records from the insolvency professional agencies, insolvency professionals and information utilities.
• Publish such information, data, research studies and other information as may be specified by regulations.
• Collect and maintain records relating to insolvency and bankruptcy cases and disseminate information relating to such cases.
• Issue necessary guidelines to the insolvency professional agencies, insolvency professionals and information utilities.
• Make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under this Code

Insolvency Professionals (IPs)

• The Code provides for Insolvency Professionals (IPs) to act as intermediary in the insolvency resolution process.
• Insolvency professionals are a class of regulated but private professionals having minimum standards of professional and ethical conduct.
• He acts as a “resolution professional” in the corporate insolvency resolution process
• An insolvency professional also acts as a liquidator
• Section 206 lays down that no person shall render his services as insolvency professional under this Code without being enrolled as a member of an insolvency professional agency and registered with the Board.

Insolvency Professional Agencies (IPA)

• Insolvency Professional Agencies are designated to regulate Insolvency Professionals.
• These agencies conduct examinations to enrol Insolvency Professionals and enforce a code of conduct for their functioning.
• Following are the Insolvency Professional Agencies (IPAs) designated under the Code:
  • The Indian Institute of Insolvency Professionals of ICAI
  • ICSI Institute of Insolvency Professionals and
  • Insolvency Professional Agency of Institute of Cost Accountants of India

Functions of Insolvency Professional Agencies (IPA)

• Grant membership to persons who fulfil all requirements set out in iU’l bye laws on payment of membership fee
• lay down standards of professional conduct for its members
• monitor the performance of its members
• safeguard the rights, privileges and interests of insolvency professionals who are its members
• suspend or cancel the membership of insolvency professionals who are its members on the grounds set out in its bye-laws
• redress the grievances of consumers against insolvency professionals who are its members
• publish information about its functions, list of its members, performance of its members and such other information as may be specified by regulations

Adjudicating Authority (AA)

• Section 5(1) of the Code provides that the “Adjudicating Authority” for insolvency resolution and liquidation for corporate persons and LLP means National Company Law Tribunal
• Similarly, in case of individuals and partnership firms, section 79(1) of the Code provides that the “Adjudicating Authority” for insolvency resolution and bankruptcy for individuals and partnership firms is the Debt Recovery Tribunal
• Appeals from NCLT orders lie to the National Company Law Appellate Tribunal (NCLAT) and thereafter to the Supreme Court of India. For individuals and other persons, the adjudicating authority is the DRT. Appeals from DRT orders lie to the Debt Recovery Appellate Tribunal (DRAT) and thereafter to the Supreme Court.

Information Utility (IU)

• The Information Utility collect, collate, authenticate and disseminate financial information
• The purpose of such collection, collation, authentication and dissemination financial information of debtors is to facilitate swift decision making in the resolution proceedings.

Obligations of information utility

1. Create and store financial information in auniversally accessible format
2. Accept electronic submissions of financial information from persons who are under obligations to submit financial information
3. Meet such minimum service quality standards as may be specified by regulations
4. Get the information received from various persons authenticated by all concerned parties before storing such information
5. Provide access to the financial information stored by it to any person who intends to access such information in such manner as may be specified by regulations
6. Publish such statistical information as may be specified by regulations
7. Have inter-operatability with other information utilities