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Insolvency and Bankruptcy Code (IBC)

Jul 4, 2024

Insolvency and Bankruptcy Code (IBC) Lecture Notes

Basics of IBC

  • IBC Importance: 8 to 10 marks in exams; very critical.
  • Page number 184 discussed—particularly important.
  • PPIRP part to be covered later; primarily focus on main IBC concepts first.

Overview

  • IBC: Insolvency and Bankruptcy Code, consolidates various insolvency laws.
  • Codification: Merged insolvency laws from companies, partnership law, RDDBFI, SARFAESI, etc.
  • Problem: Previous laws had overlaps and conflicting orders (e.g., stay orders by different courts), causing delays in resolutions.
  • Solution: Insolvency and Bankruptcy Code for unified resolution of insolvency.
  • Distinction: Insolvency (companies), Bankruptcy (individuals and partnership firms).
    • Note: Personal insolvency not yet notified.
    • Thresholds: Individual cases can start at Rs 1,000; company cases require Rs 1 crore.

Applicability

  • Applies to companies under the Companies Act, any previous company law, LLPs, bodies corporate notified by the Central Government.
  • Applications to NCLT: Financial creditor, operational creditor, or corporate debtor.
  • Minimum Default Amount: Rs 1 crore default.

Procedure

  • NCLT Process: Accepts application, appoints resolution professional, creditors take control over the company.
  • Moratorium: Suspends legal proceedings and claims against the company during the resolution process.
  • Committee of Creditors (COC): Formed to oversee the resolution process, decides on resolution plans.
  • Timelines: Resolution to be completed within 180 days, extendable by 90 days, with a maximum of 330 days including court delays.

Key Sections and Provisions

  • Section 7, 9, 10: Applications by various creditors and the corporate debtor itself.
  • Approval Voting: 66% for significant matters, 51% for routine matters within the COC.
  • Moratorium (Section 14): Halts all recovery actions, legal suits, etc.
  • Resolution Professional (RP): Manages the company during CIRP; replaced if necessary by COC.
  • IRP to RP Transition: Interim Resolution Professional (IRP) acts until RP is appointed.
  • Liquidation: Triggered if resolution isn’t possible within prescribed timelines or plans are rejected.

Important Processes and Timelines

  • Application Filing: Within specified timelines, typically 14 days for NCLT to decide on the application.
  • Verification of Claims: Resolution Professional verifies creditors' claims within 7 days.
  • COC Formation and Meetings: Initial meeting within 7 days of COC formation.
  • Resolution Plan Evaluation: COC evaluates and approves resolution plans, including considering expressions of interest from potential buyers.

Specific Amendments and Cases

  • SR Steel Case: Supreme Court clarified the commercial wisdom of COC is paramount and cannot be questioned by NCLT or NCLAT.
    • Resolution Value vs. Liquidation Value: Distribution should ensure operational creditors get at least liquidation value or resolution value, whichever is higher.
  • Section 29A: Ineligible categories for resolution applicants to prevent defaulting promoters from regaining control.
  • Moratorium Exemptions: Personal guarantors to corporate debtors; amendments have fine-tuned these provisions.

CIRP (Corporate Insolvency Resolution Process)

  • Stages: Application -> Admission -> IRP Appointment -> Moratorium -> COC Formation -> Resolution Plan -> Approval/Rejection -> Liquidation if unresolved.
  • Voting Shares: Present and voting basis, with specific thresholds for different types of decisions.
  • Preferential Transactions: Invalid if they unfairly benefit certain creditors or are made within specified periods before insolvency commencement.
  • Post-Approval: Resolution plan binds all stakeholders; asset distribution as per the waterfall mechanism.

Future Provisions and MSME Adjustments

  • PPIRP (Pre-Packaged Insolvency Resolution Process): Special provisions for MSMEs to simplify and expedite the insolvency process.
  • MSME Definition and Thresholds: Specific thresholds and simplified processes for Micro, Small, and Medium Enterprises.

Conclusion

  • Overall Summary: The IBC aims to create a streamlined process to address insolvency situations efficiently, minimizing delays and conflicts from overlapping laws.
  • Strategic Importance: The code is essential for maintaining business continuity, maximizing asset values, and protecting the interests of creditors and other stakeholders.
  • Continuous Learning: Staying updated on changes and amendments in IBC is crucial for accurate application and understanding.

Stay focused on understanding these key principles, as they are integral to both your exams and practical application in the field of insolvency and bankruptcy.

Full transcript