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Bankruptcy and NCLT

ROLE OF NCLT IN INSOLVENCY PROCEEDINGS

The National Companies Law Tribunal (NCLT) was constituted under Section 408 of the Companies Act, 2013 (Companies Act) and has been recognized by the Insolvency and Bankruptcy Code 2016 (Code) as the Adjudicating Authority for the purpose of insolvency resolution as well as the liquidation of corporate persons.

Jurisdiction of NCLT

The Jurisdiction for an insolvency resolution and/or liquidation of corporate persons, corporate debtors and personal guarantors lies in that place where the registered office of the corporate entity is situated. To initiate an insolvency resolution process or liquidation of corporate debtor, one must file an Application for the same before having jurisdiction over such place. Likewise, one can voluntarily file for a liquidation of corporate person in the same manner.

The Code has also recognized Debt Recovery Tribunal (DRT) which has been constituted under Section 3(1) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) as the Adjudicating Authority for the purpose of insolvency resolution and bankruptcy of partnership firms and individuals. However, in case of a corporate insolvency resolution process or liquidation proceedings of a corporate debtor is pending before a NCLT wherein an individual is a personal guarantor of such corporate debtor, then an application relating to the insolvency resolution or bankruptcy of personal guarantor of such corporate debtor shall also be filed before such NCLT and such NCLT shall have the powers of DRT dealing with the insolvency resolution or bankruptcy of individual.

Admission by NCLT

According to Section 7(4) of the Code, after an application is filed by the Financial Creditor, the NCLT has to ascertain the existence of default within 14 days from the receipt of such application. After the NCLT ascertains the existence of a default and no disciplinary proceedings is pending before the proposed IRP, then the Application will be accepted. It is to be noted that the NCLT can reject an application as well, however, before doing so, the Tribunal must serve a notice to the Applicant Creditor in order to rectify default in his application within 7 days.

Declaration of Moratorium by NCLT

As per Section 13 of the Code, after an Application has been admitted by the NCLT, it must declare a moratorium in terms of Section 14 of the Code prohibiting the following:

  • The institution of suits or continuation of pending suits or proceedings against the corporate debtor that includes execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
  • Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
  • Any action to foreclose recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act);
  • The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

Power to Extend the Time Limit for IRP

According to Section 12(1) of the Code, the IRP has to be completed within 180 days and in case of fast tracked IRP under Section 56, it has to be completed within 90 days. However, wherein the Resolution Professional has been instructed by the Committee of Creditor for an extension of time beyond prescribed default maximum time, the Resolution Professional has to file an Application before the NCLT for such extension.

It is pertinent to note that the NCLT can only grant one time extension beyond prescribed default maximum time subject to the satisfaction of the NCLT that such IRP cannot be completed within default maximum time. The extension can only be of maximum 90 days for a normal IRP, and maximum 45 days for fast tracked process.

Initiation of Liquidation Process by NCLT

According to Section 33(1) and (2) of the Code, In the event of either of the following situations, the NCLT must pass an order requiring the corporate debtor to be liquidated and initiate its liquidation process:

  • Where a resolution plan has not been received within the maximum time period allowed for resolution process;
  • Where the resolution plan received has been rejected as the said plan does not comply with the requirement specified under Section 31 of the Code;
  • Where the Committee of Creditors through the Resolution Professional intimates the NCLT about its decision to liquidate the corporate debtor during the IRP but before confirmation of resolution plan;

Dissolution of Corporate Debtor by NCLT

According to Section 54 of the Code, in the event of complete liquidation of the assets of the Corporate Debtor, the Liquidator has to make an Application before the NCLT to pass an order for the dissolution of such Corporate Debtor which shall come into effect from the date of that order and the corporate debtor shall be dissolved accordingly.

The Dissolution Order must be forwarded to the Authority with which the Corporate Debtor is registered within 7 days from the date of such Order. In case of voluntary liquidation, the time period is of 14 days.

Power in Case of Fraudulent or Malicious Proceedings

Section 65 of the Code empowers the NCLT to deal with cases of fraudulent and malicious initiation of proceedings to ensure proceedings are brought only for the purpose of resolution of insolvency, or liquidation, as the case may be and not for a malicious or fraudulent purpose. The NCLT may impose upon such person mentioned below a penalty which may be between Rs 1, 00,000 to Rs. 1,00,00,000:

  • where any person initiates fraudulent or malicious liquidation proceeding or insolvency resolution process;
  • where any person initiates voluntary liquidation proceeding with the intent to defraud any person;

Power in Case of Fraudulent or Wrongful Trading

According to Section 66, if during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the NCLT has been empowered to pass an order on the application of the resolution professional that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

Furthermore, in the following situations, the NCLT may by an application by the Resolution Professional during the corporate IRP, pass an order directing that such director or partner of the corporate debtor mentioned below, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit:

  • If before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
  • If such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

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