Jul 13,2020 | 10 min read

Insolvency proceedings under the IBC

Process of Resolution and Liquidation of Corporate Debtors and a few provisions that a creditor needs to know before approaching the NCLT

Author : Ramasamy Santhanakrishnan    

Insolvency proceedings have always been an important tool for the protection of the rights of investors in a corporate entity. In India, there are a plethora of statutes, that dealt with insolvency and liquidation. The Insolvency and Bankruptcy Code, 2016 (the Code) is a comprehensive act that consolidates the existing and disparate laws relating to insolvency and bankruptcy into a single legislation. This act aims at reducing complexity, to promote entrepreneurship and to protect the interests of all stakeholders.
I. Claim and Debt

Only when there is a claim, a debt and a default of the same, then arises the question of an insolvency proceeding. Before we set out to explore the Code, it is vital to learn these definitions below:

“claim” means –

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

“debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

“default” means non-payment of debt when the whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

II. The minimum amount of default in order to resort to IBC

As per Section 4 of the Code, the minimum amount of default for initiation of insolvency proceedings is specified as One Crore Rupees. This amount was increased from One Lakh Rupees to the current stipulation of One Crore Rupees vide Notification dated 24.03.2020.

III. Initiation of Insolvency Proceedings.

Section 6 of the Code provides that a financial creditor, operational creditor, or a corporate debtor itself can initiate insolvency proceedings upon any default made by the corporate debtor.

A. Initiation by Financial Creditor.

A financial creditor is a person to whom a financial debt is owed and a financial debt includes, inter alia, money borrowed against the payment of interest, amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures etc.

Section 7 of IBC describes how financial creditors can initiate insolvency proceedings against a financial debtor. The financial creditor may approach the National Company Law Tribunal (the NCLT) by an application, either by itself or along with other financial creditors or any other person on behalf of the financial creditors. The application shall be accompanied by:

record of the default; 

the name of the resolution professional proposed to act as an interim resolution professional; and 

any other information as may be specified by the Board.

Upon receipt of the application by the Financial Creditor, the NCLT shall ascertain the existence of a default and either admit or reject the application according to Section 7 of the Code.

B. Initiation by Operational Creditor.

An operational creditor is a person to whom an operational debt is owed and such debt means a claim in respect of the provision of goods or services, payment of dues arising under any law and payable to the Central Government, any State Government or any local authority.

As per Section 8 of the Code, an operational creditor shall deliver a demand notice, for payment of the amount involved in the default. As per Section 9, after the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute, the operational creditor may file an application for initiation of insolvency resolution process. The application shall be accompanied by:

a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.

The Supreme Court, in the case of K. Kishan v. Vijay Nirman Company Pvt. Ltd., held that operational creditors have no right to use IBC either before time or for any immaterial considerations or as a replacement for the debt replacement procedure. Further, It was held in this case that any petition against the arbitral award, filing under section 34 of Arbitration and Conciliation Act, 1996, itself indicates pre-existence dispute which resulted in its first stage as an award. And, IBC proceedings can only be initiated upon all the provisions of appeal that have been used or are exhausted.

Upon receipt of the application, the NCLT shall ascertain the existence of debt and either admit or reject the application according to Section 9 of the Code.

C. Initiation by a Corporate Applicant.

A corporate applicant can be a member or partner of the corporate debtor, an individual who is in charge of operations of the corporate debtor or its financial affairs.

As per Section 10 of the Code, a corporate applicant may file an application for initiating corporate insolvency resolution process and such application shall be accompanied by:

the information relating to its books of account and such other documents for such period as may be specified;

the information relating to the resolution proposed to be appointed as an interim resolution professional;

Furthermore, the application for initiating insolvency proceedings must be supported or approved by a special resolution by the shareholders of the corporate debtor or a resolution passed by at least three-fourth of the total number of the partners.

Upon receipt of the application, the NCLT may either admit or reject the application according to Section 10 of the Code.

IV. What to expect once the application is admitted

Once an application is admitted, the NCLT shall pass an order and declare a moratorium and according to Section 14 of the Code, prohibit, inter alia, the institution and continuation of proceedings against the corporate debtor; the transfer or encumbering of assets etc.

The NCLT shall, according to Section 15, cause a public announcement of the corporate insolvency resolution process and call for submission of claims. The public announcement shall contain the name and address of the corporate debtor, the last date of submission of claims, penalties of misleading claims etc.

The NCLT also appoints an Interim Resolution Professional (IRP) in the manner as laid down in Section 16. The public announcement is made immediately after the appointment of such IRP.

What does the Interim Resolution Professional do?

From the date of appointment of the interim resolution professional, the management of the affairs of the corporate debtor shall vest in the interim resolution professional; and the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional. The officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional; the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional. Needless to say, the personnel of the corporate debtor shall extend necessary support to the interim resolution professional.
The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. The Interim Resolution professional shall make necessary appointments, enter into contracts, raise finance and take other actions as may be necessary to keep the corporate debtor as a going concern.

V. Resolution process set in motion
1. Committee of creditors.

As per Section 21 of the Code, the interim resolution professional shall after collation of all claims received against the corporate debtor, constitute a committee of creditors. The committee of creditors shall comprise all financial creditors of the corporate debtor. Where any person is a financial creditor as well as an operational creditor, such person shall be a financial creditor to the extent of the financial debt owed by the corporate debtor.

a. Appointment of resolution professional.

According to Section 22, the first meeting of the committee of creditors shall be held within seven days of the constitution of the committee of creditors and the committee of creditors, may, in the first meeting, by a majority vote of not less than sixty-six per cent of the voting share of the financial creditors, either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.

The resolution professional then, according to Section 23, shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period. Section 25 says it shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.

2. Resolution Plan.

According to Section 29, the resolution professional shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan.

Section 30 provides that a resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. A resolution applicant is a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made by the resolution professional and who meet the criteria laid down by the resolution professional with the approval of the committee of creditors. A resolution applicant shall be a person not disqualified under Section 29A of the Code.

The Resolution professional after a review of the same as per the guidelines provided in the Code shall present the same to the committee of creditors for its approval. The resolution professional shall then submit the resolution plan as approved by the committee of creditors to the NCLT. If the NCLT is satisfied that the resolution plan as approved by the committee of creditors meets the requirements of the Code, it shall, by order, approve the resolution plan.

VI. Failure of resolution process: Liquidation

According to Section 33 of the Code, if the NCLT does not receive a resolution plan or rejects the resolution plan or is intimated to that effect by the resolution professional, it shall pass an order requiring the corporate debtor to be liquidated and the resolution professional appointed for the corporate insolvency resolution process shall act as the liquidator for the purposes of liquidation.

The liquidator shall, inter alia, verify claims of all the creditors, take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor and carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary.

The liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process and verify the same. The liquidator may, after verification of claims, either admit or reject the claim. After determination of claims and elaborate review of transactions of the corporate debtor, the assets are liquidated and distributed as provided in Section 53 of the Code.

VII. Dissolution of the corporate debtor.

Where the assets of the corporate debtor have been completely liquidated, as per Section 54 the liquidator shall make an application to the NCLT for the dissolution of such corporate debtor. The NCLT then orders that the corporate debtor shall be dissolved from the date of that order.

VIII. Appeal

As it may be expected, any of the orders passed by the NCLT may leave a concerned party aggrieved. And in such event, the aggrieved person may, according to Section 61, appeal to the National Company Law Appellate Tribunal (NCLAT) within thirty days and therefrom to the Supreme Court, within forty-five days from the date of receipt of such order from the NCLAT.

IX. Covid-19 and the Code

However, given the fact that this article is being written at the time of the unfortunate pandemic of Covid-19, it is my duty as an author to also bring to the notice, the following aspects.

With shutters down, the businesses are at a standstill, disrupting the performance of contracts and payments. This becomes a trigger event for creditors, both financial and operational, to initiate insolvency against corporate debtors. This could have a devastating impact on the economy. The Government, in order to protect businesses and to avoid multiplying of the burden of NCLT, decided to suspend the Code.

Therefore, the Ministry of Law and Justice, vide an ordinance dated 05.06.2020, inserted Section 10A, which states that no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25.03.2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.

No application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

X. Conclusion.

While the Code provides for mechanisms to protect creditors, the Code is still used as a threat by several to arm-twist the companies to make payments that could not be disputed effectively. While we hope that the provisions discussed above, provide a clear picture of the procedure laid down by the Code, it is still for the creditors to preserve the spirit of the Code.


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ABOUT THE AUTHOR


RAMASAMY SANTHANAKRISHNAN

Krishnan & Krishnan was founded in 2017, by a few young lawyers aspiring to see heights in the field. The firm was founded and functioned adhering to the philosophy: quality legal services accessible and affordable to any and all in need. It is the firm’s goal to provide its clients with legal representation grounded upon excellence, ethics and responsiveness. Firm’s objective is to maintain the highest standards of professionalism while providing services to the utmost satisfaction of clients.

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