The Code has come into effect in phases from 5-8-2016 to 15-12-2016. Some provisions are yet to come into effect. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 have come into effect from 1-12-2016.
(i) Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 are repealed -Section 243. (Section 243 has not yet come into effect.)
(ii) By Section 4(b) of Sick Industrial Companies Act (Special Provisions) (SICA) Repeal Act, 2003 as amended by Section 252 of Insolvency and Bankruptcy Code, 2016 read with 8th Schedule thereto, notified w.e.f. 1-12-2016, any reference made or enquiry pending before the Board or before the appellate authority under SICA shall stand abated. SICA is repealed on 25-11-2016 w.e.f. 1-12-2016 and consequently Board for Industrial and Financial Reconstruction and Appellate Authority for Industrial and Financial Reconstruction are dissolved. Reference may be made by company to National Company Law Tribunal within 180 days from commencement of IBC].
The following Acts have been amended:
(i) Partnership Act, 1932; (Section 245 and 1st Schedule have not yet come into effect).
(ii) Central Excise Act, 1944; (Section 246 and 2nd Schedule).
(iii) Income Tax Act, 1961; (Section 247 and 3rd Schedule).
(iv) Customs Act, 1962; (Section 248 and 4th Schedule).
(v) Recovery of Debts Due to Banks and Financial Institutions Act, 1993; (Section 249 and 5th Schedule have not yet come into effect).
(vi) Finance Act, 1994; (Section 250 and 6th Schedule).
(vii) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (Section 251 and 7th Schedule).
(viii) Payment and Settlement Systems Act, 2007; (Section 253 and 9th Schedule).
(ix) Limited Liability Partnership Act, 2008; (Section 254 and 10th Schedule).
(x) Companies Act, 2013 (Section 255 and 11th Schedule).
Code applies to incorporated companies under the Companies Act, any company governed by special Act, to Limited Liability Partnership (LLP), other body corporate incorporated under any law, partnership firms and individuals [Sections 2 and 3(7)].
Central Government shall establish Insolvency and Bankruptcy Board of India (Board) [Sections 3(1), 188 and 189].
Board shall perform its powers and functions as set in Section 196.
Board may constitute advisory, executive or other committees (Section 197).
Adjudicating authority in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors is National Company Law Tribunal (NCLT) [Sections 5(1) and 60].
Adjudicating authority in relation to insolvency matters for individuals and partnership firms is Debts Recovery Tribunal (DRT) [Sections 79(1) and 179].
Provisions of IBC to override other laws, even if inconsistent (Section 238).
Ouster of civil court jurisdiction
No civil court shall have jurisdiction in respect of any matter covered by the Code and no order or injunction shall be granted by any court (Sections 63 and 231).
Implications of the Code for corporates
Reading the definition of the words “claim” [Section 3(6)], “creditor” [Section 3(10)], “debt” [Section 3(11)], “default” [Section 3(12)], “corporate debtor” [Section 3(8)], “financial debt” [Section 5(8)], “operational debt” [Section 5(21)] and Section 4, where the minimum amount of default is Rs 1 lakh by a corporate debtor, a creditor, that is, a “financial creditor” [Section 5(7)], an “operational creditor” [Section 5(20)], a secured creditor, an unsecured creditor and a decree-holder, even if amount is disputed or unsecured, can file an application by initiating Corporate Insolvency Resolution Process (CIRP) against such corporate debtor before NCLT having territorial jurisdiction.
The following “claims” lie before NCLT against the corporate body:
(i) Right to payment, whether by judgment or not, fixed, disputed, undisputed, legal, equitable, secured or unsecured [Section 3(6)(a)].
(ii) Right to remedy for breach of contract under any law giving rise to a right to payment, whether or not under judgment or fixed, matured, unmatured, disputed, undisputed, secured or unsecured [Section 3(6)(b)].
“’Debt” means a liability or obligation in respect of a claim due from any person, including a financial debt or operational debt [Section 3(11)].
Debt along with interest, if any, is a “financial debt” disbursed against consideration for value of money and includes debts as set out in Sections 5(8)(a) to (i).
Claim in respect of provision of goods or services including employment or as debt in respect of dues arising under any law is an “operational debt” [Section 5(21)].
“Default” is non-payment of debt whether whole or any part of the amount of the debt becoming due and payable and is not repaid by the corporate debtor or debtor, as the case may be [Section 3(12)].
“Creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder [Section 3(10)].
“Financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred [Section 5(7)].
A financial creditor is one whose relationship with the entity is a pure financial contract, such as a loan or debt security. In other words, money lent and to be received back is a financial debt.
For the financial creditor to trigger the Insolvency Resolution Process (IRP), his claim should be a financial debt, that is, the debt satisfying the requirements of Section 7 read with Sections 5(7) and (8) of IBC. A financial transaction should be in the nature of a debt, a transaction which has consideration for time value of money (Order of NCLT in Nikhil Mehta & Sons v. AMR Anil Infrastructures Ltd.).
“Operational creditor” means a person to whom an operational debt is owed and includes assignor or transferee of an operational debt [Section 5(20)].
Operational creditor is therefore one whose liability from the entity comes from a transaction on operations.
Thus, where there exists a debt, that is loan given and receivable with interest, if any, it is a “financial debt” whether disputed or undisputed and a person can initiate IRP before NCLT as a financial creditor. Where there is a “claim” on account of supply of goods or services or employee has a claim or there exists a debt in respect of repayment of dues arising under any law, it is an operational debt and a person can initiate IRP before NCLT as an operational creditor.
Where creditor has both a financial transaction as well as operational transaction with the entity, in such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.
(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a trust;
(e) a partnership;
(f) a limited liability partnership; and
(g) any other entity established under a statute, and includes a person resident outside India [Section 3(23)].
“Corporate debtor” means a corporate person who owes a debt to any person [Section 3(8)].
“Corporate person” means a registered company under Companies Act, 2013, a LLP, or any other person incorporated with limited liability under any law for the time being in force, but shall not include any financial service provider [Section 3(7)].
Who can initiate corporate insolvency resolution
1. A “financial creditor” [Section 5(7)] entitled to a “financial debt” under Section 5(8) can initiate corporate insolvency resolution process against the corporate debtor/person committing a default [Section 6].
2. This insolvency resolution process can be initiated also by “operational creditor” [Section 5(20)] on the corporate debtor/person, for operational debt having a claim in respect of:
(i) provision of goods or services;
(ii) employment or a debt in respect of repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. [Section 5(21)]
3.“Corporate debtor” can itself also initiate corporate insolvency resolution in respect of a debt which a corporate person owes to any person [Section 3(8)].
Insolvency resolution process for corporate persons
Chapter II of Part II of the Code read with the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Rules) and the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 regulate the insolvency resolution process.
The insolvency resolution process shall be conducted in accordance with provisions of Rules and Regulations 27 to 40 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
1. Financial creditor
Any financial creditor either, by himself or with other financial creditors, may under Section 7 read with Rule 4 of the Rules file an application before NCLT in Form 1 with required documents and records for initiating corporate insolvency resolution process against a corporate debtor when a default has occurred. Under Rule 10 (Schedule thereto), the application is to be filed with a fee of Rs 25,000. The date in which an application is made to NCLT for initiating corporate IPR is “initiate date” [Section 5(11)].
Along with the application in Form 1 the financial creditor shall furnish—
(a) record of the default with the information utility or such other record or evidence of default as may be specified [Section 7(3)(a)];
(b) the name of the resolution professional proposed to act as an interim resolution professional [Section 7(3)(b)] with a written communication from insolvency professional in Form 2 [Rule 9(1)];
(c) record of existing liability with the debtor;
(d) record of default from credit contract and where applicable, information of such default as filed at a registered information utility; and
(e) any other information as specified by the Board [Sections 7(2) and (3)].
On application for corporate insolvency resolution process made by financial creditor or the corporate debtor, the resolution professional, shall be appointed as interim resolution professional [Section 16(2)].
A financial creditor shall submit proof of claim with documents to the interim resolution professional in Form C [Regulation 8].
Moratorium: NCLT shall by order declare moratorium for prohibiting all actions including institution of suits or continuation of pending suits, transferring of assets, enforcing any security under Sarfaesi or recovery of any property (Section 14).
Public announcement: NCLT shall by an order immediately after the appointment of the interim resolution professional cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims [Section 13(1)(b)]. Public announcement shall contain information as set out in Section 15. A public announcement is to be made by insolvency professional of the commencement of insolvency proceedings against corporate debtor, immediately on his appointment as an interim resolution professional [Sections 13(1)(b) and 15 and Regulation 6].
After approval of NCLT, the moratorium order passed by NCLT shall cease to have effect and resolution professional shall forward all records relating to the conduct of the corporate insolvency resolution process and the resolution plan to the Board to be recorded on its database [Section 31(3)].
After NCLT ascertains the existence of a default from the records of an information utility or on the basis of other evidence furnished and if NCLT is satisfied that a default has occurred, may admit the application [Sections 7(4) and (5)].
The corporate insolvency resolution process shall commence from the date of admission of the application [Section 7(6)]. Date of admission of an application for initiating corporate insolvency resolution process by NCLT is the “insolvency commencement date” [Section 5(12)].
The corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application i.e. insolvency commencement date [Sections 5(12) and 12].
Resolution plan: It means a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern [Section 5(26)]. Any person who submits a resolution plan to the resolution professional is a resolution applicant [Section 5(25)]. A resolution plan provides the measures required for implementing the insolvency resolution process as provided in Regulations 37 to 39 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
The resolution professional shall prepare an information memorandum as required under Section 29 and submit resolution plans to the committee of creditors for its approval. On approval of resolution plan by committee of creditors, the resolution professional shall submit the same to NCLT (Section 30). NCLT, if satisfied may by order approve the resolution plan, which shall be binding on corporate debtor and all stakeholders. NCLT may reject the resolution plan, if it does not confirm to the requirements under Sections 30(2) and 31(1)(2).
Information memorandum: The interim resolution professional or resolution professional shall submit an information memorandum to each member of the Committee [Regulation 36 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016].
Committee of creditors: The committee of creditors is regulated by Sections 21, 22, 24, 27, 28 and Regulations 16 to 26 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
The interim resolution professional, after collection of all claims against corporate debtor constitute a committee of creditors [Section 21(1)].
Where a corporate debtor has no financial debt or where all financial creditors are related parties of a corporate debtor, a committee shall be set up (Regulation 16).
The committee of creditors in its first meeting by a majority of vote of not less than 75% of the voting share of financial creditors, appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional [Section 22(2)]. The committee of creditors may replace the resolution professional by the committee of creditors (Section 27).
2. Operational creditor
An operational creditor, on occurrence of default by corporate debtor, may deliver to corporate debtor a demand notice in Form 3 or a copy of an invoice attached with a notice in Form 4 of unpaid operational debt, demanding payment of the amount involved in respect of provision of goods or services [Sections 5(20), (21), 8(1) and Rule 5].
After the expiry of 10 days from the date of delivery of notice or invoice demanding payment under Section 8(1), if operational creditor does not receive payment from the corporate debtor or receives the notice of dispute under Section 8(2), the operational creditor may file an application under Rule 6 in Form 5 before NCLT with a fee of Rs 2000 [Rule 10(3) Schedule], for initiating a corporate insolvency resolution in Form 5 [Section 9, Rules 5 to 7], accompanied with documents and records as required under Section 9(3) and under Regulation 7(2).
Where an operational creditor initiating a corporate insolvency resolution process, proposes a resolution professional to act as an interim resolution professional, the resolution professional shall be appointed as interim resolution professional [Section 9(4) read with Section 16(3)(b)]. NCLT shall appoint an interim resolution professional within 14 days from the insolvency commencement date [Section 16(1)]. Operational creditor shall obtain a written communication from insolvency resolution professional in Form 2 for appointment as an interim resolution professional [Rule 9(1)]. Operational creditor shall submit proof of claim to Interim Resolution Professional in Form B of the Schedule [Regulation (1)].
On application made by operational creditor for corporate insolvency resolution and where no proposal for appointment of an interim resolution professional is made, NCLT shall make a reference to the Board for recommendation of insolvency professional to act as interim resolution professional [Section 16(3)(a)]. The Board shall within 10 days recommend the name of an insolvency professional to the adjudicating authority [Section 16(4)]. The term of interim resolution professional shall not exceed 30 days from the date of his appointment [Section 16(5)]. The creditor shall bear the cost of proving the debt (Regulation 11).
Two registered valuers shall be appointed by interim resolution professional to determine the liquidation value of the corporate debtor (Regulation 27). Insolvency resolution professional costs/expenses (including fee to be paid to the interim resolution professional) shall be fixed by applicant, if not then NCLT shall fix it (Regulations 31 to 34).
On satisfying conditions under Section 9(5)(ii), NCLT shall admit the application within 14 days of receipt of the application or reject the application if covered under any of the clauses under Section 9(5)(iii).
3. Workman or employee
A “workman or employee” shall submit proof of claim to the interim resolution professional in Form D (Regulation 9).
4. Corporate applicant
An application for initiating corporate insolvency resolution process may be also made by a corporate debtor itself as a corporate applicant in Form 6 [Rule 7(1)] with documents and fee of Rs 25,000 [Rule 10(3), Schedule thereto] with following documents:
(i) audited record of business operation for previous 2 years;
(ii) audited record of financial and operation payments for previous 2 years;
(iii) audited statement of list of assets and liabilities at the time of application;
(iv) a signed statement of truth of document; and
(v) a proposed resolution professional (Section 10 and Rule 7).
Fast track corporate insolvency resolution
An application for fast track corporate insolvency resolution may be made along with proof of existence of default by records in following circumstances:
(i) the corporate debtor is with assets and income below a level notified by Central Government; or
(ii) a corporate debtor is with such class of creditors or such amount of debt as may be notified by Central Government; or
(iii) corporate debtor is in such other category as may be notified by Central Government (Section 55).
The fast track insolvency resolution process shall be completed within a period of 90 days from the date of insolvency commencement (Sections 56 and 57).
Similar process as for conducting a corporate insolvency resolution shall be followed (Section 58).
Provisions relating to fast track corporate insolvency resolution have yet not come into effect. No regulations are framed for fast track corporate insolvency resolution.
1. Insolvency professional agency (IPA)
IPA is regulated by Sections 199 to 205 and IBBI (Insolvency Professional Agencies) Regulations, 2016.
A registered company is eligible to be registered as IPA under eligibility criteria set out in Regulation 3. IPA is required to be registered with the Board before carrying on business as insolvency professional agency [Sections 3(20), 199 and 201]. Application for registration to the Board is in Form A with a non-refundable application fee of Rs 10 lakhs (Regulation 4). The validity of registration is five years and renewal thereof is with a non?refundable application fee of Rs 5 lakhs (Regulation 4).
IPA is to adopt principles set out in Section 200 and perform functions set out in Section 204, like, grant membership, lay down standards of professional conduct, monitor performance of its members, safeguard rights of insolvency professionals, redress grievances of consumers against insolvency professionals, etc.
IPA shall make bye-laws consistent with model bye-laws specified by the Board under Sec.196 (Section 205). Model bye-laws are framed by Board under IBBI (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016.
2. Resolution professional (insolvency professional)/interim resolution professional
Resolution professional/interim resolution professional is regulated by Sections 206 to 208 and IBBI (Insolvency Professionals) Regulations, 2016.
Resolution professional is insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional [Section 5(27)].
An individual may be appointed as insolvency professional provided he is not disqualified under Regulation 4, has qualifications as set out in Regulation 5 and is a fit and proper person as set out in Explanation to Regulation 4.
An insolvency professional is eligible for appointment as a resolution professional for a corporate insolvency resolution process of a corporate debtor, if he, and all partners/directors of insolvency professional entity of which he is a partner or director are independent of the corporate debtor [Regulation 3 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016].
The individual is required to pass national insolvency examination conducted by Board through a designated agency. If he passes limited insolvency examination, he should possess 15 years experience in management after bachelor’s degree from a recognised university and should have 10 years experience as a chartered accountant, company secretary, cost accountant or an advocate, besides being an individual of integrity, reputation and character, competent and experienced in the field of finance, law, management, insolvency or such other field, including financial insolvency and net worth (Regulations 3, 4 and 5).
A person has to enrol himself as a member of an insolvency professional agency then and be registered with the Board to render his services as insolvency professional [Sections 2(19), 206, 207 and Regulations 6 & 7].
Insolvency professional is to follow code of conduct as set out in First Schedule to the Regulations and perform functions and obligations as set out in Section 208 (Section 93).
Resolution professional shall conduct the corporate insolvency resolution process, manage the operations of the corporate debtor, exercise his powers and perform his duties as provided in Sections 23 to 25.
Interim resolution professional shall perform his duties and exercise his rights as set out in Sections 17 to 20 of the Code, like, exercise powers of Board of Directors or partners of corporate debtor and manage the affairs of the corporate debtor as a going concern.
3. Information professional entity
Insolvency professional entity (IPE) is regulated by Regulations 12 and 13 of IBBI (Insolvency Professionals) Regulations, 2016.
LLP, a registered partnership firm or a company may be recognised as an insolvency professional entity, if majority of partners of LLP or registered partnership firm or a majority of the whole-time directors of the company are registered as insolvency professionals (Regulation 12). IPE is jointly and severally liable for all acts or omissions of its partners or directors as insolvency professionals committed during such partnership or directorship.
Application for recognition/registration as an insolvency professional entity is to be made to the Board in Form C [Regulation 12(2)]. If the applicant is eligible, Board may grant a certificate of recognition as an insolvency professional entity in Form D (Regulation 13).
4. Information utility
Information utility is regulated by Sections 3(21), 209, 210, 212 to 215 and IBBI (Information Utilities) Regulations, 2017.
Any person to carry on its business as information utility, may apply to the Board for certificate of registration with particulars as set out in Sections 3(21), 209 and 210. No person shall be eligible to be registered as an information utility unless it is a public company and satisfies the conditions of registration set out in Regulation 3.
Information utility to provide core services to any person complying with terms and conditions specified in the Regulations (Section 213). Core services are set out in Section 3(9) read with Regulation 17, like, accepting electronic submissions of final information and ensuring safe and accurate recording thereof and providing access thereof to safeguard persons, etc. The information utility shall charge fees as set out in Regulation 32. The information utility shall provide information as required by the Board and submit a report to the Board annually (Regulation 36).
The obligations and duties of information utility are set out in Section 214 read with Regulations 28 to 30, like, creating and storing financial information in an universally accessible format, accept electronic submissions, meet minimum service quality standards, publish statistical information, have interoperatability with other information utilities, etc.
An insolvency professional may submit reports, registers and minutes in respect of any insolvency resolution, liquidation or bankruptcy proceedings to an information utility for storage which shall be available for access to any person, the Board or adjudicating authority (Regulation 38).
A person shall register itself with information utility for submitting or accessing information. On registration of a person, the information utility shall intimate it of its unique identifier (Regulations 18 to 27). The financial creditor shall submit the financial information in prescribed form to information utility relating to assets in relation to which any security interest has been created (Section 215).
Liquidation process for corporates
Liquidation process is regulated by Sections 33 to 54 and IBBI (Liquidation Process) Regulations, 2016. Voluntary liquidation of corporate persons is regulated by Section 59.
NCLT shall on the happening of events set out in Section 33(1)(a) and (b), pass an order requiring the corporate debtor to be liquidated. The procedure to be followed is as set out in Chapter III (Sections 33 to 54).
The resolution professional shall provide the liquidation value to the Committee [Regulation 35 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016].
Where corporate debtor has given a preference to certain transactions or undervalued the transactions or has been a party to an extortionate credit transaction, the liquidator or the resolution professional shall apply to the NCLT for avoidance of preferential transactions or undervalued transactions or extortionate credit transactions (Sections 43 to 51).
A secured creditor has rights under Section 52.
The proceeds from the sale of the liquidation assets shall be distributed as provided under Section 53.
On the complete distribution of assets of corporate debtor, NCLT on application of liquidator shall dissolve the corporate debtor (Section 54).
An insolvency professional shall be eligible to be appointed as a liquidator. Such insolvency professional shall be either partner or director of the insolvency professional entity, of which every partner or director is insolvency professional and is independent of the corporate debtor (Regulation 3).
Liquidator shall prepare and submit, a preliminary report (Regulation 13), progress reports (Regulation 15), asset memorandum, sale reports, minutes of consultation with stakeholders and final report prior to dissolution (Regulation 5).
A person shall prove his claim for his debt including interest on the liquidation commencement date (Regulation 16).
Claim by operational creditor to be in Form C (Regulation 17).
Claim by financial creditor to be in Form D (Regulation 18).
Claim by workman or employee to be in Form E (Regulation 19).
Claim by any other stakeholder to be in Form G (Regulation 20).
Claimant shall bear the cost of proving his claim (Regulation 24).
On a complete distribution of assets of corporate debtor, the adjudicating authority on application of liquidator shall dissolve the corporate debtor (Section 54).
A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under Section 59 read with IBBI [(Corporate Voluntary Liquidation Process) Regulations, 2017 notified on 31-3-2017, w.e.f. 1-4-2017.]
Any person aggrieved by an order of NCLT, may appeal under Section 61 to National Company Law Appellate Tribunal (Nclat) within 30 days of the order of NCLT on the grounds set out in Section 61(3).
An appeal against liquidation order may be filed on grounds of material irregularity or fraud committed in relation to such a liquidation order [Section 61(4)].
Appeal to Supreme Court
Any person aggrieved by an order of Nclat may file an appeal to the Supreme Court on a question of law arising out of such order within 45 days from the date of such order (Section 62).
Insolvency process for individuals and partnership firms
Part III regulates fresh start, insolvency resolution and bankruptcy for individuals and partnership firms.
Adjudicating authority is Debts Recovery Tribunal having territorial jurisdiction [Section 79(1)].
Implications of Code
Unlike the process of insolvency against the corporates where claim/debt of any nature whether disputed or undisputed would be adjudicated by NCLT, under this part, the precondition is a “qualifying debt”. It is an amount including interest owed by the debtor under any contract for a liquidated sum, payable either immediately or at certain future time. This part applies to default of not less than Rs 1000 (Section 78). The qualifying debt does not include an excluded debt, a secured debt and any debt incurred three months prior to the date of application for fresh start process [Section 79(19)]. Excluded debts are set out in Section 79(15).
Fresh start process by debtor
Fresh start process initiated by debtor is regulated by Sections 80 to 94.
This is a process adopted by the debtor when he is unable to pay a qualifying debt [Section 80(1)].
The debtor may apply either personally or through a resolution professional to DRT for a fresh start in respect of the qualifying debt, provided he qualifies within clauses (a) to (g) of Section 80(2).
A fresh start is for discharge of his qualifying debt after his application to that effect under Section 81, appointment of resolution professional under Section 82(2) and examination of his application by resolution professional (Section 83).
Interim moratorium shall commence on the date of filing of such application to all debts, any legal action or legal proceeding pending in respect of any debts shall be stayed and no creditor shall institute any legal action or proceedings in respect of any such debts. Interim moratorium shall cease to have effect on date of admission or rejection of such application [Sections 81(1) and (2)].
Application shall be in prescribed form and contain information as set out in clauses (a) to (h) of Section 81(4), supported by an affidavit.
Adjudicating authority may within 14 days from date of submission of request by resolution professional, pass an order either admitting or rejecting the application.
The application when accepted shall state the amount which has been accepted as qualifying debts by the resolution professional and other amounts eligible for discharge of the applicant for purposes of fresh start order [Section 84(2)].
On date of admission of the application, the moratorium period shall commence in respect of all the debts [Section 85(1)]. All consequences as set out in Sections 85(2) and (3) shall follow. Moratorium ceases to have effect on expiry of 180 days beginning with the date of admission unless order admitting application is revoked.
Before the moratorium period comes to an end, the resolution professional shall prepare a final list of qualifying debts at least seven days before moratorium period ends. At the end of moratorium period DRT shall by order discharge the debtor from qualifying debts and from liabilities set out in Section 92(3). Debtor shall not be discharged from debts not included in qualifying debts and liabilities not included. Discharge order shall be forwarded to the Board (Section 92).
On admission of application, creditor is given an opportunity to raise objections on grounds set out in Section 86(1)(a) and (b) only. Resolution professional shall examine the objections and either accept or reject the objections within 10 days of the application [Section 86(5)].
Debtor or creditor aggrieved by the decision of resolution professional may within 10 days of such decision, challenge such decision before DRT on the grounds set out in Sections 87(1)(a) to (c).
DRT shall decide the application within 14 days of such application and forward its order to the Board for such action as required against resolution professional.
Resolution professional may submit an application to DRT seeking revocation of its order on the grounds set out in Sections 91(1)(a), (b), (c). DRT may, within 14 days of the receipt of application admit or reject the application. If application of resolution professional is accepted the moratorium and fresh start process shall cease to have effect. Copy of the order shall be forwarded to the Board (Section 91).
Insolvency resolution process
Debtor who commits a default may himself apply in prescribed form with prescribed fees either personally or through a resolution professional to DRT for initiating the insolvency resolution process, provided he is not disqualified under Section 94(4) and debts are not excluded debts set out in Section 79(15), Sections 94(3) and 94(5). In case of a partnership firm, majority partners of partnership firm shall file the application [Section 94(2)].
2. By creditor
A creditor may apply either by himself or jointly with other creditors or through a resolution professional to DRT with specified details and documents set out in Section 95(4)(a) to (c) for initiating an insolvency resolution process in the prescribed form and prescribed fee. Application may also be made by creditor in relation to any partnership debt against the firm or any one or more partners of the firm.
The insolvency process as set out from Sections 96 to 104 is more or less similar to the insolvency process for the corporates, namely, commencement of interim moratorium, appointment of resolution professional, report of resolution professional, moratorium on admission of application, public notice, claims of creditors and so on.
The debtor shall prepare in consultation with resolution professional a repayment plan containing a proposal to the creditors for restructuring of his debts or affairs and then the process from Sections 105 to 113 to be followed, such as, report of resolution professional, meetings of creditors, rights of secured creditors, approval of plan by creditors, etc.
DRT shall by an order, approve or reject the repayment plan on the basis of report of the creditors submitted by resolution professional. DRT, on approval of repayment plan, may provide directions for implementing repayment plan (Section 114). Such repayment plan shall be binding on creditors and debtor [Section 115(1)].
If repayment plan is rejected by DRT the debtor and creditors shall be entitled to file application for bankruptcy. Copy of order shall be forwarded to the Board (Section 115).
Implementation of repayment plan shall be supervised by resolution professional (Section 116).
On the basis of repayment plan, the resolution professional shall apply to DRT for discharge order in relation to debts mentioned in repayment plan under Section 119.
Discharge order may be for early discharge or discharge on complete implementation of repayment plan. Discharge order shall be forwarded to the Board (Section 119).
NB.—The provisions of Sections 78 to 120 dealing with insolvency resolution and bankruptcy for individuals and partnership firms and regulations thereto have not come into effect till date. No forms, no fees, etc. have therefore been prescribed.
Bankruptcy order for individuals and partnership firms
Adjudicating authority shall be DRT having territorial jurisdiction (Section 179). No civil court shall have jurisdiction (Section 180).
Any debt owed by the debtor as on bankruptcy commencement date, any debt for which the debtor may become liable after bankruptcy commencement date but before his discharge and where any interest is due as a part of the debt proved under Section 171, is a bankruptcy debt [Section 79(5)].
Application by creditor
Creditor can make an application for bankruptcy of debtor under Section 121 within a period of three months from the date of the order, individually or jointly with other creditors to DRT with documents set out under Section 123 from the order of DRT of rejection of application by insolvency professional for initiation of insolvency resolution process under Section 100(4) read with Sections 94 and 95, from order of DRT under Section 115(2) of rejection of the repayment plan under Section 114, from order of DRT under Section 118(3) on the report submitted by resolution professional that the repayment has not been completely implemented within a period of three months of the date of the order (Section 121).
Application by debtor
Application for bankruptcy may be made by debtor under Section 122. On the filing of such an application, interim moratorium shall continue till bankruptcy commencement date (Section 124). Bankruptcy commencement date is the date on which a bankruptcy order is passed by DRT [Section 79(6) and Section 126].
Process of bankruptcy
The process of bankruptcy is as set out in Section 125, that is, appointment of insolvency professional as the bankruptcy trustee. Proof of debt and that by secured creditor is to be done in accordance with Sections 171 and 172, to be entitled to distribution of dividends (Section 177).
DRT shall pass a bankruptcy order within 14 days of receiving the confirmation or nomination of the bankruptcy trustee (Section 126). Bankruptcy order shall continue to be valid and have effect till the debtor is discharged (Section 127).
The effect of bankruptcy order and objections of bankrupt and further proceedings are as set out in Sections 128 to 137. Restrictions on bankrupt are as set out in Section 141 and disqualifications of a bankrupt are as set out in Section 140.
The estate of bankrupt includes all property belonging to or vested in the bankrupt at the bankruptcy commencement date and all that is set out in Section 155. All after-acquired property by the bankrupt can be claimed by bankruptcy trustee (Section 159). All documents as provided in Section 156 shall be delivered to the bankruptcy trustee.
Any disposition of property made by the debtor during the period between the date of filing of the application for bankruptcy and bankruptcy commencement date shall be void (Section 158).
The administration and distribution of the estate of the bankrupt by bankruptcy trustee with his functions, duties, rights and general powers are as set out in Sections 149 to 154.
The provisions regarding onerous property of bankrupt, disclaimer thereof and of leaseholds, challenge against disclaimed property, and undervalued transactions are as set out from Sections 160 to 164.
Preference transactions or extortionate transactions by a bankrupt with the associate during the period of two years ending on the date of application for bankruptcy and any other transaction giving preference entered into by the bankrupt during the period of six months ending on the date of the application for bankruptcy, causing the bankruptcy process to be triggered may, on application of bankruptcy trustee be declared by DRT as void and such part may be declared as part of the estate of the bankrupt (Sections 165 and 167). Such order under Sections 164 or Section 165 shall be subject to exclusions in Section 166.
Bankruptcy trustee may declare interim dividends for distribution amongst creditors whose debts are proved (Section 174).
Distribution of property which cannot be sold can be done by bankruptcy trustee with approval of committee of creditors (Section 175).
On realisation of the entire estate of the bankrupt final dividend may be declared as provided under Section 176.
Priority of payment of debts are as set out in Section 178.
If bankrupt dies, the bankruptcy proceedings shall continue as if he was alive (Section 169) and his estate shall be administered as set out in Section 170.
On the expiry of one year from bankruptcy commencement date or within seven days of approval of the committee of creditors of the completion of administration of the estate of the bankrupt under Section 137, DRT shall pass a discharge order under Section 138 on application by bankruptcy trustee and the effect thereof is as provided under Section 139.
From the order of DRT, appeal lies to Debts Recovery Appellate Tribunal. From the order of DRAT, appeal lies to Supreme Court (Sections 181 and 182).
Provisions of Sections 55 to 58, 121 to 187, 195, 227 to 229, 243, 245 & 249 of the IBC have yet not come into effect. No Regulations relating to the insolvency and bankruptcy of individuals and partnership firms are as yet framed.
* Advocate & Solicitor, team of M/s Kamal & Company, Mumbai.
 2017 SCC OnLine NCLT 219.