The Insolvency and Bankruptcy Code, 2016 (IBC)

 The Insolvency and Bankruptcy Code, 2016 (IBC) is India's comprehensive law for insolvency resolution of companies, partnerships, and individuals. It consolidates and streamlines various laws to ensure a time-bound resolution of distressed entities. Here's a structured guideline to help you understand and navigate IBC, 2016:

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📘 Overview of IBC, 2016

🎯 Objectives

• Promote resolution over liquidation.

• Maximize value of assets of a corporate person.

• Ensure timely resolution (within 180/270 days).

• Balance interests of all stakeholders.

• Improve credit discipline and ease of doing business.

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🏢 Who Can Be Resolved Under IBC?

• Corporate Persons: Companies, LLPs (excluding financial service providers).

• Partnership Firms & Individuals (Part III – notified only for personal guarantors to corporates so far).

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⚖️ Key Definitions

Term	Meaning
Financial Creditor	A person to whom a financial debt is owed (e.g., banks, NBFCs).
Operational Creditor	A person owed an operational debt (e.g., suppliers, employees).
Corporate Debtor	A company or LLP that owes a debt.
Insolvency Resolution Process	Legal proceedings initiated to resolve or liquidate the corporate debtor.
Default	Non-payment of a debt when due.

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📜 Key Sections & Process Flow

🔹 1. Initiation of CIRP (Corporate Insolvency Resolution Process)

Creditor Type	Section	Threshold
Financial Creditor	Section 7	₹1 crore
Operational Creditor	Section 9	₹1 crore
Corporate Applicant	Section 10	No threshold

🔹 2. Timeline of CIRP

Action	Time Limit
Filing & Admission	Within 14 days
Completion of CIRP	180 days (+90 extension)
Moratorium under Section 14	Immediate after admission
Resolution Plan submission & approval	Before 180/270 days
Liquidation (if no resolution)	Post CIRP failure

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🏛️ Insolvency Authorities

• NCLT (Adjudicating Authority for corporates)

• NCLAT (Appellate Tribunal)

• IBBI (Regulator)

• DJs/Civil Courts: Barred from interfering (Section 63 & 231)

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💡 Important Concepts

• Moratorium (Section 14): Legal freeze on all suits, enforcement of security, etc., during CIRP.

• Committee of Creditors (CoC): Only financial creditors vote on resolution plans (based on voting share).

• Resolution Professional (RP): Appointed to conduct CIRP, manage the company.

• Liquidation: If CIRP fails or CoC rejects all plans, liquidation begins under Chapter III.

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📌 Practical Compliance Points

• Demand notice (Sec. 8) mandatory before Sec. 9.

• Limitation: Application must be filed within 3 years from date of default (Art. 137 of Limitation Act).

• Pre-existing dispute = ground for rejection of Sec. 9 application.

• Supreme Court has held IBC is beneficial legislation, not punitive.

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🧾 Recent Key Amendments / Developments

• Threshold raised to ₹1 crore for initiation by operational creditors.

• Section 29A: Disqualification of certain persons from bidding (e.g., promoters of NPA accounts).

• Pre-Pack Insolvency: Introduced for MSMEs (under separate framework).

• Personal Guarantors to Corporate Debtors: Brought under Part III.

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📚 Landmark Judgments

Case	Principle
Innoventive v. ICICI Bank	Differentiated financial vs. operational creditors
Mobilox v. Kirusa	Defined “existence of dispute” under Sec. 9
Essar Steel Case	Upheld commercial wisdom of CoC
Swiss Ribbons v. UOI	Validated constitutionality of IBC
Vidarbha Industries v. Axis Bank	Admission not automatic under Sec. 7

Sample Section 9 Application – Form 5

 Form 5  

(See sub-rule (1) of Rule 6)

Application by Operational Creditor(s) to initiate Corporate Insolvency Resolution Process

Part I – Particulars of Applicant  

1. Name of the Operational Creditor: [Your Name / Firm Name]  

2. Identification Number (PAN/Aadhaar):  

3. Address:  

4. Email & Phone:  

Part II – Particulars of the Corporate Debtor  

1. Name of the Corporate Debtor:  

2. CIN:  

3. Registered Office Address:  

Part III – Details of Operational Debt  

1. Total amount of debt: ₹ [amount]  

2. Date from which debt became due:  

3. Date of default:  

4. Particulars of invoices: [list invoice numbers, dates, amounts]  

5. Supporting documents attached:  

   - Invoices  

   - Delivery proofs  

   - Bank statements  

   - Demand notice and proof of service  

Part IV – Proposed IRP (if any)  

[You may propose a Resolution Professional here – optional]

Part V – Declaration  

That the applicant has not received any payment and that no notice of dispute has been received.

**Signature**  

[Name & Signature of Applicant or Authorized Representative]  

[Date and Place]

**Annexures**:  

- Copy of demand notice (Form 3) and delivery proof  

- Invoices  

- Affidavit under Section 9(3)(b)  

- Certificate from financial institution (if applicable)  

- Authorization (if filed by legal counsel)

Sample Demand Notice – Form 3

 [On the letterhead of the Operational Creditor]

Form 3  

(See sub-rule (1) of rule 5)

To,  

[Name of the Corporate Debtor]  

[Address]  

Subject: Demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016

Dear Sir/Madam,

1. This is to inform you that as an operational creditor, we are initiating a corporate insolvency resolution process against you in respect of the following unpaid operational debt:

   - Amount of Debt: ₹ [Insert amount]

   - Date of default: [Insert date]

   - Nature of transaction: [Goods supplied / Services rendered]

2. The debt has not been repaid despite repeated reminders. Particulars of the debt including invoices and transaction details are annexed herewith.

3. You are hereby called upon to repay the unpaid amount mentioned above within 10 (ten) days from the date of receipt of this notice, failing which we shall file an application under Section 9 of the IBC before the National Company Law Tribunal.

4. Please take notice that if you have any pre-existing dispute relating to this debt, you must bring it to our attention in writing within the said 10 days.

Yours faithfully,  

[Name]  

[Designation]  

[Name of Operational Creditor]  

[Address]  

[Email / Contact No.]

**Enclosures**:  

- Copy of invoices  

- Bank statements  

- Proof of delivery of goods / services  

Filing a Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC)

 

Filing a Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC) involves a specific procedure that must be followed carefully. This section is used by an Operational Creditor to initiate a Corporate Insolvency Resolution Process (CIRP) against a Corporate Debtor. Here's a step-by-step breakdown of the practical aspects involved in making such an application before the National Company Law Tribunal (NCLT):

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✅ Step-by-Step Procedure for Filing Section 9 Application

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Step 1: Determine Eligibility

• Who can file?: Only an Operational Creditor.

• Minimum default amount: ₹1,00,00,000 (as per the latest threshold set by the Ministry of Corporate Affairs).

• Nature of debt: Must be an “operational debt” (e.g., supply of goods or services, employment dues, etc.)

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Step 2: Issue a Demand Notice (Form 3 or 4)

• Section 8(1) of the IBC mandates that before filing under Section 9, the operational creditor must serve a demand notice to the corporate debtor demanding payment of the operational debt.

Forms:

• Form 3: Simple demand notice.

• Form 4: If attaching an invoice demanding payment.

Mode of Service:

• Must be served via registered post, speed post, courier with tracking, hand delivery, or email (if accepted communication mode).

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Step 3: Wait for 10 Days

• The corporate debtor has 10 days from the receipt of the demand notice to either:

  • Repay the debt, or

  • Send a reply with a notice of dispute (if there is a genuine dispute regarding the debt).

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Step 4: Prepare the Application (Form 5)

If no payment or valid dispute is received within 10 days, the creditor can proceed to file an application before the NCLT under Section 9, using Form 5.

Documents to attach with Form 5:

1. Copy of demand notice (Form 3 or 4) and proof of service.

2. Invoices, purchase orders, delivery challans, etc., proving the debt.

3. Bank statement or financial records showing non-payment.

4. Affidavit under Section 9(3)(b) confirming that no notice of dispute was received.

5. Certificate from financial institution (if available) confirming non-payment.

6. Authorization letter/Board resolution (if application is being filed by someone other than the sole proprietor/partner/director).

7. Court fee: Pay the applicable NCLT filing fee (₹2,000 currently for operational creditor applications).

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Step 5: File the Application Before NCLT

• Submit the application electronically via the MCA21 portal and also physically (where required) to the relevant bench of the NCLT having jurisdiction over the corporate debtor’s registered office.

• Application must be served to the corporate debtor and Insolvency and Bankruptcy Board of India (IBBI).

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Step 6: Admission or Rejection by NCLT

• The NCLT will verify:

  • Whether debt is due and payable.

  • Whether there is any pre-existing dispute.

  • Completeness of the application.

If satisfied:

• NCLT admits the petition and declares moratorium (under Section 14), and appoints an Interim Resolution Professional (IRP).

If not:

• NCLT rejects the application, citing reasons.

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🧾 Key Legal Requirements and Pitfalls to Avoid

Issue	Guidance
Pre-existing dispute	Even if the debtor shows evidence of a genuine dispute before the demand notice, the application can be rejected.
Defective notice/service	Failure to serve the demand notice properly may result in dismissal.
Limitation	Application must be filed within 3 years from the date of default.
Proprietorship filing	File in the name of the sole proprietor, not the trade name. Attach Aadhaar/PAN to prove identity.
False claim	Filing a false claim may attract penalties under Section 75 of IBC.

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📌 Practical Tips for Drafting and Filing

• Use precise documentation: Ensure invoices, communications, and bank records are clear.

• Legal vetting: Consider engaging an IBC-experienced lawyer or Insolvency Professional.

• Maintain service proof: Keep courier receipts, email delivery reports, etc.

• Avoid casual or poorly drafted demand notices: Courts have dismissed cases for vague notices.

• Use a standard format for Form 5 and include all annexures, numbered and indexed properly.

Case Studies of Real-Life Negotiations and CoC Voting

 

Case Studies of Real-Life Negotiations and CoC Voting

Case Study 1: Jet Airways (India) Limited

Background:

• Jet Airways, once India’s largest private airline, went into insolvency in 2019. The CIRP was initiated under the IBC after the company defaulted on its debts.

Resolution Plan:

• A consortium of investors (led by State Bank of India (SBI)) proposed a resolution plan that involved restructuring Jet Airways’ debt and bringing in fresh equity.

• The resolution plan was presented to the CoC, which was primarily composed of financial creditors (banks).

Negotiations:

• The resolution plan was heavily negotiated, especially around equity offers and debt restructuring.

• The CoC eventually approved the resolution plan with significant pressure from financial creditors to accept the long-term viability of the airline, which involved capital infusion.

Outcome:

• After intense negotiations, the CoC approved the plan with a 75% majority by value, saving Jet Airways from liquidation. The airline was later restructured and resumed its operations, although the process was complex and faced significant challenges from various creditors.

Case Study 2: Essar Steel India Limited

Background:

• Essar Steel was a leading steel manufacturer that went into insolvency after defaulting on loans, mainly owed to financial creditors.

Resolution Plan:

• The company received multiple bids from potential buyers, including a resolution plan by ArcelorMittal.

Negotiations:

• There was significant disagreement over the treatment of operational creditors, with financial creditors demanding that ArcelorMittal pay off all dues.

• The Supreme Court intervened to ensure that Essar Steel was revived and creditors received their fair share.

Outcome:

• After several rounds of negotiations and court intervention, the resolution plan was approved, and Essar Steel was sold to ArcelorMittal, marking one of the largest insolvency resolutions under the IBC.

Complex Negotiations Between Debtor and Creditors

 

Complex Negotiations Between Debtor and Creditors

When a company enters CIRP, both the debtor and creditors engage in intense negotiations to shape the resolution plan. Here’s how those negotiations play out in more detail:

A. Debtor’s Negotiation Strategy

1. Avoiding Liquidation:

   • The debtor’s main objective is to avoid liquidation, as this results in the company’s assets being sold off and the business ceasing to exist. To avoid this:

     • The debtor will negotiate for extended repayment terms, debt restructuring, or even the introduction of new investors (equity infusion).

     • The debtor may offer equity in exchange for debt forgiveness, reducing immediate cash outflows and making the company more viable in the long term.

2. Equity Infusion:

   • New investors may come into play, with the debtor offering them a stake in the company. This can be a crucial part of negotiations as it shows creditors that there is a plan to revive the business, making them more likely to accept the resolution plan.

   • The debtor may also offer equity to creditors, especially operational creditors, in exchange for more favorable payment terms or debt reduction.

3. Restructuring and Moratorium Periods:

   • The debtor may negotiate for moratorium periods on principal repayments and interest, giving the company time to stabilize its operations before starting to pay creditors.

   • Debt restructuring might involve reducing interest rates, extending the repayment period, or capitalizing interest (i.e., converting unpaid interest into principal).

B. Creditors’ Negotiation Strategy

1. Maximizing Recovery:

   • Creditors, particularly financial creditors, seek to maximize their recovery under the resolution plan.

     • They may demand larger repayments (or higher interest) and ensure that their seniority in debt repayment is maintained.

   • Financial creditors might accept restructuring terms (e.g., extended repayment or reduced interest) if they believe that doing so offers the best chance of recovering their debts in the future.

2. Ensuring Payment of Operational Creditors:

   • Creditors may pressure the debtor to ensure that operational creditors (suppliers, service providers, etc.) receive at least a fair share of the payment, ensuring that business operations can continue smoothly post-reorganization.

   • If operational creditors are not paid sufficiently, they might stop providing goods or services, thus affecting the company’s future profitability and viability.

3. Securing Control in the Resolution Process:

   • Large creditors might demand more control over the resolution process, especially in selecting a resolution applicant or approving the resolution plan. They may influence the direction of the business restructuring to ensure their claims are prioritized.

Detailed Breakdown of the CIRP Process and Negotiations

 

Detailed Breakdown of the CIRP Process and Negotiations

In the Corporate Insolvency Resolution Process (CIRP) under the IBC, the debtor is given a chance to negotiate with creditors to come up with a resolution plan that ensures the company’s survival, maximizes recovery for creditors, and avoids liquidation. Here's a detailed look at how this works in practice:

A. The Role of Resolution Professional (RP)

1. Appointment of RP:

   • Upon the initiation of CIRP, an independent Resolution Professional (RP) is appointed by the National Company Law Tribunal (NCLT). The RP manages the day-to-day affairs of the company, assesses the financial situation, and oversees the resolution process.

2. Functions of the RP:

   • Forming the Committee of Creditors (CoC): The RP creates the CoC, which consists of all creditors (financial and operational) who have a claim against the debtor.

   • Managing the Insolvency Process: The RP is responsible for managing the company’s affairs during the process, ensuring the assets are protected, and negotiating with resolution applicants on behalf of the creditors.

B. The Role of the Committee of Creditors (CoC)

1. Composition of CoC:

   • The CoC is primarily composed of financial creditors (banks, financial institutions, etc.) as they hold the largest share of the debtor’s debt. Operational creditors are also included, but their voting power is typically lower.

2. Voting on the Resolution Plan:

   • Once the resolution plan is received from applicants, the CoC evaluates it based on several factors, including:

     • The liquidation value of the debtor’s assets.

     • Recovery timelines for creditors.

     • The viability and feasibility of the resolution plan.

   • The CoC votes on the plan, with the requirement of a 75% majority by value (i.e., creditors holding at least 75% of the debt value must approve the plan for it to pass).

3. Negotiating the Resolution Plan:

   • Resolution applicants often need to negotiate with the CoC to revise their resolution plans to ensure approval. These negotiations are intense, particularly when there are diverse creditor interests (e.g., operational creditors may want immediate payments, while financial creditors may prioritize restructuring).

4. Operational Creditors’ Influence:

   • Although operational creditors are ranked lower in the hierarchy (receiving payment after financial creditors), their vote becomes important if they hold significant claims.

   • They may negotiate for improved payment terms, equity stakes, or even future business guarantees as part of the resolution plan.

C. Factors Impacting Creditor Voting Dynamics

1. Stakeholder Interests:

   • Financial creditors (usually large banks) have different priorities compared to operational creditors (e.g., suppliers, service providers).

     • Financial creditors might prioritize debt recovery, while operational creditors could focus on the company’s continued operations and future business relations.

   • In some cases, financial creditors may be willing to accept reduced repayments (in terms of both principal and interest) if they believe that restructuring is the only viable option to ensure long-term recovery.

2. Equity Offers and Debt Restructuring:

   • Equity offers are a common tool used by resolution applicants to incentivize creditors to accept a particular resolution plan. This could involve offering equity in the company in exchange for debt forgiveness or extended repayment timelines.

   • If creditors are given a stake in the company, they are more likely to vote in favor of a resolution plan, as they stand to gain from the company’s future profitability.

3. Negotiations Post-Vote:

   • Even after the initial vote, there may be further negotiations on how the resolution plan can be modified to address concerns from various stakeholders, especially operational creditors. These negotiations are critical if the plan does not meet the necessary 75% approval.