Introduction to Insolvency and Bankruptcy Code – CS Professional Study Material

Chapter 2 Introduction to Insolvency and Bankruptcy Code – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Introduction to Insolvency and Bankruptcy Code – CS Professional Insolvency Law and Practice Study Material

Question 1.
Insolvency Professionals (IPs) are private persons, but are governed by Insolvency Regulator. Describe how the IPs are regulated? (June 2019, 6 marks)
Answer:
It is true to say that Insolvency professionals (IPs) are private persons, but are governed by Insolvency Regulator (Insolvency and Bankruptcy Board of India). The Insolvency and Bankruptcy Code, 2016 provides for 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. Section 3(19) of the Code defines an ‘insolvency professional’ as a person enrolled under Section 206 of the Code with an insolvency professional agency as its member and registered with the Board as an insolvency professional under Section 207 of the Code.

Section 206 of the Code 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.

Section 207(1) of the Code further lays down that every insolvency professional shall, after obtaining the membership of any insolvency professional agency, register himself with the Board within such time, in such manner and on payment of such fee, as may be specified by regulations.

Section 207(2) of the Code empowers the IBBI to specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field to act as insolvency professionals. The Insolvency and Bankruptcy Board of India has framed the IBBI (Insolvency Professional) Regulations, 2016 to regulate the working of Insolvency Professionals. These regulations are amended from time to time by the IBBI. Section 208 of the Code provides for the functions and obligations of IPs during any insolvency resolution, fresh start, liquidation or bankruptcy process.

IPs are required to follow Code of conduct, there performance is monitored by IPA and IBBI and also they are subject to disciplinary action by IBBI and IPA. Thus, from the above discussion, it is very much clear that IPs though private professional, are regulated by the IBBI, the Insolvency Regulator.

Question 2.
What is the purpose of enactment of the Insolvency and Bankruptcy Code, 2016? (Dec 2019, 3 marks)
Answer:
As per Preamble to the Insolvency and Bankruptcy, Code, 2016, the purpose of this Code is as under:
(a) To consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals.
(b) To fix time periods for execution of the law in a time bound manner.
(c) To maximize the value of the assets of interested persons.
(d) To promote entrepreneurship.
(e) To increase availability of credit.
(f) To balance the interest of all the stakeholders including alteration in order of priority of payment of Government dues.
(g) To establish Insolvency and Bankruptcy Board of India as a regulatory body for Insolvency and Bankruptcy Law.

Question 3.
What shall be included in “Financial Information” as defined under IBC, 2016?” (Dec 2019, 4 marks)
Answer:
As per Section 3(13) of the Insolvency and bankruptcy Code, 2016, ‘financial information’, in relation to a person, means one or more of the following categories of information, namely:
(a) Records of debt of the person.
(b) Records of liabilities when the person is insolvent.
(c) Records of assets of the person over which security interest has been created.
(d) Records, if any, of instances of default by the person against any debt.
(e) Records of the Balance Sheet and Cash Flow Statements of the persons; and
(f) Such other information as may be specified.

Question 4.
One of the leading Bank granted credit facility to Invent Ltd. and on default in making repayment by the Company, the Bank filed an application for initiation Corporate Insolvency Resolution Process (CIRP). Before the National Company Law Tribunal (NCLT), the Company argued that as its liabilities stood suspended pursuant to a relief order passed by Government of Maharashtra under Maharashtra Relief Undertaking (Special Provisions Act), 1958 (MRU Act) no amounts were due and payable by it to Bank and hence, the application for CIRP under the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) could not be admitted. Under the MRU Act, the State Government may take over management of undertaking and impose moratorium in the same manner as contained in IBC, 2016. Examine in the light of decided case, whether the CIRP application filed by the Bank under IBC, 2016 will prevail? (Dec 2020, 6 marks)
Answer:
In terms of Section 6 of the Insolvency and Bankruptcy Code, 2016 where any corporate debtor commits a default a financial creditor, an operational creditor or the corporate debtor itself may initiate Corporate Insolvency Resolution Process (CIRP) in respect of such corporate debtor.
The given case have the similar facts as was in the case of Innoventive Industries Ltd. v. ICICI Bank Ltd., Civil Appeal Nos. 8337-8338 of 2017, decided by the Supreme Court of India. The case involved contradictory provisions in the Code and a state law of Maharashtra state, Maharashtra Relief Undertakings (Special Provisions) Act, 1958. This brought the two legislation on a collision course, for the simple reason that enforcement of one will hinder the enforcement of the other. The Code instead provides for taking over of an undertaking’s business by an ’Insolvency Professional’ through a committee of creditors. The appeal to the Supreme Court, hence involved two major questions. One was, whether the petitioner can seek relief under the Maharashtra Act at the cost of the Code. The second was, whether both the laws are repugnant to each other.
The Supreme Court held that even if the two legislations are framed on different entries of the concurrent list, the Central law will always prevail if it comes in conflict with the State law. The State law, therefore was held inoperable to the extent that it was in contradiction to the Code. In this case the Supreme Court has opined that the provisions of the Code will have supremacy over every other law, whenever and wherever any conflict arises. Hence the provisions of the Insolvency and Bankruptcy Code shall have an overriding effect over MRU Act.
The NCLT was right in admitting the bank’s application for CIRP, declared moratorium and appointed an Interim Resolution Professional

Question 5.
What do you mean by the Doctrine of Repugnancy? Where a law, earlier enacted by any State, is now contradictory to the provisions of the Insolvency and Bankruptcy Code, 2016, then which law will prevail? Write your answer with the decided case law. (Dec 2021, 2 + 4 = 6 marks)
Answer:
Doctrine of Repugnancy means the conflict between two pieces of legislation which when applied to the same facts produce different results. Repugnancy arises when the provisions of two laws are so inconsistent and irreconcilable that it is impossible to do one without disobeying the other.
A plain reading of Article 254 of the Constitution of India gives an impression that if both central and state governments frame laws on a same entry under the concurrent list, only then the Central law will prevail.

Case of Innoventive Industries Ltd. v. ICICI Bank:
The reference of Doctrine of Repugnancy was taken by the Supreme Court in the above case.
Facts of the Case : ICICI Bank had taken Innoventive Industries Ltd. to NCLT for the recovery of its due as the company had defaulted on loan repayment. The NCLT had given a verdict in favour of the ICICI Bank, which Innoventive Industries challenged in the National Company Law Appellate Tribunal (NCLAT), where it received yet another setback. The company later filed an appeal in the Supreme Court seeking relief under the Maharashtra Act, which states that if a company is facing bankruptcy, protection needs to be provided for the employees.

Judgement: On a bare reading of the judgement, it seems that the case involved more adjudication on grounds related to Constitutional Law than on the Code. This case related to the first-ever application filed for initiating insolvency proceedings under the new Code. The Court was cognizant of the fact and hence wanted to settle the law so that all ‘Courts and Tribunals take notice of the paradigm shift in the Law’.
The case involved contradictory provisions in the Code and a state law of Maharashtra state, Maharashtra Relief Undertakings (Special Provisions) Act, 1958. This state law provided for overtaking of industries by the state by declaring them ‘relief undertakings’. Such overtaking can be done through government notifications to that effect under the Act. This is done to protect employment of the people who are working in such an undertaking.
The Code instead provides for overtaking of an undertaking’s business by an Insolvency Professional through a committee of creditors. In the instant case, insolvency application was filed against Innoventive Industries which later claimed to be a relief undertaking under the Maharashtra Act. This brought the two legislations on a collision course, for the simple reason that enforcement of one will hinder the enforcement of the other.
Supreme Court dealt with the constitutional law doctrine of repugnancy. This doctrine stems from the operation of Article 254 of the Constitution. As per this doctrine, whenever central and state laws are framed on the same subject and are contradictory to each other, it is the central law which prevails, and the state law is rendered void.
In the instant case, however, the laws even though coming in conflict with each other, were framed under different entries of the concurrent list. This involved adjudication by the Supreme Court on this point. The National Company Law Tribunal (NCLT) had ruled that Innoventive Industries cannot claim any relief under Maharashtra Act. It also decided that there is no repugnancy between the two laws, as they operate in different fields.

The appeal to the Supreme Court, hence involved two major questions. One was, whether the petitioner can seek relief under the Maharashtra Act at the cost of the Code. The second was, whether both the laws are repugnant to each other.
Invoking a lot of international cases, especially of the Commonwealth countries and previous judgments of the Supreme Court, the bench ruled that there is indeed repugnancy between the two laws. The court held that even if the two legislations are framed on different entries of the concurrent list, the Central law will always prevail if it comes in conflict with the State law. The State law, therefore, was held inoperable to the extent that it was in contradiction to the Code.
The court delved into great detail of the provisions of the Code and held it to be intended as an ‘exhaustive legislation by the Parliament, to cover the whole field of its operation. In such instances involving an exhaustive law, even though the State law may not be in strict violation of the Code, it will even then be rendered inoperative to give way to implement the exhaustive law on the point.
With respect to the Code, being acknowledged as an exhaustive law on the point is a very progressive step. It also, now brings in more clarity that the provisions of the Code will have supremacy over every other law, whenever and wherever any conflict arises.

Question 6.
Discuss in brief the Insolvency and Bankruptcy Code, 2016.
Answer:

• Insolvency and Bankruptcy Code (IBC) is a consolidated legislation providing for insolvency resolution prbcess of individuals, partnership firms, Limited Liability Partnerships and Corporate.
• It offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals.
• It facilitates time-bound process for insolvency resolution and liquidation and proposes to repeal and amend a number of legislations.
• It also introduced new regulator “Insolvency and Bankruptcy Board of India” (The Board).
• The adjudication process in relation to Corporates and LLPs would be under National Company Law Tribunal and in relation to individuals and partnerships under Debt Recovery Tribunal.

Question 7.
How is insolvency different from Bankruptcy?
Answer:

• Generally, the words “Insolvency” and “Bankruptcy” are used interchangeably 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 party to pay his debts as they become due in the ordinary course of business.
• The word “bankruptcy” denotes a legal status of a person or an entity who cannot repay debts to creditors.
• 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 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 8.
Define Bankrupt and bankrupt as per the IBC.
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 Code, “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 9.
Discuss the history of Insolvency and Bankruptcy Code, 2016.
Answer:

• The Government of India Set-up in 1981, a Committee of Experts under the Chairmanship of Shri T. Tiwari to examine the matter and recommend suitable remedies therefore.
• Based on the recommendations of the Committee, the Government of India enacted a special legislation namely, the Sick Industrial Companies Act, 1985 (SICA).
• The main objective of SICA was to determine sickness and expedite the revival of potentially viable units or closure of unviable units.
• It was expected that by revival, idle investments in sick units will become productive and by closure, the locked-up investments in unviable units would get released for productive use elsewhere.
• The Act was enacted with a view to secure the timely detection of sick and potential sick companies owning industrial undertakings, the speedy determination by a body of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined and for matters connected therewith or incidental thereto.
• Board for Industrial and Financial Reconstruction (BIFR) was set up in January, 1987 and got functional with effect from 15th May 1987.
• The Appellate Authority for Industrial and Financial Reconstruction (AAIFR) was constituted in April 1987.
• Government companies were brought underthe purview of SICA in 1991 when extensive changes were made in the Act including, inter-alia, changes in the criteria for determining industrial sickness.

Question 10.
What was the major constraints of SICA?
Answer:
The major constraint of the SICA was that it was applicable only to sick industrial companies keeping away other companies which were in trading, service or other activities. The Act was modified in 1991 to include within its purview the Government companies by Industrial Companies (Special Provisions) Amendment Act, 1991 which came into force w.e.f. 28.12.91. However, the overall experience was not satisfactory because of various factors including non-applicability of SICA to non-industrial companies and small/ancillary companies, misuse of immunity provided under Section 22 of SICA, etc. In view of this, the Insolvency and Bankruptcy Code, 2016 was notified on the May 28, 2016. At present the SICA Act, 1985 is repealed and the company in respect of which such appeal or reference or inquiry stands abated in BIFR and AAIFR may make reference to NCLT under the Insolvency and Bankruptcy Code 2016.

Question 11.
Which Acts were present before the enactment of the Insolvency and Bankruptcy Code, 2016?
Answer:

• 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, 1993 (RDDBFI Act)
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002)
• The Companies Act, 2013

Question 12.
What were the objectives of the Bankruptcy Law Reforms Committee?
Answer:
The Bankruptcy Law Reforms Committee submitted its report to the Finance Ministry on November 4, 2015. The objectives of the Committee were to resolve insolvency with:

1. lesser time involved,
2. lesser loss in recovery, and
3. higher levels of debt financing across instruments.

Question 13.
Discuss in detail various government committees on bankruptcy reforms.
Answer:

1. In 1964, Third Law Commission was established in 1961 under the Chairmanship of Justice J L Kapur. It submitted 26th Law Commission Report in 1964 proposing amendments to the Provincial Insolvency Act, 1920.
2. In 1981, as per the recommendations of the Tiwari Committee, the Government of India enacted SICA in order to provide for timely detection of sickness in industrial companies and for expeditious determination of preventive and remedial measures.
3. In 1991, as per Narasimham Committee I, The government enacted Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993.
4. In 1998, Narasimham Committee II The committee’s recommendations led to the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002.
5. In 1999, Justice Eradi Committee Recommended setting up of a National Company Law Tribunal (NCLT) and proposed repeal of SICA. 6 2001 N L Mitra Committee Proposed a comprehensive bankruptcy code.
6. In 2005, J J Irani Committee proposed significant changes to make the restructuring and liquidation process speedier, efficient and effective and accordingly amendments were made to (RDDBFI) Act, 1993 and (SARFAESI), 2002.
7. In 2008 ,Raghuram Rajan Committee proposed improvements to credit infrastructure.
8. In 2013 Financial Sector Legislative Reforms Commission recommended changes in Indian Financial Sector.
9. In 2014 Bankruptcy Law Reforms Committee (BLRC) reviewed the existing bankruptcy and insolvency framework in the country and proposed the enactment of Insolvency and Bankruptcy Code as a uniform and comprehensive legislation on the subject.

Question 14.
What was the need for a new law in the form of “Insolvency and Bankruptcy Code, 2016”?
Answer:

• 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 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.
• 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 15.
Explain Section 2 of the Insolvency and Bankruptcy Code, 2016?
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 –
(a) any company incorporated under the Companies Act, 2013 or under any previous company law
(b) any other company governed by any special Act for the time being in force
(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008
(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf
(e) personal guarantors to corporate debtors
(f) partnership firms and proprietorship firms; and
(g) individuals, otherthan persons referred to in clause (e) in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.

Question 16.
What are the key objectives of Insolvency and Bankruptcy Code, 2016?
Answer:
Key objectives of Insolvency and Bankruptcy Code, 2016 are as under:

• 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.

Question 17.
What are the various parts in which Insolvency and Bankruptcy Code, 2016 is divided?
Answer:
Part I Preliminary (Sections 1 to 3)
Part II Insolvency Resolution and Liquidation for Corporate Persons

• Chapter I Preliminary (Sections 4 to 5)
• Chapter II Corporate Insolvency Resolution Process (Sections 6 to 32)
• Chapter III Liquidation Process (Sections 33 to 54)
• Chapter IV Fast Track Corporate Insolvency Resolution Process (Sections 55 to 58)
• Chapter V Voluntary Liquidation of Corporate Persons (Section 59)
• Chapter VI Adjudicating Authority for Corporate Persons (Sections 60 to 67)
• Chapter VII Offences and Penalties (Sections 68 to 77)

Part III Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms

• Chapter I Preliminary (Sections 78 to 79)
• Chapter II Fresh Start Process (Sections 80 to 93)
• Chapter III Insolvency Resolution Process (Sections 94 to 120)
• Chapter IV Bankruptcy Order for Individuals and Partnership Finns (Sections 121 to 148)
• Chapter V Administration and Distribution of the Estate of the Bankrupt (Sections 149 to 178)
• Chapter VI Adjudicating Authority for Individuals and Partnership Firms (Sections 179 to 187)

Part IV Regulation of Insolvency Professionals, Agencies and Information Utilities

• Chapter I The Insolvency and Bankruptcy Board of India (Sections 188 to 195)
• Chapter II Powers and Functions of the Board (Sections 196 to 198)
• Chapter III Insolvency Professional Agencies (Sections 199 to 205)
• Chapter IV Insolvency Professionals (Sections 206 to 208)
• Chapter V Information Utilities (Sections 209 to 216)
• Chapter VI Inspection and Investigation (Sections 217 to 220)
• Chapter VII Finance, Accounts and Audit (Sections 221 to 223)
• Part V Miscellaneous (Sections 224 to 255)

Question 18.
Discuss in detail the salient features of the Insolvency and Bankruptcy Code, 2016?
Answer:
The salient features of the Insolvency and Bankruptcy Code, 2016 are as under:
1. The Insolvency and bankruptcy Code, 2016 offers a uniform, comprehensive insolvency legislation covering all companies, partnerships and individuals. Financial firms are not included in the ambit of the Insolvency and Bankruptcy Code, 2016.

2. To ensure a formal and time bound insolvency resolution process, the Code creates a new institutional framework consisting of the Insolvency and Bankruptcy Board of India (IBBI), Adjudicating Authorities (AAs), Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs) and Information Utilities (lUs).

3. 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. 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 designated Insolvency Professional Agencies (IPAs) established 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.

4. The Insolvency and Bankruptcy Board of India has framed the IBBI (Insolvency Professional) Regulations, 2016 to regulate the working of Insolvency Professionals. These regulations are amended from time to time by the Insolvency and Bankruptcy Board of India.

5. 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 purpose of such collection, collation, authentication and dissemination of financial information of debtors in centralised electronic databases is to facilitation swift decision-making in the resolution proceedings.

6. The Code 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 as well as regulating the insolvency process. The members of the Board includes representatives from the central government as well as the Reserve Bank of India. The Board is empowered to frame and implement rules to regulate the profession as well as processes envisaged in the Code.

7. 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 partnership firms are handled by the Debts Recovery Tribunals (DRTs).

8. To initiate an insolvency process for corporate debtors, the default should be at least INR 100,000. This limit may be increased by the Government up to INR 10,000,000. For individuals and unlimited partnerships, the minimum default amount is INR 1000. The Government may revise the minimum amount of default to a higher threshold.

9. In resolution process for corporate persons, the Code proposes two independent stages: (i) Insolvency Resolution Process, during which the creditors assess the viability of debtor’s business and the options for its rescue and revival, (ii) Liquidation, in case the insolvency resolution process fails or financial creditors decide to wind up and distribute the assets of the debtor.

10. The Code envisages two distinct processes in case of Insolvency Resolution Process (IRP) for Individuals/Unlimited Partnerships (i) Fresh Start Process (ii) Insolvency Resolution.

11. The Code provides a Fresh Start Process for individuals under which they will be eligible for a prescribed debt waiver. The individual will be eligible for the waiver subject to certain limits prescribed under the Code. Under the fresh start process, eligible debtors can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh.

12. 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.

13. The Code provides for a time bound Insolvency Resolution Process for companies and individuals.

14. 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:

• fees of insolvency professional and costs related to the resolution process
• workmen’s dues for the preceding 24 months and secured creditors
• employee wages
• unsecured creditors
• government dues and remaining secured creditors (any remaining debt if they enforce their collateral)
• any remaining debt, and
• 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.

15. The Code provides for the creation of Insolvency and Bankruptcy Fund. Section 224 of the Code provides that the following amounts shall be credited to the fund
(a) the grants made by the Central Government for the purposes of the Fund
(b) the amount deposited by persons as contribution to the Fund
(c) the amount received in the Fund from any other source; and
(d) the interest or other income received out of the investment made from the Fund.

16. In case of cross-border insolvency proceedings, the central government may enter into bilateral agreements and reciprocal arrangements with other countries to enforce provisions of the Code.

Question 19.
Write a note on Insolvency and Bankruptcy Board of India (IBBI)?
Answer:

• The Insolvency and Bankruptcy Code, 2016 provides forthe constitution of an insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (IBBI).
• The Insolvency and Bankruptcy Board of India was established on 1st October 2016.
• It is a unique regulator which regulates a profession as well as processes under the Code.
• 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.
• The Board is empowered to frame and enforce rules for various processes under the Code, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy.
• Section 188(2) of the Code provides that the Board shall be a body corporate having perpetual succession and a common seal, with power, subject to the provisions of this Code, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.
• As per section 189(4), the term of office of the Chairperson and members (other than ex officio members) shall be five years or till they attain the age of sixty-five years, whichever is earlier, and they shall be eligible for reappointment.

Question 20.
Write a note on powers and functions of Insolvency and Bankruptcy Board of India (IBBI).
Answer:
Section 196(1) of the Code (as amended by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018) provides that the Board shall, subject to the general direction of the Central Government, perform all or any of the following functions namely:
(a) Register insolvency professional agencies, insolvency professionals and information utilities and renew, withdraw, suspend or cancel such registrations.
(aa) promote the development of, and regulate, the working and practices of, insolvency professionals, insolvency professional agencies and information utilities and other institutions, in furtherance of the purposes of this Code.
(b) Specify the minimum eligibility requirements for registration of insolvency professional agencies, insolvency professionals and information utilities.
(c) 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.
(d) Specify by regulations standards for the functioning of insolvency professional agencies, insolvency professionals and information utilities.
(e) Lay down by regulations the minimum curriculum for the examination of the insolvency professionals for their enrolment as members of the insolvency professional agencies.
(f) Carry out inspections and investigations on insolvency professional agencies, insolvency professionals and information utilities and pass such orders as may be required for compliance of the provisions of this Code and the regulations issued hereunder.
(g) Monitor the performance of insolvency professional agencies, insolvency professionals and information utilities and pass any directions as may be required for compliance of the provisions of this Code and the regulations issued hereunder.
(h) Call for any information and records from the insolvency professional agencies, insolvency professionals and information utilities.
(i) Publish such information, data, research studies and other information as may be specified by regulations.
(j) Specify by regulations the manner of collecting and storing data by the information utilities and for providing access to such data.
(k) Collect and maintain records relating to insolvency and bankruptcy cases and disseminate information relating to such cases.
(l) Constitute such committees as may be required including in particular the committees laid down in Section 197.
(m) Promote transparency and best practices in its governance.
(n) Maintain websites and such other universally accessible repositories of electronic information as may be necessary.
(o) Enter into memorandum of understanding with any other statutory authorities
(p) Issue necessary guidelines to the insolvency professional agencies, insolvency professionals and information utilities.
(q) Specify mechanism for redressal of grievances against insolvency professionals, insolvency professional agencies and information utilities and pass orders relating to complaints filed against the aforesaid for compliance of the provisions of this Code and the regulations issued hereunder.
(r) Conduct periodic study, research and audit the functioning and performance of to the insolvency professional agencies, insolvency professionals and information utilities at such intervals as may be specified by the Board.
(s) Specify mechanisms for issuing regulations, including the conduct of public consultation processes before notification of any regulations.
(t) Make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under this Code, including mechanism for time bound disposal of the assets of the corporate debtor or debtor.
(u) Perform such other functions as may be prescribed.

Question 21.
Write a note on Insolvency Professionals (IPs).
Answer:

• 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.
• Section 3(19) of the Code defines an “insolvency professional” as a person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207.
• An insolvency professional plays a very important role under the Code. He acts as a “resolution professional” in the corporate insolvency resolution process (specified in Part II of the Code which deals with corporate persons) as well as a “resolution professional” under Part III of the (which deals with Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms) for conducting the fresh start process or insolvency resolution process.
• An insolvency professional also acts as a liquidator in accordance with the provisions of Part II as well as a “bankruptcy trustee” for the estate of the bankrupt under section 125 in Part III of the Code.

Question 22.
Explain the provisions related to enrolment and registration of insolvency professionals.
Answer:

• 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.
• Section 207(1) further lays down that every insolvency professional shall, after obtaining the membership of any insolvency professional agency, register himself with the Board within such time, in such manner and on payment of such fee, as may be specified by regulations.
• Section 207(2) empowers the IBBI to specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field to act as insolvency professionals.
• The Insolvency and Bankruptcy Board of India has framed the IBBI (Insolvency Professional) Regulations, 2016 to regulate the working of Insolvency Professionals. These regulations are amended from time to time by the Insolvency and Bankruptcy Board of India.

Question 23.
State the functions and obligations of insolvency professionals.
Answer:
Section 208(1) of the Code provides that where any insolvency resolution, fresh start, liquidation or bankruptcy process has been initiated, it shall be the function of an insolvency professional to take such actions as may be necessary, in the following matters, namely:
(a) a fresh start order process under Chapter II of Part III
(b) individual insolvency resolution process under Chapter III of Part III
(c) corporate insolvency resolution process under Chapter II of Part II
(d) individual bankruptcy process under Chapter IV of Part III; and
(e) liquidation of a corporate debtor firm under Chapter III of Part II.

Section 208(2) mandates that every insolvency professional shall abide by the following code of conduct-
(a) to take reasonable care and diligence while performing his duties
(b) 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
(c) to allow the insolvency professional agency to inspect his records
(d) to submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the insolvency professional agency of which he is a member; and
(e) to perform his functions in such manner and subject to such conditions as may be specified.

Question 24.
Write a note on Insolvency Professional Agencies. State its functions.
Answer:

• Section 3(20) of the Code defines “insolvency professional agency” as any person registered with the Board under section 201 as an insolvency professional agency.
• Insolvency Professional Agencies are designated to regulate Insolvency Professionals.
• These agencies conduct examinations to enroll Insolvency Professionals and enforce a code of conduct for their functioning.
• In exercise of powers conferred by the Insolvency and Bankruptcy Code, 2016, the Insolvency and Bankruptcy Board of India (IBBI) has framed the following regulations to regulate the working of Insolvency Professional Agencies (IPAs):
• The Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 and
• The Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies) Regulations, 2016.
• 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.

Question 25.
Write a note on functions of Insolvency Professional Agencies.
Answer:
According to Section 204 of the Code, an insolvency professional agency performs the following functions, namely:
(a) grant membership to persons who fulfil all requirements set out in its byelaws on payment of membership fee
(b) lay down standards of professional conduct for its members
(c) monitor the performance of its members
(d) safeguard the rights, privileges and interests of insolvency professionals who are its members
(e) suspend or cancel the membership of insolvency professionals who are its members on the grounds set out in its bye-laws
(f) redress the grievances of consumers against insolvency professionals who are its members; and
(g) publish information about its functions, list of its members, performance of its members and such other information as may be specified by regulations.

Question 26.
Explain the provisions regarding the adjudicating authority for Insolvency Resolution.
Answer:
National Company Law Tribunal is constituted as the adjudicating authority for insolvency resolution and liquidation of corporate persons as per Section 5 (1) of the Code. NCLT is formed under section 408 of the Companies Act, 2013.
Section 60(5) of the Code further provides that the National Company Law Tribunal shall have jurisdiction to entertain or dispose of –
(a) any application or proceeding by or against the corporate debtor or corporate person
(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and
(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.
As per Section 63 of the Code, no civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which National Company Law Tribunal (NCLT) or the National Company Law Appellate Tribunal (NCLAT) has jurisdiction under this Code.

Question 27.
Discuss the “Adjudicating Authority” for insolvency resolution and bankruptcy for individuals and partnership firms.
Answer:
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 constituted under sub-section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
Section 179(1) of the Code provides that subject to the provisions of section 60, the Adjudicating Authority, in relation to insolvency matters of individuals and partnership firms shall be the Debt Recovery Tribunal having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain and can entertain an application under this Code regarding such person.
Section 179(2) of the Code further provides that the Debt Recovery Tribunal shall, have jurisdiction to entertain or dispose of –
(a) any suit or proceeding by or against the individual debtor
(b) any claim made by or against the individual debtor
(c) any question of priorities or any other question whether of law or facts, arising out of or in relation to insolvency and bankruptcy of the individual debtor or firm under this Code.
Section 180 of the Code provides that no civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal has jurisdiction under this Code.

Question 28.
Discuss the provisions related to appeal against NCLT and DRT.
Answer:
The Insolvency and Bankruptcy 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 partnership firms are handled by the Debts Recovery Tribunals (DRTs). 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.

Question 29.
Define “Information Utility”?
Answer:

• Section 3(21) of the Code defines an “information utility” as a person who is registered with the Board as an information utility under section 210.
• The Insolvency professionals assist in the insolvency resolution proceedings envisaged in the Code, the Information Utility, on the other hand, collect, collate, authenticate and disseminate financial information.
• The purpose of such collection, collation, authentication and dissemination financial information of debtors is to facilitation swift decision making in the resolution proceedings.
• The Insolvency and Bankruptcy Board of India oversees the functioning of such information utilities.
• The Insolvency and Bankruptcy Board of India has framed the IBBI (Information Utilities) Regulations, 2017. These regulations are amended from time to time by the Insolvency and Bankruptcy Board of India.

Question 30.
Describe the obligations of information utility.
Answer:
Section 214 describes the obligations of information utility:
(a) create and store financial information in a universally accessible format;
(b) accept electronic submissions of financial information from persons who are under obligations to submit financial information under sub-section (1) of section 215, in such form and manner as may be specified by regulations
(c) accept, in specified form and manner, electronic submissions of financial information from persons who intend to submit such information;
(d) meet such minimum service quality standards as may be specified by regulations
(e) get the information received from various persons authenticated by all concerned parties before storing such information
(f) 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
(g) publish such statistical information as may be specified by regulations;
(h) have interoperability with other information utilities.

Question 31.
Define the term “Financial Service”.
Answer:
“Financial Service” includes any of the following services, namely-
(a) accepting of deposits;
(b) safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;
(c) effecting contracts of insurance;
(d) offering, managing or agreeing to manage assets consisting of financial products belonging to another person;
(e) rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of –
(i) buying, selling, or subscribing to, a financial product;
(ii) availing a financial service; or
(iii) exercising any right associated with a financial product or financial service;
(f) establishing or operating an investment scheme;
(g) maintaining or transferring records of ownership of a financial product;
(h) underwriting the issuance or subscription of a financial product; or
(i) selling, providing, or issuing stored value or payment instruments or providing payment services [Section 3(16)].

Question 32.
Define the following as per the Code.
Answer:
“Board”: the Insolvency and Bankruptcy Board of India established under Sub section (1) of section 188 [Section 3(1)]

“Bye-laws”: the bye-laws made by the insolvency professional agency under section 205 [Section 3(3)].

“Claim”:
(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured [Section 3(6)].

“Charge”: an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage [Section 3(4)].

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

“Corporate Debtor”: person who owes a debt to any person [Section 3(8)].

“Core Services”: services rendered by an information utility for
(a) accepting electronic submission of financial information in such form and manner as may be specified;
(b) safe and accurate recording of financial information;
(c) authenticating and verifying the financial information submitted by a person; and
(d) providing access to information stored with the information utility to persons as may be specified [Section 3(9)].

Creditor: any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder [Section 3(10)].

“Debt”: a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt [Section 3(11)].

“Default”: 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 [Section 3(12)].

“Financial Information”:
(a) records of the debt of the person;
(b) records of liabilities when the person is solvent;
(c) records of assets of person over which security interest has been created;
(d) records, if any, of instances of default by the person against any debt;
(e) records of the balance sheet and cash-flow statements of the person; and
(f) such other information as may be specified [Section 3(13)].

“Financial Institution”:
(a) a scheduled bank;
(b) financial institution as defined in section 45-I of the Reserve Bank of India Act, 1934;
(c) public financial institution as defined in clause (72) of section 2 of the Companies Act, 2013; and
(d) such other institution as the Central Government may by notification specify as a financial institution [Section 3(14)].

“Financial Product”:
securities, contracts of insurance, deposits, credit arrangements including loans and advances by banks and financial institutions, retirement benefit plans, small savings instruments, foreign currency contracts other than contracts to exchange one currency (whether Indian or not) for another which are to be settled immediately, or any other instrument as may be prescribed [Section 3(15)].

Financial Service Provider: a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator [Section 3(17)].

“Financial Sector Regulator”: “Financial Sector Regulator” means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government [Section 3(18)1

“Security Interest”: Right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee; [Section 3(31)]

“Insolvency Resolution Process Costs”:
(a) the amount of any interim finance and the costs incurred in raising such finance;
(b) the fees payable to any person acting as a resolution professional;
(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;
(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and
(e) any other costs as may be specified by the Board [Section 5(13)].

“Bankrupt”:
(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 [Section 79(3)].

“Resolution Applicant”:
Any person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub section (2) of section 25 [Section 5(25)].

“Related Party”:
(a) a person who is a relative of the individual or a relative of the spouse of the individual;
(b) a partner of a limited liability partnership, ora limited liability partnership or a partnership firm, in which the individual is a partner;
(c) a person who is a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms of the trust confers a power on the trustee which may be exercised for the benefit of the individual;
(d) a private company in which the individual is a director and holds along with his relatives, more than two per cent, of its share capital;
(e) a public company in which the individual is a director and holds along with relatives, more than two per cent, of its paid-up share capital;
(f) a body corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of the individual;
(g) a limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, act on the advice, directions or instructions of the individual;
(h) a person on whose advice, directions or instructions, the individual is accustomed to act;
(i) a company, where the individual or the individual along with its related party, own more than fifty per cent, of the share capital of the company or controls the appointment of the board of directors of the company.

“Associate” of the debtor:
(a) a person who belongs to the immediate family of the debtor;
(b) a person who is a relative of the debtor or a relative of the spouse of the debtor;
(c) a person who is in partnership with the debtor;
(d) a person who is a spouse or a relative of any person with whom the debtor is in partnership;
(e) a person who is employer of the debtor or employee of the debtor;
(f) a person who is a trustee of a trust in which the beneficiaries of the trust include a debtor, or the terms of the trust confer a power on the trustee which may be exercised for the benefit of the debtor; and
(g) a company, where the debtor or the debtor along with his associates, own more than fifty percent, of the share capital of the company or control the appointment of the board of directors of the company.

“Resolution Plan”: A plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II [Section 5(26)].

“Resolution Professional”: An insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional [Section 5(27)].

“Voting share”: The share of the voting rights of a single financial creditor in the committee of creditors which is based on the proportion of the financial debt owed to such financial creditor in relation to the financial debt owed by the corporate debtor [Section 5(28)].