3. INDIA’S NPA PROBLEM
• With the rise in corporate debt, NPAs also saw an alarming
• Indian banks had Rs.8.3 lakh crores in bad debts in 2016
• Companies would fail due to several reasons like flawed
business model, inefficient execution, economic
downturn, or competition driving them out of the market.
• Rise in NPAs constrained banks’ ability to lend to even
healthy sectors of the economy.
• This signalled capital erosion, and it was up to the
government to take legislative measures to rein in bad
6. WEAK DEBT
Insolvency was being dealt with by a multiplicity of legislations
1. Sick Industrial Companies (Special Provisions) Act, 1985
2. Securitisation and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act (SARFAESI), 2002
3. Presidency Towns Insolvency Act, 1909
4. Limited Liability Partnership Act, 2008
5. Recovery of Debts Due to Banks and Financial Institutions
6. Companies Act, 2013.
8. BANKRUPTCY LAW REFORMS
• The Bankruptcy Law Reforms Committee (BLRC), 2015
drafted a single unified framework dealing with Insolvency
• IBC was drafted to include within its ambit a wider range of
creditors such as unsecured creditors, workmen, and
operational creditors who can initiate the Insolvency
Application against the Corporate Debtor.
9. AIM OF THE IBC
• Consolidate multiplicity of legislations dealing with
• Reduce Insolvency time
• Include a wider range of creditors such as workmen,
operational creditors, and unsecured creditors
• Giver the corporate debtor the option to restructure and
revive his business
• Promote Resolution of the Corporate Debtor and Prevent
liquidation of Corporate Debtor.
11. INSOLVENCY AND BANKRUPTCY BOARD
OF INDIA (IBBI)
• Apex body for promoting transparency & governance in the
administration of the Code
• Involved in setting up the infrastructure and accrediting
Insolvency Resolution Professionals (IRPs) & Information
• Made significant progress in setting up the IPA, conducting
exams to registers IPs and issuing multiple regulations to
support the smooth implementation of the Code.
• IBBI has been at the forefront in building capacity, educating
the market and proactively supporting the implementation of
12. INSOLVENCY RESOLUTION PROFESSIONALS
• Licensed professionals regulated by the IBBI
• Conduct resolution process
• IRP runs the business during the corporate insolvency
resolution process (CIRP)
• They are expected to take all steps to keep the company as a
going concern and display utmost integrity, impartiality and
independence in their day-to-day conduct
• IPs need to possess the skills and acumen to balance
commercial reality with the legal requirements to preserve the
entitlements of all stakeholders.
13. COMMITTEE OF CREDITORS
• Consist of financial creditors who appoint and supervise
actions of IRPs
• Approve or reject resolution plans
• Every Decision taken by RP has to be approved by COC
14. NATIONAL COMPANY LAW TRIBUNAL (NCLT)
• It is the ‘Adjudicating Authority’ under the IB Code
• It entertains or disposes of insolvency applications
• It approves/rejects claims or matters of law or fact
16. WHO CAN FILE APPLICATION
1. Financial Creditors
2. Operational Creditors
3. Workmen and Employees
6. Corporate Debtor Himself
17. 1. FINANCIAL CREDITORS (MOST POWERFUL)
Those creditors to whom a 'financial debt' is owed
• Section 5 (8) :
"financial debt" means a debt along with interest, if any, which
is disbursed against the consideration for the time value of
money and includes—
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance
credit facility or its de-materialised equivalent;
(c) any amount raised pursuant to any note purchase facility or
the issue of bonds, notes, debentures, loan stock or any similar
18. (d) the amount of any liability in respect of any lease or hire
purchase contract which is deemed as a finance or capital lease
under the Indian Accounting Standards or such other accounting
standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold
on nonrecourse basis;
(f) any amount raised under any other transaction, including any
forward sale or purchase agreement, having the commercial effect
of a borrowing;
(g) any derivative transaction entered into in connection with
protection against or benefit from fluctuation in any rate or price and
for calculating the value of any derivative transaction, only the
market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee,
indemnity, bond, documentary letter of credit or any other
instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clauses (a) to (h) of
19. 2. OPERATIONAL CREDITORS
Those creditors to whom an 'operational debt' is owed
• Section 5 (21) :
"operational debt" means a claim in respect of the provision
of goods or services including employment or a debt in
respect of the 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
20. • The procedure for initiation of CIRP by operational
creditors is laid down in Section 8.
• Operational Credit shall have to send Demand Notice
before Filling Application against Corporate Debtor.
• When demand notice is issued under section 8 to the
corporate debtor, they must bring to the notice of an
operational creditor the existence of
a) any dispute or record of the pendency of any suit
or arbitration proceedings; and
b) the repayment of any unpaid operational debt.
21. TIME FRAME FOR RESOLUTION
• 180 days to complete Corporate Insolvency Resolution
• This is extendable to 270 days
• If a resolution plan is not submitted within this period the
company will go into liquidation
22. • Resolution application must send in resolution plans to the IRP
who forwards it to the Committee of Creditors
• Under section 30, a resolution plan must contain:
(a) payment of insolvency resolution process costs
(b) repayment of the debts of operational creditors
(c) management of the affairs of the Corporate debtor
after approval of the resolution plan;
(d) the implementation and supervision of the
26. Prioritisation of claims upon Liquidation
• Costs of Insolvency and Liquidation process
• Workmen's dues
• Secured debts
• Wages and unpaid dues to other employees
• Financial debts owed to unsecured creditors
• Amount owed to Government
• Debts owed to secured creditor for any amount unpaid following the enforcement of security interest
• Remaining debts and dues
• Preference shreholders
• Equity shareholders orpartners
27. CASE STUDY
KAMINENI STEEL & POWER INDIA LTD.
• The company borrowed Rs.1248 crores from a consortium of 8
banks to fund its new manufacturing facility
• Due to delay in implementation of the project, Kamineni
defaulted on its loan
• CIRP was initiated and the Company submitted a resolution
• A few banks in the CoC, with a voting share of 33.33%, rejected
• The NCLT, after considering the reasons for rejection, held that
even if the required 75% voting share was not achieved the
resolution plan would be approved
• This reduction in majority was incorporated in the recent IBC
28. KIRUSA SOFTWARE PRIVATE LIMITED V. MOBILOX
INNOVATIONS PRIVATE LIMITED
• Supreme Court held that the word ‘dispute’ must be interpreted
widely and ‘and’ must be read as ‘or’.
• This interpretation removes the requirement of there being a
pending suit or arbitration and thereby prevents a premature
filing of CIRP in cases where the dispute has recently arisen and
there is no time to approach a court or tribunal.
29. PROWESS INTERNATIONAL PRIVATE LTD.
• An application was filed by an operational creditor.
• The NCLT admitted the application and an interim IRP was
• Soon after the parties came to a settlement and filed an
application for withdrawal of CIRP
• The NCLT rejected this application and held that
“After the admission of the petition, it acquires the character of
representative suit and through publication in the newspapers, other
creditors get a right to participate in the insolvency resolution process,
and therefore, petition cannot be dismissed on the basis of compromise
between the operational creditor and corporate debtor”
Later in this case, all financial creditors were able to recover
100% of their claims
30. TARINI STEEL COMPANY PVT. LTD. v. TRINITY
AUTO COMPONENTS LTD. & ANR.
• The NCLT Chandigarh Bench approved the resolution plan of
the applicant but made some modifications.
• The applicant filed an appeal before the NCLAT and contended
that he was not bound by the modifications made by the
Adjudicating Authority since it had no jurisdiction to do so after
the resolution plan was approved by the CoC.
• The NCLAT held that if the applicant is not satisfied with the
modifications, he may withdraw the plan and the Adjudicating
Authority would proceed for liquidation.
• He is therefore not bound by the modifications. However NCLT
may modify the Resolution Plan as and when required.
33. FINANCIAL CREDITORS VS.
The Bankruptcy Law Reforms Committee envisaged the distinction
“Members of the creditors committee have to be creditors both with
the capability to assess viability, as well as to be willing to modify terms
of existing liabilities in negotiations. Typically, operational creditors
are neither able to decide on matters regarding the insolvency of the
entity, nor willing to take the risk of postponing payments for better future
prospects for the entity. The Committee concluded that, for the process
to be rapid and efficient, the Code will provide that the creditors
committee should be restricted to only the financial creditors.”
34. • Demand Notice: Financial Creditor not required to send Demand
• Dispute: Question of Dispute is only in case of Operational Creditor
• Committee Of Creditors: Only financial creditors will be the
member of COC.
35. • Recently, in ATC Telecommunications v. State Bank of India, the
NCLAT held that operational creditors cannot challenge the
CIRP initiated by a financial creditor since it was not aggrieved
• Yet, operational creditors seem to be gaining more in terms of
timely resolution of their debts.
• Financial creditors are the last ones to face default, and
according to IBBI Chairman M.S Sahoo, “the firms are settling
defaults as soon as they receive a notice from an operational
• All in all, the IBC has been a useful tool for operational creditors
such as employees.
36. CHALLENGES UNDER IBC
According to a report by PWC, 34% of cases still exceed the
maximum period of 270 days.
Interpretation of clauses in the IBC is being constantly
challenged. Resolution of many of them would depend on the
final decisions of the National Company Law Tribunal (NCLT) or
through amendments to the IBC by the government.
Decisions made by the CoC can be challenged in the NCLT, and
this is being routinely done.
This has caused delay and a huge surge in litigation.
37. IBC AMENDMENT, 2018
• In June, 2018 the President passed the Insolvency and
Bankruptcy Code (Amendment) Ordinance
• It was done in order to address industry concerns and to
make the process more facilitative towards resolution
• The goal was to give the corporate debtor the option to
restructure and revive his business, and make liquidation
the very last resort
38. HIGHLIGHTS OF THE
• New requirement for filing of insolvency proceedings by
corporate applicant is:
a) Special resolution must be passed by the shareholders
b) 3/4ths of the partners of the company must approve the
filing of application
• The word ‘repayment’ is replaced with ‘payment’. This
broadens the ambit of the word ‘debt’ to include payments
owed to operational creditors for goods supplied.
• Section 8 has been amended to clarify the meaning of the
word ‘dispute’. It would now require there to be ‘existence
of a dispute or record of pendency of suit’
39. • Majority in all decisions of CoC is reduced from 75% to 51% to
• Newly introduced, Section 12A provides for a withdrawal of
the application if approved by 90% of the shareholders. This
makes the CIRP process no longer irreversible
• Home buyers are now included as ‘financial creditors’
• Promoters of Micro, Small and Medium Scale Enterprises
(MSMEs) can now bid for enterprises undergoing corporate
40. • Sec.29 A has been amended and now includes a much
wider definition of who would constitute ‘related party’.
41. OVERALL IMPACT OF
• 800 companies have been undergoing resolution in the
last 2 years.
• IBC has tried to address the problems of earlier
legislations by not only combining the best aspects of all
existing regulations, but also making alterations where
• The core problems of time frame of resolution,
enforceability, and value obtained have been addressed.
42. THE ROAD AHEAD
• Under the Union Government’s proposed plan, small loans
up to Rs.50 crores can be handled at the individual bank
• The second category of loans between Rs.50 crores and
Rs.500 crores will be dealt with by authorising the lead
bank to execute a resolution plan within 180 days. Else it
will head to National Company Law Tribunal (NCLT).
• The loans above Rs.500 crores will go through a three-
stage mechanism involving an asset reconstruction
company (ARC), an alternative investment fund (AIF),
aided by Asset Management Companies.
43. • The IBC is yet evolving and will have to respond to
industry demands for it to continue to be effective.
• The amendments made to the Code are an example of this
and a step in the right direction
• The government seems hopeful of the IBC’s success.
44. LATEST NEWS
Parliament passes the Insolvency and Bankruptcy Code
SC rules that IBC will override Income Tax Act and
claims of taxmen
NLCAT rules that moratorium under IBC will not
affect check-bounce cases under NI Act
Adani Group acquires debt-ridden oil firm Ruchi Soya
Finance Ministry warns PSBs to check for frauds in NPAs
or face penal sanction