This article is written by Sachi Ashok Bhiwgade, B.A.LLB (Hons.) student of Hidayatullah National Law University, Raipur. This article discusses the relevant provisions and procedure to file and draft Proof of Claim before a Liquidator under the Insolvency and Bankruptcy Code, 2016 and the IBBI (Liquidation Process) Regulation, 2016.

Introduction

Prior to the enactment of the Insolvency and Bankruptcy Code 2016, the insolvency recovery system was in a very poor state. The IBC ensures efficiency in the liquidation process and for the fast recovery of debt. It applies to the companies, LLPs, Partnership Firms, Personal Guarantor to corporate debtors, etc. The provisions under IBC can be triggered only if the matter relates to a default of a minimum of 1 lakh rupees as per Section 4 of the Code. A company is liquidated when it is unable to pay its creditors and therefore has to sell off its assets in order to pay them. Section 33 of the Code lays down the circumstances under which the liquidation process is initiated. Under IBC, the liquidation process is different from the corporate insolvency resolution process and proof of claim has to be submitted separately for both. At the time of the liquidation, the claims submitted are for determining the total amount of the dues of the corporate debtor and for the priority of payments out of the liquidation estate. It is required for the claimants submitting their claims to adhere to the provision of the Code and Liquidation Regulation which provides for the procedure and time limit for submission of proof of the claim. The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulation 2016 has been recently amended on 7th January 2020.

What is a Proof of Claim

A proof of claim is a document filed by a Creditor for seeking payments from the corporate debtor. It contains details regarding the debt owed, details of the total amount of claim and any documents supporting the claim of the creditor.

At what stage of the liquidation process is it required to file/submit proof of claims?

Once the process of liquidation is initiated, a liquidator is appointed. The liquidator then makes a public announcement inviting claims from stakeholders as contained in Form B of Schedule II of the IBBI (Liquidation Process) Regulation, 2016.

Regulation 12 requires a liquidator to make a public announcement, within 5 days of his appointment, regarding: 

1. To call upon the shareholders to submit their claims on the liquidation, commencement date.
2. Providing the last date of submission.

Regulation 16 requires a person claiming to be a stakeholder to submit its claim, including interest, on or before the last date as mentioned in the public announcement.

Who can Submit claims?

A creditor who wants to get the payment from the corporate debtor submits proof of claims to the liquidator. There are different procedures for submitting proof of claims for each type of creditor. The Code acknowledges three types of creditors: Operational, Financial and Other Creditors. 

As per Section 38 of IBC;

• For submission of claims, a financial creditor has to provide a record of such a claim along with an information utility.
• An operational creditor has to submit a claim in the form and manner and with such supporting documents specified by the Board.
• A creditor who is partly financial and partly operational has to submit claims in such manner and to the extent of his financial debt and operational debt. 

If a creditor wants to withdraw or vary his claim, he may do so within 14 days of the submission of the claim.

The liquidator on receiving the claims may direct the creditor to provide evidence or document of such a claim. 

Time limit for submitting claims

Section 38 (1) read with Regulation 12(2)(b) requires that the claims are to be submitted within 30 days from the liquidation commencement date. Any claims submitted after the prescribed last date will not be entertained by the liquidator. However, if a creditor is unable to file a claim on or before the last date for submitting claims he has to file an appeal to the NCLT i.e, the Adjudicating Authority against the decision of the liquidator as per Section 42 of the Code. Hence, a liquidator will admit a late submission of the claim, when he is directed by the NCLT to do so. It is to be noted that the late submitted claim also has to be submitted before the distribution of assets. Hence, In the case of a claim submitted after the distribution of assets, the NCLT will not allow such a claim. 

The Adjudicating Authority intervenes only when there is a delay in filing of claims. A person who has not filed a claim during the resolution process will not be barred from filing a claim during the liquidation process.

Documents required for proving claims for the existence of a debt 

Regulation 17, 18, 19 and 20 mentions the documents necessary to support the claim of creditors. The documents required to prove the claim of debt for different types of creditors are mentioned below.

Operational Creditors: Regulation 17

All or any of: 

1. The records available with the information utility;
2. A contract with the corporate debtor for the supply of goods and services; 
3. Invoices of the payment for supplying goods and services to the corporate debtor;
4. Order of the Court or Tribunals that adjudicated upon the non-payment of debt;
5. Financial accounts.

Financial Creditors: Regulation 18

All or any of:

1. The records available with the information utility;
2. A financial contract stating the financial statement; 
3. Evidence of a record stating the amounts committed to the corporate debtor by a financial creditor for a facility that has been drawn up by the corporate debtor;
4. Financial statement of the unpaid debt;
5. Order of the Court or Tribunals that adjudicated upon the non-payment of debt. 

Workman/Employee: Regulation 19

 All or any of:

1. Records available with the information utility;
2. Proof of employment;
3. Evidence of (a) notice demanding payment of the unpaid amount and (b) document or any other proof of non-payment;
4. Order of the Court or Tribunals that adjudicated upon the non-payment of dues. 

Creditor’s other than Financial Creditor, Operational Creditor, Workmen/Employee: Regulation 20

1. Records available with the information utility;
2. Documentary Evidence of (a) notice demanding payment of the unpaid amount/bank statement showing that claims are unpaid;
3. Documentary evidence or electronic evidence of shareholding;
4. Order of the Court or Tribunals that adjudicated upon the non-payment of a claim.

Admission and Rejection of Claims

Section 40 provides that after the claims are verified by the liquidator he may either wholly or partly, admit or reject the claims as the case may be. 

If a liquidator rejects a claim he has to record his reasons for the same in writing. Further, he has to, within 7 days of admitting or rejecting the claims, communicate the same to the concerned Creditor and the Corporate debtor. If the claims are rejected by the liquidator the creditor can appeal to the Adjudicating Officer, within 14 days of the rejection of claims, against the decision of the liquidator. If the claim is admitted then distribution will take place according to Section 53 of the Code. Before the finalization of the proceeds, claims of the applicant can be adjudicated and admitted.

Appeal

An appeal against the order of the liquidator lies to the Adjudicating Authority. The National Company Law Tribunal is referred to as the Adjudicating Authority under IBC. Section 42 states that a Creditor may appeal, within 14 days, against the decision of the Liquidator to the Adjudicating Authority. The Supreme Court in the case of Swiss Ribbons Pvt Ltd v. Union of India observed that determination of the value of claims by the liquidator under Section 40 is a decision that is quasi-judicial in nature. Hence, the decision of the liquidator is appealable to the Adjudicating Authority as per Section 42 of the Code.

In the case of Natwarlal Shamaldas and Co Ltd v Yog Industries Ltd before the National Company Law Tribunal, Mumbai Bench, a claim was rejected by the liquidator for not filing it within the prescribed due date for filing of claims. The question before the Adjudicating Authority was whether such delay can be condoned. The application, in this case, was allowed by the NCLT and the liquidator was directed to admit the claim and determine the same.

The National Company Law Tribunal, Kolkata Bench in the case of Uco Bank v. Nicco Corporation Limited condoned the delay for the late submission of the claim by the financial creditor and directed the liquidator to reconsider the claim, in accordance with the provisions of the Code and Regulation. In this case, the financial creditor (the bank) failed to submit the claim before the liquidator within the prescribed time and therefore, it was rejected by the liquidator for not filing it within the due date for filing of claims. The Creditor explained that because of the renovation and repair work that was going on in the premises of the Bank it could not file the claim within time. The question before the Adjudicating Authority was whether such delay can be condoned. The application, in this case, was allowed by the NCLT on the ground that the Bank has satisfactorily explained the reason behind the delay. 

Drafting of Claims 

IBBI (Liquidation Process) Regulation, 2016 contains the forms required for filing/submitting claims, along with affidavit and verification for each type of Creditor. 

Forms for submitting claims

The form for submitting claims for Creditors contained in Schedule II are:

• Form B: For inviting stakeholders to submit claims;
• Form C: For Operational Creditors except for workman and employees; 
• Form D: For Financial Creditors;
• Form E: For claims by the workmen and/or employee;
• Form F: For claims by authorized representatives of workmen and/or employee;
• Form G: For other stakeholders; 

Only the Financial Creditor has to submit proof of claim to the liquidator by electronic means. Other Creditors (Operational Creditor, Workman, Employee, Other Stakeholder) have to submit proof of claim to the liquidator in person or by post or by electronic means. 

Where are the forms for claims available?

The forms for claims are available on the website of the Insolvency and Bankruptcy Board of India and can be downloaded via https://ibbi.gov.in. 

Duties of a Liquidator

• A liquidator has to receive and collect Creditor’s claims within 30 days from the date of commencement of the liquidation process;
• He has to invite and settle the claims of the creditor as well as the claimants;
• To distribute the proceeds in accordance with the provisions of the Code; 
• The Board specifies the time within which a claim is to be verified by the liquidator;
• The liquidator determines the value of the claims;
• The liquidator as per Regulation 44 has to liquidate the corporate debtor within one year from the date of commencement of liquidation date.

Steps taken with regard to claims

1. Claims submitted by the creditors are received by the liquidator.
2. Verification of all claims by the liquidator.
3. Admission or rejection of claims.
4. Determination of the value of claims.
5. Records are examined.
6. Distribution of liquidation proceeds. 

Waterfall mechanism for liquidation

Section 53 of the Code provides for the distribution of assets as per following priority order:

1. Workmen’s due and the debts owed to the secured creditor where such secured creditor has relinquished his security;
2. Wages and unpaid dues owed to employees (other than workmen);
3. Financial debts owed to unsecured creditors;
4. Amount due to the Central and State Government and debts owed to secured creditors;
5. Remaining debts and dues;
6. Preference shareholders;
7. Equity shareholders/Partners.

Conclusion

From the above article, it can be inferred that filing a proof of claim is an essential part of the liquidation process. The creditors have to submit the claims within the stipulated time to the liquidator otherwise it will not be entertained. However, in certain cases, if satisfactory reasons are provided with, the delay can be condoned. Also, the claims which do not fulfill the requirements of the Code and the Liquidation Regulations will not be admitted. 

References

• https://www.ibbi.gov.in
• The Insolvency and Bankruptcy Code, 2016
• https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2019/Jun/190609_UnderstandingtheIBC_Final_2019-06-09%2018:20:22.pdf 
• https://ibbi.gov.in//uploads/legalframwork/8e241a378e16b2821da63658bad6f0a4.pdf
• http://vinodkothari.com/wp-content/uploads/2018/09/FAQs-on-submission-of-claims.pdf 

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