India had numerous acts in place to punish the defaulters like the Indian Contract Act, the Recovery of debts due to Banks and Financial Institution Act 1993, the Securitizations and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Presidency Towns Insolvency Act, 1909, Provincial Insolvency Act, 1920, which were later on replaced by the existing Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’) to consolidate the existing framework by creating a single law for insolvency and bankruptcy. 

The Insolvency and Bankruptcy Code 2016 (IBC) aimed to revolutionise the insolvency and bankruptcy landscape by introducing a comprehensive code for both corporates and individuals. It established a new framework including a committee of creditors (COC) and dedicated adjudicating authorities (AA) to streamline insolvency resolution and liquidation processes. Its goal was to bring about a significant cultural shift in the way insolvency and bankruptcy cases are handled.

The Insolvency and Bankruptcy Code (IBC) classifies creditors into different categories, each with specific rights and responsibilities. On the other hand, debtors have a separate process to initiate insolvency proceedings against a corporate entity or an individual.

Definition Of A Debtor: –  

According to Black’s Law Dictionary, a Debtor is the one who owes a debt; who may be compelled to pay a claim or demand.

A debtor is an individual or entity that owes money to someone else, which may include individuals and/ or institutions/ statutory authorities. Typically, the debtor has to pay interest in addition to repaying the principal amount. 

Eligibility Of Debtor Under Ibc: –

Chapter III of the Code governs the Insolvency Resolution Process. Section 94 of the Code lays down the eligibility of the Debtor who has committed a default, for filing an application for insolvency resolution process, i.e., for payment of debts in accordance with a negotiated repayment plan. The eligibility criteria specified under the said section is as follows:-

  • A Debtor who commits a default may apply, either personally or through a resolution professional, to the Adjudicating Authority for initiating the insolvency resolution process, by submitting an application.
  • A Debtor being a partner of a firm, cannot apply for insolvency for the firm unless all or a majority of the partners of the firm file the application jointly.
  • A Debtor cannot make such an application if he is:-

(a) an undischarged bankrupt;

(b) undergoing a fresh start process;

(c) undergoing an insolvency resolution process; or

(d) undergoing a bankruptcy process.

  • A debtor shall not be eligible to apply if an application has been admitted in respect of the debtor during the period of twelve months preceding the date of submission of the application under this section.

Procedure For Initiating Insolvency Under Ibc By A Debtor: –

Section 94 to Section 120 under Chapter III of the Code governs the Insolvency Process. Section 94 of the Code lays down the eligibility criteria of a debtor who can initiate Insolvency Proceedings and the procedure thereto. An eligible Debtor has to file an Application before the Ld. National Company Law Tribunal (hereinafter referred to as ‘Ld. NCLT’), which should prescribe only in respect of debts which are not excluded debts. The application shall be in such form and manner and accompanied with such fee as may be prescribed.

Interim Moratorium: – 

Under Section 96 of the Code, it is stated that upon admission of the said application, Interim Moratorium commences which stays all legal actions and pending legal proceedings in respect of any debt. In case, the Insolvency proceedings are initiated in relation to the partnership firm, then said moratorium shall operate against all the partners of the firm. 

Role Of Resolution Professional Under Part Iii Ibc: –

  1. Registering of claims by creditors (Section 103) – The creditors must submit their claims to the resolution professional electronically or through traditional mail. Additionally, they must provide personal information and other specified details to the resolution professional.
  2. Preparation of list of creditors (Section 104) – The resolution professional will create a list of all creditors by gathering information from two sources: 1) the debtor’s initial application and 2) the claims submitted by creditors. This list must be finalized within 30 days of a public notice being issued.
  3. Repayment Plan (Section 105) – The debtor, with the resolution professional’s help, creates a plan to restructure debts. This plan may include business continuation, asset sale, or fund management.
  4.  Resolution Professional’s Report (Section 106) – The resolution professional submits the repayment plan and a report to the Adjudicating Authority within 21 days. The report assesses the plan’s legality, feasibility, and need for a creditor meeting.
  5. Meeting of Creditor (Section 107) – The Resolution Professional shall issue notice calling a meeting of creditors at least 14 days in advance, providing details about the repayment plan, financial statements, and proxy voting. Committee of Creditors can appoint representatives to vote.
  6. Conduct of meeting of creditors. (Section 108) – In the meeting of creditors conducted the repayment plan can be either approved, modified, or rejected. If modifications are proposed, the RP shall obtain the consent of the debtor for each suggested modification. The resolution professional may adjourn the meeting for not more than 7 days for a sufficient cause.
  7. Voting rights in meetings of creditors. (Section 109) – Each creditor shall be entitled to vote at every meeting of Creditors in accordance with their assigned voting share. The voting share of the Creditor shall be determined by the resolution professional as specified by the Board. Eligibility of Creditors to vote in the meeting is as follows:-
    • Creditor cannot vote with respect to a debt for an unliquidated claims;
    • If a creditor is not listed in the list of creditors as specified under Section 104;
    • If Creditor is an associate of a Debtor.
  8. Rights of secured creditors in relation to repayment plan (Section 110): Secured creditors can participate and vote in creditor meetings. However, by participating, they forfeit their right to enforce the security during the period of the repayment plan. To maintain this right, they must submit an affidavit to RP stating that their right to vote is only with respect to the unsecured part of the debt and the estimated value of the aforesaid debt. In case such creditors participate in voting after submitting the affidavit, the secured and unsecured parts of the debt shall be treated as separate debts. The concurrence of the secured Creditors shall be obtained in case they do not participate in the voting on the repayment plan but the provision of the plan affects his right to enforce security.
  9. Approval of repayment plan by creditors (Section 111): The repayment plan or any modifications thereto shall require approval from the majority of more than three-fourth in value of the Creditors present or represented at the meeting.
  10. Report of Meeting of Creditors on repayment plan (Section 112) – The resolution professional shall prepare a report of the meeting of creditors on repayment plan. This report shall contain:-
    • whether the repayment plan was approved or rejected, any modifications if any;
    • the resolutions proposed and any decision thereto;
    • List of creditors present or represented in the meeting and their voting records;
    • and any other relevant information.
  11. Notice of decisions taken at meeting of creditors. (Section 113) – The resolution professional must share a copy of the creditor meeting report with the debtor, all creditors (including those who missed the meeting), and the Adjudicating Authority.
  12. Implementation and supervision of repayment plan. (Section 116) – The resolution professional oversees the implementation of the approved repayment plan. They can seek apply before Ld. Adjudicating Authority for directions, if necessary. The Adjudicating Authority may issue directions to the resolution professional accordingly.
  13. Standard of Conduct (Section 120): The Code prescribes the standard of conduct for the Resolution Professional, i.e., The resolution professional shall perform his functions and duties in compliance with the code of conduct provided under section 208.

Role Of Adjudicating Authority:

  1. Admission or Rejection of Application (Section 100): The Adjudicating Authority must decide on the application within 14 days of receiving the RP’s report. If admitted, instructions for negotiation between the debtor and creditors may be issued.
  2. Moratorium (Section 101): A moratorium starts upon admission, lasting for 180 days or until a repayment plan is approved, whichever is earlier. During this time: (a) Legal actions are stayed. (b) Creditors cannot initiate actions. (c) Debtors cannot transfer or dispose of assets.
  3. Public Notice & Claims from Creditors (Section 102): The Adjudicating Authority shall issue a Public Notice within 7 days of passing the order of allowing the initiation of Insolvency, for inviting claims from all creditors within 21 days of such issue. Such notice shall include particulars of the aforesaid Order, appointed RP and last date of submission of claim. Therefore, such notice is to be published in one English and one vernacular language newspaper which is to be affixed one in the premises of the Adjudicating Authority and on the website of the Adjudicating Authority.
  4. Order of Adjudicating Authority on repayment plan (Section 114): The Adjudicating Authority shall approve or reject the repayment plan on the basis of the report of the meeting of the creditors as submitted by the resolution professional. Upon Approval, the Adjudicating Authority shall also provide directions for implementation of the repayment plan. If the Adjudicating Authority believes that the plan requires modification, it may direct the RP to convene a meeting of creditors to reconsider the repayment plan.
  5. Effect of Order of Adjudicating Authority on Repayment Plan (Section 115): if approved, the repayment plan becomes binding on the debtor and creditors. If rejected, bankruptcy proceedings can be initiated.
  6. Completion of Repayment Plan (Section 117): The resolution professional must inform relevant parties and the Adjudicating Authority about the plan’s completion within 14 days. Any extension for compliance can be sought for up to 7 days.
  7. Repayment Plan Coming to an End Prematurely (Section 118): If the plan isn’t fully implemented, the resolution professional reports to the Adjudicating Authority. The Authority declares the plan incomplete, allowing for potential bankruptcy proceedings. Relevant parties are informed.
  8. Discharge Order (Section 119): Upon full implementation, the resolution professional applies for a discharge order. This order releases the debtor from covered debts. The timing of discharge can be specified in the plan. The Board is informed for record-keeping.

Dilip B Jiwrajka Vs. Union Of India & Ors (2023 Insc 1018): Challenge To Constitutional Validity

The Hon’ble Supreme Court of India made a significant decision in 2023 regarding the constitutionality of Section 95-100 of the IBC. Here are the key points from the judgment.

  1. Scope of the Resolution Professional’s Role: – The role of the resolution professional under Section 99 is facilitative, focusing on assisting the Ld. NCLT rather than adjudicating matters. The Court have established that debtors should be given an opportunity to respond before insolvency processes are initiated, even if not explicitly stated in Section 100. The resolution professional’s inquiries must be relevant to the insolvency application, ensuring a fair opportunity for the debtor to provide information. The balance of privacy rights and legitimate legislative aims aligns with Article 21 of the Constitution.
  2. Implied Right to a Hearing & Compliance with Natural Justice: – Although Section 100 does not specifically mention a hearing, the courts may read such a requirement into the statute. This interpretation aligns with legal principles allowing for necessary implications in the absence of explicit provisions. The Ld. Adjudicating Authority must comply with natural justice, meaning they must hear all the parties involved before deciding on the application. This ensures fairness in the decision-making process regarding applications under Sections 94 and 95.
  3. Constitutional Compliance: – The provisions of Sections 95 to 100 comply with Article 14, thus not being unconstitutional. The challenge based on alleged violations lacks merit as the framework does not create arbitrary distinctions.
  4. Clarifications on Subsections:- The interpretation of Section 95 allows creditors to apply for an insolvency resolution process, whether for individual partners or the partnership itself, indicating a broader scope than suggested.
  5. Non-Retroactivity of Provisions: – The provisions are not retroactive simply because they apply to past debts. The Insolvency and Bankruptcy Code (IBC) replaces earlier laws and is not viewed as operating retroactively, thus upholding constitutional validity.
  6. Conclusion: The analysis confirms that Sections 95 to 100 of the IBC do not violate constitutional provisions and meet legal standards for fair procedure and justice. The petitioners’ claims lack sufficient grounds to deem these provisions unconstitutional.

Court Observation: – 

The Hon’ble Court held that:-

  • No judicial adjudication is involved at the stages envisaged in Sections 95 to Section 99 of the IBC;
  • The resolution professional appointed under Section 97 serves a facilitative role of collating all the facts relevant to the examination of the application for the commencement of the insolvency resolution process which has been preferred under Section 94 or Section 95. The report to be submitted to the adjudicatory authority is recommendatory in nature on whether to accept or reject the application;
  • The submission that a hearing should be conducted by the adjudicatory authority for the purpose of determining ‘jurisdictional facts’ at the stage when it appoints a resolution professional under Section 97(5) of the IBC is rejected. No such adjudicatory function is contemplated at that stage. To read in such a requirement at that stage would be to rewrite the statute which is impermissible in the exercise of judicial review;
  • The resolution professional may exercise the powers vested under Section 99(4) of the IBC for the purpose of examining the application for insolvency resolution and to seek information on matters relevant to the application in order to facilitate the submission of the report recommending the acceptance or rejection of the application;
  • There is no violation of natural justice under Section 95 to Section 100 of the IBC as the debtor is not deprived of an opportunity to participate in the process of the examination of the application by the resolution professional;
  • No judicial determination takes place until the adjudicating authority decides under Section 100 whether to accept or reject the application. The   report of the resolution professional is only recommendatory in nature and hence does not bind the adjudicatory authority when it exercises its jurisdiction under Section 100;
  • The adjudicatory authority must observe the principles of natural justice when it exercises jurisdiction under Section 100 for the purpose of determining whether to accept or reject the application;
  • The purpose of the interim-moratorium under Section 96 is to protect the debtor from further legal proceedings; and
  • The provisions of Section 95 to Section 100 of the IBC are not unconstitutional as they do not violate Article 14 and Article 21 of the Constitution.

Conclusion:

The Insolvency and Bankruptcy Code, 2016 (IBC) has revolutionized the way insolvency and bankruptcy cases are handled in India. This structured framework empowers debtors to kick-start insolvency proceedings before the National Company Law Tribunal (NCLT), marking a significant cultural shift in the entire process. The IBC plays a pivotal role in the Indian legal framework, addressing insolvency for both corporates and individuals.. Under this code, The creditor’s interests take precedence under the Code, and their decisions are seldom challenged in court. While the self-initiation process has its advantages, such as enabling timely action to safeguard the business and facilitating settlements with creditors, it also comes with risks. Losing control, facing potential liquidation, and a drop in asset value are among the potential downsides. Nevertheless, the transformative impact of the IBC on insolvency resolution and liquidation processes cannot be overstated.

Author – Neha Buttan, Senior Associate

Co- Author – Tanishqa Shukla

 

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