Insolvency and Bankruptcy Code

What is the insolvency and bankruptcy code?

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in LokSabha in December 2015. As mentioned in the objective section IBC is An act 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 order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

Order of priority for distribution of assets

  • Insolvency related costs
  • Secured creditors and workmen dues up to 24 months
  • Other employee’s salaries/dues up to 12 months
  • Financial debts (unsecured creditors)
  • Government dues (up to 2 years)
  • Any remaining debts and dues
  • Equity

The act has amended many legislations including the Companies Act and has an overriding effect over all laws when it comes to Insolvency and bankruptcy as mentioned under section 238 of the Code. This overriding effect of the code was tested in the Innoventive Industries case, a landmark decision of the Supreme Court.

 The code divides creditors into two classes, financial creditors and operational creditors, and provides superior rights to financial creditors to control the appointment of the resolution professional and choose the resolution plan. Both classes, however, can trigger the insolvency resolution process.  Recently by the 2018 Ordinance, homebuyers were also included under the financial creditors.

There exists a distinction in the process of initiating the Corporate Insolvency Resolution Process (CIRP) by the financial creditors and the operational creditors. The financial creditors can initiate the CIRP by directly filing the application with the National Company Law Tribunal on the occurrence of a default, unlike the ‘operational creditors’ either deliver a demand notice who were first required to deliver a demand notice (and invoices) to the corporate debtor, under Section 8 of the Code and The operational creditor also can file a certificate from their banker to certify that no amount had been received from the corporate debtor to satisfy the operational debt.  The certificate is to be filed only if the same is available.

CIRP can only be initiated when the minimum amount of default is rupees is one lakh or such higher amount as may be notified by the Central Government which shall not exceed one crore rupees. Interim Resolution Professional is the Insolvency Professional proposed by the Resolution applicant and appointed by Adjudicating Authority to manage the affairs of Corporate Debtor from the date of such appointment till the date of appointment of Resolution Professional (the other Insolvency Professional) by Committee of Creditors. Resolution Professional is the Insolvency Professional appointed by the Committee of Creditors in its First Meeting. Either the Interim Resolution Professional or the other Insolvency Professional may be appointed as Resolution Professional.