unsecured creditors
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This article is written by Suchi Agarwal, pursuing a Certificate Course in Capital Markets, Securities Laws, Insider Trading and SEBI Litigation from LawSikho.

Abbreviations used:

CIRP- Corporate Insolvency Resolution Process

COC- Committee of Creditors

DRT- Debt Recovery Tribunal

IBC/the Code- Insolvency and Bankruptcy Code 2016

IRP- Insolvency Resolution Professional

LLP- Limited Liability Partnership Firms

NCLT- National Company Law Tribunal

NCLAT- National Company Law Appellate Tribunal

U/s- under section 

Introduction

The Insolvency and Bankruptcy Code bill introduced in Lok Sabha in December 2015 was passed as Insolvency and Bankruptcy Code, 2016 (“IBC”/ the “Code”) by the parliament in May 2016 and received presidential assent on 28th May 2016. The purpose was to introduce a consolidated legal framework dealing with insolvency and bankruptcy of various kinds of defaulters and insolvents. Insolvency law underwent a structural change with the passing of the Code, key highlights are: 

  • Dispute resolution within 180 days extended maximum to 90 days and mechanism for liquidation of assets and repayment in case of failure of resolution of insolvency;
  • Appointment of experts licensed as insolvency professionals for preparing the insolvency resolution plan and to oversee liquidation and distribution of assets;
  • eligibility of the small and large creditors including operational and financial to seek recovery of their dues under IBC 2016;
  • defining operational creditors for facilitating recovery of the dues of creditors other than financial creditors; 
  • procedure to follow before knocking the door of the court/tribunal for recovery of dues by the creditors;
  • Single window for insolvency and bankruptcy matters;
  • Establishment of an independent body as regulator- Insolvency and Bankruptcy Board;
  • Creditors dues given weightage over government dues for payment;
  • Provisions to deal with fraud or concealment of information or manipulation thereof while resolution mechanism is prepared by the Insolvency Professional.

Meaning of insolvency and bankruptcy

Insolvency means the inability of the debtor to pay off the debts, where the debtor dries out of sufficient funds for repayment of debts. Bankruptcy whereas is declared by the adjudicating authority’s order when an insolvency application is filed by or against the debtor. All the assets are liquidated of the debtor determined as insolvent and are distributed to the creditors through legal process.

Why was the need for Bankruptcy Code? 

We had different laws dealing with the reorganisation and resolution of the insolvency of businesses and individuals. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act), Companies Act, 2013, Recovery of Debts Due to Banks and Financial Institutions Act 1993 (DRT Act), Debt Recovery Tribunal (Procedure) Rules 1993, Limited Liability Partnership Act 2008 r/w Limited Liability Partnership (Winding up and Dissolution) Rules 2012 dealt with debts of secured creditors, and the provisions for insolvency of individuals and unlimited partnerships were contained in the Presidency Towns Insolvency Act 1909, Indian Partnership Act. The system, however, failed to effectively deal with insolvency and bankruptcy matters with multiple laws and overlapping provisions.

Once the debtor runs into insolvency, lenders used to get stuck in long drawn legal battle for recovery of their dues, often either failing to recover or recovering only part of the debt. With the changing financial and business environment of the economy, ever-increasing bad assets and debts, and consequent pressure on the overall economy due to the insolvency of the corporate debtors, earlier insolvency laws of the country failed to effectively deal with the stressed assets. IBC 2016 consolidated the existing insolvency laws into a single window and brought in new provisions for dealing with insolvency and bankruptcy matters.

The IBC is inclined more in favour of creditors with provisions for completion of resolution in a time-bound manner. In a matter of Urban Infrastructure Trustees Ltd vs. Neelkanth Township and Construction Private Limited, National Company Law Appellate Tribunal (NCLAT) had upheld the order of NCLT, Mumbai bench that limitation period is not applicable for recovery of the dues under IBC. The corporate debtor had preferred an appeal against the order of the NCLAT to the Supreme Court which was dismissed on no merit on the ground of appeal, keeping the question of law open as to whether the Limitation Act applied to the matter under the Code or not where the limitation period of making a claim on debt has expired. This order has however created ambiguity on application of the Limitation Act to the proceedings initiated under the IBC. With the amendment dated August 8, 2019 proviso under Section 12 of IBC was introduced which capped the maximum time limit for completion of resolution to 330 days including extensions and time taken in legal proceedings with respect to the resolution process of corporate debtor

Applicability of the IBC 2016

Individuals, proprietorship and partnership firms, limited liability partnerships, companies and such other entities as may be notified by the Central Government are covered under the scope of the IBC. 

The IBC is applicable to all types of entities; section 2 of the Code states that this Code shall apply to- 

  1. Any company whether incorporated under Companies Act 2013 or under earlier company law;
  2. Company governed under any special Act where the provisions of the Code are not inconsistent with provisions of such special Act for time being in force;
  3. LLLPs incorporated under the Limited Liability Partnership Act, 2008;
  4. any other body corporate notified by the Central Government which is incorporated under any law for the time being in force;
  5. personal guarantors to the corporate debtors;
  6. partnership and proprietorship firms;
  7. individuals other than personal guarantors in section 2(e).

The employees, unsecured creditors and shareholders are now empowered not just to protect their stake but also to instigate winding up procedure of the corporate debtor on its failure to honour its debts. The law catches the debtors early at the sign of financial weakness by specifying the minimum amount of default enabling the creditors to seek remedy under the umbrella of the Code. Rights of unsecured creditors have been strengthened compared to the older legal system. In a case of Aruna Hotels of Chennai, the employees had approached NCLT Chennai bench, under the IBC against the employer for recovery of their dues from the employer. Section 53 of the Code gives priority to payment of employees’ dues over the financial creditors, State and Central Government dues.

Meaning of financial and operational debt under IBC 

Financial debt and operational debt are both defined U/s 5 of Part II of the Code

Financial debt means a debt including the interest thereon, if any, which is given in lieu of the consideration for time value of money. Time value of money in simple terms, is the value of money today in comparison to its value at some future point in time. It is determined by several factors like inflation, cost of procuring money today and in future, opportunity cost of not having money today, risk and uncertainty associated with money to be available in future. It is the ‘potential earning capacity’ of money today.

Various kinds of credit facilities available under different routes serving different purposes of the borrower are covered in the financial debt, and includes – 

  • interest on borrowed funds, 
  • acceptance credit facility, 
  • debt funds like bonds, debentures, notes, loan stock and such similar instruments, 
  • lease financing or hire purchase contract for the purchase of the assets or similar capital asset financing facilities,
  • finance availed through receivables sold or bills discounted on a non-recourse basis from any financial institution or a bank, 
  • facilities availed under forward sale-purchase contracts or similar transaction in nature of borrowing,
  • any derivatives transaction with protection against or benefits from rate or price fluctuation (market value is taken into account for calculating value of the transaction),
  • obligations under counter indemnities provided in respect of facility of guarantee, indemnity, bond, letter of credit or similar kind of instrument/facility facilitated by a bank or financial institution to the borrower,
  • the amount of any liability in respect of any of the guarantee or indemnity for any kinds of facilities mentioned above.

NCLAT, New Delhi in an appeal from Nikhil Mehta & Sons HUF Vs. AMR Infrastructure Ltd. explained in the matter that “the concept and plan of payment of Committed Returns/Assured Returns by the builders/real estate developers such as the Respondent, is a method adopted by them to mobilise funds/raise finance from the general public/open market at much lower rates than what is normally made available to them by banking and other financial institutions without having the obligation to offer security or any collateral…thereby making the Appellants the “Financial Creditors” of the Respondent as defined U/s 5(8)(f) of the I & B Code.” NCLT, Delhi in this case has explained that such financial transactions are included in the definition of ‘Financial debt’.

And further explained the Financial Debt as the sum of money received in a current date to be paid over a period of time whether at a single instance or in instalments on the future dates. Thus, the appellant was considered as the financial creditor of unsecured debt. Explanation in this regard was inserted through the amendment dated June 6, 2018 in section 5(8)(f) of the IBC Code, which included the home buyers as the financial creditors. 

Operational debt has been defined as the claims for the goods and provision of the services supplied/provided by the creditors or suppliers. It is defined as “a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. The word “repayment” was replaced by the word “payment” through amendment dated June 6, 2018.

Types of creditors under IBC, 2016

  1. Secured Creditor – is a creditor who has security interest created in his/its favour. Security interest is a right, title or interest or a claim in a property which is created in favour of or for the benefit of the creditor, whose interest is intended to be secured by creation of such interest, right, title or claim in the property mortgaged, hypothecated, charged or assigned, or otherwise alienated, with an intention to secure the performance of the obligations by the borrower/debtor. Provided, however, such interest does not include performance guarantee.
  2. Unsecured Creditors – unlike secured creditor an unsecured creditor does not have right, interest or any benefit created in his favour in the property of the debtor, by which the property can be taken hold of. They do not have the cushion of the rights/title/interest in any property or collateral security in lieu of the debt owed to them. Creditors for unsecured loans with zero interest rates viz zero-coupon bonds are also unsecured creditors.

Secured and unsecured creditors further classified are discussed below: 

i) Financial creditor – defined U/s 5(7) of Part II of IBC means a person/institution to whom a financial debt is owed including a person who has been assigned such debt legally.

In the matter of Nikhil Mehta & Sons (HUF) & ors Vs. M/s AMR Infrastructure Ltd. the applicant (Nikhil Mehta & Sons) was treated as the financial creditor by the NCLAT, reversing the decision of the NCLT, Delhi. The creditor had paid the corporate debtor a full price of the under construction commercial premises, and the company was to pay the creditor a fixed sum every month as assured return until the possession of the completed premises. NCLAT had held that the nature of transaction was not merely a buy and sale commercial transaction but was in nature of advancement of money in consideration of assured return giving it a character of financial debt. Explanation in this regard was inserted through the amendment dated June 6, 2018 in section 5(8)(f) of the IBC Code and it was clarified that such a transaction shall have commercial effect of borrowing

ii) Operational creditor- as defined in U/s 5(20) of Part II of the Code means a person to whom an operational debt is owed including a person who has been assigned such debt legally and includes workmen and employees.

iii) A creditor who is neither a financial creditor nor an operational creditor (vide press release dated 16th August 2017 by Insolvency and Bankruptcy Board of India).

A financial creditor can be a secured or unsecured creditor whereas an operational creditor is an unsecured creditor.

insolvency

Recourses available to the creditors

Resolution in case of the Corporate Debtor

When a corporate debtor fails to meet its financial obligations, creditors have three recourses on a broad basis, (i) recovery of their debts option, (ii) insolvency resolution process, (iii) liquidation of the corporate debtor. In case the resolution plan fails, the corporate debtor is liquidated to pay off the debts. Recovery is a simple process of recovery of dues by serving a demand notice on the corporate debtor. Insolvency resolution is full drawn legal procedure to revive the corporate debtor with involvement of the creditors, debtor, its employees, officers, workmen etc. Insolvency Resolution Professional (“IRP”) who is the qualified person to act as such, is appointed for preparation of an insolvency resolution plan. When insolvency resolution plan cannot be approved or fails, liquidation process is initiated.

National Company Law Tribunal (“NCLT”) is the adjudicating authority to have jurisdiction on the corporate debtors i.e. the companies and limited liability partnership firms. 

Corporate insolvency resolution process (“CIRP”) may be initiated by a financial creditor, an operational creditor or a defaulting corporate debtor itself under chapter II ‘Corporate Insolvency Resolution’ Process of Part II of IBC. The process of corporate insolvency resolution can be initiated only when the minimum debt is Rupees one (1) lakh. Section 12 to 30 of Part II of the Code provide the process of corporate insolvency resolution.

Section 7 of Part II of the Code deals with application for corporate insolvency resolution by the financial creditor/s. Operational creditors can file the application under section 8 or 9 of Part II of the Code. Financial creditors (including secured or unsecured) individually or jointly can file a CIRP application to the jurisdictional NCLT. A proviso was inserted in Section 7 via amendment dated December 28, 2019 according to which in case of financial creditors U/s 21 (6(A)) application for insolvency resolution can be filed jointly by at least 100 such creditors in the same class or not less than 10% of the total number of such creditors in the same class, whichever is less. The operational creditors can collectively or individually file an application to the jurisdictional NCLT to enforce their claims.

A single application by the operational creditors can however be filed on behalf of all the other operational creditors if the debt is assigned or transferred to the applicant. In Mr. Suresh Narayan Singh V. Tayo Rolls Ltd, an insolvency petition was filed under section 9 of the Code to the NCLT Kolkata bench on behalf of 284 workmen of debtor company by an authorised representative. The joint application was rejected by the bench on the ground that the debt was not assigned/transferred to the applicant. “‘Joint Application’ is only used in Section 7 of IBC, 2016 and not in Section 9. There is no provision for joint application in Section 8 & 9 of IBC, 2016.”, Mr. Suresh Narayan Singh V. Tayo Rolls Ltd

Both operational and financial creditors are required to submit their claims to the IRP on invitation of the claims by IRP on institution of the insolvency resolution process in the forms specified in the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations 2017

The other type of creditors neither being financial nor operational can submit their claims in ‘Form F’ as provided in the aforesaid regulations.

Debt recovery process for operational creditors against corporate debtors

An operational creditor first has to send a demand notice (in form 3) or a copy of the invoice (in form 4) (collectively hereinafter may be referred as “demand notice”) for the pending dues to the corporate debtor. Within ten (10) days of receipt of the demand notice, the corporate debtor should notify the operational creditor- 

  1. either of existence of any dispute or pendency suit or arbitration proceedings thereof, or 
  2. of the repayment of unpaid operational debt by sending the copy of the electronic transfer receipt or a copy of the record of the cheque encashed by the operational creditor.

The CIRP can be filed by the operational creditors for undisputed liability only. A financial creditor can however file application for disputed claims as well.

Initiation of the CIRP: 

  1. The operational creditor if doesn’t receive the payment as per the demand notice after the expiry of 10 days from the issue of the demand notice to the corporate debtor, an application of corporate insolvency can be filed to the adjudicating authority.
  2. Insolvency application shall be filed with – (i) the invoice copy, (ii) an affidavit that corporate debtor did not notify of dispute as per section 8 (2) of the Code, (iii) a copy of the certificate from the bank/financial institute with which the creditor maintains an account, certifying that operational creditor has not received the payment, and (iv) such other additional information as may be specified, for resolution of the debt.
  3. The adjudicating authority may accept or reject the application so filed, with an appropriate action U/s 9 (5) (ii) of the Code in case of acceptance, or by giving reasons of rejection thereof U/s 9 (5) (ii)of the Code, to such operational creditor.
  4. CIRP is initiated from the date of admission of the application in terms of subsection 5 of section 9 of the Code and has a timeline of 180 days from initiation of the insolvency resolution process for completion.
  5. The time limit can be extended only once for a maximum period of further 90 days. Such extension can be made if sixty-six percent (66%) (earlier requirement of seventy-five percent (75%) was replaced through the amendment dated June 6, 2018) of the creditors in their meeting for resolution, vote for an extension.
  6. The adjudicating authority after the admission of application of insolvency resolution passes an order- 

(a) for declaring the moratorium period to prohibit – 

  • the institution or continuation of any suit or pending proceedings as the case may be against the corporate debtor,
  • transfer, encumbrance, disposal or otherwise alienate the assets and/or legal rights in assets of the corporate debtor,
  • any foreclosure, recovery or enforcement of the security interest created in the properties of the corporate debtor,
  • any action of recovery of the property in occupation or possession of the corporate debtor, by the owner or the lessor.

(b) for the public announcement of the CIRP initiation and call for submission of the claims U/s 15 of IBC, 2016.

(c) for the appointment of the interim IRP to be appointed within 14 days from the date when the insolvency proceedings commenced.

(d) allowing withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of 90% voting share of the committee of creditors, in such manner as may be specified in accordance to the through insertion of section 12(A) vide amendment dated June 6 2018:

  1. The IRP appointed by the adjudicating authority U/s 16 of the Code, shall act and discharge his duties and shall have such powers as are contained in Chapter II of the Code. IRP shall protect and preserve the value of the properties of the corporate debtor and manage the operations on a going concern basis. The committee of the creditors may remove the interim IRP and appoint some other IRP under the provisions of the Code.
  2. The IRP on initiation of insolvency resolution process, collates the claims as received by him on public announcement of the initiation of the resolution process against the concerned corporate debtor and determines the financial position of the corporate debtor.
  3. Thereafter a committee of the creditors (“COC”) comprising of all the financial creditors is formed as per the provisions of section 21 of the Code. If the financial creditor is a related party of the corporate debtor, such creditor does not have the right of representation, participation or voting in the meeting of the COC (proviso to sub-section 2 of section 21 of the Code as amended through amendments dated June 6 2018 and December 28, 2019). It is to be noted that section 21 of the Code clearly says that the COC shall comprise of all the financial creditors, thus operational creditors are neither the part of the COC nor can they decide on the resolution plan, however section 30 (2) (a) of the Code provides that the resolution plan must provide for payment* of the operational creditors’ debt being not less than the amount which would have been paid from the liquidation proceeds under section 53 of the Code in case of liquidation of the corporate debtor. (*the word “repayment” has been substituted with ‘payment’ through amendment dated June 6, 2018)
  4. An information memorandum is prepared by the IRP for formulation of a resolution plan as specified by the resolution board U/s 29 of the Code and subject to the conditions specified in section 29(A) which was inserted through amendment dated November 23, 2017 and further amended through amendments dated June 6, 2018 and December 28, 2019. 
  5. Section 30(6) of the Code provides for submission of the Resolution plan approved by the COC to the adjudicating authority. The Plan should confirm to the provisions of section 30 of the Code. 
  6. The adjudicating authority if satisfied that the resolution plan conforms to the requirements of section 30 (2) of the Code, shall pass an order U/s 31 (1) of the Code, approving the resolution plan which is binding on secured and unsecured creditors whether financial or operational including the employees, workmen, members, guarantors and other stakeholders (further “the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed” were added through the amendment dated August 16, 2019), or may pass an order for rejection of the plan U/s 31(2) of the Code if it does not confirm to section 31(1)

Any party aggrieved from the order of approval of the resolution plan U/s 31(1) of the Code, may prefer an appeal U/s 32 of the Code to the National Company Law Appellate Tribunal (“NCLAT”). Section 61 (3) contains the grounds to file an appeal to the Appellate Authority.

Waterfall mechanism for payment of liquidation proceeds

The process of distribution of the liquidation proceeds in IBC has provided the order of preference for payment of debts and dues U/s 53 of the Code. The preference order is as below – 

  1. first the payment of insolvency resolution process costs and liquidation expenses in full, 
  2. debts and dues (a) of workmen* for the period of 24 months before commencement of liquidation proceedings, and (b) owed to a secured creditor where the security for the debt is as per Section 52 of the Code, shall rank equally between and amongst them for payment from proceeds, 
  3. the wages and any unpaid dues of employees other than workmen for a period of 12 months before commencement of liquidation proceedings, 
  4. financial debts of unsecured creditors, 
  5. dues and debts of (a) Central and State Government if any, and (b) secured creditors for any amount being unpaid under enforcement of security interest, rank equally 
  6. any other remaining debts and dues, 
  7. last in the order of preference is the owners’ capital – first paid to the preference shareholders and lastly the equity holders of the company or partners of the firm as the case may be.

(*Workmen’s due is defined under section 326 of the Companies Act 2013)

Section 69 of the Code provides that, if the corporate debtor or its officers defraud the creditors by way of concealing the property or by transferring the property against the order, then such officer of the corporate debtor or the corporate debtor shall be punished with imprisonment for a term not less than one year and extending up to 5 years, or with fine of not less than Rupees One (1) lakh extending up-to Rupees One Crores, or both. Provided, however, that if the transfer was made 5 years before the date of commencement of insolvency, or where intention can be proved to be not to defraud the creditors at the time of such acts under clause (a) of section 69.

Insolvency of individuals and partnership firms

Part III of the Insolvency and Bankruptcy Code 2016 is applicable to the individuals and partnership firms. Provisions under section 78 and 79 of the IBC provide for insolvency resolution in case of individuals and partnership firms. Where the amount of default is not less than one thousand rupees, the concerned affected person can seek resolution under Part III of the Code. Provisions of Part III of IBC applicable to the individuals and partnership firms have not been notified yet. 

The adjudicating authority for individuals and partnership firms is the Debt Recovery Tribunal (DRT) established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. 

A debtor who is in default may apply to the adjudicating authority either personally or through an IRP for initiation of the insolvency resolution process. Where the debtor is a partnership firm, it may apply with the consent of all the partners for insolvency process for the debts which are not excluded. A creditor either individually or jointly with the other creditors can apply to the DRT either by himself/themselves or through an IRP for insolvency proceedings on the defaulting debtor. An application is to be submitted with requisite documents U/s 95(4) of the Code of Part III and a copy of the application is also sent to the debtor for appropriate action and resolution under Part III of the Code. 

Relief through ordinance in the time of COVID-19 pandemic

Considering the impact of nationwide lockdown imposed as part of efforts to contain spread of Covid-19 pandemic on normal business operations, the government has brought an ordinance dated June 5, 2020. Under this ordinance no corporate insolvency resolution process would be initiated for any default arising after March 25, 2020 for a period of six months which may further be extended up-to one year. However, this ordinance will not be applicable to any defaults committed before March 25, 2020

Loopholes of IBC

Creditors for unsecured loans with zero interest rates viz. zero-coupon bonds, consumers, customers who have paid for the product/service do not have remedies under the Code. Customers have no place in the order of payment in liquidation proceeds of corporate debtors even when they paid for the goods and services.

The Code has some loopholes for unsecured creditors. Only financial and operational creditors are recognised under the Code for recourse, however, through the press release dated 16th August 2017 by Insolvency and Bankruptcy Board of India, the board provides for submission of the claims in the CIRP by the creditors who are neither financial nor operational creditors. In cases of bankruptcy of some real estate companies like Jaypee Infratech, it has been seen that property buyers of the real estate company had little recovery solution under this Code. The secured creditors like banks and financial institutions had rights in the property under-construction as per the mortgage terms and the home buyers who had paid for the properties for purchase had nothing but leftover compensation from liquidation proceeds to pay off their dues. Supreme Court taking cognizance of the inadequacy of the law gave direction to the parent company of Jaypee Infratech, Jaypee Associates to deposit INR 2000 crore and asked the IRP to chart out the plan to protect interest of the unsecured creditors and homebuyers. 

The Operational creditors can invoke the judicial process of insolvency only for undisputed claims. Where the debt was not admitted by the corporate debtor even when there was no pending proceeding between the parties, the application for insolvency by the operational creditor to the Principal Bench NCLT (NCLT PB) was rejected in the matter of Ambience Private Ltd vs. One Coat Plaster and Shivam Construction Company. Operational creditors irrespective of the size of their claims have no rights in the COC and have no role in formulation of the resolution plan. An operational creditor is always in the category of the unsecured creditor and the financial creditors have priority over the operational creditors except the workmen and the employees who are treated equally with secured creditors in case of liquidation proceeds distribution. Also, rights for the third category of creditors neither financial nor operational creditor have not been recognised in the Code. 

Reacting to these loopholes, efforts have been made to protect interests of homebuyers through various amendments in the act. Homebuyers have now been given status of financial creditors, by giving the amount paid a commercial effect of financial borrowing.

Conclusion

Insolvency and Bankruptcy Code enacted in 2016 as amended from time to time has been an applaudable step to effectively deal with the insolvencies and bankruptcies across the businesses. The provisions earlier were scattered under different laws and the procedure to seek remedy involved stretchy complicated legal battle and were often insufficient. IBC 2016 & its amendments came up with one law on insolvency resolution for individuals, partnership firms and corporate debtors and mechanism to ensure speedy resolution compared to the earlier system.

The Fast track resolution in chapter IV of IBC from section 55 to 58 for corporate insolvency resolution process is also another option for fast resolution of insolvency of the corporate debtors. The Code provides for stringent punitive provision against the defaulters. Even though the IBC has loopholes, law has given power to the unsecured creditors to take action and recover their legal dues much quicker under the new Code. The Code is in nascent stage and new precedents on variety of issues are opening window to new questions. The law in this direction will answer many ‘questions of law’ and will raise new ones while crystallising the law. The Code is still in its nascent phase and has been developing addressing the issues from time to time learning from the experiences from various matters faced by all the stakeholders.

Summary of resolution for unsecured creditors

The procedure for unsecured creditors for recovery of dues is summarised as below: 

  1. Unsecured Creditors if default is above INR 1 lakh, shall first raise the notice of demand upon the corporate debtor with instruction to pay the dues.
  2. The corporate debtor shall within 10 days of the receipt of such demand notice from the creditor: 
    • either, notify the creditor of the dispute regarding such demand if there are any, 
    • or shall repay the unpaid and undisputed due either through electronic mode or through cheque and inform same to the debtor.
  1. In case of no response on demand notice from the corporate debtor within the time frame, creditor may approach the jurisdictional NCLT to such corporate debtor and file a ‘corporate insolvency application’.
  2. Application should be filed with requisite documents as per the provisions of IBC.
  3. NCLT shall notify the corporate debtor before admission of the application.
  4. NCLT is required to intimate its admission or rejection with reasons of rejection to the creditor within 14 days of submission of the application as above.
  5. In case of admission of the application by the jurisdictional NCLT, corporate insolvency resolution process is initiated from the date of admission of the application.
  6. Once the application is accepted, NCLT passes an order – 
    • declaring the moratorium till resolution process is completed, 
    • for publication of the announcement of the initiation of corporate insolvency resolution process against the debtor, 
    • to appoint an interim corporate insolvency resolution professional. 
  7. The IRP thereafter undertakes to draw the plan of resolution through information memorandum, creditors meetings etc. and has to submit same to the NCLT.
  8. On approval of plan an order is passed by the NCLT which is binding on all the creditors and other stakeholders in the company, and in case of rejection or failure of the resolution plan corporate debtor is liquidated and assets are distributed in waterfall mechanism discussed above.
  9. The resolution process should be completed within 180 days from date of admission of the corporate insolvency resolution application or within the extended period which is not more than 90 days.

References

Law:

  1. The Insolvency and Bankruptcy Code 2016: http://www.indiacode.nic.in/acts-in-pdf/2016/201631.pdf
  2. The Insolvency and Bankruptcy Code (Amendment) Act 2017: http://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Jan/182066_2018-01-20%2023:35:29.pdf
  3. https://ibbi.gov.in/legal-framework/act
  4. FAQ on Insolvency and Bankruptcy Code, 2016- http://lawgyaan.in/faq-insolvency-bankruptcy-code-2016-ibc/

Articles:

  1. Insolvency and Bankruptcy Proceedings: Little recourse for homebuyers (updated Sep 12, 2017) (http://indianexpress.com/article/business/business-others/insolvency-and-bankruptcy-proceedings-little-recourse-for-homebuyers-4839239/
  2. Employees can approach NCLT for recovery of dues under IBC 2016 dated July 2017 (http://www.lawyersclubindia.com/articles/Employees-can-approach-NCLT-for-recovery-of-dues-under-IBC-2016-8326.asp
  3. Insolvency & Bankruptcy Code, 2016- by Shailen Shah, (Director, Deal Advisory) KPMG, dated May 2017- https://www.wirc-icai.org/material/InsolvencyandBankruptcyCodebyShailenShah.pdf
  4. Insolvency and Bankruptcy Code, 2016 (CA Udayraj Patwardhan) https://www.icsi.edu/Portals/68/Insolvency%20&%20Bankruptcy%20Code%20PPT%20%20.pdf
  5. Time Value of Money-TVM- www.investopedia.com
  6. Limitation Period not applicable for recovery of dues under IBC http://www.mondaq.com/india/x/624870/Insolvency+Bankruptcy/Limitation+Period+Not+Applicable+For+Recovery+Of+Dues+Under+IBC
  7. Insolvency Resolution Process, Liquidation and Opportunities… by CMA J K Budhiraja- http://www.ipaicmai.in/IPA/Upload/Article-IRP.pdf
  8. Application under Section 9 of IBC, 2016 cannot be filed jointly- http://ibccases.com/nclt/mr-suresh-narayan-singh-v-tayo-rolls-ltd-701-2017/#1519190743772-29448223-d7d0
  9. Type of creditors: 
  1. Financial Creditor vs. Operational Creditor… https://blog.ipleaders.in/financial-creditors-vs-operational-creditors-better-off/ and 
  2. Types of creditors under insolvency law… http://blog.mylaw.net/creditors-why-financial-creditors-insolvency-law/ 
  3. Nikhil Mehta and Sons vs AMR Infrastructure Ltd- NCLAT, New Delhi http://nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/21072017AT072017.pdf

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