The Author, Aaryan Pathak is 3rd Year student at National Law University,Delhi. He is currently interning with LatestLaws.com.
Introduction:
The Insolvency and Bankruptcy Code (IBC) of India, enacted in 2016, has introduced significant reforms to the country's insolvency and bankruptcy framework. This comprehensive FAQ guide aims to provide detailed insights into key provisions of the IBC, highlighting the relevant sections and provisions outlined in the legislation.
Q1: Which sections of the IBC govern the initiation of the insolvency resolution process?
A1: The initiation of the insolvency resolution process is governed by several key sections of the Insolvency and Bankruptcy Code (IBC), which include Section 7 (Financial Creditor), Section 9 (Operational Creditor), and Section 10 (Corporate Applicant). Section 7 of the IBC pertains to the initiation of the insolvency resolution process by a financial creditor. It outlines the conditions under which a financial creditor may file an application with the National Company Law Tribunal (NCLT) to initiate insolvency proceedings against a corporate debtor. The section specifies that a financial creditor may file an application if there is a default on a debt exceeding a specified threshold. Section 9 of the IBC addresses the initiation of insolvency proceedings by an operational creditor. It states that an operational creditor can file an application with the NCLT if a default has occurred in payment of an operational debt. Section 10 of the IBC deals with the initiation of insolvency proceedings by a corporate applicant. It allows a corporate debtor to file an application for its own insolvency resolution with the NCLT if it meets the specified criteria.
Q2: What is the prescribed time limit for completing the insolvency resolution process according to the IBC?
A2: According to Section 12 of the IBC, the maximum period allowed for the completion of the insolvency resolution process is 330 days from the insolvency commencement date, including any extensions granted by the NCLT. This time limit is crucial for promoting efficient and timely resolution of insolvency cases, as it helps prevent undue delays and ensures that the process is completed within a reasonable timeframe. It provides a structured framework for all stakeholders involved in the insolvency resolution process, including the resolution professional, committee of creditors, and the NCLT, to work towards achieving a resolution or deciding on liquidation within the stipulated timeframe.
Q3: How does the IBC prioritize the distribution of assets during liquidation?
A3: The IBC establishes a specific order for the distribution of assets during liquidation, prioritizing the following, as under Section 53:
Insolvency resolution process costs and liquidation costs: The first priority is given to covering the expenses incurred during the insolvency resolution process and liquidation proceedings. These costs are paid off before any other claims on the assets.
Secured creditors (in accordance with their security interests): Secured creditors, who hold collateral or security against their debts, are next in line. The distribution of assets among secured creditors is based on their respective security interests.
Workmen's dues for the preceding 24 months: The dues owed to workmen, including employees and laborers, for services rendered during the 24 months preceding the liquidation process are given priority. This provision ensures that the rights of the workforce are protected, and their outstanding dues are addressed.
Other employee dues for the preceding 12 months: This category includes dues owed to employees other than workmen (such as executives and staff) for work performed during the 12 months preceding the commencement of the liquidation process.
Financial debts owed to unsecured creditors: Unsecured creditors, who do not hold any collateral or security, come next in the order of priority. The distribution of assets among unsecured creditors is made after satisfying the claims of the preceding categories.
Government dues and remaining debts: The final category encompasses government dues, including taxes and other statutory payments, as well as any remaining debts that have not been addressed through the previous categories.
By establishing this framework, the IBC aims to ensure a fair and orderly distribution of assets during the liquidation process, giving priority to costs incurred, secured creditors, employee dues, unsecured creditors, and finally, government dues and remaining debts. This prioritization scheme promotes transparency and safeguards the interests of various stakeholders involved in the liquidation proceedings.
Q4: What role does the Insolvency and Bankruptcy Board of India (IBBI) play in the IBC?
A4: The IBBI is a regulatory body established under the IBC with the mandate of overseeing and governing the insolvency and bankruptcy processes in India.
The primary role of the IBBI is to regulate and develop the insolvency profession, insolvency professional agencies, and information utilities. It formulates regulations, guidelines, and codes of conduct to ensure the proper implementation of the IBC. The IBBI also establishes standards for the professional conduct of insolvency professionals, promotes best practices, and addresses any concerns or grievances related to the insolvency process. Additionally, the IBBI acts as a central repository of information on insolvency cases and maintains a public register of insolvency professionals, insolvency professional agencies, and information utilities. It is responsible for monitoring and supervising the activities of insolvency professionals, ensuring their competency and integrity in carrying out their duties. The IBBI plays a crucial role in ensuring the effectiveness, transparency, and integrity of the insolvency and bankruptcy processes under the IBC, thereby contributing to the overall efficiency of the insolvency resolution framework in India.
Q5: Are there any provisions in the IBC to protect the interests of small creditors?
A5: Yes, the IBC includes provisions to safeguard the interests of small creditors. Section 21(6) (a) allows the financial creditor with the highest exposure to initiate the insolvency resolution process on behalf of all the financial creditors. This provision prevents small creditors from bearing the costs of initiating and participating in the process.
Q6: How does the IBC address fraudulent and preferential transactions?
A6: The IBC empowers the resolution professional or liquidator to investigate and avoid fraudulent and preferential transactions. Sections 43 to 51 of the IBC Act outline the provisions related to the avoidance of transactions, undervalued transactions, preferential transactions, and extortionate credit transactions.
Q7: Can a person who has committed a wilful default be a resolution applicant under the IBC?
A7: No, the IBC prohibits a person who has committed a wilful default, been convicted of an offense punishable with imprisonment for two or more years, or is a disqualified director from being a resolution applicant. The eligibility criteria for resolution applicants are specified in Section 29A of the IBC. Section 29A of the IBC establishes certain disqualifications for individuals or entities to act as resolution applicants. It aims to ensure that only credible and responsible applicants participate in the insolvency resolution process and that the interests of creditors are protected.
Q8: Can a corporate debtor withdraw the insolvency application after it has been admitted by the National Company Law Tribunal (NCLT)?
A8: Yes, Section 12A of the IBC allows a corporate debtor to withdraw the insolvency application after its admission by the NCLT, provided it obtains the approval of the committee of creditors with a voting share of at least 90%. This provision allows flexibility for the corporate debtor to explore alternative resolutions or settle the outstanding debts with the consent of the majority of creditors.
Q9: What role does the Committee of Creditors (CoC) play in the insolvency resolution process?
A9: The CoC, as established under Section 21 of the IBC, plays a significant role in the insolvency resolution process. It consists of financial creditors of the corporate debtor and is responsible for taking important decisions during the resolution process, including the appointment of the resolution professional, approval of resolution plans, and monitoring the progress of the resolution process. The CoC has the power to approve or reject resolution plans by a voting share of at least 66%. Its primary objective is to maximize the value of assets and achieve an optimal resolution for the corporate debtor and its stakeholders.
Q10: Are personal guarantors liable under the IBC?
A10: Yes, personal guarantors can be held liable under the IBC. Section 60(2) of the IBC provides for the inclusion of personal guarantors of a corporate debtor in the insolvency resolution process. If the insolvency process is initiated against a corporate debtor, the personal guarantor's assets can also be included for the purpose of repayment to the creditors.
Q11: How does the IBC handle cross-border insolvency cases?
A11: Cross-border insolvency cases are dealt with under Part II of the IBC, which incorporates the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. Section 234 of the IBC empowers the Central Government to enter into agreements with other countries for implementing the provisions of cross-border insolvency. It allows for cooperation and coordination between Indian and foreign courts and insolvency practitioners, facilitating the resolution of cross-border insolvency cases in a more efficient and orderly manner.
Q12: Can the NCLT initiate the liquidation process if a resolution plan is not approved?
A12: Yes, if the NCLT is satisfied that the resolution plan does not comply with the requirements of the IBC or is not in the best interest of the creditors, it can initiate the liquidation process under Section 33(1) of the IBC. The liquidation process involves the sale of the corporate debtor's assets to repay the creditors in the prescribed order of priority.
Q13: What is the role of the Resolution Professional (RP) in the insolvency resolution process?
A13: The RP, as appointed under Section 16 of the IBC, acts as a facilitator and administrator of the insolvency resolution process. The RP takes control and custody of the corporate debtor's assets, manages its operations, and protects the interests of all stakeholders. The RP also verifies and collates claims of creditors, constitutes and conducts meetings of the CoC, invites and evaluates resolution plans, and presents them to the CoC for approval. The RP plays a crucial role in ensuring the smooth functioning of the resolution process and acts as a bridge between the corporate debtor and the stakeholders.
Q14: Can a person aggrieved by the decision of the NCLT or the National Company Law Appellate Tribunal (NCLAT) appeal to the Supreme Court?
A14: Yes, under Section 62 of the IBC, a person aggrieved by the decision of the NCLT or the NCLAT can appeal to the Supreme Court of India. The Supreme Court serves as the highest appellate authority for matters related to the IBC and has the power to review and overturn decisions made by lower courts or tribunals.
Q15: How does the IBC address the rights of homebuyers in the case of insolvency proceedings against a real estate developer?
A15: The rights of homebuyers are protected under the IBC through the amendment introduced in 2018. As per Section 5(8)(f) of the IBC, homebuyers are classified as financial creditors, thereby granting them the right to participate in the insolvency resolution process and be represented in the CoC. This provision empowers homebuyers to safeguard their interests and actively participate in decisions related to the resolution of the real estate developer's insolvency case.
