This article has been written by Sanchita Pathak, pursuing the Certificate Course in Insolvency and Bankruptcy Code from LawSikho.
Insolvency is a state of being unable to pay the debts owed by a person or a company. It is the situation in which the assets of the company are not sufficient enough to discharge the debts and liabilities incurred by the person or company. The person or the company is termed as an insolvent.
The Insolvency and Bankruptcy Code, 2016 (Code) is the Act which lays down the statutory provisions for the Corporate Insolvency Resolution Process as well as other guidelines necessary for the Corporate Insolvent. The Insolvency and Bankruptcy Code, 2016 extends its application to:
- Companies registered under Companies Act 2013 or any previous company law,
- Any Companies registered under any special act for the time being in force,
- Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008,
- Such other body incorporated under any law for the time being in force,
- Personal guarantors to corporate debtors,
- Partnership firms and proprietorship firms, and
- Individuals, other than personal guarantors.
Along with the Code, Insolvency and Bankruptcy Board of India (Board) was also established on 1st October, 2016 which lays down certain rules, regulations and provisions for the matters under the Code and acts as a regulator of the insolvency proceedings.
Threshold for initiation of the corporate insolvency resolution process
The threshold i.e the minimum amount of default to be made by the company for it to be admitted into CIRP is INR 1 Lakh as per Section 4 of the Code. However, in light of the recent COVID-19 pandemic, the threshold has been raised to INR 1 Crore for the companies.
The Adjudicating Authority for the matters under the Code is National Company Law Tribunal (NCLT) constituted under Section 408 of the Companies Act, 2013. The NCLT that will adjudicate upon the matters of any Company will be decided based on where the registered office of the Company is situated. In a case where the decision given by the NCLT is not satisfactory for an Applicant, he can approach the National Company Law Appellate Tribunal, New Delhi (NCLAT)under Section 410 of the Companies Act, 2013 and can challenge such a decision of the NCLT.
In a case where an applicant is aggrieved by the order passed by the NCLAT, he can approach the Supreme Court of India under Section 62 of the Code.
Applicants of the CIRP
When the company fails to repay the debts and is unable to do so, a corporate insolvency resolution proceeding (CIRP) is initiated against the company. Such a company is termed as Corporate Debtor. An application has to be made before the Adjudicating Authority to initiate such proceedings. Applicants can be:
- The Financial Creditor is defined under Section 5 (8) of the Code. A financial creditor is a person who owes the Corporate Debtor a sum of money on which certain interest is to be received. If there is no interest generated on the debt, then it does not constitute a financial debt. A financial creditor is given preferential treatment as compared to the operational creditor. A financial creditor may or may not send a demand notice before filing an application against the Corporate Debtor.
- The Operational Creditor is defined under Section 5 (20) of the Code. An operational creditor is a person who owes the Corporate Debtor any operational debt which includes a claim in respect of the provision of goods or services, in relation to employment or any debt payable to the Government. An operational creditor has to send a demand notice to the Corporate Debtor as a prerequisite to filing an application against the Corporate Debtor.
- The Corporate Debtor Is defined under Section 3 (8) of the Code. A Corporate Debtor can voluntarily file an application for the initiation of CIRP before the Adjudicating Authority if it can no longer function effectively as a going concern.
Timeline for the corporate insolvency resolution process
- The time period within which the CIRP should be completed is 180 days with a one-time extension of 90 days. However, the Supreme Court has held in the case of Committee of Creditors of Essar Steel Limited through Authorised Signatory V. Satish Kumar Gupta &Ors.that in exceptional cases, an outer limit of 330 days can be given, including extensions and time taken in the legal proceedings. This led to an amendment in Section 12 of the Code.
- Section 56 of the Code talks about fast track CIRP which should be completed within 90 days with a one-time extension of 45 days. Small companies defined under Section 2 (85) of the Companies Act, 2013, start-up companies and companies having assets not more than INR 1 Crore for the previous financial year are eligible to file an application for initiation of CIRP under fast track process.
- As soon as an application by either Financial Creditor, Operational Creditor or the Corporate Debtor is admitted, the Adjudicating Authority declares a period of the moratorium as per Section 14 of the Code for prohibiting any pending or initiation of suits, proceedings against the Corporate Debtor and it includes execution of any decree, order or judgment by any court of law for time being in force. This is to avoid delay in the CIRP.
- It was held in the case of Power Grid Corporation India Limited v. Jyoti Structures that the bar stipulated under Section 14 of the Code is restricted to the debt recovery actions that would diminish the resources of the Corporate Debtor and does not include the proceedings for the enforcement of an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 which is in favour of the Corporate Debtor. The moratorium does not extend to writ proceedings before the court and criminal proceedings as held in the cases of Canara Bank v. Deccan Chronicle Holdings Ltd. and Shah Brothers Ispat Pvt. Ltd. v. P Mohanraj and Ors.
- Once the application has been admitted, an Interim Resolution Professional (IRP) has to be appointed as per Section 16of the Code and he shall make a public announcement of the initiation of CIRP and inviting proof of claims by various creditors immediately after his appointment as per Section 13 of the Code.
- As per Section 21 of the Code, the IRP will constitute a Committee of Creditors (CoC) within 30 days from the commencement of the CIRP. The CoC will consist of financial creditors only. However, if any operational creditor has a claim which is more than 10% of the overall debt of the Corporate Debtor, then a representative of the Operational Creditor can attend the meetings of the CoC. It is pertinent to note that the representative of the Operational Creditor cannot vote in such a meeting. In case of no Financial Creditors of the Corporate Debtor, only then the Operational Creditors will constitute the CoC. It is pertinent to note that the members of the suspended Board of Directors or the partners of the Corporate Debtor as the case may be can also attend the meetings of the CoC. However, they will not have any voting rights in the meeting. The absence of any such director, partner or the authorized representative of the Operational Creditor shall not invalidate proceedings of the meeting.
- The first meeting has to be held within 7 days from the constitution of the CoC as given under Section 22 of the Code. In the first meeting, one of the most important decisions to be made is the appointment of Resolution Professional (RP). The IRP can continue as the RP or the CoC can replace the IRP with a new RP. The decision has to be made by way of voting with a majority of 66% of the voting share of the financial creditors.
- The RP has to appoint a valuer within 7 days of his appointment but not later than 40 days from the commencement of CIRP as per Regulation 27 of the Insolvency and Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (CIRP Regulations).
- The RP has to prepare and submit an information memorandum, which is a document containing all the material facts relating to the Corporate Debtor, to the CoC within 14 days from his appointment but not later than 54 days from the commencement of CIRP.
- The meetings of the CoC will be conducted by the RP and the same will be conducted as and when the RP deems fit or when 33% of the CoC approach the RP to conduct the meeting.
- The RP shall release an invitation of expression of interest seeking resolution plans from various resolution applicants within 75 days of the commencement of CIRP. The time limit for the receipt of the expression of interest shall not be less than 15 days from the release of the invitation.
- Upon receipt of expression of interests, the RP has to make a provisional list of applicants within 10 days from the last date of receipt of expression of interests. The RP has to verify the applicants and confirm whether the applicant is qualified under Section 29 A of the Code.
- S. 29 A was enforced in the case of Committee of Creditors of Essar Steel Limited through Authorised Signatory V. Satish Kumar Gupta &Ors. where the resolution applicants NuMetal and Arcelor Mittal were held ineligible by the Supreme Court and instead of outrightly rejecting their resolution plans, they were given a time period of 2 weeks to rectify their ineligibilities.
- A period of 5 days will be provided for raising any objections on the resolution applicants included in the provisional list. Within 10 days from receipt of any objection, the RP shall make a final list of resolution applicants.
- Once the final list is made, the RP has to issue Request for Resolution Plan, information memorandum, evaluation matrix and such documents which are essential for the Resolution Applicants to prepare a resolution plan as per Regulation 36 A of the CIRP Regulations.
- The Resolution Applicants must submit the resolution plans within 30 days of the issuance of Request for Resolution Plan.
- As soon as the resolution plans are received, the CoC will approve or reject the plans and the approved plan would be submitted before the Adjudicating Authority for its final approval. As per Regulation 39 (3) of the CIRP Regulations, the CoC shall record reasons for approval or rejection of the resolution plans to avoid acceptance or rejection of the plans without a reasonable basis.
- The resolution plan is presented before the Adjudicating Authority at least fifteen days before the maximum period for completion of CIRP of the Corporate Debtor as given under Regulation 39 of the CIRP Regulations. The Adjudicating Authority can accept or reject the resolution plan after due examination and review of the plan.
- It is pertinent to note that the commercial wisdom of the CoC has to be respected in every case and the Adjudicating Authority can reject the plans on the basis of non-compliance with the statutory provisions and cannot go into the details of the decisions made in the case. However, in the case of Committee of Creditors of Essar Steel Limited through Authorised Signatory V. Satish Kumar Gupta &Ors., it was held that there are certain exceptions where the Adjudicating Authority can interfere with the decision of the CoC.
- In a case where the CoC does not approve any resolution plan, or no resolution plan has been submitted to the CoC before the expiry of the CIRP, or the Adjudicating Authority rejects the plan, then the Adjudicating Authority shall pass an order requiring the Corporate Debtor to undergo liquidation proceedings. The CoC can also voluntarily decide to liquidate the Corporate Debtor with 66% majority of voting share before the confirmation of the resolution plan.
Process of application to initiate the corporate insolvency resolution process
A Financial Creditor can file for an application under Section 7 of the Code. There are two requirements for the financial creditor to file the application:
- There must be a financial debt owed,
- There must be a default made in respect of the financial debt.
The application fee for a financial creditor is INR 25,000.
An Operational Creditor can file for an application under Section 9 of the Code. There are four requirements for an operational creditor to file the application:
- There must be an operational debt owed,
- There must be a default made in respect of the operational debt,
- There must not be any pre-existing dispute between the Corporate Debtor and the Operational Debtor.
The demand notice must be sent by the Operational Creditor regulated under Section 8 of the Code and as per Form 3 or Form 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, whichever is suitable, to the Corporate Debtor.
The application fee for an operational creditor is INR 2,000.
A Corporate Debtor can file for an application under Section 10 of the Code. There are three requirements for the Corporate debtor to file the application:
- There must be a debt owed by the Corporate Debtor,
- There must be a default made in respect of the debt,
- A Special Resolution must be passed by the shareholders of the Corporate Debtor allowing the filing of an application under Section 10 of the Code.
The application fee for a corporate debtor is INR 25,000.
The application fee is high for Financial Creditors as well as Corporate Debtor in order to avoid frivolous applications.
Format of the application for initiation of CIRP
The applications for initiating CIRP under S. 7, 9 and 10 are mostly similar with a few minor changes. Here, S. 7 application is going to be explained. One can find the relevant forms for the applications on the website of Insolvency and Bankruptcy Board of India (IBBI). The forms can be accessed by following these steps:
- Log on to https://www.ibbi.gov.in/
- Click on – Legal Framework
- Click on – Rules
- Click on – The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Rules).
- The application has a cause title in the beginning which states the names of the parties. For a S. 7 application, the applicant would be the financial creditor/s and the respondent would be the corporate debtor.
- An index has to be given which includes the list of dates and synopsis, memo of the parties, application to initiate CIRP along with an affidavit and annexures.
- The list of dates includes the important events along with the dates on which they have taken place, for instance, an agreement between the parties, or any communications exchanged between them, or any transactions that have taken place between them, or any legal notices and so on.
- The synopsis contains brief facts of the case which led to the filing of the present application.
- The synopsis is followed by the memo of the parties which includes the details of the parties such as their registered office, corporate identity number (CIN), phone number, email address for correspondences, etc.
- This is followed by the application which is given under Form 1 of the Rules. There are five parts in the application which requires detailed information of the applicant. The first part contains the particulars of the applicant. The second part contains the particulars of the corporate debtor. The third part contains the particulars of the proposed interim resolution professional. The fourth part contains the particulars of the financial debt. The fifth part contains the particulars of financial debt (documents, records and evidence of default).
- The financial debt has to be explained in detail with all the relevant communications and documents attached to the application.
- Lastly, there is an affidavit to be submitted along with the application which states that everything contained in the application is true and correct and no information has been concealed.
Thus, it can be inferred that the Corporate Insolvency Resolution Process is a detailed process. There are various steps to be followed during the process for a desirable outcome from it. The provisions and regulations which provide the essential requirements and stipulated time frames for all the stages in the CIRP are important to be adhered to. Any delay and diversions from the stages will have an adverse effect on the CIRP. If the CIRP is conducted in a manner as prescribed by the Code and its regulations, it will result in the revival and reconstruction of the Corporate Debtor.
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