Understanding the Proceedings under Insolvency and Bankruptcy

In India, the legal and institutional machinery for dealing with debt default has not been in line with global standards. The recovery action by creditors, either through the Contract Act or through special laws such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, has not had desired outcomes. Similarly, action through the Sick Industrial Companies (Special Provisions) Act, 1985 and the winding up provisions of the Companies Act, 1956 have neither been able to aid recovery for lenders nor aid restructuring of firms. Laws dealing with individual insolvency, the Presidential Towns insolvency Act, 1909 and the Provincial Insolvency Act. 1920, are almost a century old. This has hampered the confidence of the lender. When lenders are unconfident, debt access for borrowers is diminished. This reflects in the state of the credit markets in India. Secured credit by banks is the largest component of the credit market in India. The corporate bond market is yet to develop. In this backdrop Parliament enacted Insolvency and Bankruptcy Code, 2016.

The objective of the Insolvency and Bankruptcy Code, 2016 is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.

OBJECTIVE OF THE IBC, 2016

The main purpose of the IBC, 2016 is :

1. to consolidate and amend the laws relating to reorganization and insolvency resolution of

2. corporate persons (Company & Limited Liability Partnership)

3. partnership firms and individuals

In a time bound manner for maximisation of value of assets of above persons

1. to promote entrepreneurship,

2. to promote availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and

3. to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

APPLICABILITY OF THE IBC, 2016

The provisions of the IBC, 2016 shall apply, in relation to Insolvency, Liquidation, Voluntary Liquidation, Bankruptcy as the case may be, on:

I. The Company incorporated under the provisions of the Companies Act, 2013 or any other previous Companies Act;

II. Limited Liability Partnership (LLP) incorporated under the provisions of LLP Act 2008;

III. Other body corporate as specified by the Central Government;

IV. Partnership Firm; and

V. Individual.

Scheme of Adjudication Process Under IBC,2016

Case Study

A company XYZ Pvt ltd took goods of about Rs 1 crore on credit from company ABC Pvt. Ltd. XYZ Pvt Ltd has also taken some loan of about Rs 70 lakhs from bank ‘E’. What is the remedy available to ABC Pvt Ltd, bank E & employees and how should they exhaust their remedy through IBC will be discussed.

The Act has created 3 types of entities for the purpose of debt related matter:

Procedure To be Followed by above entities for Corporate Insolvency Resolution Process

STEP 1 – APPLICATION TO NCLT

1. A Financial Creditor u/s 7 (Form-1 along with fee Rs 25,000) or an Operational Creditor u/s 9 (Form-5 along with fee Rs 2,000) or the Corporate Debtor u/s 10 (Form-6 along with fee Rs 25,000) may make an application to NCLT to initiate CIRP[1] in case a default is committed by the corporate debtor.

1. Operational Creditor has to give 10 day demand notice (Form-3 annexed with the copy of the invoices in Form-4) has to be given to the corporate debtor and Information utility u/s 8 before approaching the NCLT. However, an operational creditor can approach NCLT, if a corporate debtor does not make payment or raise any existence of dispute within 10 days of receipt of demand notice[2].

STEP 2 – NCLT MAY ADMIT OR REJECT THE APPLICATION

1. NCLT shall within 14 days[3] of receipt of application admit or reject such application.

2. If NCLT admit, then the date of admission of application is known as INSOLVENCY COMMENCEMENT DATE[4] and corporate insolvency resolution process duration starts from such date.

3. NCLT may reject the application subject to, by giving notice to the applicant to rectify the defect in the application within 7 days[5] of receipt of such notice.

4. NCLT shall communicate the decision of acceptance or rejection of application within 7 days to corporate debtor or financial creditor[6]

STEP 3 – MORATORIUM AND PUBLIC ANNOUNCEMENT

1. NCLT declare moratorium[7] which prohibits certain matters related to corporate debtor, as referred, is section 14 from the date of admission of application and up to the completion of CIRP, for the smooth functioning of corporate debtor by resolution professional.

2. After that NCLT causes public announcement of initiation of CIRP within 3 days of the appointment of interim resolution professional(IRP).

STEP 4 – APPOINTMENT OF INTERIM RESOLUTION PROFESSIONAL

1. NCLT shall appoint independent “Interim resolution professional” u/s 16 in Form A within 14 days from the date of admission of application (who shall furnish his written consent in Form-2) and shall continue up to the date of appointment of “Resolution professional” u/s 22. IRP calls for the submission of claims, which is required to be filled by the claimant within 14 days of the appointment of IRP or up to 90th day from the insolvency commencement date.

2. After receiving all the claims up to the last date, IRP shall verify all the claims within 7 days from the last date of receipt of claims.

3. The management of corporate debtor shall vest in him and the powers of the board of directors shall stand suspended from the date of appointment of Interim Resolution Professional u/s 17.

4. Interim resolution professional shall protect and preserve the value of the property of the corporate debtor and manage the operations as a GOING CONCERN.

STEP 5 – CONSTITUTION OF COMMITTEE OF CREDITORS

1. After verifying all the claims and on determination of the financial position of corporate debtor, Interim Resolution Professional shall file a report to the NCLT certifying the constitution of Committee of Creditors within 2 days of such verification[8].

2. The first meeting of Creditors committee shall be convened within 7 days of its constitution[9] and shall pass 66% of voting share either to replace or confirm the appointment of IRP as Resolution Professional subject to the written consent from the IRP in Form AA or otherwise IRP shall perform the function of resolution professional from the 40th day of insolvency commencement date till the appointment of resolution professional.

3. Committee of Creditors may replace the resolution professional[10] by according 66% of voting share in the meeting.

4. Thereafter, resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor in accordance with the Code.

STEP 6 –PREPARATION OF INFORMATION MEMORANDUM

1. Resolution Professional (RP) shall prepare Information Memorandum u/s29 to enable the resolution applicant to prepare resolution plan and submit the same to each member.

2. After that RP shall publish brief particulars of the invitation for expression of interest in Form G for eligible prospective resolution applicants who must NOT be trapped under the ambit of section 29A of code.

3. And the 3rd most imperative duty of RP is to make opinion whether the corporate debtor has been subject to any transaction i.e. preferential transactions, undervalued transactions, extortionate transactions covered u/s 43, 45, 50 or 60 repectively on or before the 75th day of insolvency commencement date.

STEP 7 – SUBMITION OF EXPRESSION OF INTEREST AND OBJECTIONS

1. Now resolution applicants may submit their expression of interest to resolution professional in not less than 15 days from the date of issue of invitation and then afterward RP shall issue eligible prospective resolution applicant (provisional list) within 10 days from the last date of submission of interest.

2. After the issue of the provisional list by the RP, participant applicants may make any objections for inclusion or exclusion in the provisional list.

3. And after considering the objections received as above, the RP shall issue the final list of resolution applicants within 10 days from the last date of receipt of objections.

STEP 8 – REQUEST AND SUBMISSION OF RESOLUTION PLAN

1. For the request of a resolution plan, Resolution Professional shall issue information memorandum and evaluation matrix to every prospective resolution applicant and who contested against its non-inclusion in provisional list, within 5 days from the date of issue of provisional list[11].

2. After considering information memorandum and evaluation matrix, a prospective resolution applicant in the final list may submit a resolution plan in minimum 30 days from the request for resolution plan + any extension time period given by the committee.

3. The next step after submission of resolution plan by resolution applicant is to present all the resolution plan to the committee of creditors after examining each resolution plan by the resolution professional along with the transactions determined u/s 43, 45, 50 and 60.

STEP 9 – SUBMITTION OF RESOLUTION PLAN

1. Committee of creditors may approve the resolution plan by 66% voting share of the financial creditor, after considering the feasibility and viability of each resolution plan and identify the best resolution plan along with any modifications.

2. The Resolution Applicant shall not have the right to vote in the meeting unless such applicant is also a financial creditor.

STEP 10 – SUBMIT TO NCLT

Resolution applicant shall endeavor to submit the resolution plan as approved by the committee of creditors to NCLT u/s 30, at least 15 days before the maximum period for CIRP (i.e. at least 15 days before 180 days from the insolvency date), along with compliance certificate in Form H

STEP 11 – APPROVAL OF RESOLUTION PLAN

1. The NCLT shall consider the Resolution Plan as submitted to it and if it is satisfied by the same as approved by the committee of creditors as per section 30, then in accordance with the provision contained u/s 31 NCLT may by order approve the resolution plan.

2. The Order passed by the NCLT as aforesaid shall have a binding effect on: –

3. Corporate debtor;

4. Employees;

5. Members;

6. Creditors;

7. Guarantors; and

8. Other stakeholders

The moratorium shall cease to have the effect on the date of passing the aforesaid order and RP shall forward all record to the Board.

RP shall obtain all necessary approval required under any law within 1 year from date of approval by NCLT.

If NCLT reject the resolution plan u/s 31, the aggrieved party may go for an appeal to NCLAT u/s 61 within 30 days from date of order.

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[1] Corporate Insolvency Resolution (for brevity referred as “CIRP”) is a process during which Financial Creditor assess whether the debtor business is viable enough to keep the business ongoing or to put a full stop on it. If situations arise where CIRP fails or the financial creditors come to a conclusion that business of the corporate debtor cannot be carried on in a profitable manner and it should be wound up, consequently the concerned debtor will then undergo liquidation process and the assets of debtor will be put to auction to realize the value and disburse the same in accordance to the Code by the liquidator.

[2] S. 8

[3] S. 7(4)

[4] INSOLVENCY COMMENCEMENT DATE is defined u/s S.5(2)

[5] S 7(5)

[6] S. 7(7)

[7] During the moratorium period:

a) any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed;

b) the creditors shall not initiate any legal action or legal proceedings in respect of any debt; and

c) the debtor shall not transfer, alienate, encumber or dispose of any of the assets or his legal right or

beneficial interest therein;

[8] S 21

[9] S 22

[10] S 27

[11] S. 30

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