This article is written by Raghav Pareek, from RGNUL, Patiala.

Meaning of insolvency

Insolvency describes a situation wherein a legal person (including corporate persons) is unable to meet their obligation to pay to its creditors. It’s a situation wherein a legal person is unable to pay its debts when they become due and payable. Various insolvency laws all over the world allow the creditors of a particular debtor (who is insolvent) to realize the debt due to them by seizing off the assets of the debtor and selling them off.

Corporate insolvency may involve several concerned parties. These include creditors, shareholders, group subsidiaries, directors, and managers of the company, employees, suppliers, and customers. A host of professional advisers will also have a role to play and these may include financial and management consultants, lawyers, bankers, and accountants.

In India, the Insolvency and Bankruptcy Code, 2016 is the legislation that powers the creditors to recover their money due from debtors.

What is corporate insolvency resolution process

The Insolvency and Bankruptcy Code, 2016 is uniform legislation brought in by the Parliament to deal with various insolvencies. The law prescribes a set procedure to be undertaken by the creditors & even the corporate debtor itself in case insolvency arises. This procedure is known as the Corporate Insolvency Resolution Process.  The Act consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximization of value of assets of these persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.

It is the creation of credit that gives rise to the debtor-creditor relationship and makes insolvency possible in the first place.^[i]

These proceedings per se start once an application for initiation of proceedings is filed by the financial or an operational creditor. The adjudicating authority appoints an interim resolution professional and makes a public announcement for the initiation of the insolvency proceedings. The interim resolution professional is obliged to constitute a committee of creditors which thereafter appoints the resolution professional who is responsible for the execution of the entire insolvency resolution process.

For the initiation of a CIRP petition, there must be an undisputed debt before the initiation of the corporate insolvency resolution process. The Hon’ble Supreme Court has held that the adjudicating authority has the power to reject the application at the stage of admission itself if it is of the view that there is a dispute concerning the existence of a debt.^[ii]

Corporate insolvency laws aim to accomplish the following tasks^[iii]:

1. To lay down rules governing the distribution of the assets of an insolvent company, including rules protecting the pool of assets available to creditors.
2. To provide for management of companies in times of crisis.
3. To facilitate the recovery of companies in times of financial crisis and to stimulate the rehabilitation of insolvent companies and businesses as going concerns.
4. To balance the interests of different groupings and to protect the interests of the public and of employees in the face of financial failures or management malpractices.
5. To encourage good management of companies by imposing sanctions on directors who are responsible for financial collapses where there has been malpractice and by providing for the investigation of the causes of corporate failure.
6. To dissolve companies when necessary.

Meaning of fast track corporate insolvency resolution process

The main purpose behind the inclusion of the concept of fast track CIRP under the insolvency law was to improve the ease of business ranking of our country. Fast track CIRP proceedings aim to eliminate the excess delay which is caused due to the insolvency process of a small-scale company.

It is to be noted that under the IBC, 2016, the maximum no of days required to complete the resolution process is 270 days.^[iv] This timeframe has affected the small-scale companies which do not require such no of days for winding up. The time limits prescribed were not appropriate from the point of view of the small-scale enterprises since these cases were less complex in nature. Therefore, Sections 55 to 58 were incorporated under the Code of 2016^[v] to address the problem of excessive delay faced during the insolvency proceedings of small-scale companies.

As the title to Chapter 4 of the IBC, 2016 rightly suggests, this process involves less no. of days required for completion of the insolvency proceedings of a legal company therefore it is a faster and more efficient way of winding up the insolvency procedure of a small-scale bankrupt company.

Fast track CIRP proceedings – A brief overview

The procedure pertaining to the fast track insolvency of small-scale enterprises is enshrined under Ss. 55 to 58 of the Insolvency and Bankruptcy Code, 2016 & the Insolvency and Bankruptcy Board of India (Fast track Insolvency Resolution Process for Corporate Persons) Regulations, 2017. The provisions of the Code specified under Part II. (Chapter II)  

Before taking into consideration the procedure specified for the Insolvency Resolution process there are a few aspects which we need to understand. 

Who is corporate debtor vis a vis FTCIRP?

Section 55 of the Code of 2016^[vi] (through notification)^[vii] states that an application for initiation of Corporate Insolvency Process can be made only against these below-mentioned corporate debtors:

1. Small-sized Companies (As defined under the Companies Act, 2013).
2. Start-up Company other than a Partnership Firm.
3. An Unlisted Company with total assets less than one crore rupees (as reported in the books of the preceding financial year).

Manner of initiating the insolvency resolution process

An application for the fast track insolvency resolution process can be filed by either a creditor (including both financial and operational creditor) or a corporate debtor itself.^[viii]

Further, to support their claim, the creditor or the corporate debtor has to attach some documents as mentioned below:

1. Proof of the existence of default substantiated through records available with the information utility.
2. Such other information specified by the Insolvency and Bankruptcy Board.

Procedure followed during FTCIRP

• Appointment of Interim Resolution professional

After the filing of an application for initiation of the insolvency resolution process, an interim resolution professional is appointed by the adjudicating authority. He shall be appointed as an interim resolution professional only if he doesn’t possess any relation with the corporate debtor.^[ix] Moreover, he is entitled to make disclosures regarding the same at the time of his appointment as an interim resolution professional.

• Public announcement

The interim resolution professional is obliged to make a public announcement vis a vis his appointment within three (3) days of his nomination. The announcement shall be made in two languages i.e. in English & a regional language. The public announcement shall provide the last date for submission of claims by the applicant which shall not be more than ten (10) days from the appointment of the interim resolution professional.^[x] Moreover, the announcement is to be posted on the website, if any, of the corporate debtor.

All the expenses regarding the same are to be borne by the applicant itself and later he can get reimbursement for the same from the committee of creditors.

• Submission of the Claims and the veracity check

As already stated, the interim resolution professional is obliged to provide a period of ten (10) days for the submission of claims. All claims by operational creditors, financial creditors workmen & employees and other creditors are to be submitted before the resolution professional within the time period prescribed along with additional documents in support of the claim.

These documents include records available with the information utility and other relevant documents including the contract for the supply of goods, books of accounts, contract of employment, or any other document which substantiates the claim.  

The resolution professional or the interim professional thereafter makes verification of all the claims submitted before him within seven (7) days of submission of the last claim before it^[xi] and prepares a list of creditors and amount due to them, amount admitted and security interest if any payable to them. Also, if the amount claimed is not precise or cannot be determined due to any contingencies, the resolution professional or the interim resolution professional shall estimate the amount based on information available with him.

• Formation of Committee of Creditors (CoC) & its meetings

The resolution professional is obliged by the law to form a committee of creditors consisting of financial and operational creditors of the corporate debtor. In the absence of a financial creditor or where the financial creditors are not independent of a corporate debtor, in that case, only the operational creditor shall be included in the committee of the creditors.^[xii]

In case the committee comprises of only the operational creditor, then the members should include the following:

1. Eighteen largest operational creditors; provided if the no is less than eighteen then all should be included in the committee;
2. One chosen representative on behalf of workmen other than those included in subclause (1);
3. One chosen representative on behalf of all the employees other than those included in subclause (1).

The voting rights of these members shall be determined proportionately following the debt due to such members and the total debt.

The interim resolution professional is mandated to file a report warranting the constitution of the committee before the adjudicating authority within 21 days from the date of his appointment.^[xiii] Furthermore, if the professional believes that the applicability of the fast track process is unwarranted, he may apply to the adjudicating authority for the conversion of the process to the corporate insolvency resolution process.^[xiv]

In the end, the first meeting of the committee is held within seven (7) days of the filing of the report by the resolution professional. The meeting can be conducted by the resolution professional who shall act as chairman of the meeting of the committee. A seven (7) day prior notice is to be given to the creditors.

• Time period for completion of the process

The fast track corporate insolvency process aims to eliminate the delay which is caused in the corporate insolvency resolution process under Part II (Chapter II) of the Insolvency and Bankruptcy Code of 2016.

The time period for the completion of the fast track insolvency as incorporated under the provisions of the Code of 2016 is ninety (90) days. This time period can be further extended for a period of forty-five (45) days. This extension can be granted only once.^[xv] 

• Appointment of registered valuer

A registered valuer is a person who is entrusted with the responsibility of carrying out the valuation of the assets of the corporate debtor under different classes and to determine the fair value and liquidation value for the same. A registered valuer is appointed by the resolution professional within seven (7) days of his appointment. The registered valuer so designated will present expected liquidation esteem after specifically confirming the stock and fixed resources of corporate indebted individuals. Moreover, the following persons cannot be appointed as the registered valuer:

1. A relative of the resolution professional;
2. A related party;
3. An auditor of the Corporate debtor within five (5) preceding years;
4. A partner or director of the insolvency resolution entity.

The registered valuer thereafter makes a fair estimate of the fair value and the liquidation value of the corporate debtor following the international valuation standards. The figures of this valuation is sent to the committee members. An information memorandum is also prepared by the resolution professional and is sent to all the members of the committee in an electronic form.

• Resolution plan: Its formation and submission

Under section 35-A, the resolution professional invites the resolution plan from all the resolution applicants which is to be submitted at least 15 days prior its submission before the adjudicating authority.^[xvi] Resolution plan specifies all the sources of funds that are to be used for payment of the costs incurred & value due to the creditors. 

It is to be noted that after submission of the resolution plan by the resolution applicant to the resolution professional, it is to be further submitted for approval of the committee. The resolution professional then submits it before the adjudicating authority at least 15 days before the expiry of the time permitted for the process.

Conclusion

In the end, it would not be wrong to say that the Fast Track Corporate Insolvency Resolution Process is an all-around made procedure intended to focus on a particular segment of corporate debtors against whom bankruptcy procedures can be started by the lenders or corporate borrower himself. Time limits are likewise endorsed in such a way that less unpredictable cases can be finished inside a constrained opportunity to give rapid disposal of issues which will eventually create more opportunity for the adjudicating authorities to concentrate on complex issues and which require a lot of time.

References

^[i] See Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, 1982) (‘Cork Report’) ch. 1, especially para. 10, on credit as the ‘lifeblood of the modern industrialised economy’ and ‘the cornerstone of the trading community’.

^[ii] Transmission Corporation of Andhra Pradesh v. Equipment Conductors and Cables Limited, (2019) 12 SCC 697

^[iii] Vanessa Finch, Corporate Insolvency Law, 27, (Cambridge University Press, 2^nd ed., 2009).

^[iv] The Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016, § 12.

^[v] Id. §§ 55-58.

^[vi] Id. § 55.

^[vii] Notification No. S.O. 1911 (E) dt. June 14, 2017.

^[viii] See Supra 1, § 57.

^[ix] The IBBI (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017, § 3.

^[x] Id. § 6.

^[xi] Id. § 7.

^[xii] Id. § 16.

^[xiii]Id. § 17(1).

^[xiv] Id. § 17(2).

^[xv] The Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016, § 56 (3).

^[xvi] See Supra 9, § 35-A.

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