The Insolvency and Bankruptcy Code, 2016 (Code/IBC) is the umbrella legislation for

insolvency resolution of all entities in India—both corporate and individuals. The provisions
relating to insolvency and liquidation of corporate persons came into force on December 1,
2016, while those of insolvency resolution and bankruptcy of personal guarantors to
corporate debtors (CDs) came into effect on December 1, 2019. Insolvency and bankruptcy
provisions for other category of individuals are yet to be notified (as on the date of this
publication). The aim of codifying insolvency law is to provide for greater coherence in law
and facilitate the application of consistent and lucid provisions to different stakeholders
affected by business failure or the inability to pay debt. To this end, the Code repealed the
Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920, and made
amendments to 11 laws, including the Companies Act, 2013, the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993, and the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002, to give effect to the newly
codified legislation. The provisions of the Code are being brought into force in phases. It
bears emphasis that the institutional framework established by the state should foster the
freedom of entry for a commercial entity (that is, the freedom to start a business), the freedom
of doing business or to continue doing business (by providing a level playing field), and the
freedom to exit or discontinue the business. While the first two freedoms were amply
recognized in the Indian regulatory landscape, the freedom to exit took concrete shape with
the enactment of the Code, which provides for a mechanism for distressed businesses to
resolve insolvency in an orderly and time-bound manner. The Code overhauled the legal
regime for corporate distress resolution in India and replaced it with a predictable, market-
led, incentive-compliant, and time-bound mechanism. It addresses the market imperfections
and plugs the information asymmetries, enabling the “freedom to exit” for commercial
entities (through corporate insolvency resolution regimes) and entrepreneurs. The Code is a
law for insolvency resolution. Its foundational objectives are as follows: “An Act to
consolidate and amend the laws relating to reorganisation 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 and incidental thereto.” The IBC was
enacted as a critical building block of India’s progression to a mature market economy. It
addresses the growing need for a comprehensive law that would be effective in resolving the
insolvency of debtors, maximizing the value of assets available for creditors and easing the
closure of unviable businesses. The first objective of the Code is resolution. The second
objective is to maximize the value of assets of the corporate debtor” and the third objective is
to promote entrepreneurship, availability of credit, and balancing the interests. The order of
these objectives is sacrosanct.[1] As a key economic reform, the Code has shifted the balance
of power from the debtor/borrower to the creditor. It has instilled a significantly increased
sense of fiscal and credit discipline to better preserve economic value. The outbreak of novel
coronavirus (COVID-19) has resulted in uncertainty for individuals and businesses [1]
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THE IBC alike. To minimize the impact of this crisis, on June 5, 2020, the President of India
promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, which
was subsequently replaced by the Insolvency and Bankruptcy Code (Second Amendment)
Act, 2020[2] which was notified on September 23, 2020 (having effect from June 5, 2020).
This was in addition to the economic measures announced by the Ministry of Finance to
support Indian businesses affected by the outbreak of the COVID-19 pandemic. The step was
taken to ensure the continuity of business operations and ensure liquidity in businesses. The
approach is aimed at giving firms breathing space so that they can explore options to
reorganize internally and bilaterally. In essence, the measures are aimed at securing the
continued existence of viable firms in crisis who may be victims of economic circumstances
and may be prone to abysmal valuations through adversarial actions by lenders. Objective of
Handbook Insolvency professionals (IPs) are one of the key constituents of the insolvency
ecosystem and form the cornerstone of the successful implementation of the law. The
principal objective of this Handbook is to foster the maintenance of the highest standards of
professionalism, credibility, independence, objectivity, and expertise in the administration
and execution of processes under the law by an IP. This Handbook has been designed to
facilitate knowledge building by providing all the information an IP or a prospective IP
would require to function, prepare for acquiring eligibility (insolvency examination), and
pursue the career in a beneficial and constructive manner. It either references or reproduces
all the laws one needs to know, blending this with practical and best-practice information
essential to someone in the chosen field. This Handbook will also help other professionals,
[2] https://ibbi.gov.in//uploads/legalframwork/c1d0cde66b213275d9cf357b59bab77b.pdf
business people, students, and all those who are interested in the modern Indian insolvency
ecosystem. Ultimately, it is designed to be an all-encompassing point of reference for
someone working in the fast evolving insolvency sector in India, addressing the professional,
commercial, and social interests. Old law versus new law—what survives? Prior to the IBC,
the insolvency and bankruptcy laws in India were multilayered and fragmented. • Individual
insolvency and bankruptcy were covered under the two pre-independence legislations: the
Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920. It should
be noted that pending notification of the provisions relating to individual insolvency and
bankruptcy under the Code, these statutes still continue to apply. For companies, the basic
law dealing with their winding up or liquidation was the Companies Act, 1956. Although the
Companies Act, 2013, replaced the Companies Act, 1956, the sections relating to winding
up/liquidation under the 2013 act were not notified. Hence, till the enactment of the Code,
provisions of the Companies Act, 1956, continued to govern winding up or liquidation of
companies. Winding up could be triggered under the Companies Act, 1956, if a company was
unable to pay its debt. Once winding up was triggered, liquidation would follow and there
was no provision to mandatorily attempt rehabilitation or reorganization of the company prior
to this. Further, liquidation itself would take several years (in the absence of any time-bound
closure process). Now, with the enactment of the IBC, winding up due to an inability to pay
debt cannot be KEY JURISPRUDENCE AND PRACTICAL CONSIDERATIONS 13
triggered under the Companies Act, 1956, or the Companies Act, 2013. However, involuntary
winding up of companies for non-insolvency-related reasons (for instance, if the company
has defaulted on filing financial statements or annual returns for five consecutive financial
years) can still be undertaken under the Companies Act, 2013. The Companies Act, 2013,
also contains provisions for schemes of financial reconstruction, approved by the National
Company Law Tribunals — these are voluntary schemes of arrangement and compromise
with the creditors and/or shareholders that are typically outside the insolvency regime
(though these schemes can also be made applicable during liquidation). Further details on the
Companies Act, 1956, and the Companies Act, 2013, are available on the website of the
Ministry of Corporate Affairs (MCA).[3] • Sick Industrial Companies (Special Provisions)
Act, 1985, was the primary rehabilitative statute that allowed a “sick” industrial firm to
voluntarily initiate a rescue and rehabilitation process if its net worth had eroded. Two of the
main reasons for its failure were the unending moratorium protection (which was sometimes
abused by the debtors in possession) and the absence of a time-bound resolution process. •
Various voluntary mechanisms for debt restructuring were formulated by the Indian banking
regulator, the Reserve Bank of India (RBI), in the form of instructions or circulars to the
banks: corporate debt restructuring, the joint lenders’ forum mechanism, strategic debt
restructuring, outside strategic debt restructuring, and the Scheme for Strategic [3]
http://www.mca.gov.in Structuring of Stressed Assets. • Following the enactment of the
Code, the RBI issued a revised framework for the resolution of stressed assets in its circular
dated February 12, 2018, which led to the withdrawal of all previous mechanisms. Many
cases were referred to and admitted for corporate insolvency resolution processes (CIRPs)
subsequent to the circular. On April 2, 2019, the Supreme Court, in its judgment on Dharani
Sugars & Chemicals Ltd. Vs. Union of India & Others [Transferred Case (Civil) No. 66 of
2018 in Transfer Petition (Civil) No. 1399 of 2018 with several Writ Petitions and
Transferred Cases and an SLP], declared this circular ultra vires of section 35AA of the
Banking Regulation Act, 1949, on the grounds that the law permits the RBI to give directions
to banks on stressed assets, only on the Central Government’s authorization and in case of a
specific default. • There are various debt and security enforcement mechanisms in India. The
individual debt and security enforcement mechanisms continue to exist; however, their
applicability, once insolvency resolution or liquidation under IBC commences, is restricted.
Specifically, for banks and financial institutions, the two key laws are the Recovery of Debts
Due to Banks and Financial Institutions Act and the SARFAESI Act. Principal features of the
IBC For CDs facing insolvency, the Code spells out two processes: insolvency resolution
(CIRP) and liquidation. When insolvency is triggered under the IBC, all attempts are made to
resolve the insolvency in a time-bound manner. If the attempt fails, the company, or the CD,
will be liquidated. This is a significant 14 UNDERSTANDING THE IBC departure from the
previous winding up regime, which did not provide for this two-stage time-bound process.
While winding up under the Companies Act, 1956, could be triggered by an inability to pay
debt and the rehabilitative process under the Sick Industrial Companies Act was triggered
once the net worth of the company had eroded, one of the key features of the IBC is the early
detection of insolvency. Hence, unlike previous regimes, insolvency is triggered under the
IBC by a simple payment default of one lakh rupees (Rs. 100,000), as provided under section
4 of the Code. However, the Indian government (Central Government) is empowered to
specify any other minimum default amount higher than one lakh rupees but not more than
one crore rupees. By exercising this power, the MCA specified one crore rupees (Rs.
10,000,000) as the minimum default amount for the purposes of section 4 of the Code with
effect from March 24, 2020. The process of insolvency resolution starts with an admission
order by the Adjudicating Authority (AA). Another departure from earlier laws is the
replacement of a “debtor in possession” approach with a “creditor in control” regime. Hence,
once the process starts, the powers of the existing board of directors are suspended and,
during the CIRP, a creditor-approved IP is appointed to manage the CD as a going concern.
The IP functions under the overall control and supervision of the Committee of Creditors
(CoC, which generally comprises the financial creditors) of the CD. The IBC is a collective
mechanism for maximizing the value of assets of a CD for the benefit of the creditors and all
other stakeholders. Hence, it provides a moratorium protection or “calm period” against
individual or collective legal actions against the CD during the CIRP. Further, the IBC also
equips the IP to apply for avoidance of certain transactions conducted by the CD prior to
insolvency, to preserve and increase the pool of assets available for the collective benefit of
the creditors. Corporate insolvency resolution under the IBC is achieved with a resolution
plan, which may be proposed by any eligible person (not necessarily the debtor or the
promoter) and which needs to be approved by the CoC and, thereafter, by the AA. If the
CIRP fails, an order to liquidate the CD is passed by the AA. The IBC also creates
institutional infrastructure to help achieve its objectives. The infrastructure comprises: • IPs
and insolvency professional agencies (IPAs) as bodies for enrolling and regulating the IPs
and insolvency professional entities (IPEs) that conduct the IBC processes; • information
utilities as repositories of information; • AAs, which are the National Company Law
Tribunals (NCLTs), established under the Companies Act, 2013, and two appellate
authorities: the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court
of India; • the Insolvency and Bankruptcy Board of India (IBBI) as the regulator.