ISSN 2455-4782

OVERVIEW OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016

& THE ACCOMPANYING REGULATIONS

Javish Valecha1 & Ankita Anupriya Xalxo2

BACKGROUND

In the backdrop of Vijay Mallya episode and season of corporate defaults when public sector
banks and financial institutions are helplessly chasing their dues in largely protracted legal
battles, the Parliament of India in the first week of May swiftly passed Insolvency and
Bankruptcy Code 2016 (New Code). The New Code has received the President's assent and
awaits to be formally notified. This Code is essential because no single umbrella legislation
has governed insolvency and bankruptcy proceedings in India till now. Instead, there was a
slew of legislation governing the legal framework.

The Insolvency and Bankruptcy Code, 2016 (Code), a landmark legislation consolidating the
regulatory framework governing the restructuring and liquidation of persons (including
incorporated and unincorporated entities) was enacted into law by the Parliament on 11 May
2016. As in the case of Companies Act 2013 (2013 Act), different provisions of the Code are
being notified and operationalised in a phased manner. Part IV of the Code provides for the
setting up of an insolvency regulator, the Insolvency and Bankruptcy Board of India (Board).
The Board is empowered to frame regulations on matters pertaining to insolvency and
bankruptcy. Provisions pertaining to the constitution and powers of the Board were notified
and operationalised by the Central Government on 5 August 2016. Subsequently, the Board
was constituted on 1 October 2016 under the Chairmanship of Mr MS Sahoo.

EARLY FRAMEWORK

Corporate Insolvency
In India till now has always been regulated and administered by multiple and sometime
overlapping laws as follows:

1
5th Year BBA LLB (Hons.)Student, School of Law, KIIT University, Bhubaneswar, Odisha.
2
5th year BA LLB (Hons.) Student, Hidayatullah National Law University, Raipur
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 The Companies Act 2013

 The Sick Industrial Companies (Special Provisions) Act 1985
 The Recovery of Debts Due to Banks and Financial Institutions Act 1993
 The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002

Individual Insolvency
This has always been regulated and administered through the Presidency Towns Insolvency
Act (for residents of Mumbai, Kolkata and Chennai) and Provincial Insolvency Act (for other
residents) which are century old legislations and have now outlived their utility.

 The Presidency Towns Insolvency Act 1909

 The Provincial Insolvency Act 1920

LEGISLATIVE HISTORY
A single piece of legislation to connect the various insolvency laws has been on the cards for
some time, with recommendations from the Law Commission of India dating back to its 26th
report on insolvency laws in 1964. Various committees have explored the idea of
consolidating India's insolvency and bankruptcy laws which are explained hereunder:

 In 1964, the 26th Report of the Law Commission recommended reform of personal
insolvency laws and suggested a new Insolvency Bill to consolidate the extant two
separate insolvency laws.
 The Tiwari Committee (1985) introduced the Sick Industrial Companies Act.
 The Narasimhan Committee I and II (1991 and 1998), introduced the Recovery of
Debts Due to Banks and Financial Institutions Act and the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act
 The Justice Eradi Committee (1999) introduced changes to the Companies Act and
proposed the repeal of the Sick Industrial Companies Act:
It revealed some startling facts – that the average time taken in winding up matters
was 11 years pan-India, and in the Eastern Region, it took on an average 25 years to
resolve a bankruptcy.

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The idea of the National Company Law Tribunal (“NCLT”) was born, inclusively, out
of the recommendations of the Eradi Committee which paved way for amendment of
the Companies Act was amended in 2002.
 The N.L Mitra Committee (2001) proposed a comprehensive bankruptcy code in
2001.
 The J J Irani Committee finally implemented the Mitra Committee recommendations
and thus, the Companies Act, 2013 was enacted. The basis of insolvency was changed
from “inability to pay” to “failure to pay”.
 In 2014, the Finance Minister announced that the government hoped to overhaul the
present setup of insolvency and bankruptcy laws in the country and the code surfaced
for the first time.
 On November 4, 2015, the Bankruptcy Law Reforms Committee (chaired by TK
Viswanathan) submitted its final report recommended the passage of the Insolvency
and Bankruptcy Code 2015.
 On December 2, 2015 Finance Minister Arun Jaitley tabled the code before the lower
house of the Indian Parliament (the Lok Sabha)
 On May 5, 2016, The Lok Sabha passed the Insolvency and Bankruptcy code 2016
with all the amendments proposed by the joint committee of Parliament being
accepted by the government.
 On May 11, 2016, the Rajya Sabha passed the Insolvency and Bankruptcy Code,
2016.
 On May 28, 2016, the Insolvency and Bankruptcy Code, 2016 (“Code”) received
President's assent.
 Notification of the code has been done. However, those sections of the Companies
Act, 2013 which form counter part of the Code got notified on June 1, 2016.

A FLAWED INSOLVENCY REGIME

The problems stemming from the present legal regime for insolvency/ bankruptcy
proceedings in India with respect to corporate insolvency are: are multi-fold, some of which
are as follows:

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1. Might is Right
The enforcement of security interests by creditors is based on a “might is right” principle – a
creditor is obviously concerned with its own dues rather than the interests of other
stakeholders in the business – other lenders, creditors, workers, and others whose livelihood
depends on the business. In short, the equitability principle in which insolvency laws are
rooted all over the world is rarely seen on the Indian scene as of now.

2. Incoherent System
The incompatibility and absence of hierarchy in jurisdictions laid down by the
aforementioned statutes have resulted in often conflicting judgements by various High Courts
and the Supreme Court of India regarding the interpretation of these statutes and how they
interact with one another.

3. Rusted Procedures
The existing legal regime makes no room for contemporary market realities ultimately
harming the businesses. The RDDB Act and the SARFAESI Act provide a safety measures to
secured creditors such as banks and financial institutions but not to unsecured creditors who
comprise equally big chunk. Even the safety for secured creditors is not assured because of
the haphazard system. Put together, such factors have resulted in India having one of the
worst recovery rates in the world.

For the sake of limited scope of this memorandum, only the various dimensions of corporate
insolvency will be dealt with.

THE NEW CODE & CORPORATE INSOLVENCY

1. Scope of Applicability
The law is to cover insolvencies of “corporate persons” (covering companies, limited liability
partnerships (“LLPs”), and all other entities having limited liability), as also individuals,
firms etc. While the law is admittedly a code for insolvent companies, it covers liquidation of
solvent companies as well, and thereby, serves as a complete code on liquidation of
companies.

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2. Institutional Framework
 Insolvency and Bankruptcy Board of India
The primary functions of the Board will include registration of insolvency professionals,
insolvency institutions, information utilities, provide guidelines on the conduct of bankruptcy
resolution, etc.

 Adjudicating Authority (“AA”)

The AA is the primary quasi-judicial body presiding over the entire process of bankruptcy. In
case of corporate persons, the AA will be the National Company Law Tribunal ("NCLT")
and National Company Law Appellate Tribunal ("NCLAT") 3 . The NCLT, which was
constituted under Section 408 of the Companies Act 2013, which got recently notified on
June 1, 2016.4 The insolvency proceedings against companies presently being handled by the
company court benches in various high courts across India will now get transferred subject to
a recent notification and an awaited notification of the Insolvency Code.

 Insolvency professionals (IPs)

IPs may be practically read as administrators (pre liquidation stage) and liquidators (post
liquidation order) – who have role to play in both insolvency, liquidation and resolution. The
following are the insolvency professionals:

- Interim resolution professional – immediately on admission of an insolvency resolution

process.

- Final resolution professional - on appointment by the Committee of Creditors.

- Liquidator – on commencement of liquidation proceedings. Typically, the final resolution

professional will act as liquidator, unless replaced by the AA.

- Resolution applicant: the entity that prepares a resolution plan.

 Information utilities
The information utilities will be storing financial information – this may be seen as electronic
filing of defaults, security interests. There will obviously be an overlap with present filing of
defaults with someone like CIBIL, security interests with the Companies Act, etc., which
may be eventually resolved. It is not clear whether this will dovetail into the existing Central
3
The AA for individuals and partnership firms, it is the extant Debt Recovery Tribunal ("DRT") and Debt
Recovery Appellate Tribunal ("DRAT").
4
Notification constituting the National Company Law Tribunal and National Company Law Appellate Tribunal
under Sections 408 and 410 respectively of the Companies Act, 2013-01.06.2016-S.O. 1932(E) and 1933(E).
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Registry of Securitisation Asset Reconstruction and Security Interest of India (“CERSAI”)

and/or Central Repository of Information on Large Credits (“CRILC”) or end up adding to
the plethora of registries in India.

 Interplay
The Code envisages that the insolvency resolution processes will be conducted by insolvency
professionals ("IPs"). The IPs will be licensed professionals and will be members of
insolvency professional agencies ("IPAs"), which will be created for regulation of such IPs.
The Code also provides for establishment of information utilities ("IUs"), for collection,
collation and dissemination of financial information to facilitate insolvency resolution. The
regulation and operation of these IPs, IPAs, and IUs is to be overseen by an Insolvency and
Bankruptcy Board ("Board") established under the Code.

3. Corporate Insolvency Resolution Process

 Who can initiate?
The “corporate insolvency resolution process” may be initiated on application to NCLT:

o by a financial creditor("FC")5, either by itself or jointly with other financial creditor,

meaning a creditor for financial facility (which is a broadly worded expression including
financial lease and hire purchase transactions, which are treated as financial transactions
under applicable accounting standards);
o by an operational creditor (“OC”)6, meaning a creditor other than a financial creditor;
o By the corporate debtor (“CD”)7 himself, that is, company itself.

 On what basis?
o In case of FCs, the basis of filing is the fact of a default to any FC. A default, for this
purpose, includes a default in respect of a financial debt owed not only to the applicant
financial creditor but to any other financial creditor of the CD. This drastically changes the
basis of the current provisions of “sickness” under the Companies Act, which is based on

5
The Code distinguishes between a FC and OC, and lays down different procedure for initiating the
proceedings. FC is a creditor to whom a financial debt is owed and includes anyone to whom such debt is
assigned/transferred.
6
OC is one to whom an operational debt is owed i.e., debt in respect of goods or services including employment
or debt arising under any law in force for the time being and payable to Central Government/State
Government/Local Authorities.
7
A Corporate applicant includes the corporate debtor (whose IRP is proposed to be initiated) or its shareholder,
management personnel or employees satisfying certain criteria. A corporate applicant may file an application
for IRP upon occurrence of any default and shall along with application submit its books of account and other
documents to initiate the IRP
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default to a majority in value of the creditors. In addition, the only fact on which the
application for insolvency will be admitted is the fact of a default, established from the
records of the information utility.

The FC has to move an application before the NCLT showing them the proof of default and
proposing an interim IP. The NCLT will then ascertain the existence of default from the
records of an IU (i.e. information utilities) or on the basis of other evidence furnished by the
creditor.

In case of OCs, he has to first serve a demand notice along with the proof of default, giving
the debtor ten days to respond to dispute the claim. If the claim remains undisputed, then the
OC can file an application before the AA. If the claim for the above situations is not paid
within 10 days, the creditor may initiate insolvency process. This largely creates a level-
playing field between secured and unsecured creditors.

Here, the NCLT has been offered mere fourteen days' time to ascertain the existence of a
default based on the records of IUs or other evidence provided by an applicant creditor in the
corporate insolvency resolution process (CIRP). This is too without offering an opportunity
of being heard to the corporate debtor. This may defeat the principle of natural justice vis-à-
vis the corporate debtor and NCLT may end up admitting several frivolous petitions. Some of
these provisions need a close review.

 Roadmap after Admission of Application

Broadly, the insolvency resolution process, after an application has been admitted by the AA
will entail the following steps:

o Declaration a moratorium period

-This will prohibit actions such as, institution of suits, continuation of pending suits/
proceedings against the CD including execution of any judgement, decree or order;
disposal/encumbering of CD's assets or rights/interests therein; any action to foreclose,
recover or enforce any security interest created by the CD, etc.

One of the most important features of a bankruptcy law is the grant of moratorium during
which creditor action will remain stayed, while the bankruptcy court takes a view on the
possibility of rehabilitation. In the chapter on Sick Companies under the Companies Act
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2013, there is no provision for automatic moratorium – it merely empowers the NCLT to
grant a moratorium up to 120 days.

The Code8 talks about a mandatory moratorium – thereby, it serves almost like the automatic
moratorium under global bankruptcy laws. The moratorium will continue throughout the
completion of the resolution process – which is 180 days as mentioned above. However, if in
the meantime, the creditors’ committee resolves to approve liquidation of the entity, then the
moratorium will cease to have effect.

Explicitly, the moratorium before liquidation applies to enforcement of security interests

under SARFAESI Act as well9. A moratorium also applies when an order for liquidation has
been passed by the AA.10

o Appointment of an Interim IP
-Issuance of public announcement of the initiation of insolvency resolution process and call
for the submission of claims. Interim IP inter alia takes over the management and powers of
the board of directors of the CD, and collects all information relating to assets, finances and
operations of the CD for determining its financial position; collates all claims submitted by
the creditors and constitutes a Committee of Creditors ("COC").

-The COC thereafter either resolves to appoint the interim IP as the IP or replaces the interim
IP by appointing a new IP, in accordance with the prescribed procedure. This IP shall be
appointed as the liquidator for the process.

The IP will then take over the management and assets of the CD, and can exercise the wide
powers granted to it, in the manner prescribed under the Code. It will prepare an information
memorandum in relation to the CD, on the basis of which the resolution applicant will
prepare a resolution plan. IP will scrutinize the resolution plan11 and present it to the COC.

8
Section 13
9
Section 14 (1) (c)
10
Section 33 (6), The Insolvency and Bankruptcy Code, 2016
11
Under the Code, each financial creditor of the COC, whether secured or not, gets to vote on the resolution
plan of the corporate debtor on the basis of its voting share (proportionate to the money advanced by the
creditor).
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The COC approved plan will be submitted to the AA, for its acceptance, and it is only when
the AA, gives it a final nod that the resolution plan becomes binding upon all the stakeholders
and the insolvency resolution process of the CD is initiated. In case the AA rejects the plan,
the liquidation process of the CD will commence.

o Timeline for the process

Particulars Timelines (in days)

Filing of Insolvency application – Details of what needs
to be mentioned in the application has been specified
(interim finance)12 X
Adjudicating Authority- admission or rejection of
application -

Before rejecting an application, the Adjudicating

Authority shall give a notice to the applicant to rectify
the defect in the application within 7 days.

If admitted, Adjudicating Authority to declare

moratorium upon admission X+14
Insolvency Resolution Professional appointment (X+14) + 14
 Constitution of Committee of Creditors
 Appointment of final resolution professional
(X+14) + 14 +10

12
Incentive to Insolvency Professionals & Interim Financing: In the distribution of liquidation proceeds, the cost
of IP and the IRP has first priority, thereby acting as an incentive for them to strive for speedy resolution. This
is at par with international practices. The Code prescribes that any interim financing and the cost of raising
such financing will be included as part of the IRP cost, thereby giving it first priority in the waterfall and also
in any creditor driven plan. Security can be created over the assets of the company to secure such financing by
the interim resolution professional without the consent of existing creditor(s) if the value of the property
secured in favor of existing secured creditors is at least twice the outstanding debt. However, any financing
after the appointment of the resolution professional and constitution of the COC must be approved by 75% of
the financial creditors by value.
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Submission of Resolution plan

 If approved- Moratorium ceases to have effect

 If rejected- Initiation of Liquidation

Insolvency Resolution Process Completion (X+14) + 180

Insolvency Resolution Process Extension (X+14) + 180 +90

Even within body corporates, small companies are fast-tracked and their insolvency
resolution processes must be completed within 90 days of submission. The Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons)
Regulations, 2016 came in effect from 1st December, 2016 onwards and will likewise govern
the procedures under this head.

4. Corporate Liquidation Process

 Initiation of the liquidation process13
 In the event that:

o the COC cannot agree on a workable resolution plan within the IRP Period (i.e. 180
days extendable once by another 90 days);
o the COC decides to liquidate the company;
o the NCLT rejects the resolution plan; or
o the corporate debtor contravenes provisions of the resolution plan,

The NCLT shall:

o Pass an order requiring liquidation of corporate debtor;

o Make a public announcement of corporate debtor entering liquidation; and
o Require a liquidation order to be sent to the registering authority of the corporate
debtor (for example Registrar of Companies in case of companies incorporated under
Companies Act).

The IP acting as the resolution professional shall, upon commencement of liquidation shall be
appointed as the liquidator for the process, unless replaced by NCLT.

13
Section 33, The Insolvency and Bankruptcy Code, 2016
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 Appointment of Liquidator14
 Formation of Liquidation Trust15

This provision is indeed very significant as it defines the reach of the so-called “liquidation
estate” 16 . That is to say, to the extent assets of the corporate debtor form part of the
liquidation trust, the assets will be distributed by the liquidator in the manner of priorities laid
in the law, and individual claimants or those claiming to have any special rights on such
assets will have to form part of the liquidation process.

o Important inclusions in the liquidation trust are:

All assets and interests as evidenced in the balance sheet of the corporate debtor. This will
continue to cause confusion as it relies on accounting principles which are quite often not
aligned with legal title.

For example, under IFRS, several securitization transactions or sale of financial assets do not
go off the balance sheets. This may put to question the “true sale” character of several
securitization transactions.

o Important exclusions are:

Third party assets, including,

 Trust assets, that is, assets whereof the corporate debtor is merely a trustee
 Bailment assets – thereby, leased assets will be excluded from liquidation trust but it
may be argued that in case of financial leases, as the assets are on the balance sheet,
at least the right to use will be an asset, unless the right to use gets terminated by
virtue of the bankruptcy event.
 Transactions where there is no transfer of title but merely a right to use.
 Assets placed as collateral with financial debtors, that are subject to netting under
multilateral or clearing contracts – thereby giving protection to such derivatives as

14
Section 34, The Insolvency and Bankruptcy Code, 2016
15
Section 36, The Insolvency and Bankruptcy Code, 2016
16
Section 36, The Insolvency and Bankruptcy Code, 2016
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are settled by multi-lateral clearing. The provision seems to have been picked from
international jurisdictions, but multilateral clearing is not currently in vogue in India.
 Assets of subsidiaries – while shares held in the subsidiary form part of the
liquidation trust, the assets do not.

o Collection of Creditors’ Claims

This has to be done within 21 days of the commencement of liquidation, and verification of
claims 17 . The COC shall only include financial creditors as decision makers (operational
creditors with more than 10% aggregate exposure have mere observer status during the COC
meetings) and shall be responsible for deciding the important affairs of the company.

It shall also be responsible for authorising the IP (acting as resolution professional) to take (or
not to take) certain actions such as raising interim finance up to the limit specified by the
committee, creating security on assets of the secured creditor, undertaking related party
transactions, amending constitutional documents, change of capital structure or management
of the Borrower etc.

More importantly, the COC shall approve the resolution plans received by the IP. All
decisions of the COC are required to be approved by a majority of 75% of the voting
shares/value of the financial creditors

It also includes elaborate provisions 18 about voidable transfers and undue preferences,
incorporating several safe harbours for bona fide transactions against “clawback” rights of a
bankruptcy court.

Under existing law, the court simply has powers to preserve bona fide transactions – the Code
gives several such transactions which are protected from any clawback. In addition to this,
there are usual provisions for undervalued transactions, fraudulent transfers, etc. There is
seemingly a new provision pertaining to avoidance of “extortionate credit” contracts, entered
into within 2 years before the commencement of insolvency process19.

17
Section 37-40, The Insolvency and Bankruptcy Code, 2016
18
Section 41, The Insolvency and Bankruptcy Code, 2016
19
Section 49-51, The Insolvency and Bankruptcy Code, 2016
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 Realization of debt by secured creditors20

-This very important section incorporates the classic principle understood over the decades in
India – which a secured creditor may either relinquish security interest or force his claim on
the overall liquidation trust assets, or may opt to realise security interest outside the winding
up process.

-The secured creditors are permitted to realise security interest according to such law as may
be applicable – thereby preserving the process of self-help realisation under the SARFAESI
Act. However, there will be reference to the liquidator for the purpose of the liquidator
identifying the asset.21

Upon liquidation, a secured creditor may choose to realise his security and receive proceeds
from the sale of the secured assets in first priority. If the secured creditor enforces his claims
outside the liquidation, he must contribute any excess proceeds to the liquidation trust.
Further, in case of any shortfall in recovery, the secured creditors will be junior to the
unsecured creditors to the extent of the shortfall.

This section, however, brings a very important balance in the process of repossession outside
the liquidation process under SARFAESI Act, by requiring the secured creditor to return the
excess realised by him to the liquidator.

Thereby, the liquidator also becomes an interested party in the process of sale of secured
assets under SARFAESI Act, throwing greater burden on the creditors in being more
transparent in the conduct of the sale.

 Distribution of assets by the liquidator22

Most interestingly, the section23 dealing with this starts with a non-obstante clause, giving
this section supremacy over conflicting provisions of a vast number of Central and State
laws. There have been several rulings of the courts, including the apex court, on conflict of
laws pertaining to claims of the state creditors over assets of companies in winding up.

Hopefully, this section, being a dedicated section pertaining to distribution of assets on

liquidation, will operate as a special law, and will resolve the cacophony currently existing in
the matter. In fact, state dues come at number 5 in the rung.

20
Section 52, The Insolvency and Bankruptcy Code, 2016
21
Section 52 (4), The Insolvency and Bankruptcy Code, 2016
22
Section 53, The Insolvency and Bankruptcy Code, 2016
23
Section 53, The Insolvency and Bankruptcy Code, 2016
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-One disturbing point is the provision24 which seeks to disregard contractual arrangements
between claimants of a single class. Usually, in capital market transactions, there are several
classes of preference created among creditors – for example, super senior, senior,
subordinated, etc. Clause 53 (2) may be interpreted to disregard these priorities as
“contractual arrangements”.

The Code is touted as and is expected to be a game-changer in dealing with India's mounting
arrears of recovery cases nationwide. The Code is also an important part of the incumbent
NDA government's Ease of Doing Business in India narrative and introduces a number of
changes to the present setup.

 Application for dissolution25

 Order for dissolution 26

5. Fast track resolution27

As a notable feature of the Code, the Code proposes a fast track resolution process, intended
to be completed within 90 days, as opposed to the 180 days’ time for a normal process. The
fast track process will be applicable for corporate debtors of a particular class, or having
assets or income up to such level as may be notified by the Central Government. Essentially
the process seems to be targeting small companies.

6. Voluntary liquidation
It would have been a pity if the process of liquidation under the Code was to be reserved only
for defaulting companies, since voluntary winding up of healthy companies in India currently
takes enormously long time and, surprisingly, all attention has been to the speed of
incorporating companies, not winding them up. Thus, a healthy company, based on a
declaration of solvency, may pass a special resolution to liquidate itself. At least 2/3rds of the
creditors in value must also support the members’ resolution. The rest of the liquidation
mechanics under the Code will apply to a voluntary winding up as well.

24
Section 53 (2), The Insolvency and Bankruptcy Code, 2016
25
Section 54 (1)
26
Section 54 (2)
27
Section 55- 58, Chapter IV, Part II
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7. NCLT to mind its timelines28

One of the highlight points of the Code is timely completion of the liquidation process. Since
most delays take place due to protracted time before the Benches, will keep the benches of
NCLT and NCLAT serious about timely disposal of matters. Theses sections enact that where
the NCLT or NCLAT does not dispose of the matter within the time limits, the president of
the forum shall record the reasons for not doing so.

LEGAL CONSIDERATIONS
1. Interplay of Existing Laws

As outlined earlier in this note, the Code not only repeals 2 statutes, but also amends 11 other
statutes such as Companies Act, SICA and SARFAESI for effectuating the provisions
relating to insolvency and liquidation/ bankruptcy of all legal and natural persons under the
Act. However, the interplay of provisions of the Code, the amended statutes and several other
statutes (such as Negotiable Instruments Act, 1881) will be an important factor in
determination of insolvency proceedings. It is imperative that the provisions of all the key
legislations are synchronized in order to ensure that there are no discrepancies or overlaps
with existing laws. Failure to ensure this may lead to more confusion in the short run, as far
as applicability of specific laws is concerned.

2. Cross Border Insolvency

Even though the Code suggests 2 mechanisms to deal with the cross border element of
insolvency/liquidation, a comprehensive framework needs to be imbibed to effectively deal
with this issue. Various Indian companies have assets and creditors located across different
parts of the world and various foreign companies have subsidiaries in India. Issues relating to
Insolvency/liquidation of Indian companies with assets located in several jurisdictions outside
India and vice-versa cannot be achieved without having a mechanism like adoption of the
UNCITRAL Model Law on Cross Border Insolvency. In case of bilateral agreements
suggested by the Code presently, it will not only be difficult but will also take a very long
time to negotiate an agreement with each country. In addition, several countries may refuse to
divulge any information about the assets located in their country upon receipt of a letter

28
Section 64
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envisaged under the Code. As such, while the Code recognises cross border issues, it does not
specifically deal with them other than providing the legal basis for dealing with the issue
down the line.

3. Practical Ramifications
 Paradigm shift in approach to debt

The Code will fundamentally change the approach to debt in India across a cross-section of
society, including the approach and psychology of promoters towards lenders, the way
business is done and for individuals, who will all need to adapt to the new framework.

 Balancing Interests of Different Creditors

In any restructuring process, different creditors have varying interests which often leads to
conflicts. Depending upon the nature of their debt (operational or financial) or the security of
debt (secured or unsecured), each creditor may have a different strategy of recovery.
Likewise, foreign creditors may have a different approach from domestic creditors. The new
inter-creditor dynamics introduced by the Code will realign the existing practices of various
creditor groups.

 Delaying Tactics

One of the key objectives of the Code is to have a system which curbs tactics used by debtors
to delay enforcement/winding up/restructuring by 'gaming' the system. This is often done by
restricting dissemination of correct information to the lenders and filing of frivolous appeals
against the orders passed in favour of the lenders. While the Code addresses the underlying
causes for such delaying tactics and seeks to put robust information systems in place, it is yet
to be seen if this is sufficient in practice to prevent debtors from arm-twisting the lenders who
may not see sufficient recovery from the liquidation process.

 Time bound process and restrained role of the Courts

The Code seeks to implement a time bound restructuring of the debtor while encouraging a
limited the involvement of Adjudicating Authorities and other judicial remedies. No doubt
the ability of Adjudicating Authorities and courts to exercise this restraint will be tested by
corporate debtors.
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 Third Parties Stepping-in

Based on the processes contemplated by the Code, a concern arises as to how well equipped
would third party professionals and creditors directing them be, to step into the shoes of the
promoters and take control of the board, especially at the beginning of the insolvency
process, and run the underlying business of a defaulting debtor.

 Applicability

Unlike bankruptcy laws in the US, the Code does not envisage 'debtor in possession' (DIP)
financing, which would effectively allow the debtor to keep control of the assets during the
IRP. Rather, it follows a UK style approach where the IP controls the process during the IRP.
However, in the Indian context, the Code does not allow the IP to sell assets without creditor
consent, thereby making UK style administration sales or pre-packaged sales ('pre-packs')
difficult to achieve.

RECENT DEVELOPMENTS

Since its constitution, the Board had initially released draft rules on the regulation of
insolvency professionals (IPs) and insolvency professional agencies (IPAs) for comments
from the public. IPs are insolvency professionals charged with the responsibility of
conducting insolvency or liquidation proceedings in accordance with the provisions of the
Code, similar to administrators in the UK. IPAs are insolvency professional agencies
responsible for registering and regulating IPs. After a period of public consultation, the
following regulations were notified into law on 21 and 23 November 2016:

 Insolvency and Bankruptcy Board of India (Registration of Insolvency Professional

Agencies) Regulations, 2016 (IPA Regulations);
 Insolvency and Bankruptcy Board of India (Model Bye-laws and Governing Board of
Insolvency Professional Agencies) Regulations, 2016 (Model Bye-laws Regulations);
and
 Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations,
2016 (IP Regulations).

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The Code and the rules framed there under, have adopted a quasi-self-regulatory model
for regulating IPs. IPs are required to be registered with any IPA. Any not-for-profit
company is eligible to be an IPA. Both IPs and IPAs are in turn regulated by the Board. In
this Newsflash, we highlight certain key aspects of these regulations.

 Also, Insolvency Resolution Process for Corporate Persons Regulations, 2016 was
notified on in the end of the month of November, 2016 and it would be in effect from
1st December, 2016 onwards.
 Again, the Insolvency and Bankruptcy Board of India (Board), in exercise of its
powers conferred under section 240 of the Insolvency and Bankruptcy Code 2016
(code), has notified on 15th December, 2016 the Insolvency and Bankruptcy Board of
India (Liquidation Process) Regulations, 2016. These regulations inter alia provide for
the details of activities from issue of liquidation order under section 33 of the Code to
dissolution order under Section 54. These regulations came into force with immediate
effect.29

1. Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies)

Regulations, 201630

The IPA Regulations lay down the procedure and eligibility for registration as an IPA and
grounds for rejection, suspension and cancellation of registration. Certain key highlights of
the IPA Regulations include:

 The IPA is required to be incorporated as a not-for-profit company under Section 8 of

the 2013 Act.
 The IPA is required to have a minimum net worth of INR 100 million and a paid- up
share capital of INR 50 million.
 Only 49% of the share capital of an IPA can be held, either directly or indirectly, by a
person resident outside India. Furthermore, prior approval of the Board is required
when a person other than a statutory body seeks to hold more than 10% in the share
capital of an IPA, either directly or indirectly.

29
Available at http://taxguru.in/corporate-law/insolvency-bankruptcy-board-india-liquidation-process-
regulations-2016.html
30
Available at http://www.ibbi.gov.in/Law/IPA%20REGULATIONS_professional_agencies.pdf
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 Every IPA applicant, along with its directors, promoters and all persons holding more
than 10% of its share capital, is required to be a 'fit and proper' person as determined
by the Board based on the guidelines in the Code and the IPA Regulations.
 In-principle registrations (i.e., temporary registrations) are also available to IPs for a
limited period of 1 year. The in-principle approval regime replaces the provisional
and transitional registration regime proposed in the draft IPA regulations.

2. Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board
of Insolvency Professional Agencies) Regulations, 201631

The Insolvency and Bankruptcy Board of India (IBBI), in exercise of its powers conferred
under Section 240 of the Insolvency and Bankruptcy Code, 2016 (Code), has notified today
the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
The regulations inter alia provide for registration, regulation and oversight of insolvency
professional under the Code. These Regulations have come into effect from 29th November,
2016. The following categories of individuals are eligible for registration as an insolvency
professional:

The Model Bye-laws Regulations prescribe model bye-laws that every IPA is required to
adopt. These model bye-laws lay down the duties of the IPA, eligibility norms for enrolment
as a member of the IPA, monitoring of members of an IPA, adoption of a grievance redressal
mechanism, the manner of conduct of disciplinary proceedings against the members of an
IPA, and norms pertaining to surrender of membership and expulsion of members of an IPA.

The Model Bye-laws Regulations also prescribe certain governance standards for IPAs,
which include:

 Governing body of the IPA is required to have at least one-half independent directors
and one-half Indian resident directors.
 No meeting of the governing body of an IPA can be held without at least one
independent director being present.
 At least a quarter of the directors are required to be insolvency professionals
themselves.

31
Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency
Professional Agencies) Regulations, 2016, Lawyersclubindia, available at
http://www.ibbi.gov.in/Law/IPA%20REGULATIONS_professional_agencies.pdf
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The following categories of individuals are eligible for registration as an insolvency

professional:

 Advocates, Chartered Accountants, Company Secretaries and Cost Accountants with 10

years’ of post-membership experience (practice or employment) or a Graduate with 15
years’ of post-qualification managerial experience, on passing the Limited Insolvency
Examination or
 Any other individual on passing the National Insolvency Examination.
 However, Advocates, Chartered Accountants, Company Secretaries and Cost
Accountants with more than 15 years’ of experience may seek registration, without any
examination. But applications for e such registration need to be made till 31 st December,
2016 and such registration shall be valid for a limited period of six months. There shall be
a ‘National Solvency Examination’ the details of which will be specified through
regulations. There shall also be ‘Limited Insolvency Examination.’ The syllabus, format
and frequency of the ‘Limited Insolvency Examination’. The syllabus, format and
frequency of the ‘Limited Insolvency Examination’, including qualifying marks, shall be
published on the website of the Board at least one month before the examination. A
limited liability partnership, a registered partnership firm and a company may be
recognised as an insolvency professional entity if a majority of the partners of the limited
liability partnership or registered partnership formed a majority of the whole-time
directors of the company are registered as insolvency professional under the Code. AN
insolvency professional may use the organisational resources of a recognised insolvency
professional entity subject to the condition that the entity as well as the insolvency
professional shall be jointly and severally liable for all acts of omission or commission of
its partners or directors as insolvency professionals. 32

3. Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations,

201633
The Insolvency and Bankruptcy Board of India has issued the Notification on Insolvency and
Bankruptcy Board of India. These Regulations shall come into force on 29th November,
2016. The IP Regulations lay down eligibility norms (including the requirement to have

32
Available at http://www.lawyersclubindia.com/news/Insolvency-and-Bankruptcy-Board-of-India-Model-Bye-
Laws-and-Governing-Board-of-Insolvency-Professional-Agencies-Regulations-2016-
16471.asp?wb48617274=02C812AB
33
Available at http://www.ibbi.gov.in/Law/GAZETTEIP_professional.pdf
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passed an examination held by the Board) and other registration requirements for IPs. They
prescribe a code of conduct that IPs must adhere to, highlighting standards of impartiality and
independence, integrity, professional competence, confidentiality, etc. Certain key highlights
of the IP Regulations include:

 What is the purpose?

At present, there are multiple overlapping laws and adjudicating forums dealing with
financial failure and insolvency of companies and individuals in India. The current legal and
institutional framework does not aid lenders in effective and timely recovery or restructuring
of defaulted assets and causes undue strain on the Indian credit system. Recognising that
reforms in the bankruptcy and insolvency regime the Government introduced the Insolvency
and Bankruptcy Code, 2016.

This step opens a new opportunities of practice for professionals in the areas of Corporate
and Individual Insolvency, Corporate Liquidation Process.

 Who can be eligible?

An Individual who

1. Is a resident of India
2. Have prescribed qualification as provided 5 the regulations
3. Is of sound mind
4. Should be a fit and proper person
5. Is not a minor
6. Is not an undischarged insolvent or has not applied to be adjudicated as an insolvent
7. Have not convicted any offence with imprisonment and others as prescribed under the
regulations

The Institute of Company Secretaries of India (ICSI) has set up an Insolvency

Professionals Agency (IPA). Insolvency professional has to get registered with ICSI’s
IPA to practice. Graduates interested can approach any of ICSI’s centres across India.
Besides getting information about the examination, they will also be provided with
study material. ICSI is already preparing study material for an examination, which will
launched within one month. As of now members of Institute of Chartered Accountants
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of India (ICAI), Institute of Cost and Work Accountants of India (ICWAI), ICSI and
legal professionals with 15 years of experience in matters relating insolvency and
liquidation can directly get registered IPA.
Though they can start practising immediately, they have to pass an examination to be
conducted by ICSI-IPA. The ICSI will soon open up enrolment to all graduates
interested in insolvency practice. Graduates can become insolvency professionals by
passing the exam.

 What are the qualifications and experience required for getting registered?

According to these regulations an Individual shall be eligible for registration as an insolvency

professional, if he –

o has passed the National Insolvency Examination;

o has passed the Limited Insolvency Examination, and has fifteen years of experience in
management, after he received a Bachelor’s degree from a university established or
recognized by law; or
o has passed the Limited Insolvency Examination and has ten years of experience as –

 A chartered accountant enrolled as a member of the Institute of Chartered

Accountants of India
 A company secretary enrolled as a member of the Institute of Company
Secretaries of India,
 A cost accountant enrolled as a member of the Institute of Cost Accountants of
India, or
 An advocate enrolled with a Bar Council.

 How can a person apply?

An individual enrolled with an insolvency professional agency as a professional member may

make an application to the Board in Form A of the Second Schedule to these Regulations,
along with a non-refundable application fee of ten thousand rupees to the Board.

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If the Board is satisfied, after such inspection or inquiry as it deems necessary that the
applicant is eligible under these Regulations, it may grant a certificate of registration to the
applicant to carry on the activities of an insolvency professional in Form B of the Second
Schedule to these Regulations, within sixty days of receipt of the application, excluding the
time given by the Board for presenting additional documents, information or clarification, or
appearing in person, as the case may be.

The New Insolvency and Bankruptcy Code, 2016 stipulates the maximum time to be taken
to liquidate a company to 180 days with a one-time extension of 90 days, while earlier it
used to take at least four years for the same. With the new law, arises the new
opportunities for youth in the form of insolvency professionals. To cater to the huge
insolvency and liquidation market and produce insolvency professionals, the Institute of
Company Secretaries of India (ICSI) has set up a Insolvency Professionals Agency and
also allotted about H14 crore to train graduates to become insolvency professionals. ICSI’s
IPA has already got permission from the Union Government to conduct examination to
register as insolvency professional from December 31, 2016 onwards.
While the ICSI can start conducting exams from this date onwards, the exact dates will be
announced soon. One can get information about insolvency professional examination from
ICSI’s official website: www.icsi.edu.

 What is the role of an insolvency professional?

He/she takes up matters relating to insolvency of individuals, partnerships and liquidation
of companies. He advises and monitors his clients in matters related to insolvency,
bankruptcy and liquidation.

Less than 100 insolvency professionals have been enrolled till now. Enrolment of insolvency
professionals has been started from December 1. Though there isn’t any clear number, ICSI
estimates that more than a lakh cases relating to insolvency, bankruptcy and liquidation are
pending and from now only insolvency professionals can 34 Insolvency and Bankruptcy

34
Available at http://www.newindianexpress.com/business/2016/dec/09/icsi-expedites-insolvency-professional-
training-1547103.html
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Board of India (Liquidation Process) Regulations, 2016.35The Insolvency and Bankruptcy

Board of India (IBBI) today notified regulations for liquidation process whereby an
insolvency professional is barred from acting as a liquidator unless that individual is
independent of the corporate debtor concerned.

4. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For

Corporate Persons) Regulations, 2016 36
The overview of the same has been given under Part 3 of this paper.

5. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 201637

While announcing that the regulations for liquidation process have been notified, IBBI on
9th of December, 2016 mentioned that these norms specify the manner and contents of
public announcement, receipt and verification of claims of stakeholders, among other
requirements. The new set of regulations provide for, among other things, details of
activities to be undertaken — from issue of liquidation order under Section 33 of the
Code to dissolution order under Section 54. The salient features of the regulations are:
 It prohibits partners and directors of an insolvency professional entity of which the
insolvency professional is a partner or director from representing other stakeholders in
the same liquidation process.
 A liquidator should ordinarily sell the assets through auctions and private sale would
be allowed only if the asset is perishable. With respect to fee payable to a liquidator,
the amount would form part of the liquidation cost.
 A liquidator shall be paid such fees and in such manner as has been decided by the
committee of creditors during the resolution process. In all other cases, the liquidator
shall be entitled to a fee as a percentage of the amount realised net of other liquidation
costs and of the amount distributed.38

35
Available at
http://www.ibbi.gov.in/Law/IBBI%20(Liquidation%20Process)%20Regulations,%202016%2015%20DEC.pd
f
36
Available at http://www.ibbi.gov.in/Law/GAZETTEIP_professional.pdf
37
Available at
http://www.ibbi.gov.in/Law/IBBI%20(Liquidation%20Process)%20Regulations,%202016%2015%20DEC.pd
f
38
IBBI notifies norms for liquidation process, Press Trust of India, Business Standard, 15 Dec 2016, New Delhi

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 These oblige the liquidator, and also registered valuer(s) and professional(s) assisting
him in liquidation to make disclosures — initial and continuing — about pecuniary or
personal relationship with any of the stakeholders entitled to distribution of assets.

All in all, the following bodies have been created under the IBC39:

Name of the Body Relevant Provisions Objective and Function

Insolvency Regulator - The Section 3(1) and Section 188 Regulatory oversight over
Insolvency and Bankruptcy of IBC Insolvency Professional
Board of India (IBBI) Agencies, Insolvency
Professionals and
Information Utilities
Adjudicating Authority Section 5(1) of IBC that Overseeing Resolution
(AA) - NCLT for recognizes National process and Authority for
Companies and LLPs, and Company Law Tribunal approval of resolution
- DRTs for individuals and (NCLT) established under process initiated against
partnership firms Section 408 of Companies Corporate Debtor,
Act 2013 Partnership Firm or
Section 79(1) of IBC that Individual and to adjudicate
recognizes Debt Recovery on provisions of law and
Tribunal (DRT) constituted rules being followed and on
under Section 3(1) of the any complaints against
Recovery of Debts Due to Resolution Professional
Banks and Financial (RP)
Institutions Act, 1993
(RDDB Act)
Insolvency Professional Sec 3(20) of IBC and Register Insolvency
Agencies (IPA) Registered with IBBI under Professional (IPs), Develop
Section 201 of IBC. professional standards, code
of ethics for IPs who
become members of IPA.
Institute of Company

39
Neeraj Parmar, Insolvency Resolution Process- A Game Changer, Dec 22, 2016, available at <
https://corporatelaws.taxmann.com/topstories/105010000000013948/insolvency-resolution-process-a-game-
changer.aspx>
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Secretaries of India (ICSI)

has formed ICSI Insolvency
Professional Agency

Institute of Chartered
Accountants of India (ICAI)
has formed The Indian
Institute of Insolvency
professionals of ICAI (IIIPI)
Insolvency Professionals Section 3(19) of IBC, To conduct entire process of
(IP) Section 206 of IBC & insolvency resolution
Registered with the Board
under Section 207 of IBC
Information Utilities (IU) Section 3(21) of IBC, To collect, collate,
Section 209 of IBC & authenticate and sharing of
Registered with the Board information which shall be
under Section 210 of IBC used by IPs, Insolvency
Applicants and AA

CONCLUSION

The Code is a landmark piece of legislation providing a major facelift to the existing regime
relating to restructuring and insolvency and bankruptcy in India. It promises to provide the
one big missing piece in the existing jigsaw of laws in the form of establishing a framework
for time–bound resolution for delinquent debts. India now has a bankruptcy and insolvency
framework which is comparable with international standards and while this will go a long
way in bringing an element of certainty and predictability to commercial transactions in the
country and facilitating the ease of doing business, the litmus test for its success will be in
how it is implemented. In particular, various practical, logistical and legal hurdles will need
to be overcome and the coming months will be crucial with a lot resting on the nuts and bolts
of the rules which are now expected to be notified under the Code.

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