Insolvency and Bankruptcy laws were initiated in India to simplify the business procedures. This law has streamlined the winding up process of business organizations, which was prior divided because of complexity of rules . One of the fundamental reasons for formation of this code is to help the creditor to regain his investments through the ‘Corporate Insolvency Resolution Process’ (CIRP). This process can be initiated when there is a default of earlier Rs. 1 Lakh or more now it limit is Rs. 1 crore in the business. Under IBC only Private and Public Companies and Limited Liability Partnership (LLP) can initiate the insolvency resolution process. National Company Law Tribunal(NCLT) has the power to initiate proceedings under CIRP when a company is unable to pay to its creditors.
What is Corporate Insolvency Resolution Process?
When a company is declared insolvent and has insufficient balance to settle its debts to the creditors is called corporate insolvency. There are two ways to evaluate the corporate insolvency:
- The cash-flow test is the company currently or in the future, unable to pay its debts when they fall due for payment.
- The balance sheet test is the value of the company’s assets less than the number of its liabilities, taking into account future liabilities
The term CIRP is a mechanism by which those creditors can recover their amount invested in the company. This process can be initiated by
- Financial Creditors under (Section 7 of Insolvency and Bankruptcy Code, 2016) – Financial creditor can be any bank or financial institution to which the company owes money. It is defined under Section 5 (7) of Insolvency and bankruptcy Code, 2016
- Operational Creditor (Section 9 of Insolvency and Bankruptcy Code, 2016)- Operational creditor can be any person such as a vendor or supplier or government to whom an operational debt is owed by the company. It is defined in Section 5 (20) of Insolvency and Bankruptcy Act,2016.
- Corporate Debtor( Section 10 of Insolvency and bankruptcy Code, 2016)- As defined in Section 3(8) of Insolvency and Bankruptcy Code, 2016 corporate debtor may be any corporate person who owes debt to any person.
Process for CIRP
The following are the steps for process of Insolvency Resolution of a corporate ;
File an application in NCLT
A Financial creditor, Operational creditor or Corporate debtor himself can file an application in National Company Law Tribunal (NCLT)to initiate insolvency resolution process under Section 7 , Section 9 and Section 10 of Insolvency and Bankruptcy Code, 2016 respectively. The Corporate debtor has to prove his incapability to clear his debt which should be more than 1 lakh. The NCLT shall pass an order either admitting or denying the application within 14 days on the basis of information or evidence furnished by a Financial creditor or Operational Creditor.
A ten days demand notice under Section 8(2) of Insolvency and Bankruptcy Code, 2016 in case of Operational Creditors has to be given to the corporate debtor by the Operational Creditors before he approaches the NCLT
Appointment of Insolvency Resolution Professional
When the application is accepted by NCLT company is placed under an “Interim resolution professional”(IRP). From this day the company ceases to have any control over the activities of the company and the management goes in the hands of IRP till the completion of CIRP. The IRP is appointed for 30 days in which he has to collect all the desired information. (Section 18 of Insolvency and Bankruptcy Code,2016)
- Declaration of moratorium and public announcement- (Section 13 of Insolvency and Bankruptcy Code, 2016)
A public announcement has to be made about the commencement of the corporate insolvency resolution process and call for submission of claims. Also , a moratorium becomes effective which prohibits:
- Continuation or initiation of any legal proceedings against the corporate debtor
- Transfer of its assets enforcement of any security interest
- Recovery of any property from it by an owner
- Suspension or termination of the supply of essential goods and services, the moratorium lasts till the corporate debtor is in CIRP (Section 14 of Insolvency and Bankruptcy Code,2016).
Formation of Committee of Creditors –
A Committee of Creditors shall be instituted by the IRP after receiving any claims by public announcement .If a Financial creditor has any relation with the company that creditor will have no right to represent, participate or vote in the committee of creditors. For Operational creditors ,the average dues of the operational creditors must be at least ten percent of the debt to be part of the Committee of Creditors.
Appointment of Resolution Professional-
First meeting of the Committee of Creditors shall be held within the first seven days of the constitution of the Committee. The committee shall decide with not less than seventy five percent votes whether to appoint interim Resolution Professional as Resolution Professional or replace him with someone else. Till the appointment of any new Resolution Professional, the Committee of Creditors can take decisions on the insolvency resolution process by seventy five percent majority voting.(Section 22 of Insolvency and Bankruptcy Code, 2016)
Preparation of Resolution Plan –
A Resolution plan is prepared by a Resolution Applicant, who is responsible to submit Resolution Plan to the Resolution Professional. The Plan is further given to the Committee of Creditors for its approval.
Approval of Resolution Plan-
A Resolution plan for the re-establishment of the company must be approved within 180 days from the commencement of CIRP by creditors. The NCLT may grant an extension of up to a maximum of 90 days if the majority of financial creditors feel that the case needs more time.
If a plan is approved within this period and sanctioned by NCLT: The approved resolution plan becomes binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholder involved in the resolution plan. It is the duty of the resolution professional to obtain all necessary approvals required under any law for the time being in force within one-year from the date of approval by adjudicating authority.
If no resolution plan is approved within the said period: In case the resolution plan is not approved then NCLT is obliged to order the liquidation of the corporate debtor. After the approval of liquidation, COC appoints the liquidator to sell the assets of the corporate debtor and share them among the stakeholders. (Section 53 of Insolvency and Bankruptcy Code 2016)
In the case, Jaiprakash Associate Ltd. & Anr. v. IDBI Bank Ltd. & Anr. The issue was whether the bidders can submit revised resolution plans after it has been rejected once by the Committee of Creditors. The SC relied on the Regulation 36B(7) of IBC,2016, which states that the Resolution Professional may, with the consent of the Committee of Creditors, reissue request for Resolution plans, if the first plan submitted is not satisfactory, with the condition that the same is notified to all prospective Resolution Applicants in the final list. Consequently, applying the principle of Regulation 36B(7), it was found appropriate to permit the interim resolution applicant to reissue request for resolution plans to the two bidders and/or to call upon them to submit revised resolution plans, which can be then placed before the CoC for its due consideration.