22 Oct 2021 Ankit Chadha

Insolvency and Bankruptcy Code: Beyond the Tip of Iceberg

Insolvency and Bankruptcy | TRC Corporate Consulting

Before we begin contemplating the Insolvency and Bankruptcy Code, let’s know the minor difference between insolvency and bankruptcy. In simple words, while insolvency is a situation where a person is unable to pay off his debts, bankruptcy is the legal situation where an application is filed to an authority declaring an individual’s or firm’s insolvency, seeking to be declared bankrupt. This continues until discharge. Now that we’ve understood the difference between insolvency and bankruptcy, let’s gain insights into IBC Code, what led to its establishment, its significance, and what issues people or firms usually face while devising the resolution plan.

The Insolvency and Bankruptcy Code, 2016 (IBC) is India’s bankruptcy law that seeks to consolidate the framework by creating one law for insolvency and bankruptcy. The IBC code offers a one-stop solution for resolving insolvencies, which was previously a really long and complex process. It aims to protect small investors’ interests and make the process of doing business seamless and less cumbersome. Despite all the positive things about this Code, the need and scope of making a few amendments were still felt. Therefore, The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, was promulgated on April 4, 2021, which amended the Insolvency and Bankruptcy Code, 2016.


While GST is widely described as India’s biggest tax reform after the economic liberalization of 1991, the IBC (Insolvency and Bankruptcy Code), yet another contemporary law, is being assessed for its efficacy. It is rightly hailed as a crucial legislative reform; the IBC is expected to resolve the prevailing NPA (nonperforming assets) crisis, the logjam in credit availability, and the impact on growth.

The Indian Insolvency and Bankruptcy Code aims at:

  • Rescuing and rehabilitating companies in due course of time
  • Shifting control to the creditor via resolution professional
  • Empowering market and commercial stakeholders with the intervention of the regulatory body

Before the introduction of the IBC Code, there were a multitude of legislations related to insolvency and bankruptcy proceedings, but all of them were scattered. Multiple legislations dealing with such proceedings were:

  • The Companies Act, 2013
  • The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  • The Recovery of Debts Due to Banks and Financial Institutions Act, 1993

The IBC Code aims to consolidate all existing laws related to insolvency as well as amending a number of legislations that cover insolvency implications. As per Section 238 of the Indian Insolvency and Bankruptcy Code, the Code has an overriding effect on all the previous laws related to insolvency and bankruptcy. Moreover, there is a multitude of potential issues that are involved while an individual or firm undergoes the resolution under the Code. Therefore, it is vital to understand each and everything carefully while devising the resolution plan.

Indian government’s decision of abolishing multiple laws on debt trap companies and having a single law has eventually built positive vibes and accelerated the ease of doing business in India. While IBC Code’s objective is to improve the financial capabilities of debtors and restructure the debt, there are some leakages on tax attributes. However, the acquirer would critically and carefully evaluate the benefits and costs that are associated with the target’s cash flow mechanics and the acquisition. The tax leakage would impact both and, in turn, impact the ROI (Return on Investment). Moreover, such slippages are becoming significant in boardroom discussions.

Common Questions Related To Indian Bankruptcy And Insolvency Code 

As the companies are going under insolvency proceedings, certain questions are evolving:

  • Is the conversion of loan/ waiver of loan/ liabilities liable to tax? 

This issue is going to persist in most of the cases under the Indian Insolvency and Bankruptcy Code as the resolution plan would mostly involve waivers/write-off of significant sums, and then, the tax implications will play a vital role. Therefore, there is a need to find a way wherein the specific aspects emerging out of a resolution plan accepted by the NCLT and the committee of creditors do not result in a sort of tax hardship.

  • Is the cost of the Insolvency resolution process deductible from the perspective of income tax? 

Due to the absence of a provision in law in regard to the treatment of such expenses related to the insolvency process, the view is divided. However, the amendment in clarification/law may aid to resolve such challenges.

  • Shall tax dues be given preferential treatment during liquidation? 

In this case, as well, there is an absence of any clarity. Therefore, one will have to wait for the view adopted by tax authorities and the judiciary.

  • On the basis of the Code’s provisions, is claiming waiver of tax dues possible? 

In these cases, it is vital to structure the restructuring and acquisition-related steps appropriately while keeping in mind all the deemed taxation rules.

  • Will the changes in Target’s shareholding impact its eligibility of carrying forward losses?

On account of the target’s restructuring, if the target is not a public company, there are chances of lapse of losses. However, as there is an absence of clarity, such issues will require attention from a structuring aspect.

  • What are the implications under the GST regime? 

Transfer of business is not liable to GST, whereas the ancillary and incidental services to the resolution proceedings could be. However, in the absence of judicial precedents, it is important to understand the GST implications under the regime of Insolvency and Bankruptcy Code.

However, the questions listed above are just the tip of the iceberg. The practical difficulties and questions faced by different parties have been increasing manifold on the basis of the facts of each case. Therefore, it is vital to leverage the services of expert insolvency professionals for your insolvency proceedings, who have dealt with different cases throughout their career and are well-versed with the theoretical knowledge and amendments in laws. 

Why Choose TRC Corporate Consulting for IBC Advisory Services? 

As we observed throughout this article, despite having multiple regulations and processes in place, it is not easy for businesses to work out resilient IBC solutions and resolution plans. Moreover, specific and minute details need to be taken care of while preparing a resolution plan. For that, it is important to stay updated with all the amendments in laws and have expertise in devising a well-strategized and thoughtful resolution plan.

We, at TRC Corporate Consulting, have 15+ IBBI registered insolvency professionals who operate PAN India. Our professionals have years of practical experience and extensive knowledge, which is why they are able to efficiently take care of all the vital activities in the liquidation/resolution process. Additionally, we assist our insolvency professionals by providing them with an array of ancillary services such as 29 A Verification, FAR Management, evaluation of resolution plans and others. Moreover, as the structuring of the resolution plan is the most crucial part of the whole process, and every next step is based on it, it is important to leverage the services of expert insolvency professionals. And, with us, you can rest assured of a strategized and smooth resolution plan.

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