This article is written by Chirag Rathi, 3rd Year Student of Rajiv Gandhi National University of Law. Here he discusses “10 important concepts for understanding Insolvency and Bankruptcy Code”.
Why we needed a new law: Insolvency and Bankruptcy Code
Debt is an essential element of finance in the present world economy for individuals, corporate bodies and even the government. No person or corporation in the world possesses sufficient resources to execute their business activities for expansion and modernization. Funds are borrowed in the normal course of business and are bound to be repaid within the stipulated time along with the agreed interest subject to the contract of debt.
Existing laws pertaining to insolvency which were unconsolidated like Provincial and Presidential Towns Insolvency Acts, BIFR (Board for Industrial and Financial Reconstruction) for regulating sick companies which can be defined as industrial units whose net worth has been eroded over a period of 5 years under SICA (Sick Industrial Companies Act), Recovery of debts due to Banks and Financial Institutions Act, 1993 and Companies Act, 2013.
Hence, there were various laws prior to IBC, 2016 which were having different application, procedures as well as jurisdictions and therefore confusion, overlapping, inefficiency and conflict of laws was being created in the economy which demanded an urgency to create a single law which would bring all the cases of insolvency and bankruptcy under single umbrella to make the legal process efficient, time-bound and enhance value maximization. Therefore, all these laws were consolidated into one single legal framework “Insolvency and Bankruptcy Code, 2016”.
It is enacted with a view to achieve the following objectives
- Ensure smooth legal process for all the insolvency and bankruptcy cases.
- Encourage Entrepreneurship and Development by making available easy credit in the market for several activities.
- Reduce the time taken to resolve the Insolvency cases.
- Elimination of confusion and conflict of laws by a complicated legal framework.
- Develop the Credit Market and protect the creditors and investors confidence.
- Balance the interest of stakeholders and prioritize the government dues over other secured dues.
Highlights of the 10 important concepts of IBC
IBC is divided into 4 parts i.e. Preliminary (Part I); Insolvency Resolution and Liquidation of Corporate Persons (Part II); Insolvency Resolution and Liquidation of Individuals and Partnership Firms (Part III); Regulation of insolvency professionals, agencies and information utilities (Part IV). It extends to the whole of India. It applies to any company registered under Companies Act, 2013 or under previous company law, any Special Act, Limited liability Partnership or any other body as Central government may specify.
At present only Part, I and Part II is operational i.e. related to Corporate Persons. It is applicable to matters relating to insolvency and liquidation of corporate debtors i.e. a corporate person who owes a debt to any person where the minimum default is 1 Lakh Rupees.
There are few important definitions to be understood in the context of the code:
Financial Creditor and Operational Creditor– It means any person to whom a ‘financial debt’ and ‘operational debt’ respectively, is owed and includes a person to whom such debt has been legally transferred or assigned to. The Code differentiates between both, financial creditors are those whose relationship with the entity is a pure financial contract, such as loan or debt security and therefore is debt, along with interest, if any, which is disbursed against the consideration for the time value of money, whereas Operational creditors are those whose liabilities from the entity comes from a transaction on operations.
It was cleared in the case Swiss Ribbons Pvt. Ltd. v. Union of India, that there is an intelligible differentia between both the creditors and is not the violation of Article 14 and arbitrary.
- Corporate Applicant– It includes a corporate debtor, his authorized member or partner, person in charge of managing his operations and resources as well as a person who has financial control over the affairs of the corporate debtor.
- Committee of Creditors- It shall consists of all the financial creditors of the corporate debtor. The interim resolution professional after collation of claims and assessing the information of the debtor constitute a committee of creditors. There voting share shall be determined on the basis of the financial debt owed to them. Otherwise provided in the code, all the decisions of the committee of creditors shall be taken by a vote of not less than 51%. It shall require a resolution professional to furnish any financial information in relation to the corporate debtor during the resolution process.
There are several institutions and bodies set up under the code-
- Insolvency Professionals- A Specialized category of officers is created to administer and enforce the resolution process, manage the affairs of the corporate debtor and share information with creditors to help them in decision-making. The adjudicating authority shall appoint an interim resolution professional within 14 days from the insolvency commencement date. He shall collect the information relating to the debtor’s assets, finances and operations, take its control and custody, receive and collate claims and constitute a committee of creditors. The personnel i.e. managers and employees of the corporate debtors shall extend cooperation to insolvency professional. He shall make efforts to preserve the value of corporate debtor’s property and manage the operations as a going concern. Within 7 days of the constitution of the committee of creditors, they should by a vote of 66% resolve to appoint an interim resolution professional as resolution professional or replace him by another one.
- Insolvency Professional Agencies- These agencies conduct an examination and certify these insolvency professionals as well as defines their code of conduct for their duties and performance.
- Information Utilities- A person registered with the Board as Information Utility i.e. a person to whom the creditors report the financial information of the debt owed to them by the debtors which include debt, liabilities and default.
- Insolvency and Bankruptcy Board- It consists of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law. It manages and controls Insolvency Professionals, Agencies and Information Utilities set up under the Code.
- Adjudicating Authorities- It shall be the National Company Law Tribunal (NCLT) having the territorial jurisdiction over the place where the registered office of the corporate person is located. Any insolvency resolution, liquidation or bankruptcy proceedings shall stand transferred to NCLT. Any person aggrieved by its order can prefer an appeal to the National Company Law Appellate Tribunal (NCLAT) within 30 days of the NCLT order, which in turn can be appealed to the Supreme Court within 45 days of NCLAT order on questions of law arising out of such order. If both the Appellate courts are satisfied about the sufficient cause they may extend the time for appeal by 15 days. No civil court shall have jurisdiction over the matters of NCLT.
- Corporate Insolvency Resolution Process (CIRP)- The creditors’ committee will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
Initiation of CIRP (Corporate Insolvency Resolution Process)
Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor. The initiation of the process shall be done by an application to the Adjudicating authority.
When the initiation is done by financial creditor, the authority within 14 days of the receipt of application ascertain the existence of default and after satisfaction about it as well as no pending disciplinary proceeding against the insolvency professional proposed to be appointed, by order admit the application and communicate to the parties. When the initiation is done by operational creditor, he is required to send a demand notice or invoice demanding payment of the default to the corporate debtor, who in turn is required to deliver the record of any dispute, suit or arbitration proceedings or the proof of paid amount within 10 days. After this period, he can file an application with the adjudicating authority, who within 14 days of the receipt of it may admit or reject the application. The initiation can also be done by a corporate applicant by filing an application with the Adjudicating authority.
Public announcement of CIRP
There shall be a public announcement of the corporate insolvency resolution process containing the name and address of the corporate debtor, name of the authority with which the corporate debtor is incorporated, last date of submission of claims, details of interim resolution professional, penalties for false or misleading claims and the date on which CIRP shall close.
Submission of Resolution plan for Approval
The resolution professional shall prepare an information memorandum in such form and manner specified by the Board for formulating a resolution plan. He shall provide to the resolution applicant access to all relevant information provided, he undertakes to comply with existing laws, protect any IPR of corporate debtor and not share information with third parties. There are certain persons who are not eligible to be resolution applicant under Section 29A of the Code.
The resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum who shall in turn examine each plan to confirm that it provides for payment of insolvency resolution process costs, payment of the debts of operational creditors in the manner specified by the Board, management of affairs of corporate debtor and management and supervision of resolution plan. Such plan shall be presented to the committee of creditors for its approval who by 66% votes shall approve it and the resolution professional shall forward the approved plan to the Adjudicating authority.
- Time Limit- The Corporate Insolvency Resolution Process (CIRP) shall be completed within a period of 180 days from the date of admission of application to initiate such process. This time can be extended on the application by resolution professional on being instructed by committee of creditors by 66% votes but not exceeding 90 days and not more than once.
- Moratorium– Moratorium as per Oxford Dictionary means, “A Legal authorization to debtors to postpone payment”. On the insolvency commencement date, the Adjudicating authority shall by order declare moratorium having effect till the completion of the corporate insolvency resolution process for prohibiting all of the following namely-
- The institution or continuation of suits or proceedings against corporate debtor including execution of any decree, judgement or order of any court or tribunal;
- Transfer, alienation, encumbrance and disposition of corporate debtor’s assets and legal rights;
- Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property;
- The recovery of any property by owner or lessor that is occupied or possessed by corporate debtor.
The supply of essential goods and services to the corporate debtor as may be specified by the Board shall not be terminated or suspended or interrupted during the moratorium period.
- Liquidation- Where the adjudicating authority before the expiry of resolution process does not receive resolution plan or rejects the plan, it shall pass an order for the liquidation of the corporate debtor and make a public announcement for the same. It can also be done at any time during the resolution process but before the approval of plan by the Committee of creditors by 66% votes. Similarly, it can also be ordered when the corporate debtor contravenes the resolution plan approved by the Adjudicating authority and creditor’s interests are prejudicially affected.
On the date of such order, the resolution professional appointed under CIRP subject to written consent acts as a liquidator for the purpose of liquidation, unless replaced by Adjudicating authority. He shall charge fees for the process in such proportion to the value of liquidation estate as specified by the Board.
Creation of Liquidation estate
The liquidator shall form an estate of assets of corporate debtor and hold it as a fiduciary for the benefit of all the creditors. It shall include assets over which corporate debtor have ownership, his encumbered assets, tangible or intangible assets, proceeds of liquidation, assets subject to determination of ownership by courts and assets recovered through proceedings of avoidance of transactions, but it shall not include assets owned by third parties in his possession, personal assets of partners or shareholders, collateral held by financial service providers and assets of Indian or Foreign Subsidiary.
Collection of Claims by Creditors
The liquidator shall have access to information of the corporate debtor and shall receive or collect the claims of creditors within 30 days from the date of commencement of liquidation process. The financial creditors may submit the claims with supporting documents and may withdraw or vary claims within 14 days of the submission. He shall verify the claims and admit or reject it followed by communication of his decision to creditors and corporate debtor. A creditor may appeal to Adjudicating authority against liquidator’s decision within 14 days of such decision.
Manner of Liquidation: Priority
A secured creditor may choose between two options, he may either relinquish its security and receive proceeds from the sale of assets by the liquidator or inform the liquidator of such interest and identify asset from which the interest is to be realized, which shall be verified by the liquidator. Following the second option, a secured creditor can then realize his debts from such assets. Where such realization is in excess to debts due, he shall deliver such excess to the liquidator to be included in the liquidation estate. The amounts of insolvency resolution process costs due shall also be deducted from such realization.
The first option i.e. the proceeds from the sale of the liquidation estate by the liquidator shall be distributed in the following priority:
- The Insolvency resolution process costs.
- Workmen’s dues for the period of 24 months preceding the date of liquidation commencement and debts owed to the secured creditor (if he has relinquished his interest).
- Wages and unpaid due to employees other than workmen (preceding 12 months).
- Financial debts owed to unsecured creditors.
- Amount due to Central Govt. or State Govt. and debts owed to the secured creditor for unrealized debt by realizing his secured interest (preceding 2 years).
- Any remaining debt or dues.
- Preference shareholders.
- Equity shareholders or Partners.
The fees paid to liquidator shall be deducted proportionately from each class. When the assets are completely liquidated, the liquidator shall make an application to Adjudicating authority for the dissolution of such corporate debtor, who shall by order give effect to the same.
- Fast Track Corporate Insolvency Resolution Process- An application may be made in respect of corporate debtors with assets and income below a level, class of creditors, such other category of corporate persons as notified by the Central government. It shall be completed within 90 days from the insolvency commencement date, that can be extended by 75% voting share but not more than 45 days and not more than once.
- Voluntary Liquidation Of Corporate Persons- A corporate person who intends to liquidate itself and has not committed any default may initiate voluntary liquidation proceedings which much meet such conditions and procedural requirements as may be specified by the Board, including several conditions like a declaration from the majority of the directors of the company verified by affidavit that the company has no debt or that it will be able to pay its debts in full, audited financial statements, report of valuation of assets, etc.
Within 4 weeks of the declaration, a special resolution should be passed in the general meeting of the company requiring the company to be liquidated voluntarily due to expiry of period of its duration, fixed by its Article of Association or occurrence of event providing for the liquidation or any other reason and for appointment of an insolvency professional to act as liquidator. The company shall notify the Registrar of companies and the Board about the resolution. Where the affairs of corporate person have completely wounded up and its assets are completely liquidated, the liquidator shall make any application to Adjudicating authority for the dissolution of such corporate persons, who shall by order give effect to the same.
Offences And Penalties
There are mainly two categories of punishment or fine under Part II of the Code:
Punishment for 3 to 5 years or a fine of Rupees 1 lakh to 1 Crore or both
- Where any officer of the corporate debtor within 12 months immediately preceding the insolvency commencement date or at any time after such date willfully, fraudulently, concealed any property or transferred/disposed of the property for a security interest in the non-ordinary course of business;
- Where any officer of the corporate debtor on or after the date of insolvency commencement date, misconducts in the course of insolvency resolution process, like does not disclose information, deliver property, books of accounts, other information to resolution professional or falsifies the books of corporate debtor or for willful and material omissions from statements relating to affairs of corporate debtor or false representation to creditors;
- Where corporate debtor willfully and knowingly provides false information in application made by the corporate debtor. But where any other person other than corporate debtor furnishes false information in the application made by financial creditors, shall only be punished with a fine and not imprisonment.
Punishment for 1 to 5 years or a fine of Rupees 1 lakh to 1 Crore or both
- Where any officer of the corporate debtor has transacted for defrauding creditors, like transfer of property in the form of gift/charge or other forms;
- Where the corporate debtor or any of its official contravenes the moratorium or the resolution plan.
Insolvency and Bankruptcy Code has emerged out to be a great success. So far, NCLT (National Company Law Tribunal) has recorded a total of 1322 cases. At the pre-admission stage, 4452 cases have been disposed; 66 have been resolved after adjudication, and 260 cases have been ordered for liquidation, Arun Jaitley said on 3rd January, 2019 adding that in 66 resolution cases, creditors recovered approximately Rupees 80,000 crores. Also, the Supreme Court of India in Swiss Ribbons Pvt. Ltd. v. Union of India & Ors. upheld the validity of IBC in its entirety against whom petitions were filed, alleging it as discriminatory.