The Bankruptcy Code & Sections 270-272 of The Companies Act, 2013- An Analysis

The Bankruptcy Code & Sections 270-272 of The Companies Act, 2013- An Analysis.

[Shreya Choudhary]

The author is a third year law student from ILS Law College Pune.

The Insolvency and Bankruptcy Code, 2016 (hereinafter the “Code“) envisages an effective time-bound insolvency resolution process, aiming to maximize the returns for its stakeholders, namely, corporate debtors, individuals and unlimited partnerships. The commencement of the new regime has affected certain provisions of the Companies Act, 2013, including the winding up process envisaged therein. It, therefore, becomes significant to analyse the Code having regard to the said provisions.

Overview of the Code

The Code lays down a two-step process for corporate debtors- insolvency resolution process and liquidation. First, an application has to be made to the adjudicating authority by the creditor or the debtor. This process is to be supervised by the resolution professional with the help of a creditors’ committee, and they have 180 days from the date of admission of the application to facilitate a resolution plan to either restructure or liquidate the debtor. The adjudicating authority orders a moratorium for this period. The resolution plan needs the approval of 75% of the financial creditors by voting share and the approval of the adjudicating authority to be binding on all creditors.

If the debtor’s situation cannot be resolved within the time allowed or the creditors reject the resolution plan or the 75% majority of the creditor’s committee resolves to liquidate the corporate debtor at any time during the process, the debtor is placed into liquidation and the resolution professional becomes the liquidator who realizes and distributes the assets in the new order of priority.

To meet its objective of time bound resolution of defaults, seamless implementation of liquidation/bankruptcy and maximization of asset value, the Code envisages a new institutional set-up comprising of-

(1) the Insolvency and Bankruptcy Board of India (IBBI) to regulate the insolvency process,

(2) the insolvency resolution professional to ensure efficient management and working of the bankruptcy process,

(3) the informational utilities (IUs) to act as a depository of financial information to avoid asymmetry in the resolution process.

(4) the National Company Law Tribunal (NCLT) to act as the adjudicating authority for corporate insolvency and liquidation.

Changes Introduced in Sections 270, 271 & 272 of the Companies Act, 2013 and in the Code

The Code has brought about certain changes in sections 270, 271 and 272 of the Companies Act, 2013. Through a notification issued under the Code, section 270, which provided for the different modes of winding up, has been substituted so as to include only winding up by the tribunal. Likewise, section 271, which elucidates the circumstances in which a company may be wound up by the tribunal, no longer covers the situation where a company is unable to pay its debts, for the said situation is now dealt with by the Code. Similar changes have been made to section 272, so as to remove “any creditor or creditors, including any contingent or prospective creditor or creditors” from the list of persons who may present a petition to the tribunal for winding up.

The provision for winding up on the ground of inability to pay debts now falls under the ambit of Section 7 to 9 of the Code. Further, creditors have the right to initiate resolution of insolvency proceeding on failure of which a liquidation application may be filed.


(1) Voluntary liquidation

Voluntary winding up has been incorporated in the Insolvency and Bankruptcy Code, 2016 under the provisions of Section 59. A corporate person who has not committed any default can initiate the voluntary liquidation process before the NCLT. The winding up process shall commence on the date on which a special resolution is passed by the members/partners of the corporate person to liquidate the corporate person and to appoint an insolvency professional to act as the liquidator. This remedy to initiate winding up proceedings against financially solvent companies that had defaulted in payment of debts was not available under the Companies Act, 2013. However, this is possible under the Code.

With respect to proceedings pending before the High Court relating to voluntary winding up, an inference can be drawn from the case of West Hills Realty Private Ltd. and Ors. v. Neelkamal Realtors Tower Private Limited[1] that only the petitions which are at a pre-admission stage and have not been served on the respondent will be transferred to the tribunal; others shall be dealt with by the High Courts.

Further, it is clear from the decision in Ashok Commercial Enterprises v. Parekh Aluminex Ltd.[2] that NCLT has jurisdiction over winding up proceedings even on account of inability to pay debts where such petition is served to a respondent after 15th December, 2016 and the High Court will continue to have jurisdiction over those winding up petitions which were served before 15th December, 2016.

(2) Winding up on inability to pay debts

As indicated earlier, section 271(1)(a) of the Companies Act, 2013 has been omitted by section 255 of the Code and the same is now dealt with in accordance with sections 7-9 of the Code. These sections deal with the initiation of corporate insolvency resolution process. On occurrence of a default, an application has to be made to the Tribunal by a creditor (financial and operational). An insolvency professional is appointed. Upon failure, there is liquidation of the corporate person is relation to whom application was made.

The scope of default under the Code is also wide as compared to the situation of inability to pay debts which was provided under the Companies Act, 2013. Section 3(12) of the Code defines ‘default’ as non-payment of debt, when whole, any part or an installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. ‘Inability to pay debts’, as interpreted by the Andhra Pradesh High Court in the case of Reliance Infocomm Ltd. v. Sheetal Refineries Pvt Ltd.[3] , means a situation where a company is commercially insolvent, that is, the existing and provable assets would be insufficient to meet the existing liabilities.

(3) Right of creditors to initiate a petition before the NCLT

Creditors no longer have the right to initiate winding up under Section 272 of the Companies Act, 2013. However, sufficient remedy is given under the Code . They have the right to initiate resolution of insolvency proceedings on failure of which a liquidation application may be made.

In the case of Nikhil Mehta v. AMR Infrastructure Limited[4], the Delhi bench of the NCLT provided guiding steps for financial creditors for filing application under the Code for the purpose of triggering the corporate insolvency resolution process. The bench explained that financial creditor refers to a person to whom a financial debt is owed. The expression ‘financial debt’ has been explained under section 5(8) of the Code according to which the debt must be disbursed against the consideration for the time value of money. Time value refers to the price associated with the length of time that an investor must wait until an investment matures. The inflows and outflows are distanced by time and there is a compensation for time value of money. Therefore, a simple agreement of sale or purchase of property will not acquire the status of financial debt merely because some assured amount of return has been promised.

Another important decision pertaining to the right of creditors under the Code is that ofICICI Bank v. Innoventive Industries Limited[5], wherein the NCLT (Mumbai) admitted the application for initiating the corporate insolvency resolution process and rejected the arguments put forth by Innoventive, holding that the suspension of liability under the Maharashtra Relief Undertaking (Special Provisions) Act (hereinafter the “MRU Act“), if allowed would be inconsistent with the ability of a creditor to initiate the resolution process under the Code. Therefore, it held that the overriding powers under section 238 of the Code shall render the suspension under the MRU Act inoperative.


The Code seeks to eliminate the complex judicial framework for resolving insolvencies and create a single unambiguous insolvency and bankruptcy framework. There are infrastructural and other challenges, and it remains to be seen whether the implementation of the Code is as effective as is contemplated by the new law.

[1] West Hills Realty Private Ltd. and Ors. v. Neelkamal Realtors Tower Private Limited,  S.C.C. OnLine Bom. 10038 (2016).

[2] Ashok Commercial Enterprises v. Parekh Aluminex Ltd.,  S.C.C. OnLine Bom 421 (2017).

[3] Reliance Infocomm.  Ltd. v.  Sheetal Refineries Pvt. Ltd., S.C.C. OnLine  A.P. 935 (2007).

[4] Nikhil Mehta v. AMR Infrastructure Limited, C.P. NO. (ISB)-03(PB)/2017 (2017)[N.C.L.T., Principle Bench, Delhi].

[5]­­­­­- I.C.I.C.I. Bank v. Innoventive Industries Limited, S.C.C. OnLine NCLT 7 (2017).

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