The concept of insolvency & Bankruptcy is a way of providing relief to the
justified entity under the unforeseen event. There is no single umbrella
legislation in India that governs the insolvency and bankruptcy proceedings.
legislation governing the legal framework pertaining to insolvency and
bankruptcy in India is contained in a remarkable length of laws.
Insolvency era had undergone a remarkable change with the coming of Banking &
Insolvency Act 2016.This research paper explains about the key aspect of the
2016 Code and also the challenges faced by the executors in executing the
procedures provided under this legislature .This paper also contains a
saturated analysis of the impact of COVID- 19 over Indian Insolvency &
Bankruptcy System and the amendment which brought insolvency ordinance 2020.
When in a transaction of business and trading when the entity becomes unable to
meet its obligation of paying the due debt or fails to comply with the same, he
becomes insolvent and falls under the view of insolvency. Bankruptcy arises when
the competent court determines insolvency and provides order regarding to
resolving for such.
Summarizing both the definitions its can be concluded that
When the debtor fails to comply with the financial obligation he becomes
insolvent and when the legal framework under which he asks for relief is called
a bankruptcy. Sometimes the situation falls out hand for the debtor in the
course of an unforeseen or unfortunate event which makes him unable for the
obligation and fails to pay back their debts. So the law try to lighten the
liability of debtor under creation conditions regarding to his debts and
The Insolvency & Bankruptcy Code 2016
In India the regulation of Insolvency & Bankruptcy used to comply through
several legislatures and enactments. All those laws provided the regulations and
procedures for the determination of insolvency in a simplified way. So multiple
laws which contained the regulatory framework were Sick Industrial Companies
(Special Provisions) Act, 1985 (SICA), the Recovery of Debt Due to Banks and
Financial Institutions Act, 1993, the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and
the Companies Act, 2013.All these regulatory frameworks dealt with individuals
and several legal entities in India.
That time the jurisdiction was held at
various stages through the courts and Tribunals such as High Courts, District
Courts, the Company Law Board, and the Board for Industrial and Financial
Reconstruction (BIFR) and the Debt Recovery Tribunals (DRTs). Subsequently the
Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 used
to deal with the Individual Cases on the other hand Liquidation of companies was
dealt by the High courts. Pertaining to all those laws and procedures it became
difficult for the judicial as the process became complex & brought systematic
For analyzing the framework Banking Law Reforms Committee for IBC was made. The
committee submitted its report to the finance minister on 4th November 2014
under chairman DR T.K Viswanathan.
Based on the report of the committee the Insolvency & Bankruptcy code 2016 came
into per view.
Procedure Under The Code 2016
The process of determining insolvency starts when the Debtor fails to comply
with his financial obligation and becomes unable to pay his due debt for such
unforeseen or uncertain event. The process may be started by the Creditor or
Debtor. The process gets administered by insolvency professionals. The process
takes 180 days within this stipulated time frame no legal action can be taken
against the Debtor. The process contains transfer of financial information for
the utility of creditor by such Insolvency Professionals, also manages the
assets of the debtors during the time frame.
Decision to resolve Insolvency
The insolvency professional will constitute a due committee consist of the
financial creditors who lent money to the debtor. The committee has the
obligation to come up with a decision regarding such insolvency within a period
of 180 days and if the committee fails in doing so the assets of the Debtor will
go into liquidation. The future of the outstanding debt owed to them will be
derived from such decision .The committee can choose to change the repayment
schedule for reviving the debt, it can also decide to liquidate the assets of
the debtor for such repayment of due debts.
The last phase of the process concluding the decision of the aforesaid committee
is liquidation of the assets of the debtor. The liquidation process also gets
administered by the Insolvency Professionals .The liquidation starts by sailing
the assets. Assets gets distributed through Determining the insolvency
resolution cost and the remuneration to the professional ,also considering the
secured creditors , unsecured creditors, government dues , prioritizing
shareholders and equity shareholders
Object Of The Code
The core objective of Insolvency and Bankruptcy Code 2016 is to amend the laws
for enhancing the procedure in a more simplified form within a stipulated time
period for avoiding delay. The amendment focuses on the reconstruction and
resolution of insolvency of corporate persons, individuals& partnership firms
and consolidation of laws regarding the same. It primarily objected in
maximization of assets by regulating a bound time frame.
The code prioritized
the payment of government dues simultaneously constructing the Insolvency and
Bankruptcy Fund which in turn contribute in the development of the credit market
and enhancing the entrepreneurship. The availability of credit becomes easier
for the stakeholders balancing their interest.
The simpler Regulation and
secured transaction, credibility will be provided through the Code which will
enhance the possibility of creating business entities, and this will facilitate
more investment, all these resolutions will tend to impact the economic growth
in a more positive way and thus enhance development. The procedure followed by
the initiation taken by either financial creditor or by operational creditor or
by the corporate debtor when the default in furnishing the financial obligation
An insolvency resolution process can be initiated by either a financial creditor
or by operational creditor or the corporate applicant (corporate debtor) upon an
event of default. A revival plan is resolved within 180 days from the admission
of the application. Making this process time bound is very essential as the
value of the assets can erode substantially with the passage of time. In the
event of disagreement or if a decision is not taken within the stipulated
time-frame the applicant automatically moves to the next stage of Insolvency
Matter Of Concern Before The Code 2016
- The procedure of insolvency takes place under the administration of
Insolvency Professionals (IPs) who were regulated under the Insolvency
Professional Agencies under guidance and supervision of The Bankruptcy
Board. Such multiplicity in regulatory bodies can bring out complexity in
the sector. It could enable the competition among the agencies .Such unclear
regulation authority might harm the goals.
- The new entities bear the burden for a more specified simpler form of
process without any inconvenience under the code. So it depends on the
insolvency professionals, Insolvency professional agencies and information
.The proper functioning of these systems needs the involvement of the
entities and periodical development which needs them to evolve over time. As
the constitution of NCLT has not been completed yet regarding the matters involving
Corporate Insolvency becomes overloaded with pending cases before the DRTs.
- The preference for distributing the assets of the debtor during
liquidation is not clearly mentioned under the code which brings confusion
as to why secured creditors will receive their entire outstanding amount
rather than up to their collateral value. Further the question comes as why
trade creditors are given an inferior priority in comparison with unsecured
creditor. Payment of government dues will get repaid after unsecured
creditors under this code makes the provision ambiguous.
Impact Of Covid 19 Over Insolvency & Bankruptcy
Putting into consideration the uncertain impact of the ongoing pandemic COVID
19, where the world is undergoing a recognizable economical change. The event
affecting the growth of different sectors in every country and regions.
Basically the business world and the corporate sector lagging back due to the
delay in procedures which in turn affecting the economy in large. The Government
of India also took measures regarding the restriction imposed upon the economic
activity which majorly affecting the corporate sector.
By considering all the
factors which are uncertain and unforeseen, the Indian Government under the per
view of Insolvency & Bankruptcy Code 2016 subsequently suspended the initiation
of the proceeding regard to insolvency when default occurs against corporate
debtors. The announcement of such suspension was made on March 24, 2020 and may
17, 2020 and the announcement got finally implemented on June 5, 2020. And the
amendment bring the insolvency ordinance as the Insolvency & Bankruptcy code
(amendment) ordinance 2020 with certain new provision keeping in mind the impact
of COVID 19.
Pursuant to a notification3 dated March 24, 2020, the amount of payment default
constituting the threshold for initiating insolvency resolution proceedings
under the Insolvency Code was increased from INR 1 Lakh to INR 1 crore. This
move is expected to benefit micro, small and medium enterprises (“MSMEs”) and is
also otherwise welcome by corporate debtors given that the earlier threshold of
INR 1 lakh was relatively low.
Further the amendment extended the statutory timeline 180 days up to 270 days
with regard to the completion of CIRP process or the liquidation process as per
the convenience, which became pending due to the lock down circumstance under
Section 12 of the Insolvency Code. It further provided the exclusion of the lock
down period for any activity or task in the Corporate Insolvency Resolution
Process under the per view of the code. The exclusion of such period from the
statutory time line was issued through the order passed by NCLAT dated 30 March
On becoming effective the Insolvency & Bankruptcy Code (Amendment) Ordinance on
June 5 2020 bring out the inclusion of creation provisions into the code
keeping eye on the impact of COVID 19 for the uninterrupted insolvency process.
Under this amendment Section 10 A newly inserted talks about Suspension of
Initiation of Corporate Insolvency Resolution Process), it restricted financial
creditors, operational creditors and corporate debtors from filing application
to initiate the CIRP regard to those corporate Debtors who were in default
during the period of 6 months initiating from and including 25th March 2020 on
which the nation commencement of lock down got announced which may be extended
up to 1 year
However, Section 10 A of the Insolvency Code will not be applicable in respect
of defaults committed by the corporate debtor prior to March 25, 2020.
The said amendment also modified section 66 which provides about wrongful
trading & fraudulent trading by adding sub section 3 which the code prohibits
filing of any application in respect of any default of corporate debtor under
which initiation of CIRP has been suspended under 10 A.
On May 17, 2020, the Indian Government announced7 the introduction of a special
insolvency framework for MSMEs – this is still awaited.
All these above mentioned circumstances were primary effects of COVID 19 which
impacts over the proceedings ought to start after commencement of lock down but
subsequently it also have the impact over the ongoing proceedings which were
pending due to the closure. There were insolvency proceedings which were
initiated before the said pandemic occurred or before the announcement of
national lock down.
The delay occurred in those cases are getting handled by the NCLT and NCLAT. They are hearing these cases through video conferencing .In
these circumstances a greater focus is required to enhancing the efficiency of
existing out of court and in court restructuring mechanisms and introducing new
mechanisms to preserve value.