CHAPTER 1

1
INTRODUCTION TO
THE INSOLVENCY AND
BANKRUPTCY CODE,2016

LEARNING OUTCOMES
After reading this Chapter, you will be able to understand:
 The terms Insolvency, Liquidation and Bankruptcy
 Journey of development of the Insolvency and Bankruptcy Code, 2016
 Overview of the Insolvency and Bankruptcy Code, 2016
 The objectives and structure of the Code
 The various processes dealt in the Insolvency and Bankruptcy Code, 2016

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 1.2 THE INSOLVENCY AND BANKRUPTCY CODE, 2016

CHAPTER OVERVIEW

Concept of Insolvency and Bankruptcy

Journey of the development of the Code

Overview of the Code

Institutional framework under the Code

1. CONCEPT OF INSOLVENCY AND BANKRUPTCY

♦ The term insolvency is used for both individuals and organizations. Insolvency is state of
not being able to pay off debts due to insufficient cash flow/assets, and bankruptcy is a
legal declaration of one’s inability to pay off debt. Insolvency is regarded as a “state” where
assets are insufficient to meet the liabilities. Untreated insolvency will lead to bankruptcy
for non-corporates and liquidation of corporates. Creditors put money into debt investments
today in return for the promise of fixed future cash flows. But the returns expected on these
investments are still uncertain because at the time of repayment, the corporate or individual
(debtor) may make repayments as promised, or he may default and not make the payment.
When this happens, the debtor is considered insolvent. Other than cases of outright fraud,
the debtor may be insolvent because of:
- Financial Failure: a persistent mismatch between payments by the enterprise and
receivables into the enterprise, even though the business model is generating
revenues, or
- Business Failure: which is a breakdown in the business model of the enterprise, and
it is unable to generate sufficient revenues to meet payments.

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State when an individual or company is not able to pay the debt

and the value of assets held by them are less than liability

If, untreated insolvency, it will lead to-

For non-corporates Corporates

Bankruptcy Liquidation

From the above it is evident that insolvency is a state or ongoing condition and bankruptcy
is a conclusion point. A bankrupt would be a conclusive insolvent whereas all insolvencies
will not lead to bankruptcies. Insolvency situation can be resolved through resolution
mechanism and a failed resolution mechanism would lead to liquidation process in relation
to corporates and bankruptcy process in relation to individuals under the Insolvency and
Bankruptcy Code, 2016.

Relationship between Bankruptcy, Insolvency and Liquidation

Insolvency: If any person or entity is unable to pay off the debts, it owes, to their creditor, on time
or as and when they became due and payable, then such person or entity is regarded as “insolvent”.

Once insolvency has been determined, the first objective is to find ways to overcome this state by
inviting plans to infuse liquidity into the organization i.e. to resolve the insolvency. However, if this
is not possible as the assets of the corporate debtor has eroded to an extent that it cannot be revived,
there is no option but to completely sell the assets, at best possible price and pay the liability to the
extent possible, and thereafter close the company.

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 1.4 THE INSOLVENCY AND BANKRUPTCY CODE, 2016

The process of selling off of assets and paying of liabilities is called liquidation.
Companies can be liquidated but Individuals cannot be liquidated. Therefore, in case of individuals
and non-corporate entities, after resolution process fails, the person is declared bankrupt.
In other words, Bankruptcy is a legal proceeding involving a person or business that is unable to
pay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, or by
the creditors. All of the debtor's assets are measured and evaluated, and the assets may be used to
pay a portion of outstanding debt.
In nut shell, insolvency is common to both bankruptcy and liquidation. Not being able to pay debts
as and when they became due and payable is insolvency and if not resolved may lead to liquidation
or bankruptcy.

2. JOURNEY OF THE DEVELOPMENT OF THE

INSOLVENCY AND BANKRUPTCY CODE, 2016
♦ On 22 August 2014, the Ministry of Finance created the Bankruptcy Legislative Reforms
Committee (BLRC), headed by Dr. T. K. Viswanathan to draft a new legal framework for
resolving matters of Insolvency and bankruptcy.
♦ The Committee submitted its report (BLRC report), which included a draft bill, on 4
November 2015.
♦ A Joint Parliamentary Committee on the Insolvency and Bankruptcy Code, 2015 (JPC) was
set up and the bill was referred to it for detailed analysis. The JPC submitted its report,
which included a new draft of the Bill on 28 April 2016.
♦ It was passed by both the Houses of Parliament in May, 2016 and was notified on 28 May
2016.

♦ The recommendations of the Bankruptcy Law Reforms Committee (BLRC) led to the
enactment of the Insolvency and Bankruptcy Code, 2016 (“IBC or Code”) on May 28, 2016.
The Committee set the following as objectives desired from implementing a new Code to
resolve Insolvency and Bankruptcy:
(i) Low time to resolution
(ii) Low loss in recovery
(iii) Higher level of debt financing across a wide variety of debt instruments.

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♦ The IBC, consolidating all existing insolvency-related laws, has brought about a
revolutionary change in the form of a robust, contemporary and comprehensive insolvency
framework. This framework seeks to achieve a resolution for corporate debtors in distress
and failing that, their liquidation in a time bound manner.

3. INTRODUCTION TO THE INSOLVENCY AND

BANKRUPTCY CODE, 2016
A well designed legal, institutional and regulatory framework that balances debtors and creditors
rights in respect to insolvency/bankruptcy proceedings is essential part of any developed or
developing economy. An ideal legislature in this respect should provide for the restructuring and
preservation of distressed yet viable businesses, and at same time provide for the orderly liquidation
of distressed and non-viable businesses. The Insolvency and Bankruptcy Code, 2016 (Herein after
referred to as The Code/IBC) enacted on 28th May, 2016, is an historical Act as it introduces a
comprehensive legal and institutional machinery to deal with defaults in payments of debts, in a
manner where interests of all the stakeholders are balanced. Prior to enactment of the Code, the
laws to deal with insolvency and bankruptcy was highly fragmented and scattered over numerous
legislations like:
♦ The individual insolvency and bankruptcy were dealt in the Presidency Towns Insolvency
Act, 1909, and the Provincial Insolvency Act 1920.
♦ Corporate insolvency was mostly covered by the Companies Act 2013 (earlier Companies
Act, 1956) which contained provisions for rescue and rehabilitation of all registered entities
in Chapter XIX, and Winding-up in Chapter XX.
♦ The Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) was the only central
corporate rescue law in force but it applied to industrial companies only.
♦ The Recovery of Debt Due to Banks and Financial Institutions Act, (RDDBFI Act) 1993 gave
banks and a specified set of financial institutions greater powers to recover collateral at
default.
♦ The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act (SARFAESI) 2002 envisaged specialised resolution through Asset
Reconstruction Companies (“ARCs”) to resolve Non-performing Assets (“NPAs”) and other
specified bank loans under distress.

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 1.6 THE INSOLVENCY AND BANKRUPTCY CODE, 2016

♦ RBI had Strategic Debt Restructuring Scheme (SDR) and Scheme for Sustainable
Structuring of Stressed Assets (S4A) for structuring of debts overdue to financial
institutions.
This Code applies to a company registered under the Companies Act, 2013, or under any previous
company law, any other company governed by any Special Act, such other body as notified, a
Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008,
Partnership firms, Proprietorship Firms and Individuals. Under the Insolvency and Bankruptcy
Code 2016, when the corporate debtor commits a default in payment of debts when it becomes
due and payable above certain limits as laid down and notified from time to time, any financial
creditor or an operational creditor can initiate corporate insolvency process against a corporate
debtor. The Code, also permits the Corporate Debtor to make an application for initiation of
Corporate Insolvency Process when it feels viability of the enterprise is at stake and timely
resolution may be helpful.

Application of the Code

- Any company incorporated under the Companies Act, 2013 or under any previous law
- Any other company governed by any Special Act.

- Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008
- Such other body as incorporated under any law, as notified by the Central Government.
- Partnership firms, Proprietorship Firms.

- Individuals.

Extent and Commencement of the Code

As per section 1 of the Insolvency and Bankruptcy Code, it extends to the whole of India.
This Code came into enforcement on 28th May 2016, however, the Central Government appointed
different dates for different provisions of this Code and any reference in any such provision to the
commencement of this Code shall be construed as a reference to the commencement of that
provision.

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The main objective of the Code

As per Preamble to the Code, the objective of this Code is as follows:
(a) To consolidate and amend the laws relating to re- organisation and insolvency resolution of
corporate persons, partnership firms and individuals.
(b) To fix time periods for implementation of the Code in a time bound manner.
(c) To maximize the value of assets of stakeholders.
(d) To promote entrepreneurship.
(e) To increase/stimulate availability of credit.
(f) To balance the interests of all the stakeholders including alteration in the order of priority of
payment of Government dues.
(g) To establish an Insolvency and Bankruptcy Board of India as a regulatory body for the Code.
The Supreme Court in the case of Innoventive Industries Ltd. Vs. ICICI Bank & Anr 1. stated that
one of the important objectives of the Code is to bring the insolvency law in India under a single
unified umbrella with the objective of speeding up the insolvency process.
The Code seeks to provide an effective legal framework for timely resolution of insolvency and
bankruptcy which would support development of credit markets and encourage entrepreneurship,
and facilitate more investments leading to higher economic growth and development.
In the case of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. 2, the Supreme Court
stated that the Code is a beneficial legislation which puts the Corporate Debtor (CD) back on its feet
and is not a mere recovery legislation for creditors. The interests of the CD have, therefore, been
bifurcated and separated from that of its promoters/those who are in management. The defaulter’s
paradise is lost. In its place, the economy’s rightful position has been regained.

Why IBC is called a Code, not an Act?

IBC is a combination of different existing multiple laws dealing with insolvency and bankruptcy.

That is why it is called a Code, not an Act.

1Civil Appeal No. 8337-8338 of 2017, dated 31.08.2017

2WP (Civil) No. 99, 100, 115, 459, 598, 775, 822, 849, and 1221 of 2018, SLP (Civil) No. 28623 of 2018 and WP
(Civil) 37 of 2019, dated 25.01.2019

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 1.8 THE INSOLVENCY AND BANKRUPTCY CODE, 2016

4. STRUCTURE OF THE CODE

The Code is structured into 5 parts comprising of 255 sections and 12 Schedules. Each part deals
with a distinct aspect of the insolvency resolution process.

Part Part Content Chapters Chapter / Contents

and Sections
I Preliminary (1-3) 1. Short title, extent and Commencement
2. Application
3. Definitions
II Insolvency I–VII I. Preliminary (Application and Definitions)
Resolution and (4–77A) II. Corporate Insolvency Resolution Process
Liquidation for
III. Liquidation Process
Corporate
Persons IIIA. Pre-packaged Insolvency Resolution
Process
IV. Fast Track Corporate Insolvency
Resolution Process
V. Voluntary Liquidation of Corporate Persons
VI. Adjudicating Authority for Corporate
Persons
VII. Offences and Penalties
III Insolvency I – VII I. Preliminary (Application and Definitions)
Resolution and (78-187) II. Fresh Start Process
Bankruptcy for
III. Insolvency Resolution Process
Individuals and
Partnership IV. Bankruptcy Order for Individuals and
Firms Partnership Firms
V. Administration and Distribution of the
Estate of the Bankrupt
VI. Adjudicating Authority
For Individuals and Partnership firms
VII. Offences and Penalties
IV Regulation of I – VII I. The Insolvency and Bankruptcy Board of
Insolvency (188–223) India
Professionals, II. Powers and Functions of the Board
Agencies and
III. Insolvency Professional Agencies
Information
Utilities IV. Insolvency Professionals
V. Information Utilities

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VI. Inspection and Investigation

VII. Finance, Accounts and Audit
V Miscellaneous (224 – 255) Miscellaneous

Schedules
I Amendment to the Indian Partnership Act, 1932
II Amendment to the Central Excise Act, 1944
III Amendment to the Income-tax Act, 1961
IV Amendment to the Customs Act, 1962
V Amendment to the Recovery of Debts due to Banks and Financial Institutions Act, 1993
VI Amendment to the Finance Act, 1994
VII Amendment to the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest, Act, 2002
VIII Amendment to the Sick Industrial Companies (Special Provisions) Repeal Act, 2003
IX Amendment to the Payment and Settlement System Act, 2007
X Amendment to the Limited Liability Partnership Act, 2008
XI Amendment to the Companies Act, 2013
XII Acts for the purposes of Clause (d) of Section 29A

Wherever the word “prescribed” is mentioned in the Code, it refers to Rules which are notified by
the Central Government.
Wherever the word “specified” is mentioned in the Code, it refers to Regulations which are notified
by the IBBI.

5. INSTITUTIONAL FRAMEWORK UNDER THE CODE

A key aspect of the IBC is a four-pillar institutional framework, comprising:
(a) the first pillar of the judicial adjudicating authority, being the National Company Law
Tribunal (NCLT or Adjudicating Authority) for the Corporates and Debt Recovery Tribunal
in case of Non-Corporate where insolvency matters shall be heard and National Company
Law Appellate Tribunal (NCLAT) and Debt Recovery Appellate Tribunal (DRAT) will
be Appellate Authority;

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(b) the second pillar is the regulator, being Insolvency and Bankruptcy Board of India (IBBI)
which has regulatory oversight over insolvency professionals (IP), insolvency professional
agencies (IPA) and Information Utilities (IU);
(c) the third pillar of a class of regulated persons, being the Insolvency Professionals and
Insolvency Professional Entities who play a key role in the efficient working of the
insolvency and bankruptcy process under the IBC; An intermediatory between the IBBI and
IPs in form of Insolvency Professional Agencies are also there which facilitate enrollment
and monitoring of IPs and IPEs.

Presently there are three Insolvency Professional Agencies working in India.

Indian Institute of Insolvency Professionals of ICAI
ICSI Institute of Insolvency Professionals
Insolvency Professional Agency of Institute of Cost Accountants of India

(d) the fourth pillar of a new institution called information utilities (IU) to electronically store
facts about lenders and terms of lending. At present there is only one IU in the country –
NeSL – National E-Governance Services Limited.
PILLARS OF THE CODE

• National Company Law Tribunal/National Company Law

first pillar Appellate Tribunal
• Debt Recovery Tribunal/ Debt Recovery Appellate Tribunal

• Insolvency and Bankruptcy Board of India

second pillar

• Insolvency Professionals and Insovency Professional

third pillar Agency

• Information Utilities
fourth pillar

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6. PROCESSES UNDER THE CODE

Part II of the Code deals with Insolvency Resolutions and Liquidation for Corporate Persons and
provides the following mechanisms:

A. For Resolution of Corporate Insolvency

 Corporate Insolvency Resolution Process (Sections 6 to 32A)

 Pre-packaged Insolvency Resolution Process (Sections 54A to 54P)

 Fast Track Corporate Insolvency Resolution Process (Sections 55 to 58)

B. For Liquidation

 Liquidation Process (Sections 33 to 54)

 Voluntary Liquidation of Corporate Persons (Section 59)

Part III of the Code deals with Insolvency Resolutions and Bankruptcy for Individuals and Partnership
Firms and provides the following mechanisms:

♦ Fresh Start Process (Sections 80 to 93)

♦ Insolvency Resolution Process (Sections 94 to 120)

♦ Bankruptcy Order for Individuals and Partnership Firms (Sections 121 to 148)

♦ Administration and Distribution of the Estate of the Bankrupt (Sections 149 to 178)
Initiation of Corporate Insolvency Resolution Process (“CIRP”)
CIRP proceedings may be initiated against a corporate debtor by the corporate debtor itself or any
of its financial creditor or operational creditor. When the Code was enacted, the minimum amount of
default to initiate CIRP against a corporate debtor was INR One Lakh. However, the Central
Government has by notification dated 24th March 2020 raised the threshold value of minimum
amount of default to one crore rupees.

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The brief procedure for initiation of CIRP by stakeholders is described as follows:

Control of Assess the

When an Committee
Defaults enterprise proposals
enterprise of Creditors
shifts to either to

• revive the
enterprise or
• take for
liquidation.
Decisions are required to be taken in a time bound manner so that there are greater chances that
the enterprise is saved as a going concern and productive resources of economy can be put to best
use. The CIRP commences from the date of admission of an application for its initiation. The process
entails a moratorium – a calm period, to give the debtor a better chance to survive as a going
concern. The moratorium period is 180 days and in limited circumstances, if the CoC, with a 66%
majority, decides that the complexity of the case requires more time for a resolution plan to be
finalized, a one-time extension of up to 90 days may be granted with approval of the NCLT.
The CIRP shall mandatorily be completed within a period of 330 days from the insolvency
commencement date, including any extension and the time taken in legal proceedings in relation to
the resolution process of the corporate debtor. The said amendment has been undertaken to ensure
a timely resolution in view of the fact that the 270 day deadline was being breached on account of
legal proceedings against the corporate debtor
In case of Fast Track Insolvency Process, the process shall be completed in 90 days from the
insolvency commencement date. Resolution professional may apply to the Adjudicating Authority for
extension for a period of maximum 45 days. This application shall be supported by resolution passed
by committee of creditor by 75% voting share. Only one such grant for extension is allowed.
Pre-Packaged Insolvency Resolution Process for Corporate Debtors (Chapter III-A) (Section
54A to the Section 54P)
It will be effective in the cases where the Corporate Debtor has been classified as Micro, Small or
Medium Enterprise under section 7(1) of the Micro Small and Medium Enterprises Development
Act,2006 and Central Government has specified ` 10 Lakh as Minimum Default for the matters
relating to the pre-packaged insolvency resolution process of Corporate Debtors.
Initiation of Insolvency Resolution and Bankruptcy for Individual and Partnership Firms
Part III of IBC shall apply to matters relating to fresh start, insolvency resolution and bankruptcy of
individuals and partnership firms where the amount of the default is not less than one thousand rupees.

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Fresh Start Process can be initiated by a debtor, who is unable to pay his debt. He/ She may apply,
either personally or through a resolution professional, for a fresh start in respect of his/ her qualifying
debts to the Adjudicating Authority if-
(a) the gross annual income of the debtor does not exceed ` 60,000
(b) the aggregate value of the assets of the debtor does not exceed ` 20,000;
(c) the aggregate value of the qualifying debts does not exceed ` 35,000;
(d) he is not an undischarged bankrupt;
(e) he does not own a dwelling unit, irrespective of whether it is encumbered or not;
(f) a fresh start process, insolvency resolution process or bankruptcy process is not subsisting
against him; and
(g) no previous fresh start order under this Chapter has been made in relation to him in the
preceding 12 months of the date of the application for fresh start.
The Insolvency Resolution Process for individuals and partnership firms can be initiated by a creditor
or debtor himself.
Debt Recovery Tribunal (DRT) will be the Adjudicating Authority and Debt Recovery Appellate
Tibunal (DRAT) will be the Appellate Authority for individuals and partnership firms. These provisions
are not yet effective as not notified, except for the provisions pertaining to personal guarantors to
corporate debtors in which case the NCLT will be the Adjudicating Authority and NCLAT will be
Appellate Authority.
Provisions of this Code to override other laws: Section 238 of the Code states that the Code
shall have over-riding effect over other laws.

7. FURTHER DEVELOPMENT IN THE IBC, 2016

The Code has been amended six time after its enactment to address the issues from the functioning
of the Code:
I. The Insolvency and Bankruptcy Code (Amendment) Act, 2018
II. The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018
III. The Insolvency and Bankruptcy Code (Amendment) Act, 2019
IV. The Insolvency and Bankruptcy Code (Amendment) Act, 2020
V. The Insolvency and Bankruptcy Code (Second Amendment) Act, 2020
VI. The Insolvency and Bankruptcy Code (Amendment) Act, 2021

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 1.14 THE INSOLVENCY AND BANKRUPTCY CODE, 2016

TEST YOUR KNOWLEDGE

Multiple Choice Questions (MCQs)

1. What triggers insolvency proceedings under the Insolvency and Bankruptcy Code, 2016:
(a) Default
(b) Claim
(c) Debt
(d) Dispute
2. Who can initiate Corporate Insolvency Resolution Process:
(a) Financial Creditor or Operational Creditor
(b) Financial Creditor or Corporate Debtor
(c) Operational Creditor or Corporate Debtor
(d) Financial Creditor, Operational Creditor or Corporate Debtor
3. Who frames the Rules and Regulations under the Code:
(a) Rules and Regulations are framed by the Central Government
(b) Rules are framed by the Central Government and Regulations are framed by the
Insolvency and Bankruptcy Board of India
(c) Rules and Regulations are framed by the IBBI
(d) Rules are framed by the IBBI and Regulations are framed by the Central Government
4. Which is the Adjudicating Authority for Insolvency matters of corporate and individuals:
(a) National Company Law Tribunal for individuals and Debt Recovery Tribunal for
corporates
(b) National Company Law Tribunal for individuals and IBBI for corporates
(c) National Company Law Tribunal for corporates and Debt Recovery Tribunal for
individuals
(d) Special Court for corporates and Debt Recovery Tribunal for individuals

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5. What is the minimum amount of default to initiate corporate insolvency resolution process
and pre-packed insolvency resolution process respectively.

(a) ` 1 lakh, ` 10 lakh

(b) ` 10 lakh, ` 1 lakh.
(c) ` 10 lakh, ` 1crore.

(d) ` 1 crore, ` 10 lakh.

Answers to Multiple choice Questions:

1. (a) 2. (d) 3. (b) 4. (c) 5. (d)

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