The primary focus of the Code is to ensure revival and continuation of
corporate debtor from its own management. The code is a beneficial legislation
which puts corporate debtor back on its feet
.--- The Hon’ble Supreme Court
(Swiss Ribbons Pvt. Ltd. vs. Union of India)
Insolvency and Bankruptcy Code, 2016 came into effect in December, 2016 and was
made operational to corporate debtors. Its initial experience of implementation
was encouraging as the attitude of borrowers also started to improve.
Insolvency and Bankruptcy is a complete code in itself and is exhaustive in the
matters dealt with therein.
In Innovative Industries v. ICICI Bank
, it was held that the Code is
Parliamentary law that is exhaustive code on the subject matter of insolvency.
It is covered in Entry 9 List III of Seventh Schedule. Section 238 of the
Insolvency and Bankruptcy Code, 2016 states that the Code has an overriding
effect over other laws. National Company Law Tribunal (NCLT) is the Adjudicating
Authority and National Company Appellate Law Tribunal (NCLAT) is Appellate
Authority for corporates. Section 179 (1) of the Code states that Debt Recovery
Tribunal (DRT) will be adjudicating authority for individuals and firms.
Difference Between Insolvency And Bankruptcy
Insolvency is a state where the liabilities and obligations of an individual or
an organization exceeds its assets and that entity is unable to raise enough
cash to meet its obligations or debts as they become due for payment. Hence, it
is the inability of the persons or companies to pay their dues as and when they
become payable. Here, the organization is not able to pay its outstanding debts.
If insolvency cannot be resolved, the assets of the business/debtor can be sold
to repay the outstanding debt.
Per Contra, Bankruptcy is defined as a state when a person is legally declared
incapable of paying his due and payable bills. When an individual is unable to
pay his outstanding debts, then he generally files for bankruptcy. Hence,
insolvency is a state whereas bankruptcy is the legal implication of that state.
Bankruptcy is of two types:
- Reorganization Bankruptcy:
When people tend to restructure the repayment
plans to pay them easily is called reorganization bankruptcy.
- Liquidation Bankruptcy:
When the debtor tends to sell of its certain
assets to pay off its debts, this process is called liquidation bankruptcy.
When an individual/firm/corporate turns insolvent and he has no means left to
raise cash to pay off its debts, it is in a state of insolvency. When he
notifies the adjudicating authority regarding the same to declare itself as
legally incapable, the process is called bankruptcy. Here, the entity asks for
the help from the government to pay off its debts to the creditors.
Scheme Of Initiating Applications Under The Code
Section 4 of the Insolvency and Bankruptcy Code, 2016 provides that the matters
relating to the insolvency and liquidation of corporate debtors will apply only
where the minimum amount of default is one lakh rupees. And it can extend to
maximum one crore rupees. Part II of the Insolvency and Bankruptcy Code, 2016
lays down the following two independent stages:
- Corporate Insolvency Resolution Process (Sections 4 and 6 to Section 32)
- Liquidation (Sections 33 to 54 and 59)
In Corporate Insolvency Resolution Process (CIRP), the financial creditors
assess the viability of debtor’s business and options for its revival and
rehabilitation. If the CIRP fails and financial creditors decide that the
business of the debtor cannot be carried on in a profitable manner and it should
be wound up, the debtor’s business undergoes a liquidation process.
In liquidation process, the assets of the debtor are realized and distributed by
the liquidator in accordance with the provisions of Insolvency and Bankruptcy
Persons Who May Initiate Corporate Insolvency Resolution Process
Section 5(5) of the Insolvency and Bankruptcy Code, 2016 provides for the
definition of corporate applicant. As per this provision, it includes a
corporate debtor; a member or a partner of the corporate debtor who is
authorized to make an application for Corporate Insolvency Resolution Process
(CIRP), under the constitutional document of corporate debtor and an individual
who is in charge of managing operations and has control and supervision over
financial affairs of corporate debtor.
Section 6 of the Code provides that where any corporate debtor commits a
default, a financial creditor, an operational creditor or the corporate debtor
itself may initiate Corporate Insolvency Resolution Process (CIRP). Default
means any non-payment of debt when whole or any part or installment of the
amount of debt has become due and payable and is not paid by the corporate
debtor. Also, the process can be initiated by a financial creditor or an
operational creditor. Financial debt means claim in respect of the money, which
is due to the creditors whereas Operational debt can be defined as claims in
respect of goods and services and not money.
Initiating Corporate Insolvency Resolution Process By Financial Creditor(S)- Section 7
Section 7 of the Insolvency and Bankruptcy Code, 2016 lays down the procedure
for initiation of CIRP by a financial creditor.
Filing an application against corporate debtor before the Adjudicating
Authority: Section 7(1) provides that financial creditor, either by himself or
jointly with other financial creditors, or any other person on the behalf of the
financial creditor may file an application for CIRP when the default has
occurred; before the National Company Law Tribunal (NCLT). The explanation
appended to Section 7(1) makes it clear that default includes the default in
respect of financial debt not only to the applicant financial creditor but to
any other financial creditor of the corporate debtor.
In Dr. H N Nagaraj v. Edelweiss Asset Reconstruction Co Ltd
, it was held
that if there was a debt and there is default, the application is required to be
admitted and the reasons for the default are not relevant. In this case, the
applicant argued that the restructured loan installments were to be paid by
selling immovable properties. It was held that these could not be sold as the
financial creditor had obtained injunction from the Court.
Furnishing of information by the financial creditor: Section 7(3) of the Code
mandates that the financial creditor shall furnish the proof of default along
with the application of initiating insolvency resolution process and the name of
resolution professional proposed to act as interim resolution professional in
respect of the corporate debtor. The main aim of this provision is to avoid
Time frame for ascertaining the existence of a default: Section 7(4) states that
after filing the application, the National Company Law Tribunal (NCLT) shall
ascertain the existence of the default from the records of an information
utility or on the basis of other evidence within 14 days from the receipt of the
Admission or Rejection of Application: Section 7(5) of the Code states that if
the NCLT is satisfied as to the existence of the default and has ensured that
the application is complete and no disciplinary proceedings are pending against
the proposed resolution professional, it shall admit the application. But if the
Tribunal finds that default has not occurred or the application is incomplete or
disciplinary proceedings are pending against a resolution professional, it may
reject the application under Section 7(5) (b) of the Code. Before rejecting the
application, the Tribunal shall give notice to the applicant to rectify the
defect within seven days.
Commencement of Corporate Insolvency Resolution Process: Section 7(6) of the
Code states that insolvency process shall commence from the date of admission of
the application under Section 7(5) of the Code and the Tribunal shall pass a
communication order within seven days of the admission or rejection of such
- To the financial creditor and the corporate debtor if the application is
- To the financial creditor if the application is rejected.
Persons Not Entitled To Make Application-Section 11
Section 11 of the Code provides for those persons who are not eligible to make
an application for initiating Corporate Insolvency Resolution Process. According
to this provision, the following persons are not entitled to make an
- A corporate debtor undergoing a corporate insolvency resolution process;
- A corporate debtor having completed the corporate insolvency resolution
process twelve months preceding the date of making an application;
- A corporate debtor or financial creditor who has violated any of the
terms of resolution plan which was approved twelve months before the date of
making an application;
- A corporate debtor in respect of whom a liquidation order has been made.
The explanation appended to Section 11 makes it clear that for the purpose of
Section 11, a corporate debtor includes a corporate applicant in respect of such
Simplifying Section 11 Of The Ib Code, 2016
Thus according to Section 11 of the Insolvency and Bankruptcy Code, 2016, a
corporate debtor which is undergoing a Corporate Insolvency Resolution Process
(CIRP), (at the time of such application) or has completed the process in the
preceding twelve months is not entitled to file an application for initiating
the insolvency resolution process. Clause (a) an (b) of Section 11 ensures that
corporate debtors do not have the repeated recourse to Corporate Insolvency
Resolution Process in order to delay the payment of debts or to keep assets out
of the reach of creditors.
Similarly, a corporate debtor or financial creditor who has violated any of the
terms of the resolution plan that was approved twelve months before making an
application for initiating process is also not entitled to make an application
for initiating Corporate Insolvency Resolution Process. Clause (c) aims at
ensuring that corporate debtors or financial creditors do not abuse the
corporate insolvency resolution process for extraneous considerations in
addition to ensuring compliance with the terms of resolution plan. Lastly, a
corporate debtor, in respect of which, a liquidation order has been passed is
not allowed to initiate insolvency resolution process again. Thus, Clause (d)
ensures the finality of the liquidation order.
Time Limit For Completion Of Insolvency Resolution Process- Section 12
Time limit for completion of Insolvency Resolution Process- Section 12(1) of the
Code lays down that, subject to the provisions of sub section (2), the
Corporate Insolvency Resolution Process shall be completed within a period
of one hundred and eighty days from the date of admission of the application.
Extension of time- Section 12 (2) of the Code states that the Resolution
Professional shall file an application to the National Company Law Tribunal to
extend the period of Corporate Insolvency Resolution Process beyond one hundred
eighty days, if he is instructed to do so by a resolution passed at the
Committee of Creditors by a vote of sixty-six per cent of the voting shares.
Section 12(3) of the Code provides that on the receipt of the application, if
the NCLT is satisfied that the subject matter of the case is such that the
corporate insolvency resolution process cannot be completed within 180 days, it
may order to extend to extend the duration of such process beyond 180 days by
such other period as it thinks fit but such period cannot exceed 90 days.
Withdrawal Of Application Under Section 7,9 Or 10- Section 12a
Section 12A was added by the Insolvency and Bankruptcy Code (Second Amendment
Act, 2018). The newly added section provides that the Adjudicating Authority may
allow the withdrawal of application admitted under Section 7, 9 or 10 of the
Code; on an application made by the applicant with an approval of ninety per
cent voting share of the Committee of Creditors, in such manner as may be
Inferences And Conclusion
- All in all, it can be extrapolated that a financial creditor,
operational creditor or the corporate debtor itself may initiate an
application for initiating Corporate Insolvency Resolution Process under the
appropriate provisions of the Code. (CIRP)
- The Corporate Insolvency Resolution Process has to be completed within
180 days as per the provisions of Section 12; but an extension of 90 days
can be granted; as provided by the same provision.
- The application can also be withdrawn by passing a resolution at the
meeting of Committee of Creditors which should have at least 90 per cent of
voting share as per Section 12 A of the Code.
- The financial creditor, while submitting the application to the
Adjudicating Authority, must submit the same with utmost care and in the
best manner prescribed.
- Corporate Insolvency Resolution Process (CIRP) cannot be initiated
against a debtor, who is already undergoing the process or has undergone the
same in the preceding twelve months.
- (2018) 1 SCC 407 =143 SCL 625= 84 taxmann.com 320 (SC)
- (2018) 148 SCL 447 = 84 taxmann.com 326 (NCLAT)
- Rishabh Taneja And
- Harnoor Johal