This article has been written by Jinal Prajapat pursuing the Introductory Course: Legal Writing For Blogging, Paid Internships, Knowledge Management, Research and Editing Jobs from LawSikho. This article has been edited by Aatima Bhatia (Associate, Lawsikho) and Ruchika Mohapatra (Associate, Lawsikho).
The existing set of laws and forums in India venot been able to aid various lenders in inefficacious recovery/restructuring of debts. This also has a serious effect of causing undue stress upon the existing Financial and Credit System of the country. As a result of this, the International Bankruptcy Code (IBC) was created to help lenders recover and restructure their debts more effectively. Creating a single legislation for insolvency and bankruptcy is the goal of India’s Insolvency and Bankruptcy Code 2016. With the enforcement of IBC, the winding-up procedure is now under the supervision of the National Company Law Tribunal (NCLT), which ensures quick and prompt action during early stages of debt default by a firm, thereby resulting in an optimum recovery rate.
What is insolvency?
Insolvency is the procedure of financial death and rebirth. A company or individual is declared insolvent if it is unable to pay its debts and if its liabilities exceed its assets. An inability to pay one’s bills is known as insolvency. The insolvency of a person or a company can be caused by a variety of circumstances. Inadequate accounting or human resources management hired by a firm, increased vendor expenses, litigation brought by customers or business partners may lead to insolvency. Customers’ requirements change over time, this can lead to the demise of certain companies. Customers’ requirements change over time, which can lead to the end of certain companies. Informal arrangements with creditors are common before a company or individual becomes involved in insolvency proceedings, such as putting up alternative payment arrangements.
However, being insolvent doesn’t necessarily mean the inevitable end of the company, there are options for business debt restructuring, company rescue, and business turnaround. Insolvency practitioners have a heavy focus on restoring a company rather than liquidating it so that it can continue. Insolvency proceedings are designed to maximize the return on the company’s creditors’ investments.
The firm can be resurrected by finding a new buyer to sell it, as a going concern and raising fresh funds. This is done through the Corporate Insolvency Resolution Process. Another individual may propose a resolution plan to take over the company and pay out the remaining obligations, thus settling the remaining debt. The CIRP procedure is regarded to have failed if a resolution plan is not filed or accepted by the committee of creditors (COC). The liquidation process would subsequently begin, as ordered by the tribunal, in such a case.
Corporate Insolvency Resolution Process (CIRP)
According to the Code, a company’s insolvency is resolved through CIRP. Insolvency resolution and liquidation for corporate persons is addressed under Part II of IBC, 2016. At least one crore rupee in default is required to trigger application, according to IBC Section 4. The Central Government has the authority to enhance this sum up to a maximum of Rs. 1 crore. In CIRP, the financial creditors assess the viability of the debtor’s business and the options for its revival and rehabilitation. The debtor’s business goes through a liquidation process if the corporate insolvency resolution procedure fails or if the financial creditors conclude that the debtor’s firm cannot be operated profitably and should be wound up.
Persons who may initiate corporate insolvency resolution process
CIRP may be initiated by a financial creditor, an operational creditor, or a corporate applicant of the corporate debtor in the event of any default by the corporate debtor.
A financial creditor is defined in Section 5(7) as any person who owes a financial debt, including any person who has been legally assigned or transferred the debt, while an “operational creditor” is defined in Section 5(20) as any person who owes an operational debt. Both these expressions include persons to whom such debts have been legally assigned or transferred.
The Code offers a simple test to begin the resolution process for corporate insolvency. An insolvency resolution procedure is triggered by the Code’s use of a default-based test. When a company displays early symptoms of a financial crisis, an insolvency resolution method that is based on a default test allows for early intervention. A prompt settlement of insolvency can only be achieved if early signs of financial distress are detected.
Once a corporate debtor default on a debt, the Insolvency and Bankruptcy Code, 2016 allows both the corporate debtor and its operational creditors to commence the insolvency resolution procedure. Unsecured creditors can now initiate insolvency resolution processes, which aligns the legislation with worldwide standards. This includes all operational creditors such as employees, suppliers, and other third parties.
Initiation of CIRP by financial creditor
The process laid forth in Section 7 is for a financial creditor to initiate the process of corporate insolvency resolution. It is possible for a financial creditor to make an application with the National Company Law Tribunal on behalf of a financial creditor, either alone or along with other financial creditors or any other person on behalf of a financial creditor, as may be notified by the Central Government.
The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, revised Section 7 of the Code. Financial creditors were previously the only ones who could apply for initiating corporate insolvency resolution against a corporate debtor, but since the Second Amendment Act, any financial creditor or any other person on behalf of the financial creditor may now apply for initiating the process.
When a financial creditor of the corporate debtor defaults on a financial debt owing not only to the applicant but to any other financial creditor of the corporate debtor, it is considered a default. Financial creditors can thus apply for corporate insolvency resolution even if the default is about the debt of another financial creditor
Furnishing of information by the financial creditor
The financial creditor shall, along with the application for initiating the corporate insolvency resolution process, furnish a proof of default and the name of a resolution professional proposed to act as the interim resolution professional in respect of the corporate debtor. Proof of default is required to prevent financial creditors from filing frivolous or petitions that prematurely place the corporate debtor in insolvency resolution procedures for unrelated reasons.
The time frame for ascertaining the existence of default
NCLT must determine whether a financial creditor is in arrears within fourteen days of receiving the application.
Admission of application
If NCLT is convinced that the default exists, the application is complete and that no disciplinary procedures are underway against the suggested resolution professional, the application shall be admitted. It is not required to look into any other criteria for admission of the application.
Rejection of application
As long as it is determined that the suggested resolution professional has not committed a breach of contract, or that the application is unsatisfactory in some way, the NCLT can reject an application. Before rejecting the application NCLT, shall give notice to the applicant to rectify the defect in the application within seven days of receipt of such notice from the National Company Law Tribunal.
Commencement of corporate insolvency resolution process
A corporate insolvency resolution procedure begins on the date of admission of the application.
Communication of Order
NCLT shall communicate, within seven days of admission or rejection of such application, as the case may be to the financial creditor and the corporate debtor where the application is accepted, or to the financial creditor where the application is rejected.
What happens once the National Company Law Tribunal (NCLT) admits the application against defaulting debtors?
The NCLT will appoint an Interim Resolution Professional (IRP) to handle the defaulting debtor as soon as the case is accepted by the NCLT. The Committee of Creditors has the option of keeping or terminating the Resolution Professional at this point. To the extent practicable, the Resolution Professional’s job is to guarantee that the defaulting debtor continues to function as a going concern. It is the goal of the CIRP to maximize the amount of money owed to creditors.
Who will manage the corporate debtor and board of directors after admission of CIRP?
The corporate debtor’s issues will be handled by the interim resolution expert once he is appointed. After then, it will be under the control of the resolution professional, who will be appointed as soon as possible. Once an interim resolution expert has been appointed, the powers of the corporate debtor’s board of directors or its partners, if applicable, should be suspended. The interim resolution professional or the resolution professional, as the case may be, will have these powers.
Time-limit for completion of insolvency resolution process
Resolution professionals are required to make an application to the NCLT for an extension of the corporate insolvency resolution process if they are ordered to do so by a vote of 66% of the voting shares at a meeting of the committee of creditors. Section 12 of the Code has been revised by the IBC (Second Amendment) Act, 2018 to reduce the voting threshold from 75% to 66% for the committee of creditors’ extension of the corporate insolvency resolution procedure term. Section 12 sets a 180-day deadline for the completion of the corporate insolvency resolution procedure, which can be extended for an additional 90 days. Only the resolution professional can apply for the extension, and it must be approved by a majority of 66% of the voting shares at a meeting of the committee of creditors. This section does not allow for more than one extension of the corporate bankruptcy resolution process. Commercially unviable corporate debtors will not be retained in the resolution process for extended periods and will be liquidated based on the financial creditors’ choice at the earliest opportunity, thanks to a well-defined time limit For creditors and other stakeholders, the time restriction would not only lower the expense of a long-drawn-out operation but also eliminate any decline in the value of the corporate debtor’s firm. As a result, it would be easier for business owners to get out of failing operations quickly.
Withdrawal of application admitted under Section 7, 9 or 10
By the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018, a new section, Section 12A, was added. According to this, Adjudicating Authority may enable the withdrawal of an application allowed under section 7, section 9, or section 10, if the application is filed by the applicant with the permission of the committee of creditors, in such way as may be defined, under the new section 12A.
The goal of the IBC Law was to make conducting business in India significantly easier. The winding-up procedure for corporations has been streamlined by this law, which was previously fragmented owing to a multitude of regulations and forums. Through the Corporate Insolvency Resolution Process or liquidation of the defaulting debtor firm, creditors are empowered to recoup their losses under this legislation.
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