The Insolvency and Bankruptcy Code, 2016


The code was notified to streamline and consolidate the loss relating to the reorganization and insolvency resolutions of Corporates, Partnership and Individuals in a time bound manner. For the first time, the power was transferred to creditors to take control. The Code has an overriding effect over the other laws in India and will impact the initially constituted enactments like Companies Act, 2013 / 1956, Arbitration and Conciliation Act, 1996, Rockery of Debts due to Bank and Financial Institution Act, Negotiable Instrument Act, SICA and other laws related to recovery and insolvencies.


Section 2 of the Code makes it applicable to all the Companies, Limited Liability Partnership, any other Body incorporated under any law for the time being enforced and individuals.

Note: However, the insolvency legislation does not apply to financial firms.

Section 3 (6) defines the “claim” which means a right to payment, whether or not the right has been reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured.

NOTE: The definition takes in its ambit almost all rights which a creditor considers as its rights and the said right does not require a ratification of its correctness by any agency.

Section 3 (6) in part (b) of this definition the “claim” also means right to remedy of contract under any law for the time being enforced if such breach gives rise to a right to payment.

NOTE: This again is an unbridled definition of “claim” and the creditor accrues a right mere upon breach of contract. The word breach of contract has not been defined, thereby it is the discretion of the creditor to initiate the proceedings after adjudicating the breach has been committed by the debtor which has given a right to lodge a claim.

Section 3 (10) defines “creditor” means any person to whom a debt is owned and includes a financial creditor, operation creditor, secured creditor, unsecured creditor and decree holder.

NOTE: The terminology unsecured creditor and a degree holder, who have the authority to trigger the proceedings under the Code are risky. Since, an unsecured creditor and decree holder requires to prove its claim if disputed. In the circumstances, by granting a right to such class of persons, thereby may affect the authenticity of the claim.

Section 3 (11) defines “debt” means a liability or obligation in respect of its claim which is due from any person.

NOTE: The use of words liability in respect of a claim includes in its ambit even the disputes related to breach of contract, therefore, the Code considers, an obligation even under a dispute of breach of contract as a “debt”. This goes against the present legal dictums where mere claim of damage is not a “debt”.

Section 3(12) defines “default” means not payment of debt when whole or any part or instalment amount of the debts has become due and payable and is not repaid.

Section 5(6) defines “dispute” which includes a suits or arbitration proceedings relating to existence of the amount of debts, quality of service and breach of representation or warranty.

Section 5(20) defines “operational creditor”, means a person to whom an operation debt is owed and includes any person to whom such debt is legally assigned or transferred.

Section 8(1) sets out the procedure under which an operational creditor on the occurrence of default deliver a demand notice to the Corporate Debtor. Upon the receipt of the said demand, the corporate debtor shall furnish its reply within 10 days Section 8(2).

NOTE: However, the grounds for reply are limited. First is that the debt has been discharged and second is the dispute has been referred to the Arbitration or is pending in Suit. No other ground is referable in the reply to the default notice.

Section 9 stipulates that if no notice has been received within 10 days or the reply file is not in terms of Section 8(2) the aggrieved party may file an application before the concerned bench of NCLT for corporate insolvency.

NOTE 1: The demand notice required to be issued in Form 3. Under Form 4 the notice requires the inclosing of the unpaid invoice.

NOTE 2: The application by an operational creditor requires to be filed in the concerned NCLT in triplicate. The Application consists five parts, part one is the description of the applicant, part two is the description of the corporate debtor, part three is the details of the proposed interim resolution professional, part of four is details of operations debts and part is the particulars of documents and records in support of the operational debt.

NOTE 3: The Code has taken away the jurisdiction under A&C Act, 1996 as now such disputes can be adjudicated under the Code of 2016.

NOTE 4: The purpose of the application will only be for resolution of insolvency by initiating such process against the Corporate Debtor. It does not authorize to deal the defaults in different manner like when.

Notification: The Section of Code were notified on different dates and in tranches.

Section 3(1) was notified on 19.08.2016 and Section 3(2) – 3(27), Section 3(30)-3(36) were notified on 01.11.2016. Section 3(28) and 3(37) were notified on 19.08.2016.

Section 188 – 194 was notified on 05.08.2016 and Sections 196 & 197 were notified on 01.11.2016, Section 221-223 and 225-226, 230, 232-233, 239 were notified on 19.08.2016, Section 239(further parts) were notified on 01.11.2016, Section 240 (in parts) were notified on 19.08.2016 and 01.11.2016, Section 241, 242 were notified on 19.08.2016 and Section 244, 246-248, 250, 252 were notified on 01.11.2016.

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