This article has been written by Surya Rose Thomas pursuing the Diploma in M&A, Institutional Finance and Investment Law from LawSikho.
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Can you believe that in 1997, ‘Apple‘, one of the largest companies in the world became insolvent and was on the verge of going bust? What happened to Marvel Entertainment in 1996? The company with trillions of fans all around the world filed for bankruptcy! There are many instances of corporate insolvency in India and one such example is that of Essar Steel, which was one of the largest steel manufacturers of India. In 2017, insolvency proceedings were initiated against Essar Steel.
What is Insolvency? What happens to a company which becomes insolvent? There may be many more questions that you are wondering about. This article will briefly discuss the proceedings of Corporate Insolvency and more.
Insolvency, corporate insolvency, and bankruptcy
Insolvency can be defined as a financial difficulty where an individual or a firm does not have the ability to service debt. When companies confront such a situation, it is called Corporate Insolvency. As of 31st March 2021, 6893 companies were under liquidation in India. Bankruptcy is a legal proceeding involving a person or business that is unable to repay its outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of the outstanding debt. So Insolvency is the cause and Bankruptcy is the effect. It can be summed up that all bankruptcies are insolvencies, but all insolvencies are not bankruptcies.
Suppose Company A is struck hard by economic depression. It is unable to perform well, earn profits and pay for its debtors. This situation of the Company is called Insolvency. Now the Company A decides to avail legal protection. It will file an application for initiation of the resolution process in the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of Company A is located.
Corporate person and corporate debtor in Insolvency and Bankruptcy Code, 2016
In 2016, Parliament consolidated a single law for Insolvency and Bankruptcy brought in the Insolvency and Bankruptcy Code, 2016. The objective of the Code is to resolve insolvency in a time-bound manner by selling the assets of the insolvent company to pay the creditors while also balancing the interests of the stakeholders.
The Code does not give a direct definition for Corporate Insolvency. But under Sections 3(7) and 3(8), the definitions of Corporate Person and Corporate Debtor are given respectively which are as follows:
- Corporate Person: It means a company as defined in the Companies Act, 2013 in clause (20) of Section 2, a limited liability partnership, with the meaning given in Section 2(1)(n) of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but do not include any financial service provider.
2. Corporate Debtor: This means an indebted corporate person.
How to determine corporate insolvency?
There are two ways to check corporate insolvency. These are:
- The Cash–Flow Test
This test determines insolvency if a company is found unable to pay back its debts to the creditors in the future or at present.
2. The Balance-Sheet Test
Insolvency and liquidation proceedings are initiated against corporate debtors only if the minimum amount of default is one lakh rupees or minimum amount of higher value which cannot be more than one crore rupees as notified by the Central Government. It is governed by the Insolvency and Bankruptcy Code, 2016 in India.
Who can initiate the Insolvency Resolution Proceedings?
A corporate insolvency resolution proceedings can be initiated against a corporate debtor in case of default by the following persons:
- A financial creditor,
- An operational creditor, or
- The corporate debtor itself.
Sections 7 to 10 of Insolvency and Bankruptcy Code, 2016 detail initiation of corporate insolvency resolution process by a financial creditor, operational creditor, and corporate debtor.
Who cannot initiate the Insolvency Resolution Proceedings?
The code specifies persons who cannot initiate an application for the corporate insolvency resolution process under Section 11. Accordingly, if corporate insolvency resolution proceedings are ongoing against a corporate debtor, he cannot initiate an application for the corporate insolvency resolution process. Also, a corporate debtor cannot initiate the application if he has completed the insolvency resolution process or has contravened any stipulations of the resolution plan sanctioned twelve months before the date of making of the application. A corporate debtor against whom the liquidation order is made also cannot file the application. For instance, a Company called A underwent an insolvency resolution process twelve months preceding the date of making the application for initiation of the corporate insolvency resolution process. According to Section 11(b) of the Insolvency and Bankruptcy Code, 2016, this Company A is incompetent.
Duration of the Insolvency Resolution Process
The maximum period within which the resolution process should be completed is 180 days from the date of admission of the application. The Committee of Creditors can instruct the resolution professional to seek an extension after a resolution for the same is passed at the meeting of the committee of creditors. The adjudicating authority can if it thinks fit grant the extension but not more than once and not more than ninety days. National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located is the adjudicating authority in the insolvency resolution and liquidation process.
What happens after the admission of the application for initiation of the resolution process?
After admitting the application for initiation of the resolution process, the adjudicating authority can declare a moratorium and can appoint an interim resolution professional. After the appointment of an interim resolution professional, public announcements regarding the resolution process and calls for claims from the public are made.
It is the duty of the interim resolution professional to constitute a committee of creditors and this committee will appoint a resolution professional. The resolution professional has to convene and attend all meetings of the committee of creditors. The resolution professional prepares an information memorandum for formulating a resolution plan.
Section 29A entails the list of persons not eligible to be a resolution applicant. So a resolution applicant has to submit an affidavit along with the resolution application that he is eligible under Section 29A. Resolution applicants prepare the resolution application based on the information memorandum and submit the same to the resolution professional. Therefore, preparation of an information memorandum is important and it should consist of details of the financial position of the corporate debtor, all information related to disputes by or against the corporate debtor, and any other matter pertaining to the corporate debtor. The resolution professional scrutinizes each application and confirms its compliance with the conditions such as:
- the priority be given to the payment of costs of insolvency resolution process than to any other debts of the corporate debtor;
- operational creditors to be paid an amount which is not less than what they get in the event of liquidation of the corporate debtor under Section 53 of the Insolvency and Bankruptcy Code, 2016;
- it provides for the management of the affairs of the Corporate debtor after approval of the resolution plan and contains how it implements and supervises the resolution plan;
- it will abide by the law for the time being in force and to any other requirements specified by the Board.
Resolution professionals after scrutinizing each application will submit eligible applications (qualified under Section 30(2) of the Insolvency and Bankruptcy Code, 2016) to the committee of creditors for their approval. The committee of creditors securing a minimum sixty-six percent of voting share of the financial creditors may approve a resolution plan after perusing its feasibility and viability, and other requirements provided by the Board. The resolution professional shall submit the approved resolution application to the adjudicating authority. Adjudicating authority shall approve the resolution application if it satisfies all the requirements and criteria and then it will be binding on the corporate debtor and its employees, members, and everyone associated with the resolution plan.
Order for liquidation
In the absence of any resolution application within the maximum term for completion of the corporate insolvency resolution process and the fast track corporate insolvency resolution process under Sections 12 and 56 respectively, the adjudicating authority shall pass an order for liquidation of the corporate debtor. Also, if the adjudicating authority finds that the resolution application is not in compliance with the stipulations mentioned in Section 31 of Insolvency and Bankruptcy Code, 2016, it shall pass an order for liquidation of the corporate debtor. Or, if the adjudicating authority after receiving an application praying for an order of liquidation from any person other than the corporate debtor, whose interests are prejudicially affected by the contravention of the corporate debtor, is satisfied that there occurred contravention by the corporate debtor in the approved resolution application, shall order for liquidation.
Chapter IV of Insolvency and Bankruptcy Code, 2016 is a fast-track corporate insolvency resolution process, which has four Sections from 55 to 58 detailing the insolvency process being relatively faster than the general one. The resolution process needs to be completed within 180 days and the fast-track corporate insolvency resolution process should be completed within 90 days from the date of commencement of insolvency. The application for fast track corporate insolvency resolution process can only be made by certain corporate debtors with particular assets, debts, and other categories as notified by the Central Government. It can be filed either by a creditor or the corporate debtor itself. The adjudicating authority is National Company Law Tribunal and appeals from the order of NCLT lie to the National Company Law Appellate Tribunal and with a limitation period of forty-five days from the date of receipt of the order, any person aggrieved by the order may file an appeal to the Supreme Court of India regarding a question of law of such order. Enactment of Insolvency and Bankruptcy Code, 2016 has brought in outstanding results like solving insolvency issues in a time-bound manner which is 180 days, a decrease in the number of Non- Performing Assets, etc. It is evident that the IBC, 2016 is an appreciable enactment.
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