FUNDAMENTAL OF INSOLVENCY AND BANKRUPTCY CODE, 2016 

INTRODUCTION

The Insolvency and Bankruptcy Code (IBC) was introduced in 2016 to improve the relationship between creditors and debtors. It was passed by the Lok Sabha on May 05, 2016, and by the Rajya Sabha on May 11, 2016. After receiving the President's assent on 28th May 2016, the IBC became active in December of 2016. The National Company Law Tribunal (NCLT) and its appellate body i.e. National Company Law Appellate Tribunal (NCLAT) were established on June 1, 2016, to adjudicate disputes in matters of companies and limited liability partnerships.

PURPOSE OF IBC

The IBC allows both individuals and organizations to apply for insolvency, with bankruptcy being the term used for individuals and corporate insolvency for companies. Insolvency occurs when an individual or company is unable to pay their debts, and the value of their assets is less than their liabilities. The IBC was enacted to consolidate and replace existing laws related to insolvency and bankruptcy. It aimed to address the burden of increasing non-performing assets and introduce necessary reforms.

HISTORY

The Bankruptcy Law Reforms Committee (BLRC) (chaired by T.K. Viswanathan) was established in 2014, to recommend a code applicable to both non-financial corporations and individuals. The draft of the Insolvency and Bankruptcy Code was submitted in 2015. The Insolvency and Bankruptcy Code, 2016 (referred to as "the Code") is the legal framework governing the insolvency process in India. It provides procedures for restructuring the finances of a corporate entity or, if restructuring is not possible, maximizing the recovery for creditors

SCOPE OF IBC

Section 2 of the code states that the provisions of the code shall apply to the following person:

? Any company incorporated under the Companies Act, 2013 or any other previous law.

? Any other company which is governed by any Special Act

? Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008

? Partnership firm whether registered or not under the Partnership Act, 1932

? Any Individual Person.

The code extends to the Whole of India.

PROVIDED THAT the provisions applicable to the Partnership Firm and person shall not apply to the state of Jammu and Kashmir.

CIRP UNDER IBC

In the context of the Corporate Insolvency Resolution Process (CIRP) under the Code, insolvency refers to a situation where a corporate entity is unable to repay its debts when they are due. It can also occur when the value of the entity's assets is less than its liabilities, resulting in negative equity. The CIRP is a process established by the Code to protect potentially viable but insolvent entities from liquidation. It brings together diverse creditors and compels them to participate in a collective and compulsory resolution process. Sections 7 and 9 of the Code outline this process, which aims to address the entity's insolvency while keeping it operational.

During the CIRP, an automatic moratorium is imposed, preventing individual creditors from pursuing their dues. The court appoints a resolution professional to manage the affairs of the corporate entity while overseeing negotiations among the creditors. The creditors may agree on a settlement of old debts and interests in exchange for new ones. If a consensus cannot be reached, the court may approve a resolution plan if a certain majority of creditors support it.

Dissenting creditors may still receive payments according to the priority established by the Code.

Overall, the CIRP provides a structured framework to address the insolvency of a corporate entity, preserve its operations, and facilitate negotiations among creditors for a resolution plan.

WHO IS A CORPORATE DEBTOR?

As per Section 3(8), a Corporate Debtor is a corporate person who owes a debt to any person.

{Section 3 (7) defines the Corporate Person as under:

“CORPORATE PERSON” means 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}

FINANCIAL & OPERATIONAL CREDITORS UNDER IBC

? Section 7 of the Code allows financial creditors to initiate the CIRP by applying the resolution of insolvency against a corporate entity. This provision is applicable when a corporate debtor fails to repay its debts to a financial creditor; on the other hand, Section 9 of the Code enables the operational creditors to initiate the CIRP by applying the resolution of insolvency against a corporate entity. Both Sections 7 and 9 of the Code provide a mechanism for creditors to seek resolution of insolvency issues and potentially recover their dues.

WHAT IS MORATORIUM?

The moratorium means a period, declared by the adjudicating authority, wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor.

The moratorium in insolvency resolution serves multiple purposes. It aims to preserve the company's assets, facilitate a seamless resolution process, and enable the company to operate as usual while creditors explore ways to resolve the default. Furthermore, the moratorium prevents creditors from taking individual enforcement actions during a specified period, ensuring an uninterrupted and favourable environment for the insolvency resolution process.

Who is a Financial Creditor?

According to section 5(7) of the Insolvency and Bankruptcy Code, 2016, a financial creditor is a person or entity to whom money is owed as a debt (including someone who has legally obtained or taken over that debt from someone else).

{The term "financial debt" refers to the amount of money borrowed, including any interest charged on that borrowed money. This interest is charged because the person or entity lending the money is giving up the opportunity to use that money himself during the borrowing period.}

For example Banks, financial institutions, private individuals and money lenders, allottees under a real estate project and every other person to whom a financial debt is owed, including a person to whom such debt has been

Legitimately assigned or transferred.

WHO IS THE ADJUDICATING AUTHORITY?

The National Company Law Tribunal (NCLT), established under Section 408 of the Companies Act, 2013, serves as

the adjudicating authority for insolvency resolution of corporate debtors. This provision is stated in Section 5(1) of the Insolvency and Bankruptcy Code. In other words, the NCLT has the jurisdiction and authority to handle cases related to the insolvency resolution process of corporate debtors as outlined in the Code.

WHO IS THE APPELLATE AUTHORITY?

The National Company Law Appellate Tribunal (NCLAT) was established under Section 410 of the Companies Act, 2013, It was formed on June 1, 2016, to hear appeals against the orders of the National Company Law Tribunal (NCLT). It also acts as the appellate tribunal for appeals against NCLT orders under the Insolvency and Bankruptcy Code, 2016 (IBC) since December 1, 2016. Also, the NCLAT is responsible for hearing appeals against orders of the Competition Commission of India since May 26, 2017, and appeals against orders of the National Financial Reporting Authority since May 7, 2018.

NOTE: The Supreme Court is the highest appellate authority under this code.