THE INSOLVENCY AND BANKRUPTCY CODE, 2016
The Insolvency and Bankruptcy Code, 2016 is, undoubtedly, one of the biggest economic
reforms in India next only to GST. The rate at which the Legislation was enacted and
subsequently, made operational along with the detailed rules and regulations was indeed,
surprising. The code consolidates and amends the existing laws governing the insolvency
resolution of individuals, partnership firms and companies.
Several overlapping laws were there before the introduction of this code which was making
it difficult to deliver proper judgments. The Insolvency and Bankruptcy Code, 2016 was
framed with the intention to simplify the process of Insolvency and Bankruptcy proceedings
in India thereby providing an equal ground to both the debtor and the creditor in terms of
rights. One of the fundamental features of the Code is that it allows a creditor to understand
the position of the debtor and either opt for a different plan of payment or a speedy
liquidation. It creates a new institutional framework, consisting of a regulator, insolvency
professionals and adjudicatory mechanisms.
Let us assume ‘A’ has taken a loan from the bank. However, under circumstances he is
unable to repay the loan. Two situations can arise in this case. First, ‘A’ is a genuine person
who is not capable of paying off his debts and certain atrocities are being committed on him
by the bank. Second, ‘A’ is in a position to repay his debt but the bank is being cheated on
by him. Therefore, to protect the interest of both ‘A’ and the bank the Code has been
formed. The relationship that exists between the bank and ‘A’ is based on trust or the credit
worthiness which is governed or regulated by the Insolvency and Bankruptcy Board of India
which has been constituted under the Insolvency and Bankruptcy Code, 2016. Here ‘A’,
according to the code, can be Individuals, or Companies, or Partnership Firms.
Understanding the terms
Now, before we proceed further into the details of the code, let us understand the terms
Insolvency and Bankruptcy.
Often we have come across the word ‘Insolvent’ in terms of businesses or individuals.
Insolvency is a state or position where one’s liabilities exceed one’s realizable assets. In
simpler words, a person becomes insolvent when he is unable to repay his debts. For
example, if Mr. Gupta is unable to pay back the amount to his creditors, he will be called an
insolvent. Insolvency can be resolved by way of changing the plan of repayment or writing a
part thereof. If it cannot be resolved then legal proceedings are started. Insolvency precedes
bankruptcy. It can be said that while insolvency is the cause, bankruptcy is the effect.
Bankruptcy, on the other hand, is a legal proceeding involving an Individual or, a Company
or, a Partnership firm that is unable to repay the outstanding debts. The bankruptcy process
begins with a petition filed by the debtor to get him declared as an insolvent. Otherwise, the
creditor can file an application in the court against the insolvent. It is a legal scheme
wherein the court determines insolvency and the bankrupt seeks relief.
Although, the meanings of both the terms are similar, they are not the same. Insolvency is a
financial condition where the individual or the entity is unable to meet his financial
obligations as they are due for payment. It is a temporary situation where the money is
recoverable and definitely not the last resort. It is attained involuntarily. While, bankruptcy
is a legal situation where the court declares insolvency of an individual or entity and passes
orders for its resolution. It is the permanent state leading to the winding up of an
individual’s assets. This stage is reached voluntarily.
It refers to a financial condition of an It refers to a legal state of an individual, or a
individual, a company or a partnership company, or a partnership firm where it has
firm where it has become insolvent. become bankrupt.
It is a temporary situation and there is a It is a permanent stage where the person’s
possibility of recovering the money. assets are seized in order to recover the
Related to: Related to:
It is a financial concept but can lead to It is a legal situation from the very
legal proceedings if required. beginning.
Scenario before the formation of the code
Insolvency and Bankruptcy are not novel concepts; therefore, it is quite evident that there
have been laws governing these issues prior to the formation of the Insolvency and
Bankruptcy Code, 2016. However, the problem was that one specific act wasn’t there that
dealt with all the arms of the single issue. The Insolvency and Bankruptcy Code, 2016
repealed many of the existing acts. The significant among them were Presidency Towns
Insolvency Act, 1909 and Sick Industrial Companies (Special Provisions) Repeal Act of
PRESIDENCY TOWNS INSOLVENCY ACT, 1909
The Presidency Town Insolvency Act, 1909 dealt with the matters related to insolvency. The
jurisdiction was given to the High Courts of the ‘Presidencies’ i.e. Calcutta, Madras and
Bombay. A single judge per presidency, appointed by the Chief Justice of the following High
Courts, was to discharge his duties in relation to insolvency. Therefore, enormous power was
given to a handful of elites from the happening towns in as important an issue like
insolvency. As the number of companies started growing, the number of frauds and similar
problems started popping up in bulk. The act was also slightly biased towards the debtor. The
creditor had an upper hand even in genuine cases of insolvency.
SICK INDUSTRIAL COMPANIES ACT, 1985
The first ever law to this context was the Provision’s Act, 1985 or as we popularly call it
SICA or the Sick Industrial Company’s Act. It was enacted for the time to time detection of
sick and potentially sick companies owning industrial undertaking and their revival, in
possible cases or closure, in irrecoverable situations. The main objective was to detect the
Industrial Sickness that was on the rise in that time. Now, sickness is not related to physical
unhealthiness of a company. A sick industrial unit, as defined in the act, is one that has
existed for a period of at least five years and incurred a total loss equal to or exceeding its net
worth at the end of any financial year.
This act was repealed in 2003 and came to be known as the Sick Industrial Companies
(Special Provisions) Repeal Act of 2003. The amendment to this act not only made the
detection of sick industries stronger but also looked to it that no company declared sickness
with the aim of avoiding legal obligations and gaining access to concessions from financial
With time different statutes and legislations were passed which were overlapping. The
contrasting and contradicting views on the issue of insolvency and bankruptcy in different
acts such as The Companies Act, 2013, Sick Industrial Companies Act, 1985 (SICA),
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB ACT),
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI ACT), The Presidency Towns Insolvency Act, 1909, The Provincial
Insolvency Act, 1920 and more created loopholes in law. A highly mismanaged and
fragmented system was prevailing leading to hugely different interpretation of these laws by
the judges of High Courts and Supreme Courts. In the process the judgments that were passed
on same issues were conflicting. The existing legal regime was also outdated and not in sync
with the present day reality of the functioning of businesses thereby hampering the
effectiveness of it.
JOURNEY OF THE CODE
This highly complex and chaotic situation was finally, fixed with the introduction the
Insolvency and Bankruptcy Code, 2016.
In 1999, Justice V.B. Eradi Committee was set up by GOI to examine and make
recommendations for the changes that should be made in the existing laws with respect to
winding up of companies, transparency and avoiding delays in final liquidation of
companies. The report submitted by the committee in 2000 recommended that the
jurisdiction, power and authority should be vested in a National Tribunal instead of the High
Courts in order to deal with the number of pending cases pertaining to the concerned issue.
In the December the Companies(second amendment) Act, 2002 was passed which lead to
the setting up of NCLT and NCLAT.
In 2004, the Government constituted the J.J. Irani Committee to provide India with a modern
Company Law to meet the need of a competitive economy. In the report that the committee
submitted on 31st May, 2005, among other recommendations, suggested that the debtor and
creditor be given equal rights and sick industry be redefined as insolvent company. In the
Companies Act of 2013 the same was done along with provisions which were laid down for
the constitution of NCLT and NCLAT. Finally, in 2015 the Bankruptcy Law Reform
Committee was set up.
THE JOURNEY OF A BILL TO AN ACT AT A GLANCE
21st December, 2015 The Code was introduced in the Lok Sabha by Finance Minister Mr.
23rd December, 2015 The Code was discussed in a Joint Parliamentary Committee Session.
5th May, 2016 After the joint committee submitted its report, the Insolvency and
Bankruptcy Code was passed in Lok Sabha.
11th May, 2016 The Insolvency and Bankruptcy Code was passed in the Rajya Sabha.
28th May, 2016 It received the assent of the President and became an Act there upon.
1st December, 2016 The Code came in effect.
The case of Swiss Ribbons has given an insight as to what the code seeks to achieve. The
following has been stated in the judgment-
1. It has been implemented for the reorganization and insolvency of corporate debtors.
2. The reorganization has to be conducted in a time bound manner or otherwise the
value of the assets will deplete.
3. Maximization of the value of the assets of persons is an important objective of the
code. This will ensure the going concern and efficient running.
4. This will further seek to promote entrepreneurship as the persons in management of
the corporate debtor is removed and replaced by entrepreneurs.
5. When a resolution plan takes off, the corporate debtor will be brought back into the
economic mainstream which will enhance the availability of credit in the hands of
the banks and other financial institutions.
6. Since more investment can be brought in back into the economy, business then eases
up to higher economic growth and development of the economy.
7. The code will enable the corporate debtor back at its feet
8. The interests of the corporate debtor have been bifurcated and separated from that of
its promoters those who are in management.
9. The timelines within which the resolution process is to take place again protects the
corporate debtors assets from further dilution and protects all its creditors and
workers by seeing that the resolution process goes through as fast as possible so that
another management can resuscitate the corporate debtor to achieve all these ends.
History of the Debt Resolution Mechanism
1985 – Sick Industrial Companies Act (BIFR)
1993- Recovery of Debt Dues to Bank and Financial Institute Act (DRTs)
2001- Corporate Debt Restructuring Cell (CDR)
2002- SARFAESI Act – ARC’s
2014- Announced asset classification forbearance on Restructuring ended from MAR-15
2014- Revitalising Distressed Assets in the Economy ( SMA and JLF)
2014- Flexible structure of long terms Loan
2015- Strategic Debt restructuring
2016- Scheme of sustainable structuring of stressed assets
2016- Asset Reconstructing Companies
2016- Insolvency and bankruptcy code
2018- Resolution plan under RBI guidelines which subsumes previous schemes
It has been seen that with respect to the cross border insolvency the insolvency law
committee noted that the existing provisions in the code (section 234 and 235) do not provide
a comprehensive framework for cross border insolvency matters. s - border insolvency
matters. The Committee decided to attempt to provide a comprehensive framework for this
purpose based on the UNCITRAL Model Law on Cross - Border Insolvency, 1997 which
could be made a part of the Code by inserting a separate part for this purpose.
The necessity to make the existing cross - border insolvency framework under the Code more
elaborate and self - contained, is widely accepted 5 and needs immediate attention. Some of
the key advantages of adopting the Model Law with specific carve outs as recommended by
the Committee are as under:
1. Increasing foreign investment- Even though foreign creditors have a remedy under the
Code presently, adoption of the Model Law will provide added avenues or recognition
of foreign insolvency proceedings.
2. Flexibility – The model law is designed to be flexible and to respect the differences
amongst national insolvency laws.
3. Protection of domestic interest- The model law enables refusal of recognition of
foreign proceedings or provision of any other assistance if such action contradicts
domestic foreign policy.
4. Priority of domestic proceedings- The model law will give precedence to domestic
insolvency proceedings in relation to foreign proceedings.
5. Mechanism for cooperation- The model law incorporates a robust mechanism for
cooperation and coordination between courts and insolvency professionals in foreign
jurisdictions and domestically.
Constitutionality of the Act
The constitutionality of the IBC 2016 was challenged in the case of Akshay Jhunjhunwala &
anr v. UoI. It was contended by the petitioners that there has been a differentiation been done
between the financial creditor and operational creditor amongst the corporate debtors.
According to the petitioner, this differentiation is not based on intelligible or rational basis.
The effect of the abovementioned differentiation is that the financial creditor does not have a
right to be in Committee of Creditors however an operational creditor does not have any say
in the same. Also, IBC does not give the power to the adjudicating authority to look deeply
into the claims of the financial creditor. There is a difference in the way the claims of the
operational and financial creditor’s claims are treated.
It was held by the court that the financial creditor is a creditor whose claims have been arisen
out of a transaction in liquidity entered by the creditor with the company whereas operational
creditor is a creditor whose claims have arisen out of the normal transactions of the business.
A secured or unsecured creditor is reclassified as financial or operational creditor under the
IBC. The creditor of the company which is involved in the insolvency proceedings would not
lose the character of being secured or unsecured creditor under the code.
The classification amongst the similarly situated persons would be held permissible as it is
based on intelligible differentia. If the classification would not have been based on
intelligible differentia then it would go against the principle of equality. It was held by the
court that the classification between the operational and the financial creditor is based on
intelligible differentia and shall held to be not unconstitutional. The operational creditor
would not be ousted in entirety to come to the CoC. The operational creditor would not have
the voting right in the event it is in the committee of creditors.
Troubles with IBC,2016
Lack of motivation to move to IRP
The corporate debtor and the creditor have been empowered by the IBC to initiate corporate
resolution process if in case there is a default. But just by providing an enabling provision
does not mean that there are incentives for stakeholders to initiate the resolution process.
There can be a scenario where the creditors amount which has been due may not be large
enough to justify invoking the IRP. The financial creditors are more likely to initiate the
Paradox of Cost
Another flaw with the IRP is that the main intention of having this process is to have higher
realizations, it has been seen in its earlier adoptions in UK that the adoption of IRP model has
resulted in increasing the cost of bankruptcy and hence resulted in lower yield. Thus it has
been seen that the regime has to be adopted very carefully since the emergence IRP market
would prove to be critical to the success of the code.
Introduction of NCLT
A tribunal is defined as a quasi judicial body which has jurisdiction over a specific topic of
law and is set up to fasten the process of delivering justice. The NCLT stands for National
Company Law Tribunal which adjudicates issues relating to the companies in India. It has
been established by the Ministry of Corporate Affairs under the provision of section 408 of
the Companies Act, 2013. Before the establishment of the NCLT, all the matters related to
the companies were placed before the Company Law Board or CLB. All the matters pending
before the CLB will now be referred to NCLT and the CLB has been dissolved.
NCLT has eleven benches across India, two of which are in New Delhi; one is the principal
bench and the other is a regional bench. The other regional benches are located in
Ahmadabad, Allahabad, Bangalore, Kolkata, Chandigarh, Chennai, Guwahati, Mumbai and
Hyderabad. On 23rd January, 2018 a proposal was placed for the establishment of regional
benches in Bhubaneswar, Kochi and Jaipur.
COMPOSITION OF NCLT
The tribunal is constituted by a President and such Judicial and Technical Members as the
Central Government shall deem necessary. The required qualification of the President of the
NCLT is that he has to have an experience of not less than five years as a Judge of a High
Court. Hon’ble Justice M.M. Kumar, retired judge of Jammu and Kashmir High Court has
been appointed as the President, at present. The total number of members cannot exceed sixty
two at any given point of time.
NEED FOR NCLT
The National Company Law Tribunal has certain definite benefits such as removing the
burden of legal work from the shoulder of the Company Courts as well as the other
institutions which are required for the smooth working and speedy conveyance of justice. The
National Company Law Tribunal would exercise its original jurisdiction to resolve disputes
The National Company Law Tribunal deals with all the cases pertaining to companies. The
cases which were pending before the CLB or High courts or BIFR have now been transferred
to the NCLT. The cases from NCLT are appealed to in NCLAT which stands National
Company Law Appellate Tribunal.