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CAIIB Paper 4 BRBL Module C Unit 16 : Introduction To The Insolvency And Bankruptcy Code, 2016 (New Syllabus)
IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Introduction To The Insolvency And Bankruptcy Code, 2016”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.
In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module C (IMPORTANT ACTS/LAWS & LEGAL ASPECTS OF BANKING OPERATIONS – PART B) Unit 16 : Introduction To The Insolvency And Bankruptcy Code, 2016, Aspirants must go through this article to better understand the topic, Introduction To The Insolvency And Bankruptcy Code, 2016 and practice using our Online Mock Test Series to strengthen their knowledge of Introduction To The Insolvency And Bankruptcy Code, 2016. Unit 16 : Introduction To The Insolvency And Bankruptcy Code, 2016
- Recognizing that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the Insolvency and Bankruptcy Code Bill (IBC) was enacted by the Government and the same came into force in December 2016.
- After its enactment, the statute has been amended a few times with the latest amendment being through the Insolvency and Bankruptcy (Amendment) Act, 2021 which come into force on the 4th of April, 2021.
- Insolvency is when an individual or organization is unable to meet its outstanding financial debt towards its lender as it become due.
- Insolvency can be resolved by way of changing the repayment plan of the loans or writing off a part thereof.
- If it cannot be resolved in the aforesaid manner, then a legal action may lie against the insolvent and its assets will be sold to pay off the outstanding debts.
- Generally, an official assignee/ liquidator appointed by the Government of India, realizes the assets and allocates it among the creditors of the insolvent.
- Bankruptcy is when a person voluntary declares himself as an insolvent and goes to the court.
- On declaring him a ‘bankrupt’, the court is responsible to liquidate the personal property of the insolvent and hand it out to its creditors. It provides a fresh lease of life to the insolvent.
- The term ‘financial Creditor’ has been defined in Section 5(7) of the code as “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; and financial Debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money
- Section 5(20) of the Code defines an operational debt as “a claim in respect of the provisions of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority”. Operational creditors are those whose claims arise “from a transaction on operations”.
- Means a corporate person who owes a debt to any person
As per Section 1(2) of the statute, it extends to the whole of India.
As per Section 2 of the Code, it applies to
- Any company incorporated under the Companies Act, 2013 or under any previous company law
- Any other company governed by any special Act for the time being in force
- Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008
- Such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify
- Personal guarantors to corporate debtors
- Partnership firms and proprietorship firms
- Individuals, other than persons referred to in clause (e).
Pillars of IBC, 2016
- The primary duty of the Insolvency Professionals (IPs) is to assist in the completion of insolvency resolution, liquidation and bankruptcy proceedings.
- Insolvency Professionals are regulated persons who maintain professional standards and code of ethics as first level regulators.
- The Limited Insolvency Examination is one of the mandatory conditions of getting registered as an Insolvency Professional with IBBI.
- “Insolvency professional agency” means any person registered with the Board under section 201 as an insolvency professional agency (Section 3(20)).
- Information Utilities’ would collect, collate, authenticate and disseminate financial information.
- They would also maintain electronic databases on lenders and terms of lending, thereby eliminating delays and disputes when a default actually takes place.
- Information Utility is defined in Section 3 (21) as “information utility” means a person who is registered with the Board as an information utility under section 210.
- The adjudicating authorities under the Code are National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT).
- The NCLT is the forum where cases relating to insolvency of corporate persons (limited liability entities) will be heard, while DRTs are the forum for insolvency proceedings related to individuals and partnership firms.
- These institutions, along with their Appellate bodies, viz., the National Company Law Appellate Tribunal (NCLAT) and the Debt Recovery Appellate Tribunal (DRAT), respectively, will seek to achieve smooth functioning of the bankruptcy process.
- An appeal can be preferred on the orders of NCLT to National Company Law Appellate Tribunal (NCLAT) within 30 days (15 days’ extension if there is sufficient ground). Orders of NCLAT are appealable within 45 days before the Supreme Court only on question of law. Civil Courts or any other authorities do not to have jurisdiction and also cannot grant any injunction.
The Insolvency and Bankruptcy Board of India (IBBI)
- This body has regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.
The Insolvency Resolution Process For Companies And Limited Liability Entities
If the default is above Rs. 1 Lakh (minimum amount of default has been increased to Rs. 1 Cr by the Government, by a notification, with effect from 24th March 2020), the creditor may initiate insolvency resolution process.
The Code proposes two independent stages:
- Insolvency Resolution Process – during which financial creditors assess whether the debtor’s business is viable to continue and the options for its rescue and resurrection.
- Liquidation– if the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor.
Initiation Of Corporate Insolvency Resolution Process (CIRP)
- The initiation of Corporate Insolvency Resolution Process (CIRP) by a Financial Creditor is provided in Section 7 of the IBC.
- As per Section 7 (1): A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
- An application for initiation corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less.
Time-limit For Completion Of Insolvency Resolution Process
- As per Section 12, the corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such process.
- The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond 180 days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of sixty-six percent of the voting shares.
- On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within 180 days, it may by order extend the duration, but not exceeding ninety days.
- Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of 330 days from the insolvency commencement date.
Appointment Of Resolution Professional
As per Section 22 which deals with the appointment of a ‘Resolution Professional’
- The first meeting of the committee of creditors shall be held within seven days of the constitution of the committee of creditors.
- The committee of creditors, may, in the first meeting, by a majority vote of not less than 66% of the voting share of the financial creditors, either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.
In liquidation proceedings, the Code provides secured creditors the right to choose between
- Enforcing /realizing/settling/compromising/dealing with their security interests and applying the proceeds to recover the debts due to it, or
- Relinquishing rights on these assets to the liquidation trust and receiving the proceeds obtained from the liquidator’s sale of assets.
The commencement of liquidation process takes place on account of:
- Failure to submit the resolution plan to the NCLT within the prescribed period, or
- Rejection of resolution plan for non-compliance with the requirements of the Code, or
- Decision of creditors’ committee based on vote of majority, or
- Contravention of resolution plan by the debtor.
- During liquidation, no suit or other proceedings shall be instituted by or against the corporate debtor; except through the liquidator on behalf of corporate debtor with permission of the NCLT.
- The Resolution Professional shall act as liquidator unless replaced.
- The liquidator shall form an estate of all assets of corporate debtor called the liquidation estate.
- Liquidator shall receive, verify and admit or reject, as the case may be, the claims of creditors within the prescribed time. Creditor may appeal to the adjudicator within 14 days.
- Assets will be distributed by the liquidator in the manner of priorities of debts as laid down in Section 53 of the Code.
- All sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund will be considered as priority dues and is not to be included in the liquidation estate and estate of bankrupt.
- Upon the assets of corporate debtor being completely liquidated and the liquidator making an application, the NCLT shall pass an order dissolving the corporate debtor.
Order Of Priority Of Payment Of Debts
- Insolvency resolution cost and liquidation cost
- Workmen’s dues (for 24 months before commencement) and debts to secured creditor (who have relinquished their security interest)
- Wages and unpaid dues to employees (other than workmen) (for 12 months before commencement)
- Financial debts to unsecured creditors and workmen’s dues for earlier period
- Crown debts and debts to secured creditor following enforcement of security interest
- Remaining debts
- Preference shareholders
- Equity Shareholders or partners
Fast Track Insolvency Resolution Process
The Government of India has introduced a ‘Pre- Packaged Insolvency Resolution Process’(Section 54 A) for MSME corporate debtors classified as such under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.
The Code has provided for a fast track insolvency resolution process in respect of the following corporate debtors (under Section 55)
- A corporate debtor with assets and income below a level as may be notified by the Central Government; or
- A corporate debtor with such class of creditors or such amount of debt as may be notified by the Central Government; or
- Such other category of corporate persons as may be notified by the Central Government.
The process, in such cases shall be completed in 90 days (extendable by maximum 45 days).