Assessing Section 29A of the Insolvency and Bankruptcy Code, 2016

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Introduction

Insolvency is the condition of being unable to pay off one’s debts. When a person or company is insolvent, creditors pursue and collect their debts. Bankruptcy is a legal process set up to help debtors manage their financial problems. In this process, debtors can reduce the amount of debt and regain profitability while protecting their assets. Filing for bankruptcy is a decision that should be made after weighing the benefits and consequences of the action.

Insolven Smoke & Co., a high-end cigar manufacturer, found itself in serious financial trouble after an economic downturn caused its sales to decline. Instead of restructuring his company’s debt in bankruptcy, the owner chose to file for voluntary insolvency instead.

This choice allowed him to reduce his company’s liability and protect its assets. However, filing for bankruptcy proved to be a difficult process for Insolvency Smoke & Co. as many lenders refused to cooperate with the court proceedings. Ultimately, this resulted in a smaller number of bankruptcies compared to voluntary insolvencies.

When a debtor files for bankruptcy, the court appoints a bankruptcy trustee to collect all the remaining assets and liquidates the remaining debt. The debtor remains liable for all of their liabilities during this process but is no longer personally obligated to pay back any of his debts. The court conducts a hearing within 90 days after the petition is filed and decides whether or not to grant the bankruptcy case.

There are only two types of bankruptcies: liquidation and reorganization. In liquidation proceedings, debts are paid off in full with collateral while in reorganization proceedings, some of the debts are paid off with insolvent business’s own assets. The court also appoints an attorney general to represent the interests of all creditors when a bankruptcy occurs on behalf of a corporation or partnership.

Although bankruptcy is a difficult process, it can be an effective way for business owners to settle their debts and reorganize their businesses. Not everyone can successfully file for bankruptcy; they must first conduct a thorough financial audit first and understand their liability before deciding which path to take. Filing for bankruptcy can be tricky- but it may be necessary if your business is unable to repay its debts or recover from financial difficulties on its own.

The Effect of Section 29A of the Insolvency and Bankruptcy Code, 2016 on creditors

As a result of the incorporation of Section 29A into the Code, a person who causes a corporate debtor to default or is persona non grata by reason of incapacity under that section or who is an “affiliate” of another defaulting party will not be able to obtain The controlling corporate debtor declares that it is ineligible to file a resolution plan under the Code. Rather than aiming to help corporate debtors get back on their feet, the provision protects corporate creditors from wrongdoers who, despite past failures, seek to reward themselves by undermining the entire purpose of the code.

Section 29(A)(h): Amendment clarifies that anyone providing an enforceable security for a creditor-debtor is not entitled to a resolution plan. The criteria for barring a sponsor now depends on whether the NCLT approves the application.

This section protects corporate creditors from wrongdoers who try to reward themselves by testing the system despite prior failures, causing the settlement process’s goals to be tossed. The settlement specialist is responsible for carrying out due diligence in accordance with section 29A of the Code.

Reasonable due diligence on potential resolution applicants and their associates must be carried out effectively and independently in accordance with the timetable prescribed by the NCLT. The CoC has the right to review the due diligence report submitted by the resolution expert and decide whether to approve or reject the resolution plan.

The effect of section 29A of the Insolvency and Bankruptcy Code, 2016 (the “Code”) has been a matter of debate and discussion ever since the Code was enacted. The Code provides that certain categories of creditors shall not be entitled to vote in a meeting of creditors if the debt owed to such creditors is less than one lakh rupees.

The section has been challenged on the ground that it is violative of the right to equality as guaranteed under Article 14 of the Constitution of India. It has also been argued that the section is against public policy as it goes against the basic principle that all creditors should be treated equally.

The Supreme Court of India is yet to pronounce its verdict on the validity of the section. However, the effect of the section has been felt by creditors who are now prevented from voting if the

Considerations for assessing Section 29A of the Insolvency and Bankruptcy Code, 2016

Section 29A of the Insolvency Act 2016 has become one of the key pieces of legislation determining the eligibility of resolution applicants in corporate insolvency resolution proceedings. Nothing in the code as originally drafted would prevent defaulting promoters from buying back corporate debtors, which could be done at steep discounts.

Subsequently, amendments to the code retroactively extended section 29A to 23 November 2017. The second amendment to the Code came into force on 6 June 2018 and includes changes to section 29A.

Section 29A of the Insolvency and Bankruptcy Code, 2016 (the “Code”) has become one of the key aspects in determining whether a potential applicant is eligible for a long-term resolution, with a view to rescuing the company concerned from corporate insolvency under the Settlement Proceedings (CIRP).

This has already resulted in considerable delays in the approval phase of the upcoming resolution plan. In the ingenuity of the code when it came into force, there was nothing in the code to exclude defaulting promoters or their employees from the process, which would have meant repeating the mistakes of past systems to save “sick” companies.

The provision was introduced through subsequent legislative amendments on the advice of the Insolvency Law Commission set up by the central government and various opinions in the landmark judgment of the Supreme Court of India.

Section 29A of the Insolvency and Bankruptcy Code, 2016 (the “Code”) is established as the fundamental law for assessing eligibility for resolution applicants in the Corporate Insolvency Resolution Procedure (CIRP). The code as originally drafted contained no safeguards against defaulted promoters buying back corporate debtors, which can be done at steep discounts.

The Insolvency and Bankruptcy Code, 2016 (Code) was introduced with the aim of reducing the number of disputes and providing a more efficient and cost-effective resolution mechanism. The code gives the debtor a chance to restructure its debts and continue business operations, if it is viable.

One of the key aspects of the code is the assessment of the debtor’s viability. Section 29A of the Code provides a list of factors that the resolution professional must consider while assessing the debtor’s viability.

The following are some of the key considerations for assessing the debtor’s viability under section 29A of the Code:

  • The viability of the debtor’s business model
  • The feasibility of the debtor’s restructuring plan
  • The debtor’s financial position
  • The debtor’s track record
  • The debtor’s operational performance

Types of insolvency that can be treated under Section 29A of the Insolvency and Bankruptcy Code, 2016

Key features of effective bankruptcy law – the law from the initiation of bankruptcy proceedings to the discharge of the debtor and the conclusion of the procedure. These include standardized processes, ongoing funding, creditor engagement and simplified claims filing and verification requirements, a proposed route to liquidation should restructuring fail, and the eventual completion of the process.

Prior to the 2016 Bankruptcy Act, India did not have a specific law regulating insolvency and bankruptcy. Various laws have been implemented to regulate the insolvency and bankruptcy regime in India. Presidential Township Bankruptcy Act, 1909 and Provisional Bankruptcy Act, 1920, Companies Act, 2013, Sick Industrial Companies (Special Provisions) Abolition Act, 2013, Limited Liability Partnership Act, 2008, Secularization and Reconstruction of Financial Assets and Enforcement of the Security Interests Act, 2002, the Banks and Financial Institutions Debt Recovery Act, 1993 and the Indian Partnership Act, 1932 govern the insolvency and bankruptcy of individuals and companies.

Section 29A of the Code lists the types of insolvency that can be treated under the resolution process. The types of insolvency are as follows:

  • Financial insolvency – This arises when an individual or firm is unable to pay its financial debts as they fall due.
  • Operational insolvency – This arises when an individual or firm is unable to pay its operational debts as they fall due.
  • Commercial insolvency – This arises when a company is unable to pay its debts as they fall due.

Insolvency law treatment of corporate groups – domestic and international. This part is a supplement to the above two parts. This part focuses on cooperation and coordination and extends the provisions to the group context under the Model Law on Cross-Border Insolvency.

The Insolvency and Bankruptcy Code, 2016 (the “Code”) provides for insolvency resolution of individuals, partnership firms, companies and limited liability partnerships. The resolution process may be initiated by the firm itself or by financial creditors, operational creditors or the Central Government.


By: Shivangi Haldwani, a student at Amity University Noida.


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