This article has been written by Naresh Kumar Nagar, pursuing the Certificate Course in National Company Law Tribunal (NCLT) Litigation from LawSikho.
The Insolvency regime in India is dealt and administered under the Insolvency and Bankruptcy Code, 2016 ( ‘the Code’). The procedures under the Code can be used to restructure a corporate entity and its finances, failing which there are provisions in the Code that seek to maximise realisations for the creditors. The discussion in this article is restricted to the Corporate Insolvency Resolution Process (CIRP) under Section 7 and Section 9 of the Code whereby the financial creditors and operational creditors respectively are entitled to move an application for resolution of insolvency against a corporate entity.
Overview about CIRP under the Code
Insolvency, in relation to CIRP under the Code, is a situation where a corporate entity is not able to pay off its debt liabilities when they become due for payment. It could also be a situation where the market value of the assets of an entity fails to measure up to the market value of the liabilities and thereby leading altogether too negative equity in case of all liabilities occasion to be due at any given time.
The CIRP, under the Code, is an expedient devised to protect an apparently insolvent but potentially viable entity from liquidation. The Code provides a mechanism to make the diverse creditors act in unison by bringing them under an overarching, compulsory, and collective process. This type of compulsory and collective process against the corporate debtor has been envisaged under Section 7 and Section 9 of the Code with a view to resolving the potential insolvency of the entity while maintaining the entity as a going concern.
Further, an automatic moratorium under the insolvency resolution process under the Code precludes individual creditor action for collection of dues; and the court oversees a structured negotiation amongst the creditors while deputing a resolution professional to operate the corporate entity. The creditors may agree on a settlement of old debts and interests in exchange for the new ones. However, if the creditors fail to reach a consensus the court may confirm a resolution plan, provided a given majority of creditors agree to it. The dissenting creditor may, nevertheless, be allowed to receive commensurate amounts as per the priority established under the Code.
Enactment of the IBC Code
Prior to the ushering in of the Code, the corporates/companies were being governed under the Companies Act, 2013; and the issues and aspects related to corporate sickness had to be handled by the High courts. The industrial sickness of the non-corporate entities Like partnership firms, individuals, HUF, etc. is still being handled under Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. These, however, will be transferred to the Debt Recovery Tribunals (DRTs) when the Code is extended to them. These archaic provisions did not serve their purpose and have to be replaced by the Code.
The Insolvency and Bankruptcy Code 2016 ( the Code) is a consolidating Act and is complete and comprehensive with regard to the subject matter it deals with. The judicial decisions in other Acts including the provisions of the Companies Act 2013 or NCLT Rules, in general, would have no bearing on the matters which fall under the ambit of the Code.
The Scheme of the Code, in a nutshell, is that in the event of default by an entity or enterprise in payment of its dues, the control of the affairs of the entity would come in the hands of the committee of creditors (hereinafter referred to as the COC) of financial creditors though the work would be managed by the insolvency professional to be appointed by the adjudicating authority. The insolvency resolution proceedings are to be concluded within the time-bound manner as per the Code so that the entity or enterprise could be salvaged as a going concern and the precious resources are not wastefully depleted.
Initiation of CIRP
Who can initiate CIRP?
The insolvency resolution process against the corporate debtor can be started under Section 7 and Section 9 by the financial creditor and operational creditor respectively in case there happens to be a default in payment of the debt they have advanced.
What is the criterion for initiation of CIRP?
Section 4 of the Code prescribes the criterion for initiation of CIRP to be a minimum default of Rupees One Lakh to be committed by the corporate entity when it becomes due. This Criterion has further been enhanced for time being to Rupees One Crore in light of prevailing restrictions during the COVID-19 pandemic.
Who is the adjudicating authority?
The adjudicating authority for the purpose of insolvency resolution of corporate debtors has to be the National Company Law Tribunal (NCLT) constituted under Section 408 of the Companies Act, 2013. This has been provisioned under Section 5(1) of the Code.
What are the prerequisites for filing an application for CIRP under Sections 7 and 9 of the Code?
There have been different sets of requirements for the financial creditors and operational creditors for launching corporate insolvency resolution proceedings under Section 7 and Section 9 respectively as described under:
- An application under Section 7 of the code requires a financial creditor to establish that:
- there has been a financial debt;
- the financial debt has become due for payment;
- default has been committed in respect of the debt;
- a fee of Rs. 25000/- has to be paid with the application.
- An application under Section 9 of the Code requires the operational creditor to establish that:
- there has been an operational debt;
- the operational debt has become due for payment;
- default has been there in respect of the debt;
- there is no pre-existing dispute about the existence of debt; and
- demand notice has been served on the corporate debtor;
- a fee of Rs. 2000/- is required to be paid with the application.
Appointment of Interim Resolution Professional (IRP)
An ‘Interim Resolution Professional (IRP’) is required to be appointed at the time of admitting the application for insolvency resolution of the corporate debtor in accordance with Section 16 of the Code. However, the name of an IRP is to be proposed by the Financial Creditor in the application itself to be filed under Section 7 of the Code; and whereas there is no such requirement for the operational debtor filing application under Section 9 of the Code. The adjudicating authority directs the Insolvency and Bankruptcy Board of India (IBBI) to appoint a resolution professional for the purpose of the application filed by the operational creditor under Section 9 of the Code.
Progression of CIRP After the date of admission of the application
- The CIRP is to be completed within a period of 330 days from the date on which the application has been admitted by the adjudicating authority as per Section 12 of the Code. This date is deemed as an insolvency commencement date.
- An Interim Resolution Professional (IRP) gets appointed at the time of admission of application as per Section 16 of the Code, and a moratorium is also pressed into effect under Section 14 of the Code pausing all pending or contemplated legal action against the corporate debtor for recovery of debts.
- The IRP makes a public announcement under Section 15 of the Code about the launching of the CIRP against the corporate debtor and calls for the proof of claims by the creditors immediately after he assumes the charge under Section 13 of the Code.
- The IRP constitutes a Committee of Creditors (COC) within a period of thirty days from the date of commencement of CIRP.
- The IRP holds the first meeting of the COC within seven days of his appointment, and a regular Resolution Professional (RP) gets appointed in the very first meeting itself.
- A registered valuer gets appointed by the RP within a period of seven days from the date of his appointment which however should not be delayed beyond forty-seven days since the date of commencement of CIRP in terms of Regulation 27 of the Insolvency and Bankruptcy Board of India ( Insolvency Resolution Process for Corporate persons) Regulations, 2016 ( hereinafter referred to as CIRP Regulations).
- A document called ‘Information Memorandum’ comprising all material information about the corporate debtor gets prepared by the RP for submission to the COC within fourteen days of his appointment which however is not to be delayed beyond fifty-four days from the commencement date.
- The RP invites an Expression of Interest (EOI) for a resolution plan within seventy-five days from the insolvency commencement date.
- The RP provisionally shortlists the resolutions applicants within ten days from the last date for receipt of the Expression of Interest (EOI); and also verifies and confirms as to whether the resolution applicant is qualified under Section 29A of the Code.
- RP releases a Request for Resolution Plan (RFRP) immediately after the finalisation of the list of resolution applicants.
- The resolution applicants submit the resolution plans within thirty days from the date on which RFRP was issued.
- The COC selects the most appropriate resolution plan and submits the same before the adjudicating authority for final approval at least fifteen days from the deadline prescribed for completion of the CIRP.
- The adjudicating authority either accepts or rejects the resolution plan after due consideration and scrutiny of the same.
- The adjudicating authority passes an order for liquidation of the corporate debtor if:
- No resolution plan is received from the COC; or
- Adjudicating authority rejects the resolution plan; or
- COC decides to liquidate the corporate debtor by 66% vote share.
Withdrawal of application for initiation of CIRP
The application which has been filed under the Code for starting CIRP can be withdrawn either before or after its submission to the adjudicating authority. Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 provides for the withdrawal of the application before admission of the same by the adjudicating authority.
Moreover, an application, which has already been admitted by the adjudicating authority, may be allowed to be withdrawn by the adjudicating authority if an application is made to that effect with the approval of ninety percent voting share of the Committee of the Creditors (COC) as provided under Section 12 A of the Code.
Furthermore, the Hon’ble NCLAT in Janak Goyal v. Satyendra Jain, Company Appeal (AT)(Ins)No.202 of 2019, held that if the matter between the parties gets settled, the application may be dismissed as having been withdrawn.
The application for withdrawal is to be made in Form FA as per the guidelines provided in Regulation 30A of the CIRP Regulations. The application, in accordance with Regulation 30A, as such would have to be moved through the resolution professional. A bank guarantee would have to be given with the application for the estimated expenditure incurred or about to be incurred by the resolution professional.
After the grant of approval by the Adjudicating Authority for withdrawal of the application, the applicant would have to deposit the exact amount, expended by the resolution professional, in the bank account of the corporate debtor within three days failing which the bank guarantee shall have to be invoked and encashed for the purpose.
The brooding concern under the Code has perceptibly been the fact that merely an inability to satisfy the fixed obligation, may not, per se, be definitively indicative of a corporate entity’s economic failure. The Code as such earnestly envisions to espouse the cause of entrepreneurship and progressive innovations. The resolution plans to be envisaged during CIRP ought to aim at promoting and supporting entrepreneurship by ensuring the availability of necessary credit facilities to the corporate entity while balancing the inter se interests of all the stakeholders.
The basic priority of the Code is to provide support and succour to the stressed corporate debtors for securing their revival and reorganisation. The reorganisation is to be speedily brought about within a statutory timeline so as to avoid the erosion of the value of the assets of corporate entities.
The dissolution or liquidation of a corporate entity has to be the last resort. The Code as such is beneficial legislation striving for the rehabilitation and revival of businesses thereby strengthening and buttressing the Indian economy itself in the long run.
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