This article is written by Radheshyam Jaju, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “Corporate Insolvency and Resolution Process”.

Introduction

Prior to Insolvency and Bankruptcy Code, we had multiple overlapping laws and various tribunals to govern Insolvency and Bankruptcy issues such as Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002; The Recovery Of Debts Due to Banks And Financial Institution Act, 1993; and Companies act, 1956 and its amendment in 2013. But this multiple acts and regulation have not been able to get the desired documents, neither been able to aid the recovery for lenders and nor aided in the restructuring of company and/or firms. However, there was no clarity and certainty of jurisdiction and are dealt with in different legal for ranging from the BIFR to debt recovery tribunals to civil courts and high courts[1], Each of these laws had their way of dealing with insolvency and many times in conflict with each other [2]. More importantly, India is witnessing a huge pilling up of non-performing assets; the process of discharging an insolvent was very lengthy. 

The Bankruptcy Code is an effort to reform the Corporate Insolvency Resolution Process, to allow faster mechanisms within a minimum amount of time to deal with the Insolvency Process, to reduce bankruptcy stigma, improve ease of doing business and making sure that the financial risk to the foreign investor is decreased. The code unified all existing former law which deals with the insolvency of corporate firms and individuals into single legislation and law has simplified the winding-up process in respect of companies. The main purpose of this code is to empower creditors through Corporate Insolvency Resolution Process for reviving of the company as well as recovery of defaulted amount through CIRP as it is stated in the Preamble of the code reorganization and insolvency resolution. 

Applicability

A company is declared insolvent if it is unable to pay debt or inefficient to settle down debts to the creditors. There are the following ways to evaluate corporate insolvency.

• Cash flow test- If the company is unable to pay its debt in the future within the prescribed time. 
• Balance sheet test- The liabilities are increasing and it’s become less than the company’s assets, taking into account future liabilities. 

The Code empowers creditors to initiate a corporate insolvency resolution process against a debtor if he fails to pay an amount to a creditor within the prescribed time. There are three types of creditors which are Financial Creditor, Operational creditor, and /or Corporate Debtor himself defined in the code that can initiate proceedings against a debtor.

Financial creditor- As per section 5(7) Of IBC,2016 financial creditor is Bank or Financial institution or any lender or anyone providing a loan or another financial assistance comes under the category of Financial creditor.

Operational Creditor- As per section 5(20) of IBC, the 2016 operational creditor is who has provided goods and services to the debtor and/or dues arising out of employment or dues arising under any law for time being force and payable to the centre/state government.

A corporate debtor may also, by itself, be able to also file initiate voluntary application to undergo CIRP if he is unable to discharge his liabilities and does not have enough funds available to run a company.

While in any other counties concerning for insolvency proceedings there is no as such difference between creditors as operational and financial whereas it was declared in the Swiss Ribbons Pvt. Ltd v Union of India, that there is intelligible differentia between both creditors and is not violation Constitution of India as far as Article 14 is concerned and it’s not arbitrary. 

Features of IBC        

Exclusive Jurisdiction of Adjudicating Authority-

Adjudicating authorities will consist of National Company Law Tribunal (hereinafter referred to as NCLT) and Debt Recovery Tribunal who will have exclusive jurisdiction in insolvency-related matters. 

Time-Bound Process- Timeline for completion of Corporate insolvency Resolution process 

The Insolvency and Bankruptcy Code, 2016 required that Corporate Insolvency Resolution Process should be concluded within a maximum period of 180 days, with a one-time extension of 90 days, initially proceeding had to furnish within 270 days for the resolution after which liquidation shall be invoked In the case of Bank of Baroda vs Rotomac Global Pvt ltd and Rotomac Exports Pvt. Ltd [3], it was held that if there is no resolution plan within 180 days of CIR process. So, the liquidation of the corporate debtor was admitted.  

In September 2019 deadline was extended to 330 days with amendment brought in section 12 said that if the CIR process is not resolved within 330 days, it will go for liquidation, In case of the Essar Steel India Limited [4], the supreme court struck off the word mandatorily and held that in the exceptional cases, the time can be extended and the general rule of 330 days as outer limit stay.

Appointment of IPs– 

After the insolvency application is admitted the adjudicating authority will direct the board to appoint an insolvency professional to manage a part of CIRP and forming a committee of creditors.  

Corporate Insolvency Resolution Process- 

The CIRP is a recovery mechanism for creditors. It can be initiated by an application to the National company law tribunal by the financial creditor under section 7 of IBC, 2016 by Operational Creditors under section 9 of IBC, 2016, and by the corporate debtor himself under section 10 of the IBC, 2016.

The following is the process for resolution or liquidation which is the following-

Step 1: Application to NCLT

On the occurrence of default, a creditor of corporate (financial or operational) or the company can file application Adjudicating authority (NCLT) for the initiation of CIRP. After an application before adjudicating authority, NCLT within 14 days, shall ascertain the existence of the debt and default and either admit or reject the application. However, the Supreme Court in court In case of Innovative industries vs IDBI Bank [5] has stated that 14 days time limit is granted to National company law tribunal to ascertain whether the default on the part of corporate debtor exists or not and not deliberates into its extent or composition. 

The creditors required to show that to Adjudicating Authority, there has been a default in the paying back of its debt which is more than 1 lakh rupees. In proviso of section 4, the code talks about the Central government have discretionary power and, by notification, the minimum amount of default may be extended to 1 crore by using this proviso recently our government in the wake of a recent outbreak of COVID-19 on March 24, 2020, announced threshold limit one crore for filing an application before NCLT. Once the default crosses the threshold limit, an application may be filed by the financial creditor(s) under section 7 with the evidence or record default of the corporate debtor in an application. Under section 8 of IBC, 2016 the bankruptcy code laid down a two-step procedure for the operational creditor to file an application for the initiation of CIRP.

An operational creditor would upon the occurrence of default have to send notice of demand for payment of an unpaid debt. If the corporate debtor does not reply or repay within 10 days receipt stating either dispute the debt or pay the unpaid debt, an application could be filed by an operational creditor before NCLT to initiate CIRP.In the landmark case Era Infra Engineering Ltd. v. Prideco Commercial Projects Pvt [6]. Ltd.5, NCLAT dismissed the application because the operational creditor didn’t serve notice to the other party under section 8 of the Code.

After applying to AA by creditors, NCLT either admits or reject an application within 14 days, as per sub-section- (4) of section 7, subsection (5) of section 9 and sub-section (4) of section 10 of code the 14days time prescribed in the above section can be counted from the date of receipt of an application and cannot be treated from date file of the application. The time of 14 days within NCLT is mandated to either admit or reject an application under section7, 9 and 10 of the code is a directory [7].

Figure 1: Initiation of CIRP

Step 2: Corporate Insolvency Resolution Process begin; Interim Resolution Professional takes charge; Moratorium sets in

Once Corporate Debtor is accepted into the Corporate Insolvency Resolution Process, the NCLT will make a public announcement for the submission of claims by creditors also Interim Resolution Professional is appointed within 14 days to take over the charge or management of the company. Whereas the board of directors is to be suspended and management ceases to have any control over the activities of the company until the end of CIRP, and as per Section 14 of code, the moratorium shall affect up to the completion of CIRP. The purpose of moratorium includes keeping the corporate debtor’s assets together during the CIR process and ensuring that the business of corporate debtor may be continued as going concerned whereas the creditors of corporate debtor’s look up to take a view on the resolution of default. While at time of moratorium takes a part which prohibits the following- 

• Transfer of any assets of the corporate debtor during the period of moratorium.
• Execution of security interest.
• Continuing or beginning of any legal proceedings on the corporate debtor.
• Recovery of property as an owner.
• Discontinuing or termination of the supply of essentials goods and services to the Corporate Debtor.

 

                                      Figure 2: Commencement of CIRP

At the time of moratorium or after moratorium came into effect under section 14 of IBC, 2016, arbitration proceedings cannot be invoked or continued against corporate debtor [8], as far as Performance Bank Guarantee (hereinafter referred as PBG) is concerned, there no restriction put up on PBG during moratorium whereas security interest mentioned in clause (c) of section 14 of IBC, 2016 does not include PBG [9], the recovery part mentioned section state that, Security and Exchange Board of India is not permitted to recover or sell any assets of corporate debtor till the time moratorium period exits[10]., the supply of essential goods are not be suspended or terminated during the moratorium[11].

Step 3: Role of Interim Resolution Professional U/S- 16-20 of the IBC, 2016

After the appointment of Interim resolution professional(hereinafter referred to as IRP) Under section 16(1) of IBC,2016, as the name suggests interim the professional is appointed for a very short period of time not exceeding 30 days from the date of appointment. IRP will have to act as per the direction of code stated in section 18, the IRP shall receive claim and after collecting all claim of creditors received against the Corporate Debtor and determining the position of the corporate debtor as financially, constitute a Committee of Creditors, IRP will have control over assets and financial details of the corporate debtor, He will verify all claims submitted by various creditors either he can reject or admit claims. 

In case of SBI financial creditor vs SKC Retails Ltd & Ors [12], Financial creditor who is member of Committee of Creditors, filed appeal setting that CoC is not liable to pay the fees of the IRP, whereas appellate tribunal said that applicant who suggests the name of resolution professionals to be appointed pays the expenses, which is later reimbursed by the COC.

Figure 2: Role of IRP 

Step 4: Committee of creditors

The COC members, though generally financial creditors, wear several hats when they sit in the CoC meeting as they decide the fate of the corporate debtor, let’s look at the how COC is formed:

Committee of creditors (COC) is formed by the Interim Resolution Professionals, this committee consisting of financial creditors of the corporate debtor which eventually forms the decision making body of various routine tasks involved in CIRP and also responsible for giving approval to Resolution Professionals to carry out actions that might affect the CIRP. 

Member of Committee of Creditor section 21(2) & (3):

• As per IBC, 2016, only Financial creditor can be included to take part COC for making a respective decision under the observation of Resolution Professionals, However, Operational creditor can take part only if the amount of claim is more than ten per cent of total debt, provided they can be allowed to take part in the meeting but with no right to vote. 
• The voting Power is granted only on the basis of the amount of claim received by IRP. 
• Directors of a company cannot be allowed to take part in a meeting of the COC; however, they can attend the meeting but no voting rights can be granted to them. 

In the case of Jet airways[13] held that if the parallel insolvency proceeding initiated against a corporate debtor before Adjudicating Authority, then the respective authority from other countries has also permitted to participate in Committee of creditors meeting & join CIR process accordance with IBC, 2016. 

Voting percentage

All determination about the revival of the company as well as the implementation of successful resolution plan is needed to be comprised by the Committee of Creditors by the majority vote which must be not less than 66% of voting share of financial creditors whereas operational creditors are not permitted to be part of COC meeting and to vote in favour or against such resolution plan except if there is no financial creditor for the corporate debtor, such operational creditors have limited rights to be present in meeting on condition that their aggregate dues are at minimum equal to 10% of the total debt.

In case of Tata steel Ltd vs Liberty House Group Pte Ltd & Ors[14], Supreme Court held that votes of only such Financial Creditors shall be considered as total voting shares who are present in the meeting, one who participated in meeting neither through video conference nor through an in-person, voting share of such person not counted at all.

Event requiring approval by COC	Required voting share	Section under IBC
Appointment of RP replacing an existing IRP or replacing an existing RP with another RP	66%	Sec-22
Extension for CIRP process	66%	Sec-12
Approval or rejection of a resoltion plan	66%	Sec-30(4)
Withdrwal of appliaction under Sec-12A	90%	Reg-30A(4)
Sale of the assets by RP outside the ordinary course of business	66%	Reg-29(2)

Step 5 – Appointment of Resolution Professional

The first meeting which needs to be held within seven days of the constitution of the COC as per section 22 of the IBC, 2016, the 33% quorum shall be required to present at the first meeting and in same meeting, COC will appoint a person to function as the “Resolution Professional”, As per section 23, RP needs to conduct a meeting and manage the operation of corporate debtor till approval of resolution plan or the appointment of a liquidator under CIR process, For the formulation of a Resolution Plan, the Resolution Professional prepares an Information Memorandum to be submitted to the potential resolution applicants. RP also needs to request for Resolution Plan/ Process Memorandum which provides how entire CIRP will work. In case of Goa Auto Accessories v. Suresh Saluja [15], its was held that it’s right of resolution professional to take assets in the custody of corporate debtor, its duty of resolution professional to make and submit the information memorandum for sake of resolution applicant, RP is also required to examine resolution plan, present those plan before COC and to submit the resolution plan before the adjudicating authority approved by COC. In the case of Swiss Ribbon pvt.ltd vs Union of India [16], the Supreme Court observed that the RP is only a facilitator of CIR process; He can act only after approval by Committee of Creditors (COC).

                                            Figure 4: Role and duties of RP

Step 6: Approval of the Resolution Plan or liquidation

The resolution plan refers to a plan proposed by resolution applicant those are invited by the Resolution Professional to resolve the insolvency or to provide a resolution to the problem of the corporate debtor’s insolvency. The process of submitting a resolution plan by resolution applicants to resolution professional involves the following:

1. Resolution professional invites prospective Resolution applicant to place their resolution plan before COC for their necessary approvals and Submission of Expression of Interest (EOI) by various Resolution Applicant, its need to submit in accordance with Regulation 36A of CIRP regulation, The Resolution Appliacntant has a right receive complete information as to CD (Corporate debtor), debts owed by it, and its activity as going concern, as well as the evaluation matrix prior to commencement of CIRP. The resolution plan must provide that the amount due to operational creditors shall be given priority payment over financial creditors, must include provision regard interest of all stakeholders including FCs and Ocs of CD furthermore, provide a term of plan with management and control of the business of CDs as well as its implementation and demonstrate that the plan is feasible and viable and the resolution applicant has the capability to implement the said plan. 
2. After examining EOIs received by various Resolution Applicants, the resolution professional issues provisional list with due approval of COC. The selected resolution applicant further submits the resolution plan for the approval of COC, Resolution Applicant shall need to submit an undertaking that it does not suffer from any ineligibility under section 29A of IBC. 
3. After evaluating Resolution Plans submitted by the selected Resolution Applicants the COC approves the plan with the due majority (66.66% of total voting share in favour as prescribed under section 30(4) of IBC, 2016 and the resolution professional issue a final list.
4. The resolution plan submitted by respective applicants doesn’t amount directly to any transfer and/or reduction of share, which also includes preferential shareholding. It is merely a proposal of “Resolution applicants” and once it is approved by the COC under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, and thereafter by the ‘Adjudicating Authority’ under Section 31, which shall be stand binding on the corporate debtor and its employees, member, including Government, Financial Creditors, guarantors, Operational Creditors and other stakeholders involved in the resolution plan [17]. 

Let us examine eligibility criteria to become a successful Resolution Applicant as prescribed under Section 25(2) h and Section 29A of the IBC, 20 are mentioned below:- 

1. It has been seen in the case of Group companies, That the company who submits the Expression of Interest can itself or through authorising any other company by the way of Board Resolution to Submit the Resolution plan to Resolution Professional establishing affiliate relationship. Hence, it can be rightly contended that the company who submits EOI and the company who further submits the resolution plan can be two different companies. 
2. Section 25 of IBC, 2016 talks about duties of RP, One among the significant duties of resolution professional, as per section 25(2) (h) is to invite prospection resolution applicant, who fulfil such criteria as may be prescribed by Resolution Professional with approval of COC, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board, to submit resolution plan or plans.
3. As far as eligibility criteria for submitting resolution plan is concerned, Section-29A was added to the Code by the ordinance 2017, the person who contributed to defaults of the corporate debtor or due to incapabilities as specified in the section or are a related party to another defaulting party, are prevented from gaining control of the corporate debtor by being declared as ineligible to submit a resolution plan under the Code.  

In the case of the Jaypee Infratech [18], Jaiprakash Associates Limited is a public listed company and Jaypee Infratech Limited is its subsidiary, JAL, the parent company of JIL applied as resolution applicant while dealing with the eligibility of Jaiprakash Associate Limited (JAL), the Supreme Court observed that JAL and other promoters are ineligible to submit resolution plan by using Section-29A of code. 

Further section 29A, of Code, allows the bidder/applicant if it clears off all its dues to be eligible as resolution applicant, In the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors. [19], Supreme Court has interpreted Section 29A has applied de jure and de facto test, ArcelorMittal and Numetal both found were ineligible due to related party clause. Numetal had Rewant Ruia, the son of Essar steel promotor Ravi Ruia, as beneficiary, while ArcelorMittal owned 29.05 stakes in defaulter Uttam Galva as well as a defaulter in KSS Petron, Supreme Court finalized that both applicants are hit by section 29A and were disqualified from submitting resolution plans; furthermore, Supreme Court exercising its extraordinary power under article 142 of the Constitution of India, its has given one more opportunity to both applicants to clear its dues within one week.  

After receiving a plan from resolution applicant, the RP shall first ensure that the planned complaint to the provision of the code, it may include for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger and then present the plans before the COC, who may accept or reject the same. If in any case the plan is approved by COC, the RP need to file an application before adjudicating authority for approval of plan ratified by the Committee, QVC Exports Pvt. Ltd. vs. United Tradeco [20] held that the Adjudicating Authority had no authority or jurisdiction to rectify an approved Resolution Plan and/or make changes in the Plan. 

If the Adjudicating authority is satisfied that the resolution plan as approved by the committee of creditors meets the requirements specified in section 30, it shall by order approve the resolution plan and its binding on all involved in a resolution plan, where the adjudicating authority is in view of that the resolution plan does not conform to the requirements, it may, by order reject the resolution plan. 

If the resolution plan does not work, not approved by COC after taking required effort by RP in the period CIR Process, the Adjudicating Authority has jurisdiction to order the liquidation of the corporate debtor. If the same order is passed, a liquidator will be appointed by approval from COC to sell, transfer the assets of the corporate debtor and distribute the assets among the creditors, stakeholders. In that case, the assets of the corporate debtor will be distributed as per section 53, IBC, 2016.

Conclusion

The Insolvency and Bankruptcy Code has taken steps to improve insolvency process in India and resolution of stressed assets, though in the nascent stages it faced a lot of criticism and controversies but now government increasing the number NCLT benches across India.

According to Insolvency and Bankruptcy Board of India, chief M S SAHOO insolvency process is working better, it has helped creditors to recover Rs 1.6 lakh crore, which is 207 per cent reliable value asset of under this code almost 190 companies rescued through resolution plan till December 2019, the number of companies that have benefitted from this law is large, there has been an improvement in speed as well as the success rate of the resolution process.

References

1. Asset Reconstruction Co. India P. Ltd v Shamken Spinners – CA 62/2019 in CP No. (IB)131/ALD/2017
2. Kritika Rubber Industries v. Canara Bank, (Karnataka High Court), C .A. No. 190/2008 in Co. P. No.167/1999, decided on: 13.06.2013
3. Bank of Baroda Vs. Rotomac Global Pvt. Ltd- 203(IBC)12/2018
4. Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, 2019 SCC OnLine SC 1478, decided on 15.11.2019
5. Innovative industries vs IDBI Bank[5]  Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017
6. Era Infra Engineering Ltd. v.Prideco Commercial Projects Pvt – 207(IBC)12/2017
7. M/S. Surendra Trading Company Vs. M/S. Juggilal Kamlapat Jute Mills Company Limited and Others(IBC)03/2017
8. Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited-2017 SCC OnLine SC 1362
9. GAIL (India) Limited Vs. Rajeev Manaadiar & Ors.- Company Appeal (AT) (Insolvency) No. 319 of 2018
10. Ms. Anju Agarwal, RP (Shree Bhawani paper Mills Ltd.) Vs. Bombay Stock Exchange & Ors. [CA(AT)(Ins) No. 734/2018]
11. Canara Bank v. Deccan Chronicle Holdings Limited, 2017 SCC OnLine NCLAT 255
12. SBI financial creditor vs SKC Retails Ltd & Ors – Company Appeal (AT) (Insolvency) No. 08 & 43 of 2018
13. Jet Airways (India) Ltd. v. SBI, 2019 SCC OnLine NCLAT 385
14. Tata Steel Limited v. Liberty House Group Pte. Ltd.& Ors.(Company Appeal (AT) (Insolvency) No. 198 of 2018
15. Goa Auto Accessories v. Suresh Saluja – MA No. 130/2019NC.P. (IB)-3863/MB/2018
16. Swiss Ribbons Pvt. Lmt. v. Union of India, 2019 SCC OnLine SC 73
17. Ultra Tech Nathdwara Cement Ltd. Vs. Union of India – 194(IBC) 158/2020
18. https://www.mondaq.com/india/insolvencybankruptcy/682398/jaypee-infratech-insolvency-case
19. ArcelorMittal India Private Limited v. Satish Kumar Gupta, (2019) 2 SCC 1
20. QVC Exports Pvt. Ltd. vs. United Tradeco- 40(IBC)40/2020

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