Insolvency Proceedings India

Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (hereafter “the Code”) provides the process for the insolvency resolution process (IRP) by the National Company Law Tribunal (NCLT).

Insolvency Proceedings in India

When the corporate debtor defaults in making payments to its creditors the process of corporate insolvency resolution process (CIRP) shall be initiated against him. For this purpose the government also enacted the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (hereafter “the Regulations”). The Central government on 24^th March’2020 notified that the minimum threshold under section 4 of the Code to initiate any proceeding of insolvency against a corporate debtor shall be not less than one crore rupees. [1]

Who can initiate a corporate insolvency resolution process (CIRP)?

There are in total 3 kinds of applicants who can file an application for corporate insolvency resolution process (CIRP) against the corporate defaulter, to the Adjudicating Authority, they are:

1. Financial Creditor
2. Operational Creditor
3. Corporate applicant

It is required to note that amid the pandemic, the government had introduced an amendment to section 10A of the Code, whereby suspending initiation of any CIRP for six months from 25^th March, 2020. The said period was further extended for 3 months, effecting from 25^th December, 2020. [2]

Financial Creditor

As defined in section 5(7) of the Code, a financial creditor include all person/corporation who are legally owed financial debt. It includes any debt which has been disbursed against the some kind of consideration. They shall file a complaint to initiate CIRP against the financial debtor as specified under From 1 of the Code.

Operational Creditor

As defined in section 5(20) of the Code, an operational creditor include all person/corporation who are legally owed operational debt. It includes debts with respect to the exchange of goods or services and includes dues to employee. They shall first send an invoice demanding payment as prescribed under Form 3 of the Code along with the notice as prescribed under Form 4. If the operational debtor fails to rely or make payment with respect to the above mentioned invoice within 10 days, then the operational creditor shall file an application to initiate CIRP against the operational debtor as specified under From 5 of the Code, 2016.

Corporate applicant

As defined in section 5(5) of the Code, a corporate applicant includes a corporate debtor or person who is a partner/member/in charge of managing the corporate debtor. They shall file a complaint to initiate CIRP against the corporate debtor as specified under From 6 of the Code.

Under National Company Law Tribunal (NCLT)

An application of CIRP against corporate debtor shall be initiated before the Adjudicating Authority. Section 60 of the Code specifies that NCLT shall be the adjudicating authority, within the jurisdiction of which the registered office of the Corporate Debtor is located.

After filing of the Petition, the Hon’ble Tribunal at its discretion would allow filing of Reply and Replication thereto. Upon its satisfaction as to existence of default, and if the application is complete, the Tribunal shall admit the application and initiate CIRP. They shall pass the orders for declaring a moratorium for certain purposes as mentioned in section 14 of the Code. The resolution professional shall issue public announcement informing his appointment, within 3 days of his appointment in Form A [3] and as specified under section 15 of the Code. The tribunal is mandated to appoint Interim Resolution Professional within 14 days from the insolvency commencement date. [4]The resolution professional along with his partners and directors of the insolvency professional entity shall be independent of the corporate debtor. [5]

Section 12 of the Code mandates that the CIRP shall be completed within a period of 180 daysfrom the date of admission of the application to initiate such process. However, the Tribunal at its discretion has the power to grant one-time extension up to further period of 90 days for completing the process on the application of resolution professional.

Resolution process after appointment of interim resolution professional

• The resolution professional shall within 7 days of his appointment appoint 2 registered valuers to determine the fair value and liquidation value of the corporate debtor [6]. Any operational creditor [7] and financial creditors [8] shall submit to the resolution professional claim of proof in Form B and C of the Schedule I to the Regulations respectively. All claims of the workmen and employees shall be made with proof to the resolution professional as prescribed in Form D of the Schedule I of the Regulations [9].
• After the financial position of the company has been analyzed and determined based on the all the claims received against the company, the interim resolution professional shall constitute a committee of creditors [10]. All financial creditors shall be a part of the committee of creditors. All financial information required by the committee of creditors shall be made available to them by the resolution professional within 7 days from the date of such request. [11]
• The first meeting of the committee of creditors shall be held within 7 days of its constitution and decide by 75% of votes either to replace or confirm interim insolvency professional as Resolution Professional. In case they fail to decide the name of the resolution professional within 10 days, the tribunal shall order the interim resolution professional to continue until new one is appointed [12].  
• The power and duties vested on the interim resolution professional shall be transferred to the resolution professional upon completion of his appointment. The resolution professional shall manage the operations of the company during the pendency of CIRP and also conduct the entire CIRP. [13]
• The resolution professional shall prepare an information memorandum containing all relevant information required to prepare resolution plan. [14] The resolution plan shall provide for measures for insolvency resolution of the corporate debtor for maximization of its assets [15] and shall contain all components as mentioned under rule 38 of the Regulation. Only after reviewing the plans provided by the creditors, the resolution professional shall present it to the committee of creditors for its approval. Section 30 of the Code mandates that the resolution plan must have the consent of at least 75% of voting share of the financial creditors.
• The approved resolution plan shall be submitted by the resolution professional to the NCLT. Upon NCLT’s satisfaction with the resolution plan as approved by the committee of creditors, it shall by order approve the resolution plan which shall be binding on the company, else order time for another resolution plan or order liquidation of the Company. [16]

One of the aims of an insolvency law is to utilize the maximum value of the assets of a corporate debtor, and the value is usually dependent on the time taken to resolve the insolvency, since it erodes over time, and rapidly once formal insolvency proceedings commence. Amongst the major concerns is that delays may make reorganization impossible, and may induce liquidation, causing value destruction. Thus it is of immense importance to follow the timeline for CIRP as laid down under the provisions.

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[1] Ministry of Corporate Affairs, India, S.0. 1205(E).

[2] Ministry of Corporate Affairs, India, S.0. 4638(E).

[3] Rule 6 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016.

[4] Section 16 of the Insolvency and Bankruptcy Code, 2016.

[5] Rule 3 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016.

[6] Rule 27 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016.

[7] Rule 7 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016

[8] Rule 8 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016

[9] Rule 9 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016

[10] Rule 16 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016.

[11] Section 21 of the Insolvency and Bankruptcy Code, 2016.

[12] Section 22 of the Insolvency and Bankruptcy Code, 2016.

[13] Section 23 of the Insolvency and Bankruptcy Code, 2016.

[14] Section 29 of the Insolvency and Bankruptcy Code, 2016.

[15] Rule 37 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016

[16] Section 30 of the Insolvency and Bankruptcy Code, 2016.