Insolvency Resolution Process under Insolvency & Bankruptcy Code 2016

By Aaron S John & Adv. Nikita Vaigankar

Introduction

India passed the Insolvency and Bankruptcy Code, often known as the IBC, in 2016. This code brought about numerous important modifications and changes, and it was regarded as India’s most significant economic reform. It was thought that this law would hasten India’s insolvency procedure. The IBC’s primary objective is to alter the laws that largely dealt with a corporate person’s, an individual’s, and a partnership firm’s insolvency, among other things. The process by which legal action is taken against the debtor is called CIRP. –

A. Debtors with financial debt 

B. Debtors with operational debt 

C. Corporate entities

The National Company Law Tribunal, popularly known as the NCLT, is a renowned court that handles corporate insolvency cases. The NCLT’s findings are appealable to the National Company Law Appellant Tribunal, or NCLAT. According to the IBC, the insolvency and liquidation process for all corporations must be completed within 180 days, with the possibility of an additional 90 days in extraordinary circumstances. The formation of a new forum for the process of adjudicating insolvency procedures, the establishment of a specific regulator, and the development of a new category for all professional-related insolvencies are a few additional noteworthy aspects of the IBC. IBC also emphasizes the development of a brand-new category that will exclusively include information utility suppliers. 

Many people believe that this code is a credit-driven insolvency resolution technique. India has had great success as of 2020 thanks to this code; before this, according to the World Bank’s “Ease of Doing Business Report” from the year 2014, India was ranked 142 out of 190 nations. But as a result of this code, India is currently ranked 63rd. In the case of M/S Innovative Industries Limited v. ICICI Bank, the highest court noted for the first time how precisely the 2016 ruling had amended all the rules about the insolvency and bankruptcy processes and had brought about a fundamental change throughout the entire nation. 

The insolvency procedure regarding a corporate person deals with the process of insolvency of the corporate bodies, for example, a limited private company or an unlimited company. This section strictly deals with the insolvency resolution process in situations of a corporate debtor and is also known as the corporate insolvency resolution process. There are various licenses involved under the same that enable them to execute the process of insolvency under the supervision of the adjudicating authority. This entire process will be covered in this article and the reader will have a clear view of the whole process along with its key terms.

What is CIRP and Who can Initiate it?

According to the Insolvency and Bankruptcy Code of 2016 (commonly known as the IBC), which is available to all creditors, the Corporate Insolvency Resolution Process (CRP) can be seen as a recovery mechanism. In situations where a corporate entity becomes solvent or is unable to repay the obligation, the decision to initiate the CRP rests with the concerned creditor, the corporate entity, or the debtor himself.

The Insolvency and Bankruptcy Code of 2016 aims to strike a balance between all of the interests of today’s holders by amending and combining the laws that are related to the reorganisation and insolvency of the various corporate entities, individuals, and partnership firms in a time-bound manner for ease of doing business and better understanding. The corporate insolvency resolution process is one of the primary avenues of appeal open to all of the creditors listed under the 2016 Insolvency and Bankruptcy Code. Numerous problems have been resolved with the aid of the redressal procedure, which has also sped up decision-making and made conducting business simpler. The World Bank report, which was previously cited, shows this success. In many aspects, this action helped India reach its goals far more quickly and effectively. Who exactly has the authority to activate the CIRP mechanism is now under doubt.

The Insolvency and Bankruptcy Code of 2016 allows the operational creditors listed under section 9 to initiate the insolvency resolution process. Under the IBC, corporate entities are eligible to be operational creditors. If a corporate entity debtor becomes insolvent and as a result of this comment defaults, they have the right to approach the National Company Law Tribunal, also known as the NCLT, for the process of adjudicating and serving as the judicial authority for the insolvency resolution process of corporate persons. Applying to begin the CIRP process against the defaulter is one way to accomplish this. Of course, the procedure for beginning this operation and the following stages vary depending on the type of creditor. 

According to the IBC guidelines, a financial creditor is a person to whom a financial debt is owed. Financial debts, including mortgages on real estate, have since been described as any amount of money that is obtained through a real estate project from an allottee and can be deemed to be money that serves as a commercial loan to the buyer of the property.  As a result, they have to adhere to a different application process that deals exclusively with financial creditors. The parties to whom any debt is owned by a corporate debtor are dealt with by the operational creditors under sections 5 (20) and (21) of the IBC. The process for an operational creditor to begin CIRP under the IBC is as follows. Section 9 of the IBC describes the process for an operational creditor to start CIRP against a corporate debit.

Demand notice: The first need that must be met by the optional creditor relates to section 8 of the IBC, which is already past due. By Section 8, the corporate debtor will be served with a demand notice requesting payment of the operational creditor’s debt. Within 10 days of receiving the demand notice, the corporate debtor is required to respond, either by informing the operational creditor that the debt has been paid in full or by bringing up any additional issues with the debt. It should be emphasised that, unlike an operational creditor, a financial creditor is not required by law to send the corporate debtor any demand notices and may instead immediately file a claim with the NCLT under the IBC. Operational creditors, on the other hand, are required by law to give the corporate debtor a 10-day notice before the NCLT starts the CRP to enable the operational debt to be settled. Application to NCLT: The operating creditor has the option of applying to the National Company Law Tribunal (NCLT), the deciding body for the relevant jurisdiction, as part of the corporate resolution and insolvency procedure under section 9 (1) of the IBC. Submission of required documents: Section 9(3) of the IBC lists some of the important documents that must be submitted to the operating creditor, including the following:

A copy of the demand notice that was forwarded from the corporate debtor to the operational creditor.

B. The corporate debtor hasn’t given anyone a notice of dispute, per an affidavit that the operational creditor has signed.

C. A replica of the financial institutions’ certificate attesting that no operational debt has been paid

D. A copy of any document that contains information from the utility attesting to the operating Debt’s non-payment.

 E. Any more evidence of non-payment or similar data.

Initiation of CIRP by a Financial Creditor

All financial creditors who are the allottee of a real estate project must file a joint application to launch a CIRP against a corporate that contains at least 10% of the total number of the relevant projects’ allottees or at least 100 of such a lot is in the present project, whichever is lower. These creditors are required to apply within the allotted period and pay the required fee. An information utility stores the proof of a depth default or a record of default.

An information utility is any person or entity that is legally entitled to serve as a repository for legal information about any death or claim made by a financial or operational creditor. However, any other party to the death or claim, such as the national e-governance services limited, must first verify and authenticate this data. The creditor must put forth a resolution name during the interim resolution procedure. You must give any further information that the Indian insolvency and bankruptcy board requests.

After receiving the application, the NCLT has 14 days to determine if a default exists. This is done by examining previous records of any information available or using any proof that the financial creditor supplies. If the same cannot be completed in the allotted time, the tribunal must note this and explain why. The tribunal must further ensure that there are no ongoing disciplinary actions against the potential resolution processor if it has determined that this is the default in a case and is satisfied with the application that has been presented.

Additionally, the applicant will have seven days to correct any errors and take any necessary actions if the initiating authority discovers any problems with any of the aforementioned three components. The NCLT will keep in touch with the corporate debtor and financial creditor with the settlement procedure, and this communication will start as soon as the application is accepted.

Moratorium

Following the submission of the application, the adjudicating authority issues the orders listed below by section 13 (1) of the 2016 Insolvency Code.

A. The operations described in section 14 of the 2016 insolvency legislation are put on hold by this.

B. the announcement to the public that Section 15 of the Code-referenced corporate insolvency resolution procedure and claim submission are about to start

C. The selection of a resolution intern by section 16. Following the appointment of the interim resolution professional in the same state by section 13 clause 2 of the law, the public notification mentioned above must be published right away.

Definition of moratorium

A sort of postponement or suspension of a certain act or law is called a moratorium. It is the legal licence for the debitors to postpone the payments that are due. Legally speaking, it is referred to as the temporary suspension of law to permit an independent legal challenge to be made.

An order imposing a Suspension

On the day the insolvency officially begins, the adjudicating body must declare a moratorium that prohibits all of the actions stated in section 14 clause one of the laws.

A. The filing of lawsuits or the continuation of existing lawsuits regarding the actions taken against corporate debtors, including the implementation of any specific judgment reduction or orders. 

B. Any asset or legal right or beneficial interest in it that the corporate debtor transfers encumbers, sells, or Indian eats.

C. Any action taken to foreclose, collect, or enforce any security interest created by the corporate debtor with relation to its assets under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.

D. repossession of any property by a less-than-owner or in situations when the corporate debtor is in possession or occupies the property. According to section 14(3)(b) of the Insolvency Code, a guarantor under a guaranteed contract with a corporate debtor is exempt from the terms of section 14(1) of the Insolvency Code.

Therefore, even if the corporate debtor is granted a moratorium, recovery procedures, insolvency resolution processes, or bankruptcy proceedings can still be started against the surety (guarantor). No moratorium on necessary supplies – The provision of essential goods or services to the corporate debtor, as may be specified by Regulations, shall not be terminated, suspended, or interrupted during the moratorium period, according to section 14(2) of the 2016 Insolvency Code. “Property” is defined as “currency, goods, actionable claims, land, and any other sort of property located in or outside of India” under section 3(17) of the 2016 Insolvency Code. It also encompasses all kinds of interests, including those that are current, contingent, vested, or prospective interests related to or incidental to property.

The period covered by the moratorium order – The moratorium order will be in place from the time it is issued until the corporate bankruptcy resolution process is finished. But according to Section 14(4) of the 2016 Insolvency Code, if the resolution plan is authorized under Section 31(1) or if a corporate debtor order is made, the moratorium will cease as of the date of such approval or liquidation order. 

According to section 31(3) of the 2016 Insolvency Code, the moratorium order issued by the adjudicating authority under section 14 of the Insolvency Code shall no longer be in effect following the adjudicating authority’s (NCLT) approval of the resolution plan. The resolution procedure must be finished within 180 days of the date NCLT filed its application to start the corporate insolvency process, according to section 12(1) of the Insolvency Code, 2016. 

According to Section 12(2) of the Insolvency Code, 2016, this 180-day window may be extended if the resolution professional requests it by a resolution that was passed by the Committee of Creditors (CoC) meeting by a vote of 66% of the voting shares. Resolution of Corporate Person Insolvency: NCLT’s Authority – 

The following are known as the National Company Lord Triveni’s overriding provisions and are subject to the National Company Lord Triveni’s authority while exercising that jurisdiction, particularly where they are illegal. The 2016 Insolvency Code’s Section 60(5) refers to the same thing.

A. Any request for or action taken by or in opposition to a corporate person or entity.

B. Any claim made by or against the corporate debtor or a corporate entity, including any claim made by or against any subsidiary with a base in India.

 C. Any priority questions are on any other legal or fax questions that come out of the corporate debtor’s or corporate person’s solvency resolution or liquidation proceedings. 

“Insolvency initiation date” refers to the day the application for the start of a corporate and solvency resolution process was accepted by the adjudicating body. This is referenced in sections 7 through 10 of the 2016 insolvency code. 

According to Section 5 (12) of the insolvency code, the insolvency initiation date will always be the day the adjudicating body accepted the application for initiating the corporate insolvency resolution procedure. According to the 2019 amendment to section 16(1) of the insolvency code, the reason IRP must be constituted on the day of the insolvency.

The Committee of Creditors

The financial creditors are at liberty to get involved in the inquiry process and get their vote share and for this, a group is formed, commonly known as the Committee of Creditors (COC), comprising all the financial creditors of the corporate debtor, if they are more than one. Similarly, as a part of a common agreement, if there are two or more financial creditors, then while determining their vote share, the financial debt owed to the corporate debtor is looked upon and their voting share is determined accordingly.

If there are no financial creditors of the corporate debtor or if the creditors are the related parties who are not eligible to become a part of COC, then the team of operational creditors takes over the insolvency resolution process. Operational creditors are the ones to whom the corporate debtor owes a debt regarding the provision of goods and services. As per regulation 16 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the COC of only operational creditors shall consist of members who are eighteen largest operational creditors by value, out of which, the workmen and all the employees shall elect one representative.

Whenever a meeting of COC is scheduled, a notice shall be sent by the IRP to all the members of the committee. As per regulation 21 of IBBI, the said notice shall contain the details regarding the place, time, and options available for participation through electronic mode. It shall also contain a note of all the matters along with copies of documents that are relevant to understand and put more light on the matters to make the voting process effective.

Sometimes, financial creditors prefer to participate in the meetings through their authorized representatives. The authorized representative has not only a right to participate in the meeting but also the right to vote in the meetings of COC on behalf of their respective financial creditor upon obtaining prior instructions as well as consent, without which he/she shall abstain from voting process as the consent and instructions are very much relevant before casting a vote on behalf of the financial creditor. The authorized representative is duty-bound to provide the agenda or the plan and minutes of the meeting to the financial creditor to whom he/she represents. It is natural to believe that the authorized representative shall in no situation act against the interest of the financial creditor and shall at all times look forward to making a profitable deal with the financial creditor. 

Resolution Professional

Once the COC is formed, it shall hold its first meeting, and that too, within seven days of its constitution and shall decide on the issue to appoint a resolution professional within seven days of its formation by following a proper protocol. The Resolution Professional is one of the main pillars and a driver of IBC who needs to be an expert in the field and shall possess all the skills required to carry out multiple duties and fulfillment of objectives of the code.

The appointment shall be done through a voting process by the members of the committee which is open for voting for at least 24 hours after the circulation of the minutes in which the financial creditors possess 66% of the voting share in deciding whether to appoint existing IRP as resolution professional or to replace him by another professional to take charge. The decision taken on the appointment matter shall be immediately intimated or communicated to the Adjudicating authority.

Powers and Duties of the Resolution Professional

The Resolution Professional after his/her appointment is obliged to carry out certain duties under the supervision of the Adjudicating Authority which makes him a guardian of the corporate debtor as every possible effort is made by him to guard and preserve the value of the property belonging to the corporate debtor.

It shall be noted that the powers of the board of directors of the company shall stand suspended and are taken over by the resolution professional who shall be provided access to all the documents related to and also belonging to the corporate debtor as may be required during the process. Even the organizations which maintain the accounts of the corporate debtor shall provide all the information to the resolution professional regarding the respective debtor.  The personnel and promoters of the debtor shall also assist and cooperate with the resolution professional during the whole process of insolvency.

The resolution professional has the authority to sell the asset/s of the corporate debtor which are not encumbered. The decision to sell the asset/s shall be taken with the prior approval of the committee and it shall aim to achieve a better realization of the value of the asset/s. The one who purchases such asset/s shall be considered a bona fide purchaser who shall have a clear title to such asset/s.

The foremost duty of the resolution professional includes the protection and preservation of the assets and the business operations of the corporate debtor. It is also compulsory for the resolution professional to attend all the COC meetings and also to make use of the powers vested in him for the benefit of the corporate debtor in various proceedings which are judicial in nature.

Another function of the resolution professional is to prepare an information memorandum which shall contain the relevant information in the form and manner prescribed. This information memorandum is essential to form a base for making a resolution plan. Once the information memorandum is prepared, it shall be submitted to each member of the committee and each prospective resolution applicant to ease the process of preparing a resolution plan.

Verification & Analysis of Claims

During this stage, the IRP (Interim Resolution Professional) has a major role to play to determine and verify the claims made against the corporate debtor by creditors, workmen, and employees. The IRP is duty-bound to analyze all the information regarding the assets and liabilities, business operations, and other payments of a corporate debtor by applying a wider perspective, thereby, leaving no stone unturned. Once the detailed analysis of the holdings and liabilities of the debtor are looked upon, the IRP shall move his/her focus on the claims of the financial creditors against the concerned debtor. To adopt the proper procedural method, the IRP may summon and verify the claims of the creditors. In case the debts are in foreign currency, then their value shall be determined in Indian currency at an official rate notified by RBI.

Resolution Application

As we have seen that the main role of IBC is to assist the corporate debtor to take advantage of the various opportunities to revive back and therefore, it allows any individual, a trust, or a corporate bidder also known as a resolution applicant by give the opportunity to come forward voluntarily, invest their capital and buy the concerned corporate entity which is the subject matter of current resolution process so that the company will get a chance to revive back and stand on its own feet. 

However, Section 29 A of the IBC, bars undischarged insolvent, wilful defaulters as per guidelines of RBI, a person having an account with a bank that is a non-performing asset, a person convicted for certain offenses, a person who is disqualified to act as a Director of a Company, a person prohibited from trading in the securities market and a surety of the corporate debtor who has not paid the guarantee amount when such a guarantee has been invoked. These categories of persons are not allowed to become resolution applicants and submit a resolution plan as they are considered ineligible to do so as per the Code.

While allowing anyone to make an investment and purchase the corporate entity, IBC takes due care and precaution to avoid anyone from taking undue advantage of gaining control of the defaulting company. It makes every possible effort to avoid the back door entry of the promoters who are connected to the group of the corporate debtor in any possible way and the ones who possess the illicit intention to acquire the company of the corporate debtor at a discounted rate. If this is not done, then they will deteriorate further the status of the ailing company as they are also one of those who contributed to the defaults of the company.

All these precautions and barring the ineligible persons are adopted to ensure that only persons who are technically sound and financially competent shall be able to submit the resolution plan and hence, shall genuinely aim to achieve success in the CIRP.

Another advantage of becoming a resolution applicant is an opportunity to attend the meetings of COC but the applicant shall not have the right to vote in the meeting unless he/she is one of the financial creditors who is also a member of COC.

Resolution Plan

Every applicant needs to put up and submit their resolution plan within 30 days, either individually or jointly with any other person by carefully obtaining the matters from the information memorandum prepared by the resolution professional and the plan is further subject to scrutiny by the resolution professional. The only precaution to be undertaken by the resolution applicant is to maintain confidentiality and protect the intellectual property rights of the corporate debtor while accessing the secret information and documents of the ailing company.

The resolution plan shall specifically contain all the provisions for restructuring the corporation which is in debt, including by way of merger, amalgamation, and demerger. The first and foremost thing is the inclusion of the details of the resolution applicant in a resolution plan. The plan shall also contain a statement as to how the interests of all the stakeholders are dealt with. It shall provide the measures to be undertaken for the smooth process of insolvency resolution. Operational creditors shall be given preference over the financial creditors while distributing payment under a particular resolution plan.

Each resolution plan submitted by the eligible applicants is examined by the resolution professional to ensure that the submitted plan provides an arrangement for the due payment of debts of the corporate debtor and along with the debts, also it can recover all the financial costs carried out during the whole insolvency resolution process and most importantly that it does not contradict the provisions of the law in force. After the examination of plans, they are submitted further to the COC for approval. 

COC shall evaluate the resolution process and may approve the plan subject to the modifications as it deems fit. Moreover, the approval is subject to more than 66% of voting of financial creditors in favor of the plan, and then once approved, the plan is submitted by the resolution professional to the adjudicating authority.

The duration for the approval of the resolution plan is up to 180 days from the date of the beginning of the CIRP by the financial creditors. However, the said limit can be extended by the Adjudicating Authority to more than 90 days.

Once the plan is received and sanctioned by the Adjudicating Authority after confirming that it meets the requirements laid down under IBC, the plan will be binding upon the corporate debtor and its stakeholders. The duty of obtaining necessary approvals and permissions from any concerned authority/ies is levied upon the resolution professional and this task has to be completed within the time frame of one year from the date of approval of the resolution plan by the Adjudicating Authority.

If there is a situation wherein either no plan is submitted within the stipulated period or the submitted plan/s does not meet requirements laid down under IBC and hence rejected, then the Adjudicating authority has the power to order for the liquidation of the assets of the corporate debtor, for which a liquidator is appointed by the COC to dispose of the assets of the corporate debtor and distribute the same among the stakeholders according to the provisions laid down under IBC.

Fast Track Corporate Insolvency Resolution Process

As of now, the discussion above was about the standard 180-day regular process under IBC to resolve corporate insolvency. Apart from this standard process, the IBC has also given a quicker way to achieve corporate insolvency within the period of 90 days only especially for small companies and start-ups whose assets are worth below rupees one crore. This alternate process was designed to provide an easier and quicker insolvency resolution process for entities with less complex operational structures. 

However, even this fast-track procedure can be extended beyond 90 days by acceptance of a proper application made to the Adjudicating Authority by the resolution professional. However, this extension cannot be longer than 45 days. Hence, this element of CIRP has faced criticisms as it offers no solution more effective than CIRP as its duration is almost the same as compared to the regular process of CIRP. Several recommendations were made to re-design the current fast-track process for the benefit of small companies.

Termination of CIRP

It is pertinent to note that there is no express provision for termination of the CIRP process once it is started. The only way or the option to release the corporate debtor other than CIRP is liquidation. However, under section 65(1) of the code, the Adjudicating Authority has been given discretionary power and it has used the said power to terminate the CIRP on a few occasions. One such case is that of M/S. Surendra Steel Sales v/s M/S. Immortal Buildcon Pvt. Ltd., in which no claim was received in the resolution process and even the meetings of the COC have been postponed on several occasions on the pretext of the settlement of debts with the corporate debtor. There was no progress for a longer duration and hence, the Adjudicating Authority passed an order to terminate the CIRP, and the corporate debtor was released and was allowed to function through its board. Moreover, the operational creditors were instructed to make a payment of Rs. 50,000/- to be paid to the Prime Minister’s Relief Fund as a recovery towards all the expenses incurred during the process by the resolution professional.

Conclusion

IBC brought a new era towards the recovery mechanism of the debt from the corporate debtors by the genuine operational and financial creditors. It has facilitated ease of doing business and has proved to be an effective mechanism. The code indirectly assumes that the failure of any corporate debtor is not only because of the mistakes in the business operations but there are several other factors like misappropriation of funds by the management, changing trends, and preference of the public over goods which are technologically advanced due to which a particular business may run into losses. For eg., We all know how Nokia company faced distressed sales of their products when hi-tech smartphones were introduced in the market.  There may be an occasion when a particular business franchise is not able to cope with the speed of the growing economy and one wrong decision may throw them out of the business. Hence, IBC is one such code that provides a golden opportunity for the corporate debtor to get rehabilitated, revived, and re-grow through the processes of insolvency resolution.

IBC is identified as beneficial legislation which can strengthen our economy in the long run.