Introduction
The Insolvency and Bankruptcy Code, 2016 (IBC) is a law that provides a framework for the resolution of corporate insolvency and bankruptcy in India. The IBC applies to companies, limited liability partnerships that are registered or incorporated in India.
The IBC establishes a specialized insolvency resolution process for companies and other corporate entities that are facing financial distress. The process is designed to allow the company to either restructure its debts and continue in business, or to wind up its affairs and sell its assets in an orderly and transparent manner.
Under the IBC, a company facing financial distress can initiate insolvency proceedings by filing an application with the National Company Law Tribunal (NCLT). The NCLT will then appoint an insolvency professional to oversee the resolution process and determine the best course of action for the company.
The IBC also provides for the appointment of a resolution professional to manage the company's affairs during the insolvency resolution process and to try to reach a resolution with the company's creditors. If the resolution process is successful, the company may be able to continue in business and pay off its debts over time. If the resolution process is unsuccessful, the company may be liquidated and its assets sold to pay off its debts.
What were the laws governing Insolvency and Bankruptcy before the enactment of IBC?
Before the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted, several laws governed insolvency and bankruptcy in India. Some examples of these laws include:
The Companies Act, 1956: This law governed the insolvency and winding up of companies in India. It provided for the appointment of a liquidator to oversee the wind-up of a company's affairs and the distribution of its assets to its creditors.
The Sick Industrial Companies (Special Provisions) Act, 1985: This law provided for the resolution of the financial distress of sick industrial companies in India. It established a specialized process for the rehabilitation and revival of such companies, including the appointment of a financial institution or a company as an "operating agency" to manage the company's affairs.
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993: This law provided for the recovery of debts owed to banks and financial institutions in India. It established a specialized process for the recovery of such debts, including the appointment of a debt recovery tribunal to adjudicate disputes.
The IBC has consolidated and replaced these and other laws relating to insolvency and bankruptcy in India, and provides a unified framework for the resolution of corporate insolvency and bankruptcy.
When can the Insolvency and Bankruptcy Code (IBC) be applied?
The Insolvency and Bankruptcy Code, 2016 (IBC) applies to companies, limited liability partnerships, and partnership firms that are registered or incorporated in India. The IBC applies to these entities when they are facing financial distress and are unable to pay their debts as and when they become due.
In order for the IBC to apply, the entity must be registered or incorporated in India and must have unpaid debts of at least INR 1 crore.If the entity meets these criteria, it can initiate insolvency proceedings by filing an application with the National Company Law Tribunal (NCLT).
It is important to note that the IBC does not apply to individuals or to unincorporated entities, such as sole proprietorships or partnerships. These types of entities are generally governed by separate laws and procedures for the resolution of insolvency and bankruptcy.
What is Corporate Insolvency Resolution Process (CIRP)?
The Corporate Insolvency Resolution Process (CIRP) is a procedure provided for under the Insolvency and Bankruptcy Code, 2016 (IBC) for the resolution of the financial distress of companies and other corporate entities in India. The CIRP is a specialized process that allows the company to either restructure its debts and continue in business, or to wind up its affairs and sell its assets in an orderly and transparent manner.
The CIRP is initiated when a company files an application with the National Company Law Tribunal (NCLT) stating that it is facing financial distress and is unable to pay its debts as and when they become due. The NCLT will then appoint an insolvency professional to oversee the CIRP and determine the best course of action for the company.
During the CIRP, the insolvency professional will manage the affairs of the company and try to reach a resolution with the company's creditors. If the resolution process is successful, the company may be able to continue in business and pay off its debts over time. If the resolution process is unsuccessful, the company may be liquidated and its assets sold to pay off its debts.
It is important to note that the CIRP is a complex and time-consuming process that can have significant consequences for the company and its stakeholders. The success of the CIRP depends on the ability of the insolvency professional to reach a resolution with the company's creditors and to implement a viable restructuring plan.
Who is financial creditor and operational debtor?
Under the Insolvency and Bankruptcy Code, 2016 (IBC), a financial creditor is a person or entity that has provided financial assistance to a company in the form of a loan, credit, or other financial arrangement. This can include banks, financial institutions, and other lenders.
An operational creditor is a person or entity that has provided goods or services to a company under a contract and is owed payment by the company. This can include suppliers, contractors, and service providers.
In the context of the IBC, financial creditors and operational creditors have different rights and remedies in relation to the resolution of the financial distress of a company. Financial creditors have a higher priority in the distribution of the company's assets in the event of liquidation, while operational creditors have a lower priority.
It is important to note that the terms "financial creditor" and "operational creditor" are specific to the IBC and apply only in the context of the insolvency resolution process. The terms may have different meanings in other contexts.
What is the procedure for initiating Insolvency Resolution process by the Operational Creditor?
Under the Insolvency and Bankruptcy Code, 2016 (IBC), an operational creditor can initiate the insolvency resolution process for a company by filing an application with the National Company Law Tribunal (NCLT).
To initiate the process, the operational creditor must first send a demand notice to the company stating the amount of the unpaid debt and requesting payment within a specified time period. If the company does not pay the debt within the specified time period, the operational creditor can file an application with the NCLT seeking the initiation of the insolvency resolution process.
The operational creditor must file the application with the NCLT within three years of the date on which the debt became due and payable. The operational creditor must also provide proof of the unpaid debt and evidence that the company is facing financial distress and is unable to pay its debts as and when they become due.
If the NCLT determines that the requirements for initiating the insolvency resolution process have been met, it will appoint an insolvency professional to oversee the process and determine the best course of action for the company.
It is important to note that the insolvency resolution process can be a complex and time-consuming process that can have significant consequences for the company and its stakeholders. The success of the process depends on the ability of the insolvency professional to reach a resolution with the company's creditors and to implement a viable restructuring plan.
What will be the consequence if the demand is disputed?
Under the Insolvency and Bankruptcy Code, 2016 (IBC), if a demand notice sent by an operational creditor is disputed by the company, the operational creditor may still be able to initiate the insolvency resolution process if it can provide sufficient evidence to support its claim.
If the operational creditor disputes the demand notice, it must file an application with the National Company Law Tribunal (NCLT) seeking the initiation of the insolvency resolution process. The operational creditor must also provide evidence of the unpaid debt and evidence that the company is facing financial distress and is unable to pay its debts as and when they become due.
The NCLT will consider the evidence provided by the operational creditor and the company, and will decide whether the requirements for initiating the insolvency resolution process have been met. If the NCLT determines that the requirements have been met, it will appoint an insolvency professional to oversee the process and determine the best course of action for the company.
If the NCLT determines that the requirements for initiating the insolvency resolution process have not been met, the operational creditor's application may be dismissed. It is important to note that the outcome of a disputed demand will depend on the specific facts and circumstances of the case and the evidence provided by the parties.
When does the Adjudicating Authority admit the application?
Under the Insolvency and Bankruptcy Code, 2016 (IBC), the Adjudicating Authority (AA) is the National Company Law Tribunal (NCLT) or the National Company Law Appellate Tribunal (NCLAT). The AA has the authority to admit or reject an application for the initiation of the corporate insolvency resolution process (CIRP).
The AA will admit an application for the CIRP if it determines that the requirements for initiating the process have been met. These requirements include:
The company is registered or incorporated in India.
The company has unpaid debts of at least INR 1 crore.
The company is facing financial distress and is unable to pay its debts as and when they become due.
The operational creditor has provided evidence of the unpaid debt and the financial distress of the company.
The application has been filed within three years of the date on which the debt became due and payable.
If the AA determines that these requirements have been met, it will admit the application and appoint an insolvency professional to oversee the CIRP and determine the best course of action for the company. If the AA determines that the requirements have not been met, it will reject the application.
It is important to note that the AA has the discretion to admit or reject an application for the CIRP based on the specific facts and circumstances of the case and the evidence provided by the parties.
Can the decisions of NCLT be appealable and on what grounds?
Yes, the decisions of the National Company Law Tribunal (NCLT) can be appealed to the National Company Law Appellate Tribunal (NCLAT) under certain circumstances.
Under the Insolvency and Bankruptcy Code, 2016 (IBC), any person aggrieved by a decision of the NCLT can file an appeal with the NCLAT within a specified time period. The appeal must be filed within a period of 45 days from the date of the NCLT's decision, unless the NCLAT grants an extension of time for filing the appeal.
The NCLAT has the authority to hear appeals against the decisions of the NCLT in relation to the insolvency resolution process and the liquidation of companies. The NCLAT can also hear appeals against the decisions of the NCLT in relation to the merger or amalgamation of companies, the winding up of companies, and other matters governed by the IBC.
In order to file an appeal with the NCLAT, the appellant must file a memorandum of appeal setting out the grounds for the appeal and the relief sought. The appellant must also pay the prescribed fees and charges for filing the appeal.