Corporate Insolvency Resolution Process under the Bankruptcy Code: Relevant Provisions Notified

[The
following guest post is contributed by Shikha
Bansal
, under the aegis of Vinod Kothari & Company. She can be
contacted at Shikhabansal2610@gmail.com]
The Ministry of Corporate Affairs, by way of Notification no. S.O. 3594(E) dated 30 November 2016, has notified 1 December 2016 as the
date for commencement and enforcement of certain core sections of the Insolvency
and Bankruptcy Code, 2016 (“the Code”), as listed below –
(i)   clause (a) to clause (d) of section 2 (except
with regard to voluntary liquidation or bankruptcy);
(ii)  section 4 to section 32 [both inclusive];
(iii) section 60 to section 77 [both inclusive];
(iv) section 198;
(v)  section 231;
(vi) section 236 to section 238 [both inclusive];
and
(vii) clause
(a) to clause (f) of sub-section (2) of section 239.
The provisions pertain to the corporate insolvency
resolution process envisaged under the Code.
It may be
noted
that a few days ago the Central Government, by way of Notifications
S.O. 3568(E) and S.O. 3569(E), both dated November 25, 2016, notified 1st
December, 2016 as the date on which the SICA Repeal Act, 2003 shall come into
force. On and from this date, any reference or inquiry pending before the Board
of Industrial and Financial Reconstruction (“BIFR”) and any appeal pending
before the Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”)
shall stand abated, and companies may make reference to the National Company
Law Tribunal (“NCLT”) under the Code within 180 days from the commencement of
the Code in accordance with the provisions of the Code.[1]
The present notification opens the gate for such companies too
to proceed for resolution under the Code.
Enforcement Status
of the Code Till Date
It may be noted that the proviso to section 1(2) of the Code
allows for a piecemeal enforcement of the Code. The Central Government, so far,
has issued give notifications. The present notification is fifth in the series,
with the earlier ones being –
(1)        Notification S.O. 2618 [E] dated 5 August 2016[2]
notifying 7 sections of the Code. Sections 188 to 194 (both inclusive) were
enforced.[3]
(2)        Notification S.O. 2746 [E] dated 19 August 2016[4] ,
notifying 17 sections of the Code under Chapter VII of Part IV and sections
under Part V of the Code.[5]
(3)        Notification SO 3355 [E] dated 1 November 2016[6]
providing for commencement of Sections under Chapter II, Chapter VII of Part IV
and sections under Part V.[7]
(4)        Notification S.O. 3453(E) dated 15
November 2016[8]
providing for commencement of Sections under Chapter III, Chapter IV, Chapter
VI of Part IV and sections under Part V.[9]

 

Provisions Notified
in the Present Notification
1.         Section
2(a) to 2(d)
(except with
regard to voluntary liquidation or bankruptcy) – Applicability of the Code
Section 2 deals with the applicability of the Code. It reads
as follows:
“2.
The provisions of this Code shall apply to—
(a)
any company incorporated under the Companies Act, 2013 or under any previous
company law;
(b)
any other company governed by any special Act for the time being in force,
except in so far as the said provisions are inconsistent with the provisions of
such special Act;
(c)
any Limited Liability Partnership incorporated under the Limited Liability
Partnership Act, 2008;
(d)
such other body incorporated under any law for the time being in force, as the
Central Government may, by notification, specify in this behalf; and
(e)
partnership firms and individuals,
in
relation to their insolvency, liquidation, voluntary liquidation or bankruptcy,
as the case may be.”
Note that only clauses (a) to (d) of section 2 have been
notified. The provisions relating to insolvency resolution and bankruptcy of
individuals and partnership firms have not been notified. Further, provisions
relating to liquidation and voluntary liquidation of the persons covered under
clauses (a) to (d) are due for enforcement. In essence, the notification seeks
to enforce provisions relating only to insolvency resolution process of
corporate persons.
2.         Section 4 to section 32 [both
inclusive] – Corporate Insolvency Resolution Process
Sections 4 to 32
(both inclusive) are comprised in Chapters I and II of Part II of the Code.
Chapter I of Part II (sections 4 & 5) contains preliminary provisions while
Chapter II of Part II (sections 6 to 32) provides for corporate insolvency
resolution process. Such sections do not cover fast track corporate insolvency
resolution process.
Section 4 limits the
applicability of the Code to cases where the amount of default is a minimum of
Rs. 1 lakh. The Central Government may, by way of notification, raise such
minimum limit up to a maximum of Rs. 1 crore. Section 5 contains definitions of
the words and expressions used in Part II of the Code (i.e. in context of the
corporate insolvency resolution process).
The corporate
insolvency resolution process as contained in sections 6 to 32 has been briefly
stated as follows:
– There must be a debt, in respect of
which the corporate debtor must have committed a default. The amount of default
should be Rs. 1 lakh or more.
– A financial creditor (solely or
jointly), an operational creditor, or a corporate applicant may file an
application for initiation of corporate insolvency resolution process in
respect of the corporate debtor to the adjudicating authority. In case of
operational creditor, a pre-requirement is delivery of demand notice.
– The adjudicating authority admits or
rejects the application.
– On admission of the application, the
corporate insolvency resolution process commences.
– Moratorium commences, interim
resolution professional is appointed, and public announcement is made.
– Committee of creditors is constituted
by the interim resolution professional
– Resolution professional is appointed
by the committee of creditors in its first meeting.
– Resolution professional prepares
information memorandum.
– Resolution applicant prepares
resolution plan on the basis of the information memorandum.
– The resolution plan is examined by
the resolution professional, and approved by the committee of creditors.
– The resolution plan is approved by
the adjudicating authority.
The corporate
insolvency resolution process has to be complete within the default maximum
period of 180 days, extendable by a further period of 90 days only once.
3.         Section 60 to section 77 [both
inclusive] – Adjudicating Authority for Corporate Persons and Offences &
Penalties
Sections 60 to 67
cover provisions relating to adjudicating authority for corporate persons,
while sections 68 to 77 list out offences in relation to the processes of
resolution and liquidation and penalties therefor. These constitute another set
of necessary provisions to facilitate corporate insolvency resolution process.
4.   Section 198 – Condonation of Delay
The section deals with condonation of delays made by the Insolvency
and Bankruptcy Board.
The section is a
non-obstante clause and provides that where the Board does not perform any act
within the period specified under this Code, the relevant Adjudicating
Authority may, for reasons to be recorded in writing, condone the delay.
5.   Section 231 – Bar of Jurisdiction
Section 231 bars the
jurisdiction of any court
in respect of any
matter in which the adjudicating authority is empowered by, or under, this Code
to pass any order. No injunction shall be granted by any court or other
authority in respect of any action taken or to be taken in pursuance of any
order passed by such adjudicating authority under this Code.
6.   Section 236 to section 238 [both inclusive]
– Trial of Offences by Special Court, Appeal and Revision, and Overriding
Effect of the Code
Section 236 provides
for trial of offences under the Code by the Special Court
established
under Chapter XXVIII of the Companies Act, 2013. According to section 237, the
High Court may exercise, so far as may be applicable, all the powers conferred
by Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High
Court, as if a Special Court within the local limits of the jurisdiction of the
High Court were a Court of Session trying cases within the local limits of the
jurisdiction of the High Court.
Section 238 emphasises on the overriding effect of the Code
— The provisions of this Code shall have effect, notwithstanding anything
inconsistent therewith contained in any other law for the time being in force
or any instrument having effect by virtue of any such law.
7.   Clause (a) to clause (f) of sub-section
(2) of section 239 – Power of Central Government to frame Rules under the Code
Section 239 (2)
empowers the Central Government to frame rules in regard to the following (only
notified part reproduced) –
(a)
any other instrument which shall be a financial product under clause (15) of
section 3;
(b)
other accounting standards which shall be a financial debt under clause (d) of
sub-section (8) of section 5;
(c)
the form, the manner and the fee for making application before the Adjudicating
Authority for initiating corporate insolvency resolution process by financial
creditor under sub-section (2) of section 7;
(d)
the form and manner in which demand notice may be made and the manner of
delivery thereof to the corporate debtor under sub-section (1) of section 8;
(e)
the form, the manner and the fee for making application before the Adjudicating
Authority for initiating corporate insolvency resolution process by operational
creditor under sub-section (2) of section 9;
(f)
the form, the manner and the fee for making application before the Adjudicating
Authority for initiating corporate insolvency resolution process by corporate
applicant under sub-section (2) of section 10;”
Note that the
Central Government has also issued the Insolvency and Bankruptcy (Application
to Adjudicating Authority) Rules, 2016 by way of Notification no.
G.S.R. 1108(E)
dated 30 November, 2016.
What is Missing?
The present notification misses out on one of the most
crucial aspects in the corporate insolvency resolution process – avoidance of
transactions. Sections 43 to 51 of the Code empower both the liquidator and the
resolution professional to file applications to the adjudicating authority for
avoidance of certain transactions, viz.
(i)   preferential transactions,
(ii)  undervalued transactions, and
(iii) extortionate credit transactions,
The resolution process may not be effectively carried out in
the absence of these provisions.
The way ahead
In furtherance of the power conferred under section 240, the
Board has issued the Insolvency and Bankruptcy Board of India (Insolvency
Resolution Process for Corporate Persons) Regulations, 2016 by way of Notification no.
IBBI/2016-17/GN/REG004
dated 30 November, 2016.
Seeing the trend, it is evident that the Central Government
is keen on implementing the Code in fast track mode and it is expected that the
sections relating to avoidance of transactions will be notified soon.
– Shikha Bansal



[1] Read more: http://www.india-financing.com/images/Articles/SICA_bids_adieu.pdf
[2] https://indiacorplaw.in/wp-content/uploads/2016/12/Notificationdated05.08.2016.pdf
[3] Read more: http://www.india-financing.com/images/Articles/7_sections_notified.pdf
[4] https://indiacorplaw.in/wp-content/uploads/2016/12/Notification_22092016_1.pdf
[6] https://indiacorplaw.in/wp-content/uploads/2016/12/Notification_01112016.pdf
[7] Read more: http://www.india-financing.com/images/Articles/Sections_notified_under_the_Bankruptcy_Code.pdf
[8] http://www.mca.gov.in/Ministry/pdf/Notification_17112016.pdf
[9] Read more: http://www.india-financing.com/images/Articles/Sections_notified_under_the_Code_4th_Tranche.pdf

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • So does that mean that both winding up under section 433 of CA 1956 and IRP are in place? Then which remedy to pursue?

    Additionally, Government has also notified section 255 of Insolvency code on 15 November. Section 255 amend CA 13. Few provisions thereby amended deal with winding up of companies (section 271). Does that mean that winding up under new act is also enforced, that too without repealing winding up under CA 1956.

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