In this article, Samanna Gaffoor, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata analyses the time period for CIRP under IBC

Introduction

The Insolvency and Bankruptcy Code, 2016 (the “Code”) was finally given the presidential assent on 28th May 2016 and few of the provisions of the Act came into force in August 2016. The Act came at a time when the banks in India were facing a huge backlash due to non performing assets(NPA).

The main objective of this enactment is to provide a time bound and cost effective solution to insolvency and bankruptcy of corporates, individuals and firms thereby protecting the interest of all stakeholders and promoting entrepreneurship and ease of doing business. It has also proved beneficial to banks with a stressed account to recover at least the principal portion from the defaulting borrowers, as is evident from the acquisition of debt-ridden  Bhushan steel by TATA steel. The bankrupt firm was among the 12 stressed assets that the RBI had referred to the NCLT proceedings last year. By virtue of the Insolvency and Bankruptcy Code, the lenders of the bankrupt firm were able to recover the principal amount. This was hailed as a historic breakthrough in resolving legacy issues in banks.

Corporate Insolvency Resolution Process

The IBC provides insolvency and bankruptcy solution to both corporate debtors and individuals/firms. Corporate Insolvency resolution process (CIRP)  is the process of resolution of insolvency of a corporate debtor as provided under this code. Part II of the Insolvency and Bankruptcy Code, 2016 deals with insolvency resolution and liquidation for corporate persons. Corporate debtor means a corporate person who owes a debt to any person. Corporate debtor includes a company, a limited liability partnership firm or any other person incorporated with Limited Liability under any law, but does not include a financial service provider

Definition of Corporate Debtor

Section 3(7) of the Insolvency and Bankruptcy Code, 2016 defines a Corporate person to mean

‘a company as defined in clause (20) of section 2 of Companies Act ,2013 (18 of 2013), a Limited liability partnership ,as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act,2008 (6 0f 2009) or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.’

Procedure involved in Corporate Insolvency under the code

The procedure for insolvency resolution of a corporate debtor is dealt in Chapter II to part II of the code.

1. Where any corporate debtor commits default, financial creditor, an operational creditor or the corporate debtor itself may initiate the Corporate Insolvency Resolution process.
2. The Adjudicating Authority (AA) will declare a moratorium. The adjudicating Authority for the insolvency of  a Corporate Debtor is the National Company Law Tribunal
3.  The AA will appoint an Interim Resolution Professional.
4.  Immediately after the appointment of the Interim Resolution Professional, the AA will cause a public announcement of the initiation of the resolution process of the corporate debtor and also will call for submission of claims by the creditors.
5.  The affairs of the Corporate Debtor against whom the insolvency procedure is initiated shall be managed by the Interim Resolution Professional from the date of his appointment. He has to manage the operations of a corporate debtor as a going concern and strive to protect and preserve the property of the corporate debtor.
6. The Interim professional shall constitute the committee of creditors on the basis of the claims submitted during the Public Announcement.
7.  The Committee of Creditors on their first meeting has to appoint a Resolution professional. In most of the cases, the interim profession itself shall be the resolution professional. The committee of creditors has to make an application to the AA who in turn shall forward the same to the Insolvency and Bankruptcy Board of India.
8. The resolution professional shall prepare an Information Memorandum to enable the resolution applicant to prepare a resolution plan as a solution for resolving the insolvency of the corporate Debtor.
9. The Adjudicating authority  may approve /reject the resolution plan which is approved by the committee of creditors
10. The resolution plan is approved if it fulfils the requirements as provided in subsection 2 of Section 30 of the Insolvency and Bankruptcy Code,2016.
11. In case the resolution plan is rejected, the AA will initiate Liquidation process which is dealt in Chapter III of the Insolvency and Bankruptcy code, 2016.

Time limit for completion of Corporate Insolvency Resolution Process

Section 12 of the Insolvency and Bankruptcy Code, 2016 (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process. (2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five per cent. of the voting shares. (3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days: Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once

As per the code, the procedure involved in the Corporate Insolvency Resolution Procedure should be completed within 180 days or within the extended period of 90 days. In short, the resolution procedure should be completed within 270 days, failing which the Adjudicating Authority will initiate Liquidation procedure under Chapter III of the Code.

The request for extending the Corporate resolution process beyond 180 days shall be made by the resolution professional on passing of a resolution by at least 75% of the voting shares of the Committee of creditors. The resolution professional will file an application with the Adjudicating Authority who if satisfied that the corporate insolvency resolution process cannot be completed within the period of 180 days, may extend the time period but the same shall not exceed 90 days.

Time period of 180 days – Mandatory or not?

If the Resolution professional fails to submit the resolution plan within 180 days or within the extended period of 90 days the Adjudicating Authority may initiate Liquidation procedure. Once the liquidation procedure is initiated the Company will be wound up and the steps will be taken for distribution of proceeds to creditors as per the provisions of the code. It will also result in the discharge of the officers, workmen and employees of the Corporate Debtor.

The Supreme Court gave a significant judgement under the insolvency and Bankruptcy Code, 2016 in  M/s Surendra Trading Co. v. JK Jute Mills Co. Ltd (here) wherein it was held that ‘Time is the essence of Insolvency and Bankruptcy code’.It was observed by the supreme court that non-completion of the [proceedings within the stipulated time given under section 12 of the Code will result in liquidation proceedings under section 33 of the said act

In view of the above provisions of the Code, it can be said that the resolution procedure has to be completed within 180 days. It is mandatory and only on a approval from the adjudicating Authority can the time period be extended upto 90 days.

Merits and Demerits of shorter periods for completion of insolvency procedures

Merits

• The lower time limit will help in achieving the goal of ease of business and providing a quick and viable solution to commercially unviable corporates.
• It will also help in garnering more financial support to corporates as the creditors will have an assurance of recovery of their debts.
• One of the serious bottleneck in the Sick Industrial Companies( Special Provisions) Act,1985 was the long time period of an average of 4 years for completion of the insolvency procedure.
• The stakeholders had to wait for quite long to recover their dues from the sick companies
• The long drawn procedures spread over long period entails a cost to the creditors as well as to the corporate debtor who has become commercially unviable.
• A shorter period will help in finding a better feasible solution for reviving the corporate debtor which is on the brink of financial collapse.

Demerits

The very limited deadline may ultimately force Company into liquidation without serving the main objective of the revival of the financial health of the corporate debtor.

Conclusion

In the United States and United Kingdom Bankruptcy procedure, the time period for completion of the insolvency procedure is one year and one and half years respectively. The Insolvency and bankruptcy code has almost provided the time limit in tune with the international standards

The Insolvency and Bankruptcy code in India is however used as a tool for recovering the loans rather than as revival and rehabilitation tool. This mindset should change for the overall development of the economy and divert the resources of the sick company to a more viable and feasible organisation.