Chapter 25: Resolution of Stressed Assets Under the Insolvency and Bankruptcy Code 2016 (CAIIB – Paper 1)

1. What does the term 'Insolvency' primarily refer to?

• A. Total assets of a company
• B. Inability to pay debts when due
• C. Insolvency refers to the inability to pay debts when they are due
• D. Liquidation of assets by owner

Insolvency is the financial state where a person or company is unable to pay its debts as they fall due.

2. Bankruptcy is best described as:

• A. Legal declaration of inability to repay debts
• B. Voluntary liquidation of company assets
• C. Merger of two companies
• D. Restructuring of company management

Bankruptcy is a legal status of a person or entity that cannot repay debts owed to creditors.

3. To whom does the Insolvency and Bankruptcy Code, 2016 apply?

• A. Only individuals and HUFs
• B. Only banks and NBFCs
• C. Only corporate entities
• D. Individuals, partnership firms, companies, and financial institutions

The IBC 2016 applies to individuals, partnership firms, companies, and financial institutions to resolve insolvency in a time-bound manner.

4. Which of the following is true regarding the definition of 'Bankruptcy' under IBC 2016?

• A. Bankruptcy occurs only for companies
• B. Bankruptcy is a legal process declared for individuals and entities unable to repay debts
• C. Bankruptcy refers to insolvency without legal recognition
• D. Bankruptcy is voluntary liquidation of assets

Under IBC, bankruptcy is a legal status declared for individuals and entities unable to repay their debts.

5. Which entities are explicitly covered under the IBC for insolvency resolution?

• A. Government departments and municipalities only
• B. Sole proprietors only
• C. Corporate persons, partnership firms, and individuals
• D. Non-profit organizations only

IBC 2016 provides a framework for insolvency resolution of corporate persons, partnership firms, and individuals.

6. Which of the following is a key legal element of the Insolvency and Bankruptcy Code, 2016?

• A. Time-bound resolution of insolvency cases
• B. Voluntary merger of companies
• C. Issuance of banking licenses
• D. Tax exemptions for distressed companies

A key legal element of the IBC is the time-bound resolution of insolvency cases to improve creditor recovery and reduce delays.

7. Under IBC 2016, what is meant by a 'Paradigm Shift' in the context of insolvency resolution?

• A. Shift from banking to insurance sector
• B. Shift from fiscal to monetary policy focus
• C. Shift from private to public sector management
• D. Shift from debtor-in-possession to creditor-in-control approach

The IBC 2016 introduced a paradigm shift from a debtor-in-possession model to a creditor-in-control approach, giving creditors more control over the resolution process.

8. Which of the following legal provisions ensures that insolvency resolution is conducted within a strict timeline?

• A. Banking Regulation Act
• B. Insolvency and Bankruptcy Code, 2016
• C. Companies Act, 1956
• D. SARFAESI Act

IBC 2016 provides legal provisions to ensure insolvency resolution is conducted within 180–270 days for corporate entities.

9. The 'Paradigm Shift' under IBC primarily benefits which group?

• A. Government only
• B. Debtors only
• C. Creditors, by giving them more control over resolution
• D. Tax authorities only

The paradigm shift under IBC gives creditors more power to control and monitor the resolution process, ensuring better recovery rates.

10. Which of the following is a legal consequence of initiating insolvency proceedings under IBC?

• A. Moratorium on all pending suits and recovery actions against the debtor
• B. Immediate liquidation of all debtor assets
• C. Automatic forgiveness of all debts
• D. Transfer of ownership to government

Initiation of insolvency proceedings triggers a moratorium, stopping all pending suits, recovery actions, and enforcement against the debtor to facilitate resolution.

11. Who can initiate the Corporate Insolvency Resolution Process (CIRP) under IBC 2016?

• A. Only the debtor company
• B. Only the financial creditors
• C. Financial creditors, operational creditors, or the corporate debtor itself
• D. Only the regulatory authorities

CIRP can be initiated by financial creditors, operational creditors, or the corporate debtor itself under IBC 2016.

12. What is the maximum time allowed for completion of the CIRP under IBC 2016?

• A. 90 days
• B. 330 days including litigation and extensions
• C. 540 days
• D. 180 days strictly

IBC 2016 mandates that CIRP should be completed within 180 days, extendable by 90 days by NCLT, totaling a maximum of 330 days including litigation delays.

13. Who is appointed to manage the affairs of the company during the CIRP?

• A. Resolution Professional (RP)
• B. Board of Directors
• C. Financial Creditor
• D. Operational Creditor

During CIRP, a Resolution Professional is appointed by the Committee of Creditors to manage the company and ensure the resolution process.

14. What is the role of the Committee of Creditors (CoC) in CIRP?

• A. Approving mergers and acquisitions of other companies
• B. Filing lawsuits against the corporate debtor
• C. Managing day-to-day operations of the debtor company
• D. Approving the resolution plan and making key decisions regarding the debtor

The Committee of Creditors (CoC) approves the resolution plan, decides on the fate of the debtor, and monitors the CIRP progress.

15. During CIRP, which of the following actions is prohibited without the approval of NCLT or RP?

• A. Payment of routine salaries
• B. Disposal or sale of assets of the corporate debtor
• C. Routine business operations like billing customers
• D. Communication with creditors

During CIRP, disposal or sale of any assets requires approval of the Resolution Professional or NCLT to ensure proper resolution and protection of creditor interests.

16. When is a corporate debtor put into liquidation under IBC 2016?

• A. When the company voluntarily decides to close operations
• B. When the company merges with another company
• C. When the Corporate Insolvency Resolution Process (CIRP) fails to yield a resolution plan
• D. When the debtor repays all its debts

If CIRP fails to produce an approved resolution plan within the stipulated time, the corporate debtor is ordered to be liquidated under IBC 2016.

17. Who is appointed to manage the liquidation process of a corporate debtor?

• A. Liquidator
• B. Board of Directors
• C. Resolution Professional
• D. Committee of Creditors

A liquidator is appointed by the NCLT to oversee the liquidation process, including selling assets and distributing proceeds to creditors.

18. Which of the following is the correct order of priority in distribution of proceeds during liquidation under IBC?

• A. Shareholders, secured creditors, unsecured creditors
• B. Government dues, operational creditors, secured creditors
• C. Secured creditors, shareholders, operational creditors
• D. Insolvency resolution costs, secured creditors, workmen and employees, unsecured creditors, shareholders

The IBC 2016 specifies a waterfall mechanism: insolvency resolution costs, secured creditors, workmen and employees, unsecured creditors, and finally shareholders.

19. During liquidation, what happens to the management of the corporate debtor?

• A. Board of Directors continues to manage the company
• B. Management powers are transferred to the liquidator
• C. Committee of Creditors takes over daily operations
• D. Government appoints a special administrator

Once liquidation is initiated, the liquidator assumes control of the corporate debtor, replacing the management to conduct the liquidation process.

20. What is the main objective of the liquidation process under IBC 2016?

• A. To merge the debtor with another company
• B. To forgive all debts and close the company
• C. To sell the debtor's assets and distribute proceeds to creditors in an orderly manner
• D. To take over the company's management permanently

The liquidation process ensures that the corporate debtor's assets are sold and proceeds are distributed among creditors according to priority, providing an orderly closure.

21. What is the main objective of the Pre-packed Insolvency Resolution Process (PPIRP) for MSMEs?

• A. To liquidate MSMEs immediately
• B. To merge MSMEs with large companies
• C. To provide a faster and efficient resolution process for stressed MSMEs
• D. To forgive all debts of MSMEs

PPIRP aims to enable a time-bound and simplified resolution process for stressed MSMEs to ensure continuity of business and protect jobs.

22. Who primarily initiates the Pre-packed Insolvency Resolution Process under IBC?

• A. Only the government
• B. Corporate debtor with the consent of 66% of financial creditors
• C. Any operational creditor
• D. Only the National Company Law Tribunal (NCLT)

In PPIRP, the corporate debtor can initiate the process after getting approval from at least 66% of its financial creditors.

23. Which of the following is a key benefit of PPIRP for MSMEs?

• A. Higher litigation costs
• B. Longer resolution timelines
• C. Unregulated liquidation
• D. Faster resolution with minimal disruption to business

PPIRP is designed to expedite resolution, reduce litigation costs, and allow MSMEs to continue operations while resolving debt issues.

24. What is the maximum time frame prescribed for completing PPIRP for MSMEs under IBC 2021 amendments?

• A. 180 days
• B. 270 days
• C. 90 days
• D. 120 days

PPIRP must be completed within 90 days from the date of admission to provide a fast-track resolution for MSMEs.

25. Which of the following stakeholders is directly involved in approving the resolution plan under PPIRP?

• A. Ministry of Corporate Affairs
• B. Financial creditors of the corporate debtor
• C. Operational creditors only
• D. Employees of the corporate debtor

In PPIRP, financial creditors play a key role in approving the resolution plan, ensuring that creditor interests are protected.

26. Which of the following is a major difference between PPIRP and regular CIRP?

• A. PPIRP allows liquidation only after 1 year
• B. Regular CIRP is faster than PPIRP
• C. PPIRP is a pre-packaged, faster resolution process specifically for MSMEs
• D. Regular CIRP does not involve creditors

PPIRP is designed as a pre-packaged, time-bound resolution process for stressed MSMEs, making it faster and less complex than regular CIRP.

27. During PPIRP, who submits the resolution plan to the National Company Law Tribunal (NCLT)?

• A. Operational creditors
• B. Resolution Professional (RP) appointed for PPIRP
• C. Ministry of Corporate Affairs
• D. Employees’ union

The Resolution Professional manages the PPIRP and submits the approved resolution plan to NCLT for final approval.

28. Which of the following is true regarding the moratorium under PPIRP?

• A. No moratorium is applicable
• B. Only financial creditors are restricted
• C. Employees can enforce claims immediately
• D. Moratorium applies, stopping all pending suits and recovery actions against the debtor

Under PPIRP, a moratorium is imposed to halt all pending legal actions, recovery proceedings, or enforcement against the MSME debtor, ensuring a smooth resolution.

29. In PPIRP, what minimum percentage of financial creditors’ consent is required to initiate the process?

• A. 51%
• B. 75%
• C. 66%
• D. 100%

The corporate debtor must obtain consent from at least 66% of its financial creditors to initiate PPIRP under IBC 2021 amendments.

30. Consider this scenario: An MSME debtor has obtained 70% approval from financial creditors for a PPIRP. Which of the following actions is correct?

• A. The debtor can immediately liquidate assets without NCLT approval
• B. The debtor can initiate PPIRP by filing the resolution plan with NCLT
• C. The PPIRP cannot start until 100% creditor consent is obtained
• D. Employees’ consent is required before filing with NCLT

Since the debtor has obtained more than 66% financial creditor consent, it can initiate PPIRP and submit the resolution plan to NCLT for approval.