This article has been written by Mehboob Gaddi pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution and has been edited by Oishika Banerji (Team Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
The Insolvency and Bankruptcy Code, 2016 (IBC, 2016) was recommended on 31st May 2005, by Dr. JJ Irani Committee to the Government of India. Their key recommendations were time-bound proceedings, applicability and accessibilities, moratorium and suspension of the proceedings, setting up of operating agencies, the appointment of administrators and their duties, committee of creditors and liquidators, cross-border insolvency and so on. The recommendations were considered, with the Government taking up steps to regulate the existing bankruptcy laws and replace them with one uniform Code that would facilitate in an easy and time-bound manner. One of the prime significance that IBC holds and which will be a subject matter of discussion in this article as well is the corporate insolvency resolution process (CIRP) dealt with under Sections 7 and 10 of IBC, 2016.
All you need to know about CIRP
It is ideal to note that the ambit of winding up was previously covered by the Companies Act, 1956 / the Companies Act, 2013. Following the enactment of the Insolvency Code in 2016, the new process that replaced the concept of winding up was termed as the Corporate Insolvency Resolution Process (CIRP). The process functions to resolve issues in relation to the defaulting companies within a reasonable period of time thereby maintaining the company as a whole. This insolvency resolution process has been widely covered under Chapter I of Part II of the Insolvency and Bankruptcy Code, 2016.
Who can initiate the CIRP
It is necessary to understand that if any default is committed by a corporate debtor (person who has taken the loan or the amount from a creditor or bank), the CIRP process can be initiated by means of filing an application before the Adjudicating Authority in the provided manner. It is also ideal to note that CIRP can be initiated by a financial creditor as well and there is no bar on the same. Thus, CIRP may be initiated by either:
- Financial creditor (FC) under Section 7.
- An operational creditor (OC) under Section 9.
- A corporate applicant of a corporate debtor under Section 10 of the Code.
Consequences of initiation of CIRP
There are generally two consequences that can follow the initiation of CIRP, namely:
- Revival of the corporate debtor, or
- Liquidation.
It is noteworthy to mention that the underlying purpose of the Code of 2016 is to go with the first consequence that is a revival of corporate debtors. Only when the same is not in favour, liquidation is called for. Revival can further lead to a restructuring of the existing set-up or a new plan of ownership that needs to be implemented.
Stages in the CIRP process
CIRP has a three-stage process:
Pre-admission Process(Sections 3 to 11)
A person who can apply to NCLT to initiate the CIRP process Under Section 7 as Financial Creditor “FCs”, in Section 9 as an Operational Creditor “OCs”, or in Section 10 as a Corporate Debtor “CDs”.
Post-Admission Process (Sections 12 to 32A)
After an application to NCLT, it is their discretion whether to accept or reject an application. The whole process of CIRP process should be completed within 180 Days from the date of admission an application extension is allowed for 90 days only one extension is allowed by NCLT However, CIRP should be completed within a period of a maximum of 330 days from the date the insolvency commencement date Otherwise, the Company would go into the Liquidation process as per Sections 33 to 54.
Liquidation Stage (Sections 33 to 42 and Sections 52 to 54)
If the resolution plan fails for a company, such a company would go into the liquidation process.
The trigger point for the initiation of the CIRP is when the default amount is more than one crore rupees (10,000,000), earlier it was just one lakh rupees (1,00,000). Financial creditors, operational creditors, or corporate debtors apply to recover their debts before the adjudicating authority i.e. NCLT (National Company Law Tribunal).
NCLT within 14 days of receipt of an application passes an order to accept or In case reject the application by giving notice to the applicant to rectify the default within 7 days from receipt of notice from the NCLT.
On acceptance of an application that date will be called the insolvency Commencement Date. By acceptance of an application as per Section 14 of IBC. The moratorium period will start with, the appointment of an Interim Resolution Professional by an Adjudicating Authority after that Public Announcement by an Interim Resolution Professional in Form A of IBBI.
Who are the main stakeholders in IBC
There are Four Main Stakeholders:
- Interim Resolution Professionals (IRP)/ Resolution Professionals (RP).
- Committee of Creditors (COC).
- Resolution Applicant (RA).
- National Company Law Tribunal (NCLT).
One of the primary players who play a major role in CIRP is the Interim Resolution Professional (IRP), who constitutes a Committee of Creditors (COC) as per Section 21 of IBC. The COC appoints or regularises a Resolution Professional by conducting a meeting as per Section 24 of IBC after that the Resolution Professional should prepare an Information Memorandum as per Section 29 and Regulation 36.
‘Resolution applicant’ means a person who presents a resolution Plan to the Resolution Professional; however, a resolution applicant should fulfill the condition of Section 29A of IBC. Resolution Applicant submits a resolution plan with an affidavit that he is not disqualified under Section 29A.
The Committee of Creditors may approve a resolution plan by VOTING a minimum of 66% of the voting share of the Financial creditors. The Resolution Professional should submit a resolution to the National Company Law Tribunal. The resolution plan is approved by a COC, followed by which the National Company Law Tribunal gives the order to approve the plan should be binding on corporate debtors and their employee, members, creditors, guarantors, and other stakeholders involved in that plan. First-ever successful insolvency resolution scheme under IBC was Synergies-Dooray Automotive Ltd.
Conclusion
One of the major steps taken to ease doing business in India is the CIRP process. The IBC has imbibed some of the best international practices of an asset resolution mechanism. It provides an honourable exit mechanism for honest business failures and enables the release of credit locked into the stressed assets for better resource allocation. This market-driven, transparent resolution mechanism instill confidence in the financial system and attracts many new investors to invest in Indian businesses. A significant achievement of the IBC has been the change brought in the debtor-creditor relationship. Debtors are resolving stress early to avoid being pushed into insolvency.
References
- https://www.icsi.edu/media/webmodules/151120221_Module_3_Paper_9_8_ILP_Book_11_11_2021_1.pdf
- https://www.juscorpus.com/wp-content/uploads/2021/05/50.-Mayank-Pandey.pdf
- https://blog.ipleaders.in/all-need-know-about-insolvency-bankruptcy-code/
- https://blog.ipleaders.in/process-institution-ibc/
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