IBC 2016 Operational & Financial Creditors PDF

Module III: Corporate Insolvency Resolution Operational creditor & financial creditor as per IBC 2016 The Insolvency and Bankruptcy Code (IBC) of 2016 distinguishes between two primary types of creditors: financial creditors and operational creditors. This classification is crucial for understandin...

Module III: Corporate Insolvency Resolution Operational creditor & financial creditor as per IBC 2016 The Insolvency and Bankruptcy Code (IBC) of 2016 distinguishes between two primary types of creditors: financial creditors and operational creditors. This classification is crucial for understanding the rights and obligations of each type of creditor during insolvency proceedings. Definitions Financial Creditor L S According to Section 5(7) of the IBC, a financial creditor is defined as "any person to whom a E S L financial debt is owed." Financial debt is further defined in Section 5(8) as a debt that arises from RC a financial transaction, typically involving the borrowing of money or the provision of credit, I C often with interest. This includes loans, bonds, and other forms of debt securities. Y Operational Creditor U D S T In contrast, an operational creditor, as per Section 5(20), is "any person to whom an operational M debt is owed." Operational debt, defined in Section 5(21), refers to claims arising from the A L provision of goods or services, including employment-related debts or statutory dues owed to A L K government bodies. This means operational creditors typically include suppliers of goods and services, employees, and entities owed statutory payments. D U B Key Differences A J AP Aspect Nature of Debt FC Debt arises from financial OC Debt arises from transactions transactions (e.g., loans) involving goods/services Rights in the Insolvency Right to initiate insolvency Right to issue a demand Process proceedings (Section 7) notice (Section 8) Participation in CoC Members of the Committee of Not part of the CoC; limited Creditors (CoC) participation  Priority in Liquidation Higher priority; paid before Lower priority; paid after operational creditors financial creditors Claim Submission Can file claims directly with Must submit a demand notice the resolution professional before filing for insolvency Treatment Under IBC The IBC provides different treatment for financial and operational creditors: Financial creditors have the right to initiate corporate insolvency resolution processes (CIRP) directly upon default. They are also part of the CoC, which plays a significant role in decision- L S making during insolvency proceedings. E S L I RC Operational creditors, on the other hand, must first issue a demand notice for payment. If they do C not receive a response within ten days, they can then file an application for insolvency. They do Y process. U D not have voting rights within the CoC and generally have less influence over the resolution S T Rationale for Distinction AM L The distinction between these two types of creditors stems from their roles in business A L K operations. Financial creditors are seen as having a vested interest in the financial viability and restructuring of the debtor company. In contrast, operational creditors often prioritise immediate D U payment for goods and services provided. The Banking Law Reforms Committee noted that A B operational creditors are typically less equipped to evaluate the long-term viability of a company J compared to financial creditors, which justifies their different treatment under the IBC. AP This differentiation has been upheld by various judicial interpretations, including by the Supreme Court, which affirmed that while both types of creditors play critical roles in insolvency proceedings, their rights and priorities reflect their distinct contributions to the corporate ecosystem. 1. Rajat Metaal Polychem Pvt. Ltd. vs. Mr. Neeraj Bhatia RP Vinayak Rathi Steels Rolling Mills Pvt. Ltd. The National Company Law Appellate Tribunal (NCLAT) ruled that operational creditors may receive zero payouts if the liquidation value is nil. The case involved an operational creditor challenging a resolution plan that excluded them from compensation, arguing it violated Section 30(2) of the IBC, which mandates consideration of all creditors. The NCLAT upheld the National Company Law Tribunal's (NCLT) decision, stating that unless legislation is amended, operational creditors could receive nothing if their liquidation value is zero. This highlights the limitations faced by operational creditors in insolvency proceedings, emphasizing the need for L S legislative review to ensure fair treatment1. E S L 2. Committee of Creditors of Essar Steel India Ltd. vs. Satish Kumar Gupta & Ors. I RC C In this landmark ruling, the Supreme Court clarified that while financial and operational creditors Y U D are treated differently under the IBC, operational creditors must at least receive what they would get in liquidation scenarios. The court underscored that the commercial wisdom of the S T Committee of Creditors (CoC) should not be interfered with as long as it adheres to IBC M provisions. This case reinforced the principle that operational creditors have a right to a A L minimum payout equivalent to their liquidation value, thereby establishing a baseline for their A K claims during insolvency proceedings1. L U 3. Damodar Valley Corporation vs. Dimension Steel and Alloys Pvt. Ltd. D A B The NCLAT referenced this case in its discussions on operational creditors receiving minimal J compensation under approved resolution plans. The tribunal noted a concerning trend where AP operational creditors often received negligible amounts—sometimes less than 1%—of their claims. The court indicated that unless legislative changes are made, operational creditors would continue to face significant disadvantages in recovery during insolvency processes1. 4. Col. Vinod Awasthy vs. AMR Infrastructure Limited This case involved the interpretation of who qualifies as an operational creditor under the IBC, specifically regarding flat purchasers. The NCLT's ruling clarified that individuals who have made payments for property purchases can be classified as operational creditors if their claims arise from service-related transactions, thus expanding the scope of who can initiate insolvency proceedings against corporate debtors. Committee of creditors The Committee of Creditors (CoC) plays a pivotal role in the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) of 2016. This body is primarily composed of financial creditors and is responsible for making critical decisions regarding the management and resolution of the corporate debtor's financial distress. L S E - Constitution: The CoC is constituted by the Interim Resolution Professional (IRP) after S L RC collating claims from all creditors, as mandated by Sections 18 and 21 of the IBC. It must making processes. C I include all financial creditors of the corporate debtor, ensuring their representation in decision- D Y T U - Operational Creditors: While operational creditors are generally excluded from the CoC, S Regulation 16 allows for their inclusion in specific circumstances—namely, when a corporate AM debtor has no financial debt or when all financial creditors are related parties. In such cases, the L CoC can consist of the largest operational creditors and representatives of workmen and A employees. L K D U Powers and Responsibilities A B The CoC holds significant authority during the CIRP, including: J - Approval of Resolution Plans: One of its primary functions is to approve or reject resolution AP plans submitted by the resolution professional. This requires a majority vote; typically, decisions are made based on a simple majority of 51% of the voting share. - Appointment of Professionals: The CoC has the power to appoint or replace the resolution professional overseeing the insolvency process. This includes confirming or changing the IRP as required. - Financial Decisions: The CoC can approve actions such as raising interim finance, creating security interests over assets, and making changes to the corporate structure. These decisions require a higher voting threshold (usually 66%) for significant actions. - Monitoring Compliance: The CoC monitors compliance with the approved resolution plan and ensures that it aligns with legal requirements under Section 30(2) of the IBC. Voting Mechanism The voting rights within the CoC are proportional to the amount of debt owed to each creditor. Each financial creditor's voting share reflects its stake concerning the total debt owed by the L S corporate debtor. This mechanism ensures that larger creditors have a more substantial influence E S on decision-making processes during insolvency proceedings. L I RC Judicial Oversight Y C The decisions made by the CoC are subject to review by adjudicating authorities, such as the U D National Company Law Tribunal (NCLT). The NCLT can approve or reject resolution plans S T based on compliance with legal standards and overall feasibility. AM L The Committee of Creditors serves as a critical decision-making body in corporate insolvency A L K scenarios, primarily representing financial creditors. Its structure, powers, and responsibilities are designed to facilitate effective resolution processes while balancing creditor interests. The D U exclusion of operational creditors from primary decision-making roles underscores a focus on B financial viability and recovery potential during insolvency proceedings. A J AP 1. K. Sashidhar v. Indian Overseas Bank (2019) In this significant Supreme Court ruling, the court upheld the principle that the decisions made by the CoC are final and based on their commercial wisdom. The court stated that neither the NCLT nor the NCLAT has the authority to interfere with the CoC's decisions regarding resolution plans unless there is a violation of the IBC provisions. This case reinforced the autonomy of the CoC in corporate insolvency proceedings, emphasizing that creditors are not required to justify their decisions. 2. Swiss Ribbons Pvt. Ltd. v. Union of India (2019) This landmark judgment addressed the constitutional validity of certain provisions of the IBC, particularly concerning the differential treatment of operational creditors versus financial creditors in CoC voting rights. The Supreme Court upheld the IBC's provisions, stating that there is a reasonable distinction between these creditor types based on their roles and interests in restructuring efforts, thus validating the framework established under the IBC. 3. Essar Steel India Ltd. v. Satish Kumar Gupta (2020) In this case, the Supreme Court ruled on the distribution of proceeds among creditors under a L S resolution plan, emphasizing that financial creditors should be prioritized over operational E S L creditors. The judgment clarified that while operational creditors' claims must be considered, RC they do not hold equal standing in terms of payouts compared to secured financial creditors. This I resolution plans. Y C ruling reaffirmed the primacy of commercial wisdom exercised by the CoC in determining U D 4. Innoventive Industries Ltd. v. ICICI Bank (2018) S T M This case is notable for establishing that a financial creditor can initiate corporate insolvency A L proceedings based solely on a default in payment without needing to prove any other conditions. A L K The Supreme Court ruled that once debt and default are established, NCLT must admit the application, thereby streamlining the process for financial creditors seeking recourse under the IBC. D U A B J 5. Vidarbha Industries Ltd. v. Axis Bank Ltd. (2020) AP The Supreme Court addressed issues related to voting rights within the CoC, particularly focusing on how debts assigned to third parties can affect voting power and participation in decision-making processes during insolvency proceedings. The court ruled that assigning debt does not automatically grant voting rights unless explicitly stated, thereby clarifying how creditor participation is governed under the IBC. 6. RPS Infrastructure Ltd. v. Mukul Kumar (2023) In this recent case, the NCLAT addressed issues surrounding claims made by creditors during CIRP and emphasized that all claims must be properly reflected in financial records for the CoC to consider them. The ruling underscored the importance of transparency and accuracy in claims submitted during insolvency proceedings. Implications These landmark cases collectively highlight several critical principles regarding: - Autonomy of CoC: The decisions made by the CoC are generally beyond judicial scrutiny, L S emphasizing their role as primary decision-makers in insolvency processes. E S L - Differential Treatment: The legal framework recognizes distinctions between types of creditors, particularly regarding their rights and priorities. I RC Y C - Streamlined Processes: Key rulings have clarified procedures for initiating insolvency actions and addressing creditor claims, promoting efficiency in resolving corporate distress. U D Regulation of insolvency professionals and agencies S T AM L The regulation of insolvency professionals and insolvency professional agencies under the A L K Insolvency and Bankruptcy Code (IBC) of 2016 is detailed in Part IV of the IBC, which includes relevant sections that govern the registration, conduct, and responsibilities of these professionals D U and agencies. Here’s an overview based on the specific sections: A B J CHAPTER IV AP INSOLVENCY PROFESSIONALS 206. Enrolled and registered persons to act as insolvency professionals. - No person shall render his services as insolvency professional under this Code without being enrolled as a member of an insolvency professional agency and registered with the Board. 207. Registration of insolvency professionals. - (1) Every insolvency professional shall, after obtaining the membership of any insolvency professional agency, register themselves with the Board within such time, in such manner and on payment of such fee, as may be specified by regulations. (2) The Board may specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field, as it deems fit. 208. Functions and obligations of insolvency professionals. – (1) Where any insolvency resolution, fresh start, liquidation or bankruptcy process has been initiated, it shall be the function of an insolvency professional to take such actions as may be necessary, in the following matters, namely: – L S (a) a fresh start order process under Chapter II of Part III; E S (b) individual insolvency resolution process under Chapter III of Part III L (c) corporate insolvency resolution process under Chapter II of Part II. I RC (d) individual bankruptcy process under Chapter IV of Part III; and Y C (e) liquidation of a corporate debtor firm under Chapter III of Part II. U D (2) Every insolvency professional shall abide by the following code of conduct: – S T (a) to take reasonable care and diligence while performing his duties; M (b) to comply with all requirements and terms and conditions specified in the bye-laws of the A L insolvency professional agency of which he is a member; A L K (c) to allow the insolvency professional agency to inspect his records; (d)to submit a copy of the records of every proceeding before the Adjudicating D U Authority to the Board as well as to the insolvency professional agency of which he is B a member; and A J (e) to perform his functions in such manner and subject to such conditions as may AP be specified. CHAPTER III INSOLVENCY PROFESSIONAL AGENCIES 199. No person to function as an insolvency professional agency without a valid certificate of registration. – Save as otherwise provided in this Code, no person shall carry on its business as insolvency professional agencies under this Code and enrol insolvency professionals as its members except under and under a certificate of registration issued on this behalf by the Board. 200. Principles governing the registration of insolvency professional agency. - The Board shall have regard to the following principles while registering the insolvency professional agencies under this Code, namely: – (a) to promote the professional development of and regulation of insolvency professionals; (b) to promote the services of competent insolvency professionals to cater to the L S needs of debtors, creditors and such other persons as may be specified; E S (c) to promote good professional and ethical conduct among insolvency L professionals; I RC specified; Y C (d) to protect the interests of debtors, creditors and such other persons as may be U D (e) to promote the growth of insolvency professional agencies for the effective S T resolution of insolvency and bankruptcy processes under this Code. AM L 201. Registration of insolvency professional agency. - A L K (1) Every application for registration shall be made to the Board in such form and manner, containing such particulars, and accompanied by such fee, as may be specified by regulations: D U B Provided that every application received by the Board shall be acknowledged within A J seven days of its receipt. AP (2) On receipt of the application under sub-section (1), the Board may, on being satisfied that the application conforms with all requirements specified under sub-section (1), grant a certificate of registration to the applicant or else, reject, by order, such application: Provided that no order rejecting the application shall be made without giving an opportunity to be heard by the applicant: Provided further that every order so made shall be communicated to the applicant within a period of fifteen days. (3) The Board may issue a certificate of registration to the applicant in such form and manner and subject to such terms and conditions as may be specified. (4) The Board may renew the certificate of registration from time to time in such manner and on payment of such fee as may be specified. (5) The Board may, by order, suspend or cancel the certificate of registration granted to an insolvency professional agency on any of the following grounds, namely: – (a) that it has obtained registration by making a false statement or misrepresentation or by any other unlawful means; (b) that it has failed to comply with the requirements of the regulations made by the Board or bye-laws made by the insolvency professional agency; L S (c) that it has contravened any of the provisions of the Act or the rules or the E S regulations made thereunder; L (d) on any other ground as may be specified by regulations: I RC Y C Provided that no order shall be made under this sub-section unless the insolvency the professional agency concerned has been given a reasonable opportunity of being heard: U D Provided further that no such order shall be passed by any member except whole-time members of the Board. S T AM L 202. Appeal to National Company Law Appellate Tribunal. - A L K Any insolvency professional agency which is aggrieved by the order of the Board made under section 201 may prefer an appeal to the National Company Law Appellate Tribunal in D U such form, within such period, and in such manner, as may be specified by regulations. A B J 203. Governing Board of insolvency professional agency. – AP The Board may, for the purposes of ensuring that every insolvency professional agency takes into account the objectives sought to be achieved under this Code, make regulations to specify– (a) the setting up of a governing board of an insolvency professional agency; (b)the minimum number of independent members to be on the governing board of the insolvency professional agency; and (c) the number of the insolvency professionals being its members who shall be on the governing board of the insolvency professional agency. 204. Functions of insolvency professional agencies. - An insolvency professional agency shall perform the following functions, namely: – (a) grant membership to persons who fulfil all requirements set out in its bye-laws on payment of membership fee; (b) lay down standards of professional conduct for its members; (c) monitor the performance of its members; (d) safeguard the rights, privileges and interests of insolvency professionals who are its members; L S (e) suspend or cancel the membership of insolvency professionals who are its E S members on the grounds set out in its bye-laws; L RC (f) redress the grievances of consumers against insolvency professionals who are I its members; and Y C (g) publish information about its functions, list of its members, performance of its U D members and such other information as may be specified by regulations. S T 205. Insolvency professional agencies to make bye-laws. – M Subject to the provisions of this Code and any rules or regulations made thereunder and A L after obtaining the approval of the Board, every insolvency professional agency shall make A section 196. L K bye-laws consistent with the model bye-laws specified by the Board under sub-section (2) of D U B Establishment, functions, and powers of the Insolvency and Bankruptcy Board of A J India (IBBI) AP Overview of Sections 188 to 198 Chapter I: The Insolvency and Bankruptcy Board of India Section 188 - Establishment and Incorporation of Board - Establishes the Insolvency and Bankruptcy Board of India (IBBI) as a statutory body. - Responsible for overseeing the implementation of the IBC. Section 189 - Constitution of Board Comprises: - A Chairperson appointed by the Central Government. - Three whole-time members. - One member from the Reserve Bank of India (RBI). - Five members nominated by the Central Government, including representatives from various ministries. Section 190 - Removal of Member from Office L S - Specifies conditions under which a member of the Board can be removed from office. E S L - Grounds for removal include misconduct, incapacity, or failure to perform duties. I RC Section 191 - Powers of Chairperson Y C - The Chairperson has the authority to exercise powers conferred by the IBC and preside over meetings. U D S T - Responsible for ensuring the effective functioning of the Board. AM Section 192 - Meetings of Board A L L K - Mandates that the Board must meet at least four times a year. - Defines quorum requirements and decision-making processes based on majority votes. D U B Section 193 - Member Not to Participate in Meetings in Certain Cases A J - Prohibits members from participating in meetings where they have a conflict of interest or AP personal stake in matters being discussed. Section 194 - Vacancies, etc., Not to Invalidate Proceedings of Board, Officers, and Employees of Board - Ensures that vacancies or defects in appointment do not invalidate proceedings of the Board or actions taken by its officers and employees. Section 195 - Power to Designate Financial Sector Regulator - Empowers the Central Government to designate a financial sector regulator for specific functions related to insolvency and bankruptcy Chapter II: Powers and Functions of the Board Section 196 - Powers and Functions of Board Enumerates powers including: - Registering insolvency professionals and agencies. - Specifying eligibility criteria for registration. L S - Conducting inspections and investigations. E S L The Insolvency and Bankruptcy Board of India (IBBI) plays a crucial role in regulating RC insolvency processes and professionals in India. Below are the key powers and functions of the I IBBI as outlined in the search results: 1. Registration and Regulation: Y C U D - Register insolvency professional agencies, insolvency professionals, and information utilities. ST - Renew, withdraw, suspend, or cancel such registrations. AM 2. Eligibility Criteria: A L agencies. L K - Specify minimum eligibility requirements for registration of insolvency professionals and D U - Lay down curricula for qualifying examinations for insolvency professionals. A B J 3. Fee Structure: AP- Levy fees or other charges related to registration and renewal processes. 4. Regulatory Standards: - Make regulations to establish standards for the functioning of insolvency professionals and agencies. 5. Process Oversight:  - Frame and enforce rules for corporate insolvency resolution, corporate liquidation, individual insolvency resolution, and individual bankruptcy. 6. Data Management: - Collect and maintain records related to insolvency cases. - Disseminate information regarding these cases to relevant stakeholders. 7. Grievance Redressal: - Specify mechanisms for addressing grievances against insolvency professionals and agencies. L S - Pass orders related to complaints filed under the provisions of the IBC. E S L 8. Monitoring and Auditing: I RC and agencies. Y C - Conduct periodic studies, research, and audits on the performance of insolvency professionals U D 9. Regulation of Valuers: S T M - Designated as the authority under the Companies (Registered Valuers and Valuation Rules), A 2017 to regulate valuers in India. A L 10. Public Consultation: L K D U - Specify mechanisms for issuing regulations, including conducting public consultations B before notifying any new regulations. A J AP 11. Miscellaneous Functions: - Perform other functions as prescribed under the IBC or required for effective implementation of its provisions. Powers Equivalent to Civil Court - While exercising powers under the IBC, the Board has similar powers as a civil court under the Code of Civil Procedure, 1908 concerning certain matters. The IBBI serves as a pivotal institution in India's insolvency framework, regulating both processes and professionals involved in insolvency proceedings. Its comprehensive functions ensure that insolvency resolutions are conducted efficiently, transparently, and by established legal standards. Section 197 - Constitution of Advisory Committee, Executive Committee, or Other Committee - Authorizes the Board to constitute advisory committees or other committees for efficient functioning. - These committees may assist in carrying out various functions under the IBC. L S E S Section 198 - Condonation of Delay L RC - Allows the Board to condone delays in filing documents or applications under certain I circumstances. Y C - Emphasizes flexibility in procedural compliance to facilitate effective resolution processes. U D S T These notes provide a structured overview of the key provisions related to the establishment, M composition, powers, and functions of the Insolvency and Bankruptcy Board of India as outlined A in Chapters I and II of the IBC. A L L K Adjudicatory Authority: National Company Law Tribunal (NCLT) D U A B The National Company Law Tribunal (NCLT) serves as the Adjudicatory Authority under the J Insolvency and Bankruptcy Code (IBC) of 2016. It plays a crucial role in the corporate AP insolvency resolution process (CIRP) and has specific powers and functions. Here are the key aspects: Establishment and Jurisdiction - The NCLT was established under the Companies Act, 2013, and is empowered to adjudicate matters related to corporate insolvency, including applications for initiation of CIRP against corporate debtors. - It has exclusive jurisdiction over matters related to insolvency and liquidation processes for companies. Powers of NCLT - Admission or Rejection of Applications: The NCLT has the authority to admit or reject applications filed under Sections 7, 9, and 10 of the IBC. It must ascertain the existence of default within 14 days of receiving an application. - Approval of Resolution Plans: After a resolution plan is approved by the Committee of Creditors (CoC), it must be submitted to the NCLT for approval. The NCLT can reject a plan if it L S does not comply with legal requirements as outlined in Section 30(2). E S L - Interim Orders: The NCLT can issue interim orders during proceedings to protect the interests of stakeholders or maintain the status quo. I RC Y C - Contempt Powers: Although not explicitly stated in the IBC, the NCLT has been recognized to possess contempt powers under Section 425 of the Companies Act, allowing it to enforce compliance with its orders. U D S T Judicial Review AM L - The NCLT's decisions are subject to appeal before the **National Company Law Appellate A L K Tribunal (NCLAT)**. However, its jurisdiction is limited to matters arising from insolvency proceedings, and it cannot reassess the commercial wisdom exercised by the CoC. D U - In landmark cases like **K. Shashidhar v. Indian Overseas Bank**, it was clarified that the B NCLT does not have the authority to question the fairness or viability of a resolution plan A J approved by the CoC. AP Inherent Powers - The NCLT possesses inherent powers under Rule 11 of its rules, allowing it to take necessary actions in furtherance of justice or to prevent abuse of its process. - These powers enable it to refer matters for investigation if fraud is suspected, ensuring accountability among corporate entities. Conflict with Civil Courts - The IBC explicitly bars civil courts from intervening in matters that fall within the jurisdiction of the NCLT, ensuring that all insolvency-related disputes are resolved within this framework. In cases like Gujarat Urja Vikas Nigam Limited v. Amit Gupta, the Supreme Court emphasized that while NCLT has broad powers under IBC, its jurisdiction is limited to issues directly related to insolvency resolution. - The court also ruled that disputes arising from contracts can only be adjudicated by NCLT if they are central to insolvency proceedings. L S The NCLT serves as a pivotal adjudicatory authority in India's insolvency landscape, equipped E S L with specific powers to facilitate corporate restructuring and liquidation. Its decisions RC significantly impact stakeholders involved in insolvency proceedings, while its inherent powers I C ensure effective enforcement and compliance within the framework established by the IBC. Y Information Utility U D S T The laws governing information utilities are Sections 209 to 216 of the Insolvency and M Bankruptcy Code, 2016 and Insolvency and Bankruptcy Board of India (Information Utilities) A L Regulations, 2017. Information Utility (IU) is a professional organization which is registered A L K under Section 210 of the Insolvency and Bankruptcy Code, 2016 whose function is to gather, assemble, accumulate, validate and disseminate financial information from companies and D U creditors to facilitate insolvency, liquidation and bankruptcy. A person can rely on the B information stored in the IU before investing. This ensures that a person’s investment is secured. A J AP Information Utility Under Sections 209-216 of the Insolvency and Bankruptcy Code (IBC) The Insolvency and Bankruptcy Code (IBC) of 2016 establishes a framework for Information Utilities (IUs), which play a crucial role in the insolvency resolution process. Below is a summary of the provisions related to Information Utilities as outlined in Sections 209 to 216 of the IBC. Section 209: No person to function as an information utility without a certificate of registration - Definition: Information Utilities are entities that collect, store, and disseminate financial information related to debts and defaults. - Purpose: They serve to provide reliable information to stakeholders involved in insolvency proceedings, ensuring transparency and aiding in the resolution process. Section 210 - Registration of Information Utilities - Registration Requirement: No person can act as an Information Utility unless registered with the Insolvency and Bankruptcy Board of India (IBBI). - Eligibility Criteria: The IBBI specifies minimum eligibility requirements for registration, L S ensuring that only qualified entities operate as IUs. E S L Functions of Information Utilities I RC Y C - Data Collection: IUs are responsible for collecting financial data from creditors and debtors. - Storage and Maintenance: They must maintain accurate records of financial information and make it accessible to authorized users. U D ST - Dissemination of Information: IUs provide information to stakeholders, including insolvency M professionals, creditors, and the NCLT, to facilitate informed decision-making during insolvency A proceedings. A L L K Section 211: Appeal to National Company Law Appellate Tribunal: Any information utility D U which is aggrieved by the order of the Board made under section 210 may prefer an A B appeal to the National Company Law Appellate Tribunal in such form, within such J period, and in such manner, as may be specified by regulations. AP Powers of Information Utilities - Inspection Powers: The IBBI has the authority to inspect the records and operations of Information Utilities to ensure compliance with regulations. - Regulatory Oversight: The Board can impose penalties for non-compliance with the provisions of the IBC or regulations issued under it. Section 212: Governing Board of information utility: The Board may, for ensuring that an information utility takes into account the objectives sought to be achieved under this Code, require every information utility to set up a governing board, with such number of independent members, as may be specified by regulations. Regulations by the Board The IBBI is empowered to make regulations regarding: - The manner of collecting and storing data by Information Utilities. - Providing access to such data by stakeholders involved in insolvency processes. L S Penalties for Non-compliance E S L - The IBBI can impose penalties on Information Utilities for violations of the provisions of the IBC or regulations issued under it, promoting accountability. I RC Section 214: Obligations of Information Utility Y C U D Section 214 of the Insolvency and Bankruptcy Code (IBC) outlines the obligations of Information S T Utilities (IUs) in providing core services. The key obligations are as follows: AM L 1. Creation and Storage: IUs must create and store financial information in a format that is A universally accessible. L K U 2. Electronic Submissions: They are required to accept electronic submissions of financial D B information from individuals obligated to submit such data, as specified in Section 215(1), A J following the regulations set by the IBBI. AP 3. Voluntary Submissions: IUs must also accept electronic submissions from individuals who wish to provide financial information, in a specified format. 4. Service Quality Standards: They must adhere to minimum service quality standards as defined by regulations. 5. Authentication of Information: Before storing any financial information, IUs must ensure that it is authenticated by all relevant parties. 6. Access to Information: IUs are obligated to provide access to the stored financial information to any person who requests it, by specified regulations. 7. Statistical Information Publication: They must publish statistical information as required by regulations. L S S 8. Inter-operability: IUs should ensure interoperability with other information utilities, facilitating E seamless data exchange and access. L I RC Y C This section establishes a framework for the operational standards, responsibilities, and transparency requirements for Information Utilities, ensuring they effectively support the insolvency resolution process. U D S T M Section 215: Procedure for submission, etc., of financial information. A A L 215. (1) Any person who intends to submit financial information to the information utility or access L K the information from the information utility shall pay such fee and submit information in such U form and manner as may be specified by regulations. D A B J (2) A financial creditor shall submit financial information and information relating to assets about AP which any security interest has been created, in such form and manner as may be specified by regulations. According to Section 215(3), it is optional for operational creditors to submit financial information to the IUs. The financial information which is required to be submitted to the IU is as follows:  1. Records of a person’s debt; 2. Liability of the person when the person is solvent; 3. Records of the assets over which the security has been created; 4. Proceedings of default by the person against any debt; and 5. Balance sheet and cash-flow statements of the person. The establishment and regulation of Information Utilities under Sections 209 to 216 of the IBC are designed to enhance transparency and efficiency in insolvency proceedings. By providing reliable financial information and maintaining accurate records, IUs play a vital role in L S E facilitating informed decision-making among stakeholders involved in corporate insolvency S L resolution. The oversight by the IBBI ensures that these utilities operate within a framework that I RC promotes compliance, accountability, and best practices in the insolvency ecosystem. Liquidation Process- Powers of liquidator Y C U D Section 33- 54 deals with liquidation S T Process: (just order) AM A L Section 33. Initiation of liquidation L K Section 34. ⁠Appointment of liquidator and fee to be paid Section 35. ⁠Powers and duties of liquidator D U Section 36. ⁠liquidation estate Section 37. ⁠powers of the liquidator to access information A B Section 38. ⁠consolidation of claims J Section 39. ⁠verification of claims AP Section 40. ⁠admission or rejection of claim Section 41. ⁠determination of the value of the claim Section 42. ⁠appeal against the decision of the liquidator Section 53. Distribution of assets Section 54. ⁠Dissolution of the corporate debtor Summary of Liquidation Process Under the Insolvency and Bankruptcy Code (IBC) Section 33: Triggers for Initiating Liquidation 1. Triggers for Liquidation: - The Adjudicating Authority can initiate liquidation if: - No resolution plan is received before the expiry of the insolvency resolution process period or if a plan is rejected for non-compliance. - The resolution professional informs that the Committee of Creditors (CoC), with at least 66% approval, has decided to liquidate the corporate debtor. L S 2. Liquidation Order: E S - Upon triggering liquidation, the Adjudicating Authority must: L - Pass an order for liquidation. I RC Y C - Issue a public announcement about the liquidation. U D S T - Notify the authority where the corporate debtor is registered. 3. Contravention of Resolution Plan: AM A L L K - If a resolution plan approved by the Adjudicating Authority is contravened, affected parties may apply for a liquidation order. D U A occurred.B - The Adjudicating Authority will pass a liquidation order if it finds that contravention has J AP 4. Legal Proceedings Post-Liquidation Order: - Once a liquidation order is passed, no legal proceedings can be initiated against the corporate debtor, except by the liquidator with prior approval from the Adjudicating Authority. - Certain legal proceedings may be exempted as notified by the Central Government. 5. Discharge Notice:  - The liquidation order serves as a notice of discharge for officers, employees, and workmen of the corporate debtor unless the business continues during liquidation. Section 34: Appointment and Powers of Liquidator 1. Appointment of Liquidator: - The resolution professional appointed during the insolvency process acts as the liquidator unless replaced by the Adjudicating Authority. L S 2. Eligibility Criteria: E S L - An insolvency professional must be independent of the corporate debtor to be appointed as a debtor. I RC liquidator, meeting specific criteria regarding relationships and prior engagements with the Y C 3. Powers Vested in Liquidator: U D S T - Upon appointment, all powers of directors and key managerial personnel cease and are transferred to the liquidator. AM A L 4. Cooperation from Corporate Debtor Personnel: L K - Personnel of the corporate debtor must assist and cooperate with the liquidator in managing U affairs during liquidation. D A B 5. Replacement of Liquidator: J AP- The Adjudicating Authority can replace the liquidator upon request, directing the Board to propose a new insolvency professional within ten days. 6. Public Announcement for Claims: - The liquidator must make a public announcement inviting stakeholders to submit or update their claims within five days of appointment. Section 54. Dissolution of the corporate debtor. (1) Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor. (2) The Adjudicating Authority shall on application filed by the liquidator under sub-section (1) order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly. (3) A copy of an order under sub-section (2) shall within seven days from the date of such order, be forwarded to the authority with which the corporate debtor is registered. In the matter of Rajive Kaul Vs. Vinod Kumar Kothari & Ors., liquidator approached the L S Adjudicating Authority for removal of the nominee directors of the corporate debtor on account of E S L their non-cooperation, active obstruction, breach of duty and breach of code of conduct. The RC Adjudicating Authority held that the liquidator has the power to remove and also appoint nominee I Y C directors of the corporate debtor which the company is bound to follow. The above Adjudicating Authority order was subject to an appeal. Accordingly, the Appellate Authority upheld the D Adjudicating Authority’s order. It held that it is a fundamental principle of law that a company in U T liquidation acts through the liquidator who fills the role of the company’s board of directors to S AM carry out its legal obligations. It was further held that the liquidator is armed with requisite powers to remove the nominee directors and is entitled to nominate the directors. The company is A L mandated to act upon the replacement proposal of the existing nominee directors and the liquidator L K is not required to inform the reasons for replacing nominee directors. D U B Powers and Duties of Liquidators A J Section 35 of the Code enumerates the Powers and Duties of the Liquidator which include the AP following:- to verify the claims of all the creditors and consolidate them; to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor; to evaluate the assets and property of the corporate debtor in the manner and prepare a report;  to take such measures to protect and preserve the assets and properties of the corporate debtor; to carry on the business of the corporate debtor for its beneficial liquidation; to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels, though transfer is subjected to section 52 and further the liquidator shall not sell the immovable and movable property or actionable claims to any person who is not eligible to be a resolution applicant. to draw, accept, make and endorse any negotiable instruments on behalf of the corporate L S S debtor, with the same effect as if such instruments were drawn, accepted, made or endorsed E L by or on behalf of the corporate debtor in the ordinary course of its business; RC to take out, in his official name, a letter of administration to any deceased contributory and I Y C to do in his official name any other act necessary for obtaining payment of any money due and payable from a contributory or his estate which cannot be ordinarily done in the name U D of the corporate debtor, and in all such cases, the money due and payable shall, to enable S T the liquidator to take out the letter of administration or recover the money, be deemed to be due to the liquidator himself; AM L to obtain any professional assistance, in the discharge of his duties, obligations and A responsibilities; L K to invite and settle claims of creditors and claimants and distribute proceeds following the D U provisions of this Code; B to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in A Jthe name of on behalf of the corporate debtor; AP to investigate the financial affairs of the corporate debtor to determine undervalued or preferential transactions; to take all such actions, steps, or to sign, execute and verify any paper, deed, receipt document, application, petition, affidavit, bond or instrument and for such purpose to use the common seal, if any, as may be necessary for liquidation, distribution of assets and in the discharge of his duties and obligations and functions as liquidator;  to apply to the Adjudicating Authority for such orders or directions as may be necessary and to report the progress of the liquidation process in a manner as may be specified by the Board; and to perform such other functions as may be specified by the Board. Other than the ones quoted above the Liquidator has the following Rights and Duties too:- 1. To Admit and Reject claims of Creditors, 2. Power to access any information system for verification of Claims and identification of L S assets forming part of the Liquidation Estate of the Corporate Debtor from sources such as, E S L Information Utility, Credit Information Systems, Central and State Government Agency, RC databases maintained by the Board etc. as specified in Section 37 of the Code. I 4. Avoid undervalued transactions Y C 3. To evaluate preferential transactions, if any done by the Corporate Debtor. U D 5. Distribute the Liquidation proceeds as per Section 53 of the Code. S T 6. Make an application for the Dissolution of the Corporate Debtor once all its assets are duly liquidated. AM A L L K In the case of Pariman Enterprises Pvt. Ltd. v. Atlantis LifeSciences Pvt. Ltd, the Mumbai Bench of the National Company Law Tribunal passed a liquidation order against the corporate debtor on U the grounds provided under Section 33(1)(a) of IBC. The corporate debtor was ordered to be D B liquidated as the adjudicating authority did not receive the resolution plan even after the expiry of A J the maximum prescribed period for the completion of CIRP (180 days). AP Swiss Ribbons Pvt. Ltd. v. Union of India (2019): The Swiss Ribbons case is a landmark case that upheld the constitutionality of IBC and specifically validated various provisions under the code. In relation to the topic of liquidation, Section 53 of IBC which deals with the distribution of assets during the liquidation process was challenged as being arbitrary and discriminatory. The petitioners in this case claimed that the order of priority of each class of creditors violated Article 14 of the Constitution. It was, however, observed that it is essential to distinguish between operational debts which are often unsecured debts and financial debts which are generally secured debts which create a flow of capital into the economy. Hence, the classification of creditors and order of priority Discharging the financial debts of banks and financial institutions will beneficially trigger a legitimate and justifiable reason. It was also affirmed by the Apex Court that the order of priority as provided under the impugned provision is to be followed only during liquidation of the corporate debtor. In this context, the Hon’ble Supreme Court upheld the constitutional validity of the Section and observed that it was neither arbitrary nor discriminatory. L S E Kridhan Infrastructure Pvt. Ltd. v. Venkatesan Sankaranarayan & Ors (2020): The Supreme S L Court dismissed the appeal filed against the liquidation order that was upheld by the NCLAT. On RC the grounds of failure to implement the approved resolution plan, the NCLT passed an order of I Y C liquidation. However, on appeal, the NCLAT provided a specific amount of time to the resolution applicant to make certain deposits instead of immediately resorting to liquidation. Subsequently, U D on the grounds of failure to make the ordered deposits, the NCLAT upheld the liquidation order S T that was passed by the NCLT. While the Supreme Court had initially, in 2020 stayed the liquidation order and provided additional time for the implementation of the resolution plan, the resolution applicant failed to do so. AM A L L K Ultimately, the Supreme Court, in 2021 held that the liquidation process must continue as permitting the process to lapse into delay will defeat the purpose of IBC. D U A B Yavar Dhala v. JM Financial Asset Reconstruction Company Ltd. & Ors (2021): the National J Company Appellate Tribunal ordered the liquidation of the corporate debtor on the grounds AP specified under Section 33(3) of IBC. The resolution applicant in question had succeeded the corporate debtor in this case and was expected to fulfil certain obligations under the resolution plan, which they failed to fulfil. The Hon’ble NCLAT held that the corporate debtor should be liquidated and passed an order of liquidation. Sunil Kumar Jain and others v. Sundaresh Bhatt & Ors (2022): The primary issue in this case was about the categorization of the wages or salaries due to be paid to the workmen employed by the corporate debtor during the CIRP. The question arose as to whether the salaries of workmen who did not work during the CIRP period would fall under the category of “CIRP costs” or whether they should be distributed according to the order of priority provided under Section 53 of IBC. The Apex Court held that, if the company was a going concern during the CIRP, the wages of those workers who worked during the process would be included under the category of CIRP cost. However, the pending wages or salaries of those workmen who did not work during the CIRP will be calculated and distributed based on the order of priority as laid down under Section 53 of IBC. L S E S L I RC Y C U D S T AM A L L K D U A B J AP