Report of the Bankruptcy Law Reforms Committee and Need for the Insolvency and

Bankruptcy Code, 2016

The Bankruptcy Law Reforms Committee (Chair: Dr. T. K. Vishwanathan) submitted its report
to the Finance Ministry on November 4, 2015. The objectives of the Committee were to resolve
insolvency with:

(i) lesser time involved,

(ii) lesser loss in recovery, and
(iii) higher levels of debt financing across instruments.

The Committee has recommended a consolidation of the existing legal framework, by repealing
two laws and amending six others. It has proposed to repeal the Presidency Towns Insolvency
Act, 1909 and the Provincial Insolvency Act, 1920. In addition, it has proposed to amend: (i)
Companies Act, 2013, (ii) Sick Industrial Companies (Special Provisions) Repeal Act, 2013, (iii)
Limited Liability Partnership Act, 2008, (iv) Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, (v) Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 and (vi) Indian Partnership Act, 1932.

The Committee observed that currently creditors have limited power, in case the debtor defaults
in making the payment. They are able to recover only 20% of the debt amount on an average,
which ultimately leads to lending being restricted to a few large companies. The Committee also
observed that decisions regarding the defaulting firm are business decisions, and should be taken
by the creditors.

Presently, laws in India bring together the legislature, executive and judiciary for insolvency
resolution.

 The Committee has moved away from this approach, and has proposed to establish a
creditors committee, where the financial creditors will have votes in proportion to their
debt. The creditors committee will undertake negotiations with the debtor, to come up with
a revival or repayment plan.
 Insolvency and Bankruptcy Resolution: The report outlines the procedure for insolvency
resolution for companies and individuals. The process may be initiated by either the debtor
or the creditors.
 Presently, only secured financial creditors, can file an application for declaring a company
sick. The Committee has proposed that operational creditors, such as employees whose
salaries are due, be allowed to initiate the insolvency resolution process (IRP).
 The entire CIRP will be managed by a licensed insolvency professional. During the CIRP,
the professional will control and manage the assets of the debtor, to ensure that they are
protected, while the negotiations take place.
 The Committee has proposed to set up Insolvency Professional Agencies. The agencies
will admit insolvency professionals as members and develop a code of conduct. An
environment where the agencies compete with each other, to achieve greater efficiency
and better performance.
 The report recommends speedy insolvency resolution and time bound negotiations
between creditors and the debtors. To ensure this, a 180 day time period for completion of
the CIRP has been recommended. For cases with high complexity, this time period may be
extended by 90 days, if 75% of the creditors agree.
 Information Utilities: The committee has proposed to establish information utilities which
will maintain a range of information about firms, and thus avoid delays in the CIRP,
typically caused by a lack of data.
 Insolvency regulator: The Committee has proposed to establish the Insolvency and
Bankruptcy Board of India as the regulator, to maintain oversight over insolvency
resolution in the country. The Board will regulate the insolvency professional agencies and
information utilities, in addition to making regulations for insolvency resolution in India.
 Bankruptcy and Insolvency Adjudicator: The Committee observes that individual and
company insolvency resolution has similar goals. However, the infrastructure for
individual insolvency resolution has to be spread across the country. Hence, the
Committee proposes two tribunals to adjudicate grievances under the law: (i) the National
Company Law Tribunal will continue to have jurisdiction over insolvency resolution and
liquidation of companies and limited liability partnerships; and (ii) the Debt Recovery
Tribunal will have jurisdiction over insolvency and bankruptcy resolution of individuals.
Legislations before IBC

Prior to the IBC, the insolvency and bankruptcy laws in India were multilayered and
fragmented.

• Individual insolvency and bankruptcy were covered under the two pre-independence
legislations: the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act,
1920. For companies, the basic law dealing with their winding up or liquidation was the
Companies Act, 1956.

Now, with the enactment of the IBC, winding up due to an inability to pay debt cannot be
triggered under the Companies Act, 1956, or the Companies Act, 2013.

• Sick Industrial Companies (Special Provisions) Act, 1985, was the primary rehabilitative
statute that allowed a “sick” industrial firm to voluntarily initiate a rescue and rehabilitation
process if its net worth had eroded. Two of the main reasons for its failure were the unending
moratorium protection (which was sometimes abused by the debtors in possession) and the
absence of a time-bound resolution process.

• There are various debt and security enforcement mechanisms in India. Specifically, for
banks and financial institutions, the two key laws are the Recovery of Debts Due to Banks
and Financial Institutions Act and the SARFAESI Act. The individual debt and security
enforcement mechanisms continue to exist; however, their applicability, once insolvency
resolution or liquidation under IBC commences, is restricted.

KEY OBJECTIVES OF THE IBC, 2016

1. To consolidate and amend the laws relating to reorganization and insolvency resolution
of corporate persons, partnership firms and individuals to provide for a time bound
insolvency resolution mechanism;
2. To ensure maximization of value of assets;
3. To promote entrepreneurship;
4. To increase availability of credit;
5. To balance the interests of all the stakeholders including alteration in the order of
priority of payment of Government dues;
 6. To establish an Insolvency and Bankruptcy Board of India as a regulatory body; and
7. To provide procedure for connected and incidental matters.

The Regulatory Mechanism and Regulatory Bodies

The regulatory mechanism as per The Insolvency and Bankruptcy Code, 2016 would be
based on the following 5 pillars:

• Insolvency and Bankruptcy Board of India

• Adjudicating Authority

• Insolvency Professional Agencies

• Insolvency Professionals

• Information Utilities

Insolvency and Bankruptcy Board of India (IBBI)

 An Insolvency and Bankruptcy Board of India (IBBI) is established by Central

Government under Section 188(1) of Insolvency and Bankruptcy Code, 2016.
 The IBBI is a unique regulator – it regulates both the professionals involved and
the transactions conducted.
 It has regulatory oversight over insolvency intermediaries, i.e. IPs (Insolvency
Professionals), IPAs (Insolvency professional Agency), IPEs (Insolvency Professional
Entity) and Ius (Information Utility).
The Board is responsible for the implementation of the Code that consolidates and
amends the laws relating to insolvency resolution of corporate persons, partnership
firms and individuals in a time bound manner. The Board is empowered to frame and
enforce rules for various processes under the Code, namely, corporate insolvency
resolution, corporate liquidation, individual insolvency resolution and individual
bankruptcy.
  The Board will have powers of civil court in respect of issuing summons, discovery
and production of books, inspection of books/ registers and issue of commissions for
examination of witnesses - Section 196(2) of Insolvency and Bankruptcy Code, 2016.
 Constitution of Board has been specified in Section 189 of Insolvency and
Bankruptcy Code, 2016. It will consist of 10 members.

(i) The Board will be headed by Chairperson.

(ii) 3 members from among the officers of the Central Government not below the
rank of Joint Secretary or equivalent
(iii) 1 member nominated by RBI, ex-officio
(iv) 5 other members nominated by the Central Government, of whom at least 3
are whole time members.
 Section 189 further provides that these members shall be persons of ability, integrity, and
standing, with known capacity to deal with problems relating to insolvency or bankruptcy.
They must have specialized knowledge and experience in the fields of law, finance,
economics, accountancy, or administration.
 The term of office of the chairperson and all members (other than ex officio members) is
five years, or till they reach 65, whichever is earlier; they are eligible for re-appointment.
 IBBI conducts its quasi-legislative, executive and quasi-judicial functions simultaneously.

 Function of the Board is defined under S. 196(1) of IBC, 2016.

(i) regulation and development of market processes and practices relating to the
CIRP, the liquidation process, and individual insolvency and bankruptcy;
(ii) registration and regulation of service providers for the insolvency process,
including IPs, IPAs, and IUs;
(iii) oversight of markets and service providers through surveillance,
investigation, and grievance redressal;
(iv) enforcement of regulations for service providers and adjudication, if
necessary, to ensure their orderly functioning; and
 (v) professional development of expertise through education, examination, and
training.

Adjudicating Authority

 According to Section 5(1) read with Section 69(1) of the Insolvency and Bankruptcy
Code, 2016, National Company Law Tribunal (NCLT) constituted under Section 408 of
Companies Act, 2013 is the Adjudicating Authority for the purpose of insolvency
resolution and liquidation for corporate persons. According to Section 61 of the Insolvency
and Bankruptcy Code, 2016, the National Company Law Appellate Tribunal (NCLAT) is
the appellate authority over decisions of NCLT. (Within 30 days from the receiving of
the order and it can be extended to 15 days if appellant had genuine reasons for not
being able to file.)

Further, under section 60(5), the AA has the jurisdiction to entertain or dispose of:

a) any application or proceeding by or against the CD or corporate person;

b) any claim made by or against the CD or corporate person, including any claims filed
by or against any subsidiaries situated in India; and
c) any question of priorities or any question of law or facts arising out of or in relation
to the insolvency resolution or liquidation proceedings of the CD or corporate
person under the IBC.

Bar on Jurisdiction

 According to section 63 of the IBC, no civil court or any other authority shall have
jurisdiction on any matter in which an AA or NCLAT is empowered by the IBC to pass
orders. Nor can such courts grant an injunction on any action taken—or about to be taken
— following an order passed by an AA.
In its judgment in the case of Committee of Creditors of Essar Steel India Limited Through
Authorized Signatory Vs. Satish Kumar Gupta & Others, in 2019, the Supreme Court held
that section 60(5)(c) of the IBC was like a “residuary jurisdiction” vested in the AA, and hence
the AA had the right to decide all questions of law or fact arising out of or in relation to
insolvency resolution or liquidation under the IBC. However, it also said that such residual
jurisdiction did not affect section 30(2) of the IBC, which circumscribes the jurisdiction of the
AA when it comes to confirming a resolution plan, as mandated by section 31(1) of the IBC. The
non-obstante clause of section 60(5) speaks of any other law for the time being in force, which
obviously cannot include the provisions of the IBC itself.

A harmonious reading, therefore, of section 31(1) and section 60(5) of the IBC would lead to the
conclusion that the residual jurisdiction of the AA under section 60(5)(c) cannot, in any manner,
whittle down section 31(1) of the IBC, by the investment of some discretionary or equity
jurisdiction in the AA outside section 30(2) of the IBC, when it comes to a resolution plan being
adjudicated on by the AA.

 Debt Recovery Tribunal (DRT) will be adjudicating authority for individuals and firms -
Section 179(1) of the Insolvency and Bankruptcy Code, 2016. DRAT (Debt Recovery
Appellate Tribunal) will be appellate authority - Section 181 of the Insolvency and
Bankruptcy Code, 2016.
 Appeal against the order of NCLAT and DRAT can be filed to the Supreme Court on
question of law arising out of such order, within 45 days, which can further extended to 15
days if the SC is satisfied that appellant had good reason for not being able to file within
45 days

Insolvency Professional Agencies

 Section 3(20) of the IBC defines an IPA as a person registered as such with the IBBI under
section 201. The IPAs are agencies responsible for enrolling and regulating IPs as their
members. They are the first-level regulators for IPs, and have to develop professional
standards and a code of ethics for them.
Insolvency Professionals

 An IP is defined in section 3(19) of the IBC as a person enrolled under section 206 with an
IPA as a member and registered with the IBBI as an IP under section 207.
 Only an IP can be appointed as an interim resolution professional (IRP), a resolution
professional (RP), a liquidator, or a bankruptcy trustee under the IBC.
 Under section 207, to become an IP, an individual should first enroll with an IPA as a
member, and then register with the IBBI in the manner specified by the regulations, after
paying the required fee.

Eligibility

No individual is eligible to be registered as an IP if he/she:

(a) is a minor;

(b) is not resident in India;

(c) does not have the specified qualification and experience;

(d) has been convicted of an offence punishable by a prison term exceeding six months, or for
an offence involving moral turpitude, and a period of at least five years has not lapsed since
the sentence expired. If a person has been convicted of any offence for which the prison term
was seven years or more, he/she will not be eligible for registration at all;

(e) is an insolvent yet to be discharged, or has applied to be adjudicated as an insolvent;

(f) has been declared to be of unsound mind;

(g) is not a “fit and proper” person. There are three criteria determining “fit and proper”:

i. integrity, reputation, and character;

ii. absence of convictions and restraining orders;
iii. competence, including financial solvency and net worth.

Qualification and Experience

Apart from being eligible, an individual needs the following qualifications to register as an IP:
 (a) He/she should have passed the Limited Insolvency Examination not before 12 months from
applying for enrollment with the IPA.

(b) After enrollment, he/she should have completed any pre-registration educational courses as
may be required by the IBBI from an IPA.

(c) He/she should also:

i. have successfully completed the National Insolvency Program, as may be approved by

the IBBI; or
ii. have successfully completed the Graduate Insolvency Program, as may be approved by
the IBBI; or
iii. have 15 years of experience in management, along with a Bachelor’s degree from a
recognized university; or
iv. have 10 years of experience as:

• a chartered accountant enrolled as a member of the Institute of Chartered

Accountants of India;

• a company secretary enrolled as a member of the Institute of Company Secretaries

of India;

• a cost accountant enrolled as a member of the Institute of Cost Accountants of

India; or

• an advocate enrolled with the Bar Council.

Information Utilities

 The Insolvency and Bankruptcy professionals are expected to function on basis of

financial information available electronically. Information Utility will collect, collate,
authenticate and disseminate financial information to be used in insolvency, liquidation
and bankruptcy proceedings.
  “Information utility” means a person who is registered with the ‘Insolvency and
Bankruptcy Board of India’ (Board) as an information utility under Section 210 of
Insolvency and Bankruptcy Code, 2016  Section 3(21) of Insolvency and Bankruptcy
Code, 2016.
 Functions: Core services rendered by an information utility include –
a) accepting electronic submission of financial information in such form and manner as may
be specified;
b) safe and accurate recording of financial information about the debtor;
c) authenticating and verifying the financial information submitted by a person; and
d) providing access to information stored with the information utility to persons as may be
specified - Section 3(9) of Insolvency and Bankruptcy Code, 2016.

The National E-Governance Services Limited was the first IU to be established under the IU
Regulations, in September 2017.

Types of Creditors and debts under IBC

The “debt” has been defined under S. 3(11) of Code as a liability or obligation in respect of a
claim, which is due from any person and includes a financial debt and operational debt.

A “claim” defined under section 3(6)) means (a) a right to payment, whether or not such right
is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured; (b)
right to Insolvency and Bankruptcy remedy for breach of contract under any law for the time
being in force, if such breach gives rise to a right to payment, whether or not such right is
reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

Particulars Financial Creditor Operational Creditor

Meaning Section 5 (7) - Financial Section 5 (20) – Operational creditor
creditor means any person means a person to whom an
to whom a financial debt operational debt is owed and includes
is owed and includes a any person to whom such debt has
person to whom such debt been legally assigned or transferred.
has been legally assigned
 or transferred to.
Meaning of Section 5 (8) - financial Section 5 (21) - operational debt
the term debt means a debt means a claim in respect of the
“debt” alongwith interest, if any, provision of goods or services
which is disbursed against including employment or a debt in
the consideration for time respect of the repayment of dues
value of money and arising under any law for the time
includes items referred to being in force and payable to the
in sub-clauses (a) to (i) Central Government, State
“financial debt” means a Government, or any local
debt alongwith interest, if authority.
any, which is disbursed
against the consideration
for the time value of
money and includes—

Voting Section 5 (28) - Voting Operational creditor shall not have

share right of a financial any right to vote at the meeting of
creditor is based on the committee of creditors. Section 24(3)
proportion of the financial (c) places restrictions on the right of
debt owed to such an operational creditor to attend such
financial creditor. The a CoC meeting. It states that those
approval of committee of operational creditors whose
creditor shall be obtained cumulative debts total at least 10% of
by a vote of not less than the total debt due from the corporate
seventy five percent3 of debtor may attend the CoC meeting
the voting shares. but not participate or vote as
permitted by Section 24(4), and their
absence will not have any bearing on
the proceedings of the succeeding
 CoC meeting.
Initiation Section 7 (1) – On Section 8 (1) – On occurrence of a
of occurrence of a default, a default the operational creditor may,
corporate financial creditor shall deliver a demand notice of unpaid
insolvency either by itself or jointly operational debtor copy of an invoice
resolution with other financial demanding payment of the amount
process creditors may file an involved in the default to the
application for initiating corporate debtor. The operation
corporate insolvency creditor may file an application after
resolution process against the expiry of 10 days from the date of
a corporate debtor before delivery of the notice or invoice
the Adjudicating demanding payment under sub-
Authority. section (1) of section 8, if the
operational creditor does not receive
payment from the corporate debtor or
notice of the dispute under subsection
(2) of section 8.
Appointme Section 7 (3) - The Section 9 (4) - An operational creditor
nt of IRP financial creditor shall may propose a resolution professional
along with the application to act as an interim resolution
furnish the name of the professional.
resolution professional
proposed to act as an
interim resolution
professional.
Constitutio Section 21 (2) - The Operational creditors shall not form
n of committee of creditors part of committee.
Committee shall consist solely of
of financial creditors, and all
Creditors financial creditors of the
 corporate debtor.
Submission Section 215 (2) - A Section 215 (3) - An operational
of financial financial creditor shall creditor may submit financial
informatio submit financial information to the information
n information and
information relating to
assets in relation to
which any security
interest has
been created.

CORPORATE INSOLVENCY RESOLUTION PROCESS (Section 6 to 32A of the IBC)

Trigger point for initiation

 A corporate insolvency resolution process may be initiated under Chapter II of the Code in
respect of a corporate debtor who has committed a default. The trigger point for initiating
the corporate insolvency resolution process is the occurrence of default.
 "Default" means non-payment of debt when the whole or any part or instalment of
the amount of debt has become due and payable and is not paid by the debtor or the
corporate debtor
 A default would have occurred when the debtor fails to pay the whole or any part or
instalment of the amount of debt that has become due and payable.
 While a financial creditor is required to present record of default before NCLT for
initiation of the corporate insolvency resolution process, an operational credit must issue a
statutory notice to the corporate debtor in the manner provided in the Code.

Who can initiate the process?

The process for initiating corporate insolvency resolution may be initiated by any of the
following:
  A financial creditor
 An operational creditor or
 The corporate debtor itself

COMMENCEMENT BY FINANCIAL CREDITOR

Below is a flowchart of the CIRP process, which starts with applying to the AA to initiate the
CIRP and ends with the order of the AA either approving the resolution plan or liquidating the
CD.

A financial creditor may initiate the process either by itself or jointly with other financial
creditors by filing an application before the NCLT, if a default has occurred in respect of a
financial debt owed not only to the applicant financial creditor but to any other financial creditor
of the corporate debtor. A financial creditor is a person to whom a financial debt is owed and
includes a person to whom such debt has been legally assigned or transferred to.

As per section 7(3) of the IBC, the FC shall, along with the application, furnish:

(a) a record of the default recorded with the IU or such other evidence of default as may be
specified;

(b) the name of the IP proposed to act as an IRP; and

(c) any other information as may be specified by the IBBI.

ASCERTAINING EXISTENCE OF DEBT DEFAULT BY NCLT

 Within 14 days of receipt of application by NCLT, must ascertain the existence of a

default from the records of an information utility or on the basis of other evidence
furnished by the financial creditor. If NCLT is satisfied that
(i) a default has occurred; or
(ii) the application made by financial creditor is complete; or
(iii) there is no disciplinary proceedings pending against the proposed resolution
professional,

it may, by order, admit such application.

 The NCLT can reject the application if it finds that

(i) default has not occurred or
(ii)the application made by financial creditor is incomplete or
(iii) any disciplinary proceeding is pending against the proposed resolution professional.

The NCLT is required to provide an opportunity to the applicant to rectify the defect in the
application if the NCLT finds the application to be defective. The applicant must rectify the
defect in his application within 7 days of receipt of such notice from the Adjudicating
Authority.

 The explanation appended to section 7(1) makes it clear that for the purposes of
section 7(1), a default includes a default in respect of a financial debt owed not only to
the applicant financial creditor but to any other financial creditor of the corporate
 debtor. Thus, a financial creditor can file an application for corporate insolvency
resolution process even if the default is in respect of debt of another financial creditor.

 While Innovtive Industries Limited. V. ICICI Bank stressed the dual test of the existence
of “Debt” and “Default” for admission of a company into the Corporate Insolvency
Resolution Process. It was also reiterated in E.S. Krishnamurthy v. Bharath HiTecch
Builders Private Limited, the Supreme Court’s decision in Vidharba Industries Power
Limited V. Axis Bank Limited went on a difference path by providing discretion to the
Adjudicating Authority to admit or reject a Section 7 Application, despite the existence of
both “debt” and “default”. However, in M. Suresh Kumar Reddy v. Canara Bank, the
Apex Court held that if there is an existence of a financial debt and a subsequent default
by the CD, the NCLT must admit the application. The only exception is when the
application itself is incomplete, in which case the creditor will be instructed to rectify the
insufficiency within 7 days.

THE OPPORTUNITY OF BEING HEARD

Before admitting a CIRP application in respect of a CD, the CD must be given an opportunity to
be heard. Rules 4(3), 6(2), and 7(2) of the Application to AA Rules mandate that the applicant
(FC, OC, and corporate applicant, respectively) shall serve a copy of the application to the
registered office of the corporate debtor and to the IBBI, by registered post or speed post or by
hand or by electronic means, before filing with the Adjudicating Authority.

In practice, however, a prior service is made to the CD because the relevant registry of the NCLT
may not accept filings any other way. Further, once the application is submitted to the AA, the
acknowledged copy of it should be served on the CD. The AA then allocates a company petition
number to it. Thereafter, the application comes up for hearing before the AA.
DATE OF COMMENCEMENT

The corporate insolvency resolution process shall commence from the date of admission of
the application of financial creditor by the NCLT. Order of admission of such application
shall be communicated by the NCLT to the applicant and corporate debtor, and of rejection to the
financial creditor, within 7 days.  (The NCLT shall communicate, within seven days of
admission or rejection of such application, as the case may be)

TIME-LIMIT FOR COMPLETION OF INSOLVENCY RESOLUTION PROCESS

 The corporate insolvency resolution process shall be completed within a period of 180
days from the date of admission of the application to initiate such process.
 The resolution professional shall file an application with the NCLT to extend the period
of the corporate insolvency resolution process beyond 180 days, if he is instructed to
do so by a resolution passed at a meeting of the committee of creditors by a vote of 66
per cent of the voting shares.
 On receipt of application, if the NCLT is satisfied that the subject matter of the case is
such that corporate insolvency resolution process cannot be completed within 180 days,
it may by order extend the duration of such process beyond 180 days by such further
period as it thinks fit, but such period cannot exceed 90 days.
 Thus, section 12 prescribe a time limit of 180 days, extendable by a further 90 days, for
the completion of corporate insolvency resolution process. The application for the
extension can only be made by the resolution professional and has to be supported by a
resolution passed at a meeting of the committee of creditors by a majority of 66 per
cent of the voting shares. Any such extension of the period of corporate insolvency
resolution process under section 12 shall not be granted more than once.
DECLARATION OF MORATORIUM AND PUBLIC ANNOUNCEMENT (Sec. 13)

The Code provides for a moratorium from creditors action against the corporate debtor. Where
the NCLT passes an order of admission of an application for commencement of corporate
resolution process, the NCLT shall, by an order:

 Grant a moratorium mentioned in section 14.

 Appoint an interim resolution professional in the manner as laid down section 16 of the
Code.
 Cause a public announcement of the initiation of corporate insolvency resolution
process and call for the submission of claims immediately after the appointment of the
interim resolution professional.

MORATORIUM (Sec. 14)

 The expression moratorium is not defined in the Insolvency and Bankruptcy Code, 2016
(“IBC”).
 The term ‘moratorium’ is defined as “a cessation of an activity for an agreed period of
time” in the Cambridge Dictionary.
 The Insolvency and Bankruptcy Code, 2016 (IBC) explains a moratorium as a period
during which no judicial proceedings for recovery, enforcement of security interests,
sale or transfer of assets, or cancellation of key contracts against the Corporate Debtor
can be launched or continued.
 The moratorium applied on initiation of an insolvency procedure is discussed in Section
14 of the Insolvency and Bankruptcy Code of 2016.
 When an order declaring a moratorium is issued, it prohibits the institution of new
litigation or the continuation of existing suits or procedures against the corporate debtor,
including the execution of any judgement, decision, or order in any court of law, tribunal,
or arbitration panel.

 Purpose of declaration of Moratorium:

 Ensures that multiple proceedings are not taking place simultaneously and thus
avoids the possibility of potentially conflicting outcomes of related proceedings.
 Keeps the corporate debtor’s assets together during the insolvency resolution
process and facilitates orderly completion of the process.
 Ensures that the company may continue as a going concern while the creditors
assess the options for resolution of default.
 Prohibition on disposal of the corporate debtor’s assets ensures that the corporate
debtor/ management does not transfer its assets, thereby stripping the corporate
debtor of value during the corporate insolvency resolution process.

The purpose of the moratorium provision in the Insolvency and Bankruptcy Code, 2016 is
to give the troubled corporate debtor some breathing room and to prevent further
deterioration of the debtor’s assets and resources. The moratorium phase also enables the
corporate debtor to devise the most appropriate resolution plan in accordance with the
IBC’s rules and to recover the highest benefit of the company’s assets.

 In Indian Overseas Bank Vs. M/s RCM Infrastructure Ltd. and Anr, Supreme
Court held that once the CIRP is initiated, there is moratorium for any action to
 foreclose, recover or enforce any security interest created by CD in respect of its
property including any action under the SARFAESI Act. IBC is a complete Code in
itself and in view of the provisions of Section 238 of the IBC, the provisions of the
IBC would prevail notwithstanding anything inconsistent therewith contained in any
other law for the time being in force.
 In the Power Grid Corporation of India Limited Vs. Jyoti Structures Limited
(2018), the Delhi High Court held that the object of the IBC is to ensure that the CD
receives relief during the “standstill” period, protecting its assets from being
diminished, and alternatively using this period to strengthen its financial position. It
also held that the term “proceedings” referred to in section 14 of the IBC does not
mean “all proceedings,” but is restricted to debt recovery actions against the assets
of the CD.

Effect of order of moratorium –

The order of moratorium shall have effect from the date of such order till the completion
of the corporate insolvency resolution process.
Provided that where at any time during the corporate insolvency resolution process
period, if the NCLT approves the resolution plan under section 31(1) or passes an order for
liquidation of corporate debtor under section 33, the moratorium shall cease to have effect
from the date of such approval or liquidation order, as the case may be.

Thus, the moratorium will continue to be in effect till the completion of the corporate
insolvency resolution process or the approval of a resolution plan by the Adjudicating
Authority or passing of order by the Adjudicating Authority for liquidation of the
corporate debtor, whichever is earlier.

The order to declare moratorium prohibits:

 The institution of suits or continuation of pending suits or proceedings against the

corporate debtor including execution of any judgement, decree or order in any court of
law, tribunal, arbitration panel or other authority.
  Section 14(1)(b) bars the CD from transferring, encumbering, alienating, or disposing of
any of its assets or any legal right or beneficial interest therein. This is a bar against CD,
however, the IRP/RP, while managing the CD as a going concern can sell the assets of the
CD in the ordinary course of business or in accordance with regulation 29 of the CIRP
Regulations (if not in the ordinary course).
 Section 14(1)(c) bars any action to foreclose, recover, or enforce any security interest
created by the CD in respect of its property. This would include cases where steps may
have been taken by a creditor under any law for the enforcement of security (for instance,
under the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act). However, once the moratorium starts, any further steps for
enforcement of security would need to be suspended.
 The recovery of any property by an owner or lessor where such property is occupied by or
in the possession of the corporate debtor.
 An explanation has been inserted after section 14(1) to clarify that for the purposes of
section 14(1), notwithstanding anything contained in any other law for the time being in
force, a license, permit, registration, quota, concession, clearance, or similar grant or right
given by the Central Government, state government, local authority, sectoral regulator or
any other authority constituted under any other law for the time being in force, shall not be
suspended or terminated on the grounds of insolvency

ARBITRATION DURING MORATORIUM

1. Fresh arbitration proceedings during CIRP/ Liquidation

Sections 14(1)(a) and 33(5) of the Code prohibit the initiation of an arbitration proceeding
against the company. In the landmark case of Alchemist Asset Reconstruction Co. Ltd. v. Hotel
Gaudavan (P) Ltd., the Supreme Court of India held that such arbitration “that has been
instituted after the moratorium is non-est.”

To recover its debts, the company facing CIRP can initiate legal proceedings, including
arbitration.
 2. Ongoing arbitration proceedings initiated prior to CIRP/ liquidation

The principles applicable to continuing arbitration proceedings initiated by a company prior to

CIRP are largely similar to those initiated during CIRP.

CIRP prohibits the continuation of arbitration proceedings against the company. Arbitration
initiated by the company generally proceeds without interruption.

 In the matter of Power Grid Corporation of India Limited vs. Jyoti Structures
Limited, Delhi High Court held that moratorium under section 14(1)(a) of the code is
intended to prohibit debt recovery actions against the assets of CD. Continuation of
proceedings under section 34 of the Arbitration Act which do not result in endangering,
diminishing, dissipating or adversely impacting the assets of corporate debtor are not
prohibited under section 14(1)(a) of the code.
The use of narrower term "against the corporate debtor" in section 14(1)(a) as opposed to
the wider phase "by or against the corporate debtor" used in section 33(5) of the code
further makes it evident that section 14(1)(a) is intended to have restrictive meaning and
applicability.
The proceedings under section 34 are a step prior to the execution of an award. Only after
determination of objections under section 34, the party may move a step forward to
execute such award and in case the objections are settled against the corporate debtor, its
enforceability against the corporate debtor then certainly shall be covered by moratorium
of section 14(1)(a).

3. Challenging the Award during CIRP/ Liquidation

Section 34 of the Arbitration and Conciliation Act, 1996 permits the filing of objections to set
aside an arbitral award. Proceedings under Section 34 of the Arbitration Act may be permitted to
continue if the award is in favour of the company. However, an award obtained against the
company undergoing CIRP cannot be challenged.

4. Execution of the Award

The execution of awards against the company depends on whether the claims are settled in the
company’s favour. If an award does diminishes the company’s assets, it cannot be executed.
Moratorium will not affect any suit pending before the - Supreme Court under Article 32
or pending before the High Court under Article 226 of the Constitution of India

 In the matter of Canara Bank Vs. Deccan Chronicle Holdings Limited , the NCLAT
ordered that 'moratorium' will not affect any suit or case pending before the Supreme
Court under Article 32 of the Constitution of India or where an order is passed under
Article 136 of Constitution of India. 'Moratorium' will also not affect the power of the
High Court under Article 226 of Constitution of India. However, so far as suit, if filed
before any High Court under original jurisdiction which is a money suit or suit for
recovery, against the 'corporate debtor' such suit cannot be proceeded after declaration of
'moratorium, under Section 14 of the I&B Code.

Negotiable Instrument Act prosecution during Moratorium

 In MBL Infrastructure Ltd. & Anr. v. Sri Manik Chand Somani, it was held that that the
declaration of a moratorium does not prevent criminal proceedings under Section 138 read
with 141 of the Negotiable Instruments Act from continuing.

 Mr. Ajay Kumar Bishnoi Vs. M/s Tap Engineering and Other, the CD underwent
insolvency resolution while a complaint was pending under section 138 of the Negotiable
Instruments Act, 1881. Further, during this time, a resolution plan for the CD was
approved with a change in management and control. The MD of the erstwhile CD sought
to quash the prosecution under section 138 in view of the approval of the resolution plan.
The High Court confirmed that the moratorium under section 14 of the IBC prohibits
proceedings, but such proceedings do not include prosecution.

Tax Proceeding during Moratorium

While the tax authorities may resume the evaluation proceedings to ascertain the amount of their
assertion, execution, distress, or recovery is not permitted. Statutory authorities fall under the
definition of “operational creditors” (Section 5(20) of the IBC), and as a result, they must file a
claim with the liquidator in the appropriate form to recover their debts. The liquidator will
authenticate their claim and pay them only in compliance with Section 53 of the IBC’s priority
system.

Writ Petitions during Moratorium

The moratorium will not affect any cases brought or pending before the Supreme Court under
Article 32 of the Indian Constitution, or any orders issued under Article 136 of the Indian
Constitution. The embargo will have no impact on any High Court’s powers under Article 226 of
the Indian Constitution.

Exclusion from moratorium

The order of moratorium should not affect supply of essential goods or services to the corporate
debtor, which shall not be terminated or suspended or interrupted during moratorium period. This
is important to explore resolution of the corporate debtor as a going concern.

The term “essential goods” is defined in regulation 32 of the CIRP Regulations as electricity,
water, telecommunications services, and information technology services, to the extent that these
are not a direct input to the output produced or supplied by the CD. An example has been given
of a case where water supplied to a CD will be regarded as “essential supplies” for drinking and
sanitation purposes, but not for the generation of hydroelectricity (because the latter would be a
direct input to the CD’s output).
 The supply of essential goods or services to the corporate debtor as may be specified shall
not be terminated or suspended or interrupted during the moratorium period.
Access to certain goods and services during the insolvency resolution process may be
important for ensuring orderly completion of the proceedings. However, the costs for such
goods or services will have to be paid in priority to other costs as part of a resolution plan
or during distribution of assets, in case the corporate debtor goes into liquidation.

 In Shailesh Verma, RP of Lavasa Corporation Ltd. Vs. Maharashtra State

Electricity Distribution Company Ltd, NCLAT held that the direction of
Adjudicating Authority to continue to supply electricity to corporate debtor during
CIRP was subject to payment of outstanding dues within 90 days as directed by
Adjudicating Authority. Corporate Debtor cannot enjoy the benefit of direction on
one part, that is, to continue the supply of electricity and deny the payment of
electricity dues of the CIRP period on other part. Section 14(2) of IBC provides for
supply of essential goods or services to the CD during CIRP and same shall not be
terminated or suspended or interrupted during the moratorium period.

APPOINTMENT OF IRP

 AA shall appoint an Interim Resolution Professional (IRP) on the Insolvency

Commencement Date. As per section 16(5), the term of the IRP continues till he is
confirmed as the RP by the Committee of Creditors (CoC) or is replaced by a new RP in
accordance with section 22.
 If the Committee of Creditors decides to replace the IRP with another IP as the RP, it is
required to file an application before the AA, together with the written consent of the
proposed RP. The AA will then forward the name of the proposed RP to the IBBI and the
appointment will be made once confirmation is received from the IBBI.
 Section 16 provides that the NCLT shall appoint an interim resolution professional on the
insolvency commencement date. [Section 16(1)] this ensures that there is no delay in the
 insolvency resolution process and the corporate debtor is managed by the Interim
Resolution Professional from the first day itself, leaving no room for the
promoters/directors of the corporate debtor to take any fraudulent or wrong step with
regard to the business of the corporate debtor during the insolvency period.
 Section 16(2) and (3) provides that where the application for corporate insolvency
resolution process is made by a financial creditor or the corporate debtor or
Operational creditor, and the name of the resolution professional is proposed, then such
person shall be appointed as the interim resolution professional by AA provided no
disciplinary proceedings are pending against him.
 Section 16(3) further provides that if the name is not proposed by the operational creditor,
then the adjudicating authority shall make a reference to the Insolvency and Bankruptcy
Board of India for recommending the name of a person to be appointed as the interim
resolution professional.

The Board shall recommend the name of a resolution professional who meets the criteria
stipulated in Clause 16(3) within 10 days from the receipt of the reference. [Section 16(4)].

 The term of the interim resolution professional continues till the date of appointment of
the resolution professional under section 22 of the Code. This ensures that the business
and dealings of the corporate debtor is always under the supervision of the IRP/RP
appointed under the Code.

Powers and Duties of the IRP:

Powers and duties of the IRP can be gathered from sections 17 to 21 of the IBC. These are
further detailed in various provisions of the CIRP Regulations. Broadly, an IRP undertakes the
following:

• Public announcement: Immediately after his/her appointment, the IRP makes a public
announcement announcing the commencement of the CIRP of the CD and invites claims from
creditors of the CD.
• Collecting information about the CD: The IRP collects information relating to the assets,
finances, and operations of the CD to determine its financial position, including information
relating to:

(i) business operations for the previous two years;

(ii) financial and operational payments for the previous two years;
(iii) list of assets and liabilities as on the initiation date; and
(iv) such other matters as may be specified;

• Collation of claims and constitution of the CoC: The IRP collates all claims submitted by the
creditors to him/her. The IRP verifies each claim as on the ICD and prepares a list of creditors in
order to constitute the CoC.

• Custody and control: The IRP takes custody and control of the assets over which the CD has
ownership rights.

• Run the CD as a going concern: The IRP makes every effort to protect and preserve the value
of the CD’s property and manage its operations as a going concern.

• Compliance: The IRP complies with the requirements under any law for the time being in
force on behalf of the CD.

As per section 17, from the date of the IRP’s appointment:

 the management of the affairs of the CD shall vest in the IRP;

 the powers of the board of directors or the partners of the CD, as the case may be, shall
stand suspended and be exercised by the IRP;
 the officers and managers of the CD shall report to the IRP and provide access to such
documents and records of the CD as may be required by the IRP;
 the financial institutions maintaining accounts of the CD shall act on the instructions of the
IRP in relation to such accounts and furnish all information relating to the CD available
with them to the IRP.

Committee of Creditors

1. As provided in Section 21(1) of the IBC, the IRP shall, after collating claims received
against the CD and determining its financial position, constitute a CoC.
 2. The CoC shall comprise all FCs (both secured and unsecured) of the CD. Where the CD
owes financial debts to two or more FCs as part of a consortium or agreement, each FC
shall be part of the CoC and their voting share is determined on the basis of the financial
debts owed to them.
3. Where any person is a financial creditor as well as an operational creditor,
(a) such person shall be a financial creditor to the extent of the financial debt owed by the
corporate debtor, and shall be included in the committee of creditors, with voting share
proportionate to the extent of financial debts owed to such creditor;
(b) such person shall be considered to be an operational creditor to the extent of the
operational debt owed by the corporate debtor to such creditor.

4. Exclusion of related party – First proviso to section 21(2) provides that a financial
creditor or the authorized representative of the financial creditor, if it is a related party of
the corporate debtor, shall not have any right of representation, participation or voting in a
meeting of the committee of creditors.

Whether the relatedness of the related party could merely have existed in the past or
whether they must continue in praesenti i.e. at the present time?

The Supreme Court in the matter of ‘Phoenix Arc Private Limited Vs. Spade Financial
Services Limited & Ors.’, clarified that while the default rule under the first proviso to Section
21(2) is that only those financial creditors that are related parties in praesenti would be debarred
from the Committee, those related party financial creditors that cease to be related parties in
order to circumvent the exclusion under the first proviso to Section 21(2), should also be
considered as being covered by the exclusion thereunder. Thus, relatedness of related parties at
the present time would be considered for exclusion from the Committee, in addition, any parties
that were related in the past and cease to be related parties at present in order to become a
member of the Committee must also be considered for exclusion from the Committee.
 5. Where there is no financial debt (or where all FCs are related parties of the CD), the CoC
consists of OCs only, comprising: the 18 largest OCs by value, one representative elected
by all workmen and one representative of employees.

Meetings of CoC  Section 24

 Section 24 of the IBC deals with meetings of the CoC. The CoC members may meet in
person or by electronic means.
 All meetings of the committee of creditors shall be conducted by the resolution
professional
 Regulation 17(1) of the CIRP Regulations states that the IRP shall file a report certifying
the constitution of the CoC with the AA within 21 days of receiving the verification of
claims under regulation 12(1).
 As per regulation 17(2), the first CoC must be convened within 7 days of filing the report.

 The Supreme Court ruled in Committee of Creditors of Essar Steel India Ltd. v.
Satish Kumar Gupta & Ors. that the adjudicating authority cannot challenge the
CoC’s commercial judgement on the basis of merits. According to the limited court
review that is available, the CD must continue operating as a going concern
throughout the insolvency resolution process, maximise the value of its assets, and
ensure that the interests of all parties, including operational creditors, have been
protected.

APPROVAL OF THE COC FOR CERTAIN ACTIONS  Section 28

Section 28 of the IBC details certain actions during the conduct of the CIRP for which the prior
approval of the CoC by the vote of 66% must be obtained by the RP. These actions are set
out below:

 Raise any interim finance in excess of the amount as may be decided by the CoC at its
meeting.
 Create any security interest over the assets of the CD.
  Change the capital structure of the CD
 Record any change in the ownership interest of the CD.
 Give instructions to financial institutions maintaining accounts of the CD for a debit
transaction from any such accounts in excess of the amount as may be decided by the CoC
in its meeting.
 Undertake any related party transaction.
 Amend any constitutional documents of the CD.
 Delegate its authority to any other person.
 Dispose of or permit the disposal of shares of any shareholder of the CD or their nominees
to third parties.
 Make any change in the management of the CD or its subsidiary.
 Transfer rights or financial debts or operational debts under material contracts other than
in the ordinary course of business.
 Make changes in the appointment or terms of contract of such personnel as specified by
the CoC.
 Make changes in the appointment or terms of contract of statutory auditors or internal
auditors of the CD.

Before taking any of these actions, the RP shall convene a meeting of the CoC and seek a vote of
the creditors. They should be approved by a vote of 66 percent of the voting share. If any of the
actions are taken by the RP without the approval of the CoC, they shall be void and the RP may
be reported to the IBBI by the CoC for necessary action(s) against him.

In addition to section 28 matters, certain other issues also require approval of the CoC with 66
percent of the voting share. These are:

 extension of a CIRP from 180 to 270 days under section 12 of the IBC,
 disposal of unencumbered assets of the CD outside the ordinary course under regulation
29 of the CIRP Regulations;
 change from IRP to RP under section 22 of the IBC or replacement of RP under section 27
of the IBC;
 approval of the resolution plan under section 30 of the IBC.
 CIRP PROCESS: Preparation of a Resolution Plan and its Approval

Once an application under Section 7, 9 or 10 is admitted, the CIRP proceedings of the corporate
debtor is commences and an Interim Resolution Professional (“IRP”) is appointed by the NCLT
for the corporate debtor. The IRP carries out the public announcement and invites creditors of the
corporate debtor to file their claims and thereafter, constitutes the Committee of Creditors
(“CoC”) of the corporate debtor. The CoC then appoints a Resolution Professional (“RP”) in the
first CoC Meeting of the Corporate Debtor.

Thereafter, the RP of the corporate debtor invites Prospective Resolution Applicants (“PRAs”) to
revive the corporate debtor. The process initially starts from inviting PRAs to file an Expression
of Interest (“EOI”) for securing eligibility to present a resolution plan for the corporate debtor
and attains finality after an order is passed by the NCLT approving a resolution plan thereby
reviving the corporate debtor with a new management. The said process is elaborated upon
herein below:

1. Issuance of Expression of interest