The Insolvency and Bankruptcy Code, 2016 lays down the distinct insolvency
resolving procedures for companies irrespective of whether it is an individual
or partnership companies. The Insolvency and Bankruptcy Code, 2016 (IBC) is the
insolvency law of India which aims at merging the existing framework by the
process of formulating a solo law for insolvency and bankruptcy.
The Insolvency and Bankruptcy Code, 2015 was presented for the first time in Lok
Sabha in December 2015, which was passed by Lok Sabha and Rajya Sabha on 5 May
2016 and 11 May 2016 respectively. But all the provisions of the act were not
brought into force at a once rather certain provisions came into force from 5
August and 19 August 2016. The bankruptcy code is a direct solution for
resolving insolvencies which the previous act did not offer a carefully
practicable plan and was a lengthy process too.
The insolvency resolving procedure can be initiated by either the creditors or
the debtors. The code even lays down certain provision which states the maximum
time period for implementing the insolvency resolution procedure for individuals
Normally, the procedure of insolvency resolving of a company must be completed
in one hundred and eighty days, but it can be extended to additional of ninety
days only when the majority of creditors permit or agree.
Whereas, when it comes to start-ups (aside to the partnership companies), small
organizations and other organizations whose assets valued at less than 1 crore,
the resolution procedure would be completed within a period of ninety days of
initiating but it can be extended to additional by as many as 45 days.
The basic principles of corporate insolvency are:
- To support and encourage the defaulter company to restore itself into a
profitable state, if possible.
- To make sure that the creditors get the maximum return possible where it
is not possible to save the company.
- To find out the reasons of failure and to warning those guilty of
- To place the assets of the company under external authority to prevent
their unsanctioned transmission.
- To avoid fake transactions, dissolution and winding up.
Evolution Of The Insolvency And Bankruptcy Code
Due to the growing menace of loan defaults, it had long been felt to have some
sort of disciplined insolvency and bankruptcy legislation to address this loan
default issue, the problem which most of the banks are plagued with.
Until the Code came into force, lenders were exercising recovery proceedings
through laws such as the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, or SARFESI Act 2002, SICA 1985 and also as per schemes
of the RBI such as SDR, CDR and S4A. Earlier in the event of a default, the
corporate debtor was subject to the BIFR/AAIFR proceedings under the SICA or
winding up proceeding under the Companies Act.
However, the procedure under the said laws were prolonged and seemingly never
ending. Before the enactment of the Insolvency code there was no proper single
law for Insolvency and Bankruptcy which could be for the benefit of the
creditors and the debtors. There was no proper enactment where all the rules and
regulations on how insolvency proceedings can be initiated and who all can start
it and there was also no time limit in which the proceedings so started can be
So these were used by the businessmen as an opportunity to fraud the
creditors that would delay the proceedings of the court and such that there is a
defeat of the principles of natural justice. So a need was felt that would seeks
to consolidate the existing framework by creating a single law for insolvency
and bankruptcy and hence the Insolvency and Bankruptcy code was enacted.
Existing Legal Situation
It is always better to have one single codified legislation rather than having
multiple legislations to deal with a particular matter in issue. It will defeat
the principles of natural justice as well as waste the time of the court. This
is the exact reason for the existence of The Insolvency and Bankruptcy Code in
India which came into effect in the year 2016. The IBC was enacted by repealing
the SICA act (Sick Industrial Companies Act) which was repealed from December 1,
The Insolvency and Bankruptcy code came into being with a wider scope and aiming
to resolve the issues via more effective provisions and implementation. It is an
act to consolidate and amend the laws having reorganization and insolvency
resolution issues as the subject-matter. IBC is a comprehensive legislation with
a speedy and specific procedure for dealing with the issue of insolvency.
The time-bound nature of IBC is a win-win situation as the resources of the
Companies are placed at the right place in time, whether it is by payment to
creditors or by winding up.
The legislature while enacting the IBC code was of the view that:
"An Act to consolidate and amend the laws relating to reorganization 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 or incidental thereto.
Summary Of The Case
Synergies Dooray had filed application for starting corporate insolvency
resolution process which was allowed by the NCLT on January 23, 2017. There was
appointment of RP as an interim resolution professional. Subsequently, there was
establishment of a committee known as committee of creditors (CoC) and
moreover, RP was confirmed as the resolution professional. As stated by the
provisions of law, RP invited prospective lenders, investors, and other persons
to state their resolution plans.
There were three entities who submitted their resolution plans and among them,
resolution plan of Synergies Castings Limited (Respondent 3) was agreed by a
majority vote in the meeting of the CoC on June 24, 2017. As per sub-section (6)
of Section 30 of the Code , a resolution professional is obligatory to submit
the resolution plan which was approved by the CoC to the NCLT for its consent.
Then, RP submitted the plan before NCLT.
According to sub-section (1) of Section 31 of the Code , there is a
pre-condition to the approval of the resolution plan by NCLT that it must be
satisfied that the resolution plan must contain certain requirements under the
Code. And after NCLT approves the resolution plan, it becomes obligatory on the
corporate debtor and its employees, members, creditors, guarantors and other
stakeholders who were involved in the resolution plan. It is relevant to note
here that three assignment agreements were supposed to have been implemented
instantly previous to the repeal of the Sick Industrial Companies (Special
Provisions) Act, 1985 by which SCL had allotted ninety percent of its debt
holding in Synergies Dooray to Millennium Finance Limited (Respondent 2).
As per proviso to sub-section (2) of Section 21 of the Code , a related party to
whom a corporate debtor owes a financial debt cannot have any right of
representation, participation or voting in a meeting of the CoC. SCL was a
related party of Synergies Dooray and therefore, was not permitted to a seat in
the CoC. However, with assignment of debt holding by SCL to Millennium Finance
Limited (MFL), MFL got a seat in the CoC with more than 75% voting share. As per
the Code, the resolution plan is to be agreed by a vote of not less than 75% of
voting share of financial creditors.
Relief Provided Under Resolution Plan By Synergies Casting Limited
The main reason behind this resolution plan is as follow:
- The resolution plan envisaged by SCL for the insolvency resolution of
Synergies Dooray Automotive ltd. and to make sure that there is the
continuance of the business with the most productive use of the assets and
equipment of SDAL which are given in detailed below:
- Financial Re-structuring
Restructuring of debts by comprising in compliance with the direction of BIFR ad
payment of such restructured dues within a period of 3 years.
- Operational Restructuring
Amalgamation of corporate defaulter with the applicant.
- Capital Restructuring
Allotment of shares of the merged entity to the shareholders of the corporate
defaulter and paying in cash towards small shares.
- Payment to Operational Creditors and statutory dues
Charges to the operational creditors and payment to such creditors and the
statutory dues to be done in such a staggered method after the final payment of
the financial creditors.
- Infusion of fresh funds by the promoters
It is not necessary but when required, the fund infusion must be by the
promoters of the applicant company.
- Payment of any cost to insolvency resolution process must be paid prior
to all other debts.
- Insolvency Resolution process cost
Amalgamation done on date as 31.03.2017 will be provided with the major
• Operational Synergies
• Marketing Synergies
• Financial Synergies
• Continuation of Employment
- Cost of scheme and means of financing
The proposed settlements and payments to the various creditors to the SDAL and
payment of cost of insolvency process was valued at Rs, 5048.21 lakhs which was
supposed to be funded by introduction of long terms funds and by operational
increases of SCL.
- The Major reliefs/concessions provided under the Resolution plan are as
- From the State Government of Andhra Pradesh
The State Government of Andhra Pradesh has exempted the merged entity i.e. SDAL
from charge of Stamp Duty on the value of assets transferred on account of
merger of SDAL with SCL.
- Sales tax-department and service tax-department
- The sales tax department to receive the repayment of the due amount of Rs.
351.69 lakhs under the head of sales tax deferred payments and the service tax
department to receive Rs.37.84 lakhs towards service tax due and that too in
equal installments in the year 2020-21, 2021-22, 2022-23 without chargig for any
interest, damages, etc
- To relinquish any penal interest, simple interest, compound interest,
damages charged on the default of the company as on the date on which the
resolution plan was approved.
- CBDT – to exclude SCL in respect of SDAL from the applied provision of section
79 of the Income Tax act, 1961 in the matters of business losses suffered by
SDAL. SCL shall be held entitled to carry forward and leave for the accumulated
losses, 1961 and unabsorbed depreciation under section 72A of the IT Act, 1961.
To exempt SCL from the application of and payment of tax under section 115(JB)
of the Income Tax, 1961, to accept the repayment of the outstanding amount as
TDS dues in 3 equal installments without any interest, damages, etc.
- The company can, at their option, pre-pay the dues owned to the banks/
financial institutions/creditors and without any additional charges.
- The directors of promoters will continue to extend their personal
guarantees to the lenders till there is complete repayment of the debts, in
the matter as stated in the scheme.
- In case of default on behalf of the company to comply and repay to the
financial creditors the amount and in the manner and in accordance to the
terms stated in the scheme, the financial creditors can reestablish their
dues to the original status as per the claim admitted by the resolution
professional with the securities at their avail as on COD. However, the
principal amount of each lender shall lessen to the extends to the amount
which the company actually repaid.
- The applicant shall try to generate financial resources in form of
equity or interest free unsecured loans to finance any deficit in each
generation to meet the repayment compulsion and even to finance any other
financial obligation which may be required for the effective implementation
of the plan.
- The financial creditors have the rights to ask for the copies of the
audited financial statements prepared as per the Indian GAAP till the time there is a
complete and final repayment of the entire amount of the restructured loan
payable to the financial creditors.
- The balance sheet of the company as on the cut-off date shall stand
restructured in accordance with the terms of the scheme and as per annexure
of the financial projections attached.