Procedure To Resolve Insolvency Under IBC

The Corporate Insolvency Resolution Process (‘CIRP’) is a recovery mechanism for a creditor of a corporate debtor. A corporate debtor means a company or limited liability partnership (‘LLP’) that owes debt to its creditors.

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) lays down the provision for the conduct of insolvency or bankruptcy of individuals, partnership firms, LLPs and companies. However, the procedure for insolvency and liquidation of corporate debtors under IBC is applicable where the minimum default amount is Rs. 1 crore.

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Creditor under IBC

When the company or LLP becomes insolvent or defaults, the financial creditor, operational creditor or corporate debtor may file an application for initiation of CIRP by the adjudicating authority, i.e. the National Company Law Tribunal (‘NCLT’).

A financial creditor is a person to whom the business owes a financial debt and includes the person to whom such debt is legally remitted or assigned. A financial loan means a loan plus interest distributed against consideration for the value of money and includes-

• The amount borrowed against payment of interest.
• The amount raised by acceptance under the acceptance credit facility.
• The amount raised under the note purchase facility or the issue of notes, bonds, loan stock, debauchers, or any other similar instrument.
• The amount of liability related to lease or hire purchase contract that is deemed as capital or finance lease under the Indian accounting standards or such other accounting standards.
• Receivable discounted or sold other than the receivable sold on a non recourse basis.
• The amount raised under any other transaction, including any purchase agreement or forward sale having commercial effect of a borrowing.
• Any derivative transaction entered in the connection with benefit from or protection against fluctuation in any price or rate.
• Any counter- indemnity obligation relating to a bond, indemnity, guarantee, documentary letter of credit or other instrument issue by a financial institution or bank.
• The amount of liabilities related to any of the indemnity or guarantee for any of the points mentioned above.

An operational creditor is a person to whom the business owes an operational debt and includes person to whom such amount has been legally transferred or assigned for survive or goods given by them.

An operational dept means a claim relating to the provision of services or goods, including dept or employment regarding payment of duties arising under any law in force and payable to the Central Government or State Government or Local Authority.

Process of Corporate Insolvency Resolution

The conduct of the CIRP of a corporate debtor is provided in part-II of the IBC, which are as follows-

Initiation of CIRP

The financial creditor can initiate CIRP against the corporate debtor by applying to the NCLT. The operational creditor must first give a demand notice of an unpaid invoice to the corporate debtors demanding the defaulted payment amount. When operational creditors do not receive payment from corporate debtors after the expiry of 10 days from the date of payment of demand notice or invoice, they can apply to NCLT for initiation of CIRP.

A partner or member of a corporate debtor authorized to initiate a CIRP or a person responsible for managing the affairs or who controls and supervises the financial affairs of the corporate debtor, may initiate a CIRP with the NCLT.

NCLT will pass the order within 14 days of accepting or rejecting the CIRP application. CIRP will start from the date of admission of application by NCLT. The CIRP completion period is 180 days from the entry date of the CIRP application.

Declaration of Moratorium and public Announcement

After the admission of the CIRP application, NCLT will pass an order

• Declaring a moratorium for prohibiting certain actions and transactions
• Causing a public announcement of initiating the CIRP and call for the submission of claims
• Appointment an interim resolution professional

NCLT orders on the CIRP commencement date declaring the moratorium for prohibiting the following:

• Continuation or institution of suits or proceedings against the corporate debtor.
• Encumbering, transferring, disposing of or alienating by the corporate debtor of its assets or beneficial interest or legal rights.
• Any action to recover, foreclose or enforce any security interest created by corporate debtor relating to its property, including any action under the securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
• Recovery of any property by a lessor or owner, where the property is in possession or occupied by the corporate debtor.

The public announcement of the CIRP should contain the following information:-

• Name and address of the corporate debtors.
• Name of the authority under which the corporate debtors is registered or incorporated.
• Last date for submission of claims.
• Details of interim resolution professional who will be responsible for receiving claims and take over the management of corporate debtor.
• Penalties for misleading or false claims.
• The date of closure of the CIRP, i.e. 180^th Day from the admission date of CIRP application.

The interim resolution professional appointed will have the following powers relating to corporate debtors from the date of his appointment.

• Management of the affair of corporate debtors.
• Exercise the power of the board of director or partner of the corporate debtors and suspension of power of director or partner of corporate debtors.
• Officers and manager of the corporate debtors will have to report to the interim resolution professional and give access to the records and documents of corporate debtors.
• Financial institutions having and maintaining account of corporate debtor will act on the instructions of the interim resolution professional and furnish all available information relating to corporate debtor.

Committee of the Creditors:

The interim resolution professional will constitute a committee of creditor after collating all received claim against corporate debtor and determining its financial position.

The committee of the creditor should hold the first meeting within 7 days of the constitution of the committee. The committee of the creditors in their first meeting should decide to either appoint or replace the interim resolution professional through a majority vote of not less than 66% of voting of share of the financial creditors.

Appointment of Resolution Professional:

When the committee of the creditors decides to continue with the interim resolution professional appointed by NCLT as the resolution professional, it should communicate its decisions to NCLT, the interim resolution professional and corporate debtor.

When the committee of the creditors decides to replace the interim resolution professional, it should file an application to NCLT to appoint the proposed resolution professional along with his written consent.

NCLT should forward the name of the proposed resolution professional submitted by the committee of the creditors to the Insolvency and Bankruptcy Board of India (‘Board’) for its confirmation from the board.

The resolution professional will conduct the entire CIRP and manage and control the operations of the corporate debtors during the CIRP.

Preparation of Information Memorandum:

The resolution professional should prepare an information memorandum in the form and manner containing the relevant information as specified by the board to formulate a resolution plan. A resolution applicant should submit a resolution plan prepared on the basis of the information memorandum to the resolution professional.

The resolution applicant is the person who submits the resolution plan either individually or jointly with the any other person. The resolution professional will examine each resolution plan submitted to him for confirming that each resolution plan

• Provide for the payment of the insolvency resolution process costs as specifies by the board prioritizing the payment of all other debts of corporate debtor.
• Provide the payment of debts of operational creditor as specified by the board.
• Provide for managing the affairs of the corporate debtor after approval of resolution plan.
• Supervision and implementation of resolution plan.
• It does not contradict the provisions of the law(s) in force.
• Confirm to such other requirements specified by the board.

The resolution professional will present the resolution plan after its examination to the committee of the creditors for its approval. The committee of the creditors can approve the resolution plan by a vote of not less than 66% of voting share of the financial creditors.

Approval of Resolution plan:

The resolution plan for revival of the company or LLP should be approved within 180 days from the commencement of CIRP by the creditors. However the NCLT can extend the period of 180 days by another 90 days.

NCLT will pass an order approving resolution plan approved by the committee of the creditors after being satisfied that the resolution plan meets the requirements of IBC. NCLT order of Approval of the resolution plan will be binding on corporate debtor and its employees and members.

NCLT order of approval of the resolution plan will also be binding on the guarantors and stakeholders involved in the resolution plan and creditors, including the Central or state government or any local authority.

NCLT can pass an order to reject the resolution plan if it is satisfied that the resolution plan does not meet the requirements laid down under the IBC. When NCLT passes the order of rejection of the resolution plan, it will pass an order of the liquidation of the corporate debtor.

After the approval of the liquidation of the corporate debtor, the committee of creditors will appoint the liquidator to sell the assets of the corporate debtor. The distribution of assets will be done as per the provisions of IBC.

Author– Mr. Ajay Kacher (M.Com, LLB, CS) is a Legal Associate in IP & Legal Filing. In case of any queries please contact/write back to us at support@ipandlegalfilings.com.