This article has been written by Sparsh Agrawal, pursuing the Certificate Course In Companies Act from LawSikho.

Introduction

It is pertinent to note that, the Insolvency and Bankruptcy Code, 2016 have recognised the National Company Law Tribunal (hereinafter referred as NCLT) which is constituted under Section 408 of the Companies Act, 2013 as the Adjudicating authority for the purpose of insolvency resolution as well as the liquidation of corporate persons.

Jurisdiction of National Company Law Tribunal 

It is worth mentioning that the registered office of a particular corporate entity is the criteria for determining the insolvency resolution and liquidation of corporate persons, corporate debtors and personal guarantors thereof.  In order to file an application pertaining to liquidation of the corporate debtor or initiating insolvency resolution proceedings, it has to be filed before the relevant National Company Law Tribunal (NCLT), having the requisite jurisdiction over the place wherein the corporate entity has its registered office situated. 

Furthermore, an application pertaining to voluntary liquidation of a corporate person can be filed before the National Company Law Tribunal (NCLT) wherein the jurisdiction of the registered office of a corporate entity is existing. 

Pertinently, the Debt Recovery Tribunal (DRT) has been vested with the adjudicating authority for partnerships firms and Individuals. However, if an individual is a personal guarantor of a particular corporate debtor and a corporate insolvency resolution process or liquidation proceedings of such corporate debtor is pending before the National Company Law Tribunal, then the application with regards to the insolvency resolution or bankruptcy of a personal guarantor or such a corporate debtor has to be also filed before the requisite National Company Law Tribunal. Therefore, in order to deal with the applications pertaining to the insolvency resolution or bankruptcy of a particular personal guarantor of a corporate debtor the National Company Law Tribunal has been vested with the powers of Debt Recovery Tribunal in order to deal with the afore-mentioned matters. 

Admission of Insolvency Resolution Application before NCLT  

There are three persons who can initiate an Insolvency Resolution Application before the National Company Law Tribunal (NCLT):

1. Financial Creditor.
2. Operational Creditor.
3. Corporate itself.

Financial creditor

According to Section 7 of the Insolvency and Bankruptcy Code, 2016. a particular Financial creditor can file an application before the NCLT on a sole basis or along with others. Such an application can be filed before the NCLT when a default has happened. Pertinently, such a default under this section talks about the financial debt owed not only to the financial creditor who has filed an application before NCLT but also to any of the financial creditors of the corporate debtor. 

The following are the condition precedent to be considered before filing an application before the NCLT Tribunal:

1. Firstly, an application before NCLT under Section 7 and Section 8 of the Insolvency and Bankruptcy Code, won’t be maintainable before the tribunal, if at all there is a slightest doubt or dispute regarding the playability of the amount claimed either by the Operational Creditor or the Financial Creditor. (Annapurna Infrastructure Pvt. Ltd and Ors. Vs. Soril Infra Resources Ltd.)
2. Secondly, if the amount claimed by the creditor is time-barred, then the application is not maintainable before the Tribunal. 
3. Lastly, the claim for short delivery or non-delivery is also not maintainable. 

Documents required by the Financial Creditor

Under Section 7 of the IBC Code, 2016, the application before the NCLT will be made in Form 6 along with the following documents:

1. A record of default done by the debtor.
2. Evidence regarding such a default.
3. Letters and communications exchanged between the parties to the suit. 
4. An account statement specifying that the Financial creditor has made the financial debt payment to the corporate debtor. 
5. A legal notice sent to the corporate debtor to the financial creditor. 
6. If at all any reply is received by the Corporate debtor to the financial creditor, then such a reply has to be attached as a document. 
7. In order to identify the person who has signed the petition, a board resolution has to be attached. 
8. Evidence regarding the payment of Rs. 25000 to the Ministry of Corporate Affairs. 
9. Copy of AOA and MOA of the Corporate Debtor.
10. A written consent is given by the Insolvency Resolution Professional. 
11. An application for an interim stay order. 

Operational Creditor

Section 8 of the Insolvency and Bankruptcy Code, 2016, talks about the petition filed by the Operational Creditor. The aforesaid section of the code states that if at all there is a default made in the payment of a debt, then the creditor is supposed to serve 10 days of demand notice along with the copy of an invoice demanding such payments of debt. If the invoice is not served to the operational debtor, then the petition is not maintainable before the Tribunal. 

Within the given period of 10 days, the corporate debtor can find the existence of a dispute and also produce the same or he can produce the proof of payment made to the Operational Creditor. 

Section 9 of the Insolvency and Bankruptcy Code, 2016 states that after the expiry of ten days time period and if the payment of the debt by the debtor has not been received by the Operational Creditor, then in such a case, the operational creditor reserve a right to file an application before the Tribunal. 

Documents Required

The aforesaid petition shall be filed along with the following documents:

1. An invoice stating the supply of goods or service.
2. Account Statement.
3. Letters and communications exchanged between the parties to the suit. 
4. A written consent is given by the Insolvency Resolution Professional. 
5. An affidavit declaring that no notice was given the corporate debtor pertaining to the dispute. 
6. A copy of the certificate has to be opted from the financial institutions who are maintaining statements of accounts of the operational creditor confirming that there has been no payment of the operational debt by the corporate debtor. 
7. In order to identify the person who has signed the petition, a board resolution has to be attached. 
8. Evidence regarding the payment of Rs. 25000 to the Ministry of Corporate Affairs. 
9. Copy of AOA and MOA of the Corporate Debtor.
10. An application for an interim stay order. 

It is imperative to note that the provisions given under Insolvency and Bankruptcy Code, 2016 does not mandate the operational creditor to suggest the name of Insolvency Resolution Professional.  In case, there is no name given to the Adjudicating authority then IRP will be appointed from the board. Therefore, it is highly suggested that when the petition is filed by the operational creditor then he must suggest the name of the IRP so that the IRP is their own person. 

Scrutinization of Debt by NCLT

It is pertinent to note that, Section 7(4) of the Code, states that within the time period of 14 days from the receipt of the application by the creditor, the National Company Law Tribunal has to ascertain as to whether there is an existence of default. 

Admission by NCLT

If the tribunal is satisfied that there is a default and application is rightfully made and there is no disciplinary proceedings pending before the proposed IRP, then it will accept the application. 

Moreover, NCLT can even reject the application. Before rejecting the application it is mandatory for the Tribunal to serve a notice to the applicant creditor in order to rectify default in his application within the period of 7 days. 

Petition filed by Corporate Debtor itself

Pertinently, Section 10(1) of the IBC Code, allows a Corporate Debtor to file a petition for initiation of insolvency resolution process before the relevant adjudication authority if the corporate debtor has made default in payment of the debt. 

Declaration of Moratorium by NCLT

Section 13 of the IBC, 2016 binds the tribunal to declare a moratorium in accordance with the terms mentioned under Section 14 of the Code.  

Scope of Moratorium

Section 14 of the IBC Code categorically talks about the scope of the moratorium. The NCLT by virtue of this section prohibit the following:

First, the continuation or institution of the pending suits or any proceedings filed against the corporate debtor which includes decree, order or judgement passed by any competent court, tribunal, arbitration panel or any other relevant authority. 

Second, Transferring, encumbering, alienating or disposing of the requisite corporate debtor with respect to its legal right or its assets or any other beneficial interest involved. 

Third, any action pertaining to foreclose recovery or enforcement of any security interest created by the corporate debtor with regards to its property which even includes any action taken under the SARFESI Act, 2002. 

Fourth, the recovery of such property by the owner or any lessor wherein such property has been occupied by or is in the possession of the requisite corporate debtor. 

Powers in order to extend the time limit

Section 12 of the Code has set default maximum time of 180 days for completing the insolvency resolution process in normal case and 90 days in fast tacked insolvency resolution process under Section 56. The resolution professional if instructed by a committee of creditors shall file an application before NCLT for extension of time beyond 180 days, or 90 days, as the case may be.

The NCLT, on being satisfied that the subject matter of the case is such that it cannot be completed within default maximum time, may, by order, grant a one-time extension beyond prescribed default maximum time. One time extension in case of normal process cannot exceed 90 days and in case of the fast-tracked process cannot exceed 45 days. The NCLT, in both cases, is empowered to grant an extension of time only once.

Approval of Resolution Plan

“When the NCLT is satisfied that the resolution plan approved by a committee of creditors meets the requirement of the Code, it shall, by order, approve the plan. An approved plan is binding on debtors and its employees, members, creditors, guarantors and other stakeholders in the resolution plan.

“However, where the NCLT is satisfied that the resolution plan does not meet the requirement of the Code, it may, by order, reject the plan. On approval of the resolution plan, the IRP is closed. When IRP is closed, the moratorium ceases to have an effect, the resolution professional is relieved of his duties and all documents related to IRP are consigned to the Board.” 

Power to Initiate Liquidation Process

“The NCLT has the power to order liquidation if resolution plan has been rejected as it fails to meet the requirements of the Code; or maximum time allowed for resolution process has expired without any resolution plan being agreed upon; or during the IRP but before confirmation of resolution plan committee of creditors through resolution professional intimates adjudicating authority to about its decision to liquidate the corporate debtor; or when the corporate debtor, or any person connected with the corporate debtor, contravenes the approved resolution plan.

Where IRP fails and liquidation proceedings have started the resolution professional continues to act as liquidators, but a new liquidator is appointed in case IRP has failed because it did not meet the requirement of law or there is a complaint against the resolution professional.”

Dissolution Order

“When the business operations of the corporate person have been completely wound up and its assets have been completely liquidated, the liquidator shall make an application to the NCLT for dissolution of the corporate person. On such an application being filed, the NCLT shall order that the corporate person shall be dissolved from the date of the order. The order of NCLT has an effect of dissolving the corporate person from the date of order. Order of dissolution is required to be forwarded within seven days (fourteen days in case of voluntary liquidation) from the date of order to the authority with which the corporate debtor (corporate in case of voluntary liquidation) is registered.”

Avoidance of Preferential Transactions

“When liquidator or resolution professional, as the case be, is of the opinion that a corporate debtor during the period specified under the Code has transferred any property or an interest thereof of the debtor to specified persons on account of an antecedent debt or liability in a manner putting a specified person in a beneficial position than it would have been in the event of a distribution of assets in liquidation(preferential transaction), he shall apply to NCLT for the avoidance of such transactions. When an application for the avoidance of preferential transaction is made, the NCLT may, inter alia by an order require that property transferred be vested in the corporate debtor; or release or discharge security interest created by the corporate debtor; or require payment by any person of the sum in respect of benefit received by him from such transaction; or restore the position of guarantor whose debts were released or discharged; or direct providing security or charge on any property for discharge of any debt under the order.”

The period specified in respect of transactions with related parties is two years preceding the insolvency commencement date and one year preceding the insolvency commencement date in other transactions.

Avoidance of Undervalued Transactions

“When a corporate debtor, except in the course of ordinary business, makes a gift or transfers one or more assets for insignificant consideration (the undervalued transaction), the resolution professional or liquidator, as the case may be, shall, or failing them a creditor, member or partner of the corporate debtor, as the case may be, may make an application to NCLT to declare such transaction void and reverse their effect.

The NCLT, on being satisfied with undervalued transaction and failure of the resolution professional or liquidator to file an application, shall pass order (i) for restoring the position as it existed before the transaction and reversing the effect thereof; and (ii) requiring the Board to initiate disciplinary proceedings against the resolution professional or the liquidator, as the case may be.

An order reversing effect may require any property transferred as part of the transactions, to be vested in the corporate debtor; or release or discharge any security interest granted by the corporate debtor; or require the payment of such consideration for the transaction as may be determined by the independent expert; or require the beneficiary to pay such sum, to the liquidator or the resolution professional as the case may be, as the NCLT may direct.”

Avoidance of Extortionate Credit Transactions

“The term extortionate transaction means a transaction wherein one party was made to pay an unfairly high rate of interest or subjected to unfair credit term. The Code provides for avoidance of extortionate transactions related to the financial or operational debt during the period within two years preceding insolvency commencement date. The application for the avoidance of extortionate credit transaction may be made by the resolution professional or the liquidator, as the case may be, to the NCLT.

The NCLT on examining the application and being satisfied that terms of the credit transactions required exorbitant payment to be made by the debtor, it shall, by order (i) restore the position as it existed before the transaction; (ii) set aside whole or part of debt created; (iii) modify terms of the transaction; (iv) require any person, who was party to transaction, to repay any amount received by such person; or (v) require to relinquish the security interest that was created as part of the extortionate transaction.”

Power in Case of Malicious and Fraudulent Proceedings

“The NCLT has been empowered under the Code to deal with cases of fraudulent and malicious initiation of proceedings to ensure proceedings are brought only for the purpose of resolution of insolvency, or liquidation, as the case may be and not for a malicious or fraudulent purpose. Where any person initiates fraudulent or malicious liquidation proceeding or insolvency resolution process the NCLT may impose upon such person a penalty which may not be less than rupees one lakh, but which may extend to rupees one crore. Also where any person initiates voluntary liquidation proceeding with the intent to defraud any person, the NCLT may impose upon such person a penalty which may not be less than rupees one lakh, but which may extend to rupees one crore.”

Power in Case of Fraudulent or Wrongful Trading

“When it is detected during the corporate insolvency resolution process or a liquidation process that the business of corporate debtor has been carried on with the intent to defraud creditors of corporate debtors or for any fraudulent purpose, the NCLT on an application may (i) pass an order that any persons who were party to such business transactions shall be liable to make such contribution to the assets of the corporate debtors as it may deem fit; (ii) by an order, under specified conditions, direct that a director or partner of a corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit. “

Conclusion

It is worth to mention that, since the inception of IBC Code in 2016, it has been easier for the financial creditor, operational creditor or corporate itself to recover the amount from the debtor. This is because the adjudicating authority i.e. the National Company Law Tribunal (NCLT) has been vested with wide powers in order to ensure that there is balance in the interests of corporate debtor and creditors. 

References

1.https://www.icsi.edu/media/portals/72/year%202017/presentation/Role%20of%20NCLT%20-%20PK%20Mittal.pdf

2. https://www.livemint.com/money/personal-finance/how-does-3. the-insolvency-resolution-process-work-1562084179866.html
3. https://www.lexology.com/library/detail.aspx?g=54f3a56b-090a-4d9f-8830-39108a16a160

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