INTERFACE BETWEEN INSOLVENCY AND  BANKRUPTCY CODE AND COMPANY LAW

ABSTRACT 

The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) marked a watershed moment  in India’s corporate legal regime. Prior to its introduction, insolvency and corporate distress were  regulated through a fragmented framework under the Companies Act, 1956/2013, the Sick  Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debts Due to  Banks and Financial Institutions Act, 1993 (RDDBFI), and the Securitisation and Reconstruction  of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). This  multiplicity of forums and processes created confusion, delay, and inconsistent adjudication.  With the IBC, India shifted to a consolidated, time-bound, creditor-driven mechanism to resolve  insolvency, thereby improving the ease of doing business and investor confidence. However, the  interface between IBC and the Companies Act, 2013 continues to pose interpretational  challenges. While the IBC is designed as a special law prevailing over conflicting provisions of  the Companies Act, certain overlaps remain concerning winding-up, fraudulent transactions,  directors’ duties,disqualification, shareholder rights, and corporate governance. 

This research paper critically examines the relationship between the IBC and the Companies Act,  highlighting areas of convergence, conflict, and complementarity. It traces the legislative history,  reviews committee reports, and analyses key judgments of the Supreme Court and the National  Company Law Appellate Tribunal (NCLAT). The paper also evaluates recent reforms, including  amendments to both statutes and judicial harmonisation efforts. The methodology adopted is  doctrinal, relying upon statutory analysis, judicial pronouncements, and secondary literature. 

The paper is structured around three central research questions: first, whether the IBC has  achieved primacy over the Companies Act in matters of insolvency; second, whether the  coexistence of both legislations creates legal uncertainty; and third, whether reforms are  necessary to further harmonise the interface between corporate law and insolvency law. The  findings suggest that while IBC has significantly improved resolution timelines and creditor  confidence, the residual overlaps with company law create ambiguities. The recommendations  include clearer legislative drafting, improved coordination between the Ministry of Corporate  Affairs (MCA) and the Insolvency and Bankruptcy Board of India (IBBI), and a more robust  jurisprudence harmonising the two regimes. 

Keywords: Insolvency, Bankruptcy, Companies Act, Corporate Governance, IBC, Winding Up,  NCLT 

Introduction

The corporate legal regime in India has historically revolved around the Companies Act, first  enacted in 1956 and subsequently replaced by the Companies Act, 2013. This legislation governs  incorporation, management, governance, shareholder rights, and winding-up of companies.  While it provided for liquidation and winding-up, the procedures were slow, cumbersome, and  often ineffective in ensuring timely resolution of corporate distress. 

The Sick Industrial Companies (Special Provisions) Act, 1985 attempted to address industrial  sickness, but was widely criticised for fostering delays. Similarly, the Recovery of Debts Due to  Banks and Financial Institutions Act, 1993 and the SARFAESI Act, 2002 addressed debt  recovery, but failed to provide a holistic insolvency framework. The absence of a consolidated,  efficient, and creditor-driven insolvency regime was seen as a major bottleneck in India’s  investment climate. 

The Insolvency and Bankruptcy Code, 2016, enacted on the recommendations of the Bankruptcy  Law Reforms Committee, consolidated the laws relating to insolvency of companies,  partnerships, and individuals into a single framework. The IBC created a time-bound mechanism  of 180/270 days for corporate insolvency resolution processes (CIRP), under the adjudication of  the NCLT, with appeals to the NCLAT and the Supreme Court. 

While the Companies Act continues to govern corporate governance, shareholder rights, and  directors’ duties, the IBC now occupies the field relating to insolvency and liquidation. However,  certain areas of overlap remain, requiring careful judicial and legislative harmonisation. 

EVOLUTION OF INSOLVENCY AND BANKRUPTCY REFORMS IN INDIA 

Meaning 

Insolvency has been defined as ”a state that leads one to seek bankruptcy”. A person, family, or a  company becomes an insolvent when it is unable to repay its loan within time. Generally, this  happens when the cash flow in of the entity falls below its cash flow out. For individual debtors,  this means that their earnings are insufficient for them to repay their debts. For businesses, this  means that the flow of money into the business and its assets is less than its liabilities. 

Bankruptcy is not exactly equivalent to insolvency. Indeed, bankruptcy arises when a court has  established insolvency, and issued orders for its settlement. Insolvency refers to the situation  when the debtor cannot fulfill his obligation of paying off debts. Bankruptcy is a judicial process  under which an insolvent debtor gets relief. 

The core reasons for insolvency are mainly poor management and financial shortages. The  following can be the cause for the same: 

• The market situation shifts and the firm failed to realize the change according to market  needs.
• Bad debts. 
• Failure of the management to gain proper skills, reckless accounting procedures and lack of data systems. 
• Loss of long-term finance or insufficient cash flow. 
• Other causes can be knock on effect, i.e. due to other insolvencies or due to some other reason like exorbitant overheads and so on 

It is, however, noted that the larger the organisation, the higher the chance of survival and of  receiving remedial treatment and of repaying creditors. 

Insolvency laws in India 

The Insolvency laws in India trace their origin in English Law. The insolvency law provisions  were originally in Section 23 and 24 of the Government of India Act 1800. A Statute was  enacted in 1828 which was the foundation of insolvency specific legislation in India. The statute  was applicable in Presidency towns that is Bombay, Madras and Calcutta. The Indian Insolvency  Act 1848 was later enacted which differentiated between traders and non-traders. The insolvency  jurisdiction was shifted to the High Courts, whose jurisdiction was restricted to presidency  towns. The Presidency Towns Insolvency Act 1909 was enacted in 1909. Until 1907, there was  no law addressing insolvency in no presidency regions, thus, in 1907, the Provincial Insolvency  Act was enacted which came to be superseded by the Provincial Insolvency Act 1920. These two  laws remained in operation until recently and were repealed by the IB Code. 

Since ”Bankruptcy & Insolvency” is a Concurrent List item in the Indian Constitution, the Centre  as well as the State Governments have legislative power on this topic. Entry 43 of List I is  concerned with incorporation, regulation and winding up of trading corporations, banking,  insurance and financial corporations, but not co-operative societies while Entry 44 of List I is  concerned with ”incorporation, re gulation and winding up of corporations, whether trading or  not, with objects not confined to one State, but not including universities”.”. Entry 32 of List II  pertains to ”incorporation, regulation and winding up of corporations, other than those specified  in List I.” Laying down these powers under the Union List, Parliament legislated the first piece  of legislation pertaining to corporate insolvency in India i.e. the Companies Act 1956. The Act,  however, did not mention insolvency or bankruptcy of corporates but only mentioned its  ”inability to pay debts.”. 

Companies (Amendment) Act 2003 suggested some modifications in the insolvency provisions  of the Companies Act 1956. These were not possible to be notified because of judicial  challenges. In 2013, the new Companies Act was enacted making several changes in the  corporate insolvency process the majority of which could not be notified for a long period of  time. The Companies Act 2013 also incorporated Ch.XIX which addressed revival and  rehabilitation of sick companies. The concept behind the inclusion of this chapter under the  company law was to expand the ambit of revival and rehabilitation mechanism encompassing within its ambit all types of companies whereas SICA had only made provision for rehabilitation  mechanism for ”sick industrial” companies. This chapter has now been revoked since the whole  revival/rehabilitation process or mechanism of corporate debtor (or ailing firms) is now provided  under the IB Code. 

After the globalisation of the economy, corporate insolvency gained a significant status. A  necessity was therefore required to introduce reforms in the field of insolvency laws. The key  aims for introducing reforms in the laws of insolvency were: 

1. For the rehabilitation of the debtor company to profitable trading where this is feasible;
2. For enlarging the return to creditors as a whole when the company itself cannot be saved;
3. For creating a reasonable and balanced system for the prioritization of claims and the allocation of assets between creditors, including reallocation of rights 
4. To provide a mechanism through which causes of failure can be determined and those responsible for mismanagement brought to account; 
5. Placement of assets of the company under public control; 
6. Replacement of group effort by individual ventures; and 
7. Avoidance of certain transactions and fraudulent conveyances, dissolution and winding  up etc. 

LEGISLATIVE BACKGROUND AND COMMITTEES’ 

The J.J. Irani Committee (2005) recognised that India needed a modern insolvency regime. It  recommended that insolvency law must balance the interests of creditors and debtors, promote  timely resolution, and integrate with corporate law. 

The Bankruptcy Law Reforms Committee (2015), chaired by Dr. T.K. Viswanathan, became the  basis for the IBC. The committee observed that fragmented legislations had failed to ensure  predictability, and recommended a consolidated code with primacy over company law in  insolvency matters. 

The Insolvency and Bankruptcy Code, 2016 was enacted as a special law, with Section 238  providing it overriding effect over other legislations, including the Companies Act.  Simultaneously, certain provisions of the Companies Act, 2013 relating to insolvency and  winding-up were amended or repealed to avoid duplication. However, the Companies Act  continues to provide for voluntary winding-up, compulsory winding-up by Tribunal, and  regulation of corporate offences, creating a dual regime. 

TIWARI COMMITTEE

In 1981, the RBI showed deep concern over blocking of huge funds and non-performing assets  of sick industrial companies that led to loss in production, revenue as well as employment. To  address this, a committee was constituted under the chairmanship of T. Tiwari. The committee came up with suggestions to secure the timely detection of sick and potentially sick industrial  companies, speedy determination of the preventive and remedial measures and enforcement of  such measures recommending the enactment of the Sick Industrial Companies (Special  Provisions) Act 1985 (SICA). A Board for Industrial and Financial Reconstruction was  established which failed to fulfil the purpose in the long run. 

JUSTICE V.B. BALAKRISHNA ERADI COMMITTEE 

The Tiwari Committee was followed by the recommendations of Justice V.B. Balakrishna Eradi  Committee Report in 1999, setting up of a National Company Law Tribunal (NCLT in short) to  be vested with the functions and power with regard to rehabilitation and revival of sick industrial  companies. It also suggested amendments to be made in the Companies Act 1956 that were  enacted but not notified. Other recommendations were adoption of UNCITRAL Model Law for  Cross Border Insolvency; need to encourage voluntary winding up of companies and criteria of  sickness of companies to include inability to pay debts. N L Mitra Committee. In 2001, the  Advisory Group on Bankruptcy Laws was constituted under the chairmanship of Dr N L Mitra.  This committee was appointed by the RBI which gave several suggestions on bankruptcy law  reforms, one such significant proposal was the consolidation of all the scattered bankruptcy laws  into a separate code. However, no steps were taken. 

J.J IRANI COMMITTEE 

Then the J.J. Irani Committee Report in 2005 was constituted to review and revise primarily  Company Law and especially establish a transparent framework for insolvency and restructuring  procedures of international level. The Committee recommended changes in the law to make the  restructuring and liquidation process expeditious. The recommendations Then the J.J. Irani  Committee Report in 2005 was constituted to review and revise primarily Company Law and  especially establish a transparent framework for insolvency and restructuring procedures of  international level. The Committee recommended changes in the law to make the restructuring  and liquidation process expeditious. The recommendations were directed at providing a single  framework for resolving insolvency of corporates through a specialised adjudicatory authority. 

INTERFACE BETWEEN IBC AND COMPANIES ACT  

1. Winding-up and Insolvency 

The Companies Act, 2013 under Sections 270–365 originally provided for winding-up, both  voluntary and by Tribunal. However, after the IBC, most of these provisions have been repealed or restricted. Now, winding-up is limited to situations such as acting against the sovereignty of  India, fraudulent conduct, or when it is “just and equitable” to do so. For insolvency resolution,  IBC is the exclusive regime. The Supreme Court in Forech India Ltd. v. Edelweiss Assets 

Reconstruction Co. Ltd., (2019) 18 SCC 549 clarified that post-IBC, winding-up petitions under  the Companies Act are maintainable only in limited circumstances. 

2. Overriding Effect (Section 238, IBC) 

Section 238 of IBC provides that the provisions of the Code shall prevail notwithstanding  anything inconsistent contained in any other law. This has been judicially upheld in Innoventive  Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, where the Supreme Court held that IBC  overrides the Maharashtra Relief Undertakings Act. Similarly, in Principal Commissioner of  Income Tax v. Monnet Ispat & Energy Ltd., (2018) 18 SCC 786, it was held that IBC  proceedings override the Income Tax Act. This confirms the primacy of IBC over the Companies  Act in insolvency matters. 

3. Directors’ Duties and Management during CIRP 

Under the Companies Act, directors owe fiduciary duties to the company and its shareholders.  Under IBC, once the CIRP is initiated, the powers of the board are suspended and vested in the  interim resolution professional (IRP) under Section 17, IBC. This creates an interface between  the fiduciary duties under the Companies Act and the insolvency framework. 

4. Fraudulent Transactions and Mismanagement 

The Companies Act, 2013 provides for investigation into fraudulent conduct, oppression, and  mismanagement under Sections 210–246. Parallelly, IBC provides for avoidance of preferential,  undervalued, fraudulent, and extortionate transactions under Sections 43–51. Courts have had to  balance these provisions. For example, in Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain,  (2021) 9 SCC 401, the Supreme Court stressed that NCLT’s jurisdiction under IBC is limited to  insolvency-related matters, and company law disputes must be separately adjudicated. 

5. Disqualification of Directors 

The Companies Act disqualifies directors for failure to file returns or repay deposits (Section  164). The IBC disqualifies promoters from submitting resolution plans if they are willful  defaulters (Section 29A, IBC). These provisions complement each other, ensuring accountability. 

6. Cross-border Insolvency and Group Insolvency 

The Companies Act is silent on cross-border insolvency, while IBC is gradually incorporating  UNCITRAL Model Law principles. Similarly, group insolvency issues have been discussed in jurisprudence, but harmonisation with corporate structures under the Companies Act is still  evolving. 

IMPACT OF IBC 2016 ON SICK COMPANIES AND INSOLVENCY RESOLUTION  PROCESS 

The initial law that addressed revival of Indian sick companies was the Sick Industrial  Companies Act 1985 which, naturally, was a commendable step but not without drawbacks. One  of the key downsides of this law was that it focused on the revival of merely ”industrial  companies”. As described by Arun Jaitely, the SICA experiment proved to be a complete failure  since the revival of a company in India is a time-consuming affair defeating the very purpose of  revival or even winding up. The Companies Act 1956 was amended along with the SICA  (Repeal) Act 2003 which never came into force. While passing the Companies Act 2013, a  whole Ch.XIX was included and dedicated to ”Revival and Rehabilitation of Sick Companies”.  That too was not notified and subsequent to the enactment of the IB Code this chapter has now  been abolished from the Companies Act 2013. 

It is noteworthy that SICA superseded the RDDBFI Act, SARFAESI superseded SICA giving  relief to secured creditors by allowing them to realize their interest without interference by courts  and now IB Code supersedes SICA. The Code has deprived the protection enjoyed by  companies/borrowers or rightfully the defaulters who seemed to have declared their company’s  net worth as depleted, driving off all the lenders by invoking unwarranted relief before the BIFR  (s.22 referred above). The IB Code has abolished the BIFR rendering the companies susceptible  to winding up petition in case no workable revival plan is finalized within the stipulated time  frame. Since the Code encompasses a broad category of creditor-applicants  (Financial/operations/secured/unsecured), insolvency resolution process can now be started  against an applicant even by unsecured creditors in contrast with the previous regime. The new  legislation offers relief to all types of creditors who are looking for redressal for their grievance  but the final authority to sanction (75% voting in favor) the revival plan or proceed with the  winding up of corporate debtor rests with the financial creditors (committee of creditors). This  may be taken as a step in the right direction for businesses that are genuinely trying to address  their financial distress and for others this legislation can act as an incentive to either settle their  debts or forfeit control of the business. 

JUDICIAL INTERPRETATIONS 

The judiciary has played a crucial role in clarifying the interface between IBC and company law.

• Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 upheld the constitutional  validity of IBC, noting that it is a complete code and overrides company law in  insolvency. 
• ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1 elaborated on  Section 29A, harmonising promoter disqualification with corporate governance. • Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209 clarified that  NCLT’s jurisdiction is confined to insolvency, not general company law disputes. • Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352 nuanced the  mandatory admission of IBC petitions, showing the balance between corporate rights and  insolvency proceedings. 

RECENT DEVELOPMENTS 

Amendments to the Companies Act, 2020 streamlined winding-up provisions to avoid overlap  with IBC. The MCA has also aligned rules regarding filing of resolutions and reporting  requirements. Similarly, IBC amendments in 2018, 2020, and 2021 clarified priority of creditors,  homebuyers’ status, and pre-packaged insolvency resolution for MSMEs. 

FINDINGS 

The research reveals that: 

1. The IBC has achieved primacy over the Companies Act in insolvency and liquidation  matters, as confirmed by Section 238 and judicial precedents. 
2. Despite this, overlaps remain in areas such as fraudulent transactions, director  disqualification, and winding-up, creating interpretational challenges. 
3. Judicial intervention has harmonised conflicts, but a clearer legislative framework is  needed. 
4. The dual role of NCLT as adjudicator under both IBC and the Companies Act sometimes  creates procedural inefficiency. 

RECOMMENDATIONS 

1. The Companies Act provisions on winding-up should be further pruned to avoid  confusion with IBC. 
2. A consolidated Corporate Insolvency and Governance Code may be considered to  unify overlapping provisions. 
3. Cross-border insolvency provisions under IBC should be fully enacted, with clear  coordination with company law.
4. Training and capacity building of NCLT members should be enhanced to manage dual  jurisdictions effectively. 
5. Coordination between MCA and IBBI must be institutionalised through joint working  groups to address regulatory overlaps. 

CONCLUSION 

The collapse of certain business plans is part of the market economy’s process. In the event of  such collapses, the most reasonable and realistic solution would be to have a quick system that  would enable financiers to negotiate and reach a new agreement. Failing which, the ideal for the  financiers and society is liquidation. Once such arrangements are made operational, the debt  recovery process will function smoothly. But as has been witnessed from the past experiences it  is necessary that the current NPA issue be dealt with separately because resolving insolvency and  dealing with non- performing assets are two related but different issues. It is thus proposed that  the need of the hour is to create a distressed asset trading market in India. 

IB Code certainly holds much importance and relevance in the current situation as it has  revamped the outdated regime concerning insolvency and bankruptcy of India. It could be said  that now we possess a unified and all-encompassing law (in the form of now available  framework for time– bound resolution for debts) which stands at par with the international  standards. This will go a long way in introducing an element of certainty and predictability to  corporate transactions and helping towards the upgrading of India’s ranking in World Bank’s  ”Doing Business” report. The requirement for this to be a success will be its implementation in a  diligent manner. 

Being in its formative stage, the Code is likely to be made operational in a manner so as to aim  towards enforcing the law instead of operationally enforcing it at a fast pace. 

REFERENCES 

• Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549.
• Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407. 
• Principal Commissioner of Income Tax v. Monnet Ispat & Energy Ltd., (2018) 18  SCC786. 
• Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17. 
• ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1.
• Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, (2021) 9 SCC 401.
• Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209. 
• Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352.
• Bankruptcy Law Reforms Committee, Report (2015).
• J.J. Irani Committee Report on Company Law (2005).
• The Insolvency and Bankruptcy Code, 2016.
• The Companies Act, 2013.