Introduction:
Under the Insolvency & Bankruptcy Code 2016, when a company fails to make payments to creditors, the National Company Law Tribunal (NCLT) takes charge of the Insolvency Resolution Process (IRP)1. The Corporate Insolvency Resolution Process involves improving the insolvent status of a company through resolution plan which may involve acquisition, merger, converting debt into equity etc, which is approved by more than or equal to 66% of Committee of Creditors by voting. The Corporate Insolvency Resolution Process is explained under Insolvency and Bankruptcy Act, 2016 from section 6 to section 32 under Chapter II.
Step 1: Check the eligibility criteria:
When application can be filed?
According to section 4 of the Insolvency and Bankruptcy Act, 2016, threshold for application is Rs. 1 crore as per the government notification, which is enforced from March 24, 20202.
Who are allowed to Initiate?
In order to restrict unwanted applications and to maintain the rule of third party can’t file a suit, Section 6 of the Insolvency and Bankruptcy Act, 2016 states that an application to start a CIRP can be filed by a) a financial creditor, b) an operational creditor or c) the corporate debtor.
Who are not allowed to initiate CIRP?
According to section 11 of Insolvency and Bankruptcy Act, 2016, following persons cannot initiate the CIRP.
(a) the company which is already in CIRP
(b) If the company has already underwent CIRP, before 12 months of the date of application.
(c)If the company or a financial creditor has acted inconsistent with the terms of the resolution plan which is approved in the last 12 months.
(d) The company with liquidation order against it.
Step 2: Initiation of CIRP by application:
Process of initiation through financial creditors:
According to section 7 of the Insolvency & Bankruptcy Code 2016,
1. A financial creditor, 2 or more of financial creditors or person representing a financial creditor may file an application on behalf of the Adjudicating Authority when a default to pay the debt by corporate debtors has occurred. And also, a person is represented by agent or trustee in financial creditors with securities such as debentures and when an insolvent professional representing large numbers of financial creditors, both can initiate the CIRP. If there are large number of allotees in a single real estate scheme, filing the apllication may be done only by 100 allotees in the same real estate scheme or 10% of the allottees of the real estate scheme (whichever is lesser).
2. Application by financial creditor should be in prescribed form, manner and with required fees.
3. Besides application, financial creditor should provide record of the default recorded with the information utility, evidence and documents of default as mentioned by the Board, the interim resolution professional, and any other information that is demanded by the Board.
4. Adjudicating Authority (National Company Law Tribunal) shall acknowledge existence of such default of payment through evidence and information furnished by the financial creditors within 14 days from the date of application made. If delayed, the reasons for delay should be made in writing.
5. For adjudicating authority to approve the application: Adjudicating authority must have satisfied by the information that the default has occurred, the application must be in prescribed form and manner and there should not be a pending disciplinary proceeding on the interim resolution professional that is given by financial creditor as per section 7 sub-section (3).
6. Reasons not to approve the application: there is no evidentiary records or information about such default, application is inconsistent with section 7 sub-section (3) and if there is any pending disciplinary proceeding on the interim resolution professional. And if not approved: the applicant should get the right to correct the mistake made within 7 days from the date of receiving notice by adjudicating authority before discharging the application.
7. The date of approving the application is the beginning date of the CIRP.
8. The Adjudicating authority should notice the financial creditors about the approval or dismissal of the application.
Process of initiation through operational creditors:
What should be done before application?
According to section 8 of the Insolvency & Bankruptcy Code, 2016,
1. Whenever a corporate debtor fails to pay the due amount, the operational creditor may send a demand notice or a copy of the unpaid invoice in the prescribed format and manner to the corporate debtor.
2. After receiving the demand notice or invoice, within 10 days, the corporate debtor can inform the operational creditor that there is already a dispute regarding the debt, which was started before the notice was served, in which the case may be going on in court or arbitration about that debt, or the debt has already been paid to the operational creditor. To prove this, they can provide proof of bank book stating the transfer or with the cheque and stating that it was received and cleared by the corporate debtor.
Initiation by operational debtor:
According to section 9 of the IBC, 2016,
1. Even after completion of 10 days from the date of delivery of notice or invoice stating that payment is due, if the payment is paid or not reverted with notice of pending litigation under section 8 sub-clause (2) or furnished (even via electronic mode) the information of completion of payment with bank transfer evidences and cheques under section 8 sub-clause (2), the operational creditor may file an application before the adjudicating authority.
2. An application made by operational creditors should be as per the prescribed form, manner with adequate fee.
3. Besides the application, the operational creditor should submit a copy of invoice or notice demanding the payment, an affidavit of no notice of pending suit, certificate declaring that there is no payment of debt from their account’s financial institution, record from information utility stating that debt was die, or any other form evidence in prescribed manner.
4. Along with application, the operational creditor must add the name of the inter resolution professional.
5. Within 14 days of the application, adjudicating authority shall admit it if the application is in prescribed manner, default of debt exists, demanded the debt via invoice or notice, corporate debtor didn’t reverted with notice of existing litigation on that debt and no record of any disputes exists, no pending disciplinary proceeding against the interim resolution professional exists or adjudication authority shall reject the application if the application is inconsistent with the prescribed manner, debt has been paid, debt was not demanded by notice or invoice, notice of pending litigation on that debt has been notified to operational debtor, that pending litigation exists in the record of information utility, there is pending disciplinary proceeding against the interim resolution professional. In case of not meeting the legal requirements, the operational creditors should have the right to rectify it within 7 days.
6. The date of admissibility of application will be the beginning date of the insolvency resolution process.
Process of initiation through corporate debtors:
According to section 10 of the IBC, 2016,
1. If the corporate debtor failed to pay the debt, the corporate debtor itself can initiate the CIRP.
2. The application made should be in the prescribed format, and manner with appropriate fee.
3. Besides the application, the corporate debtor should submit its account book, name of the interim resolution professional, in case of shareholders special resolution approving the application is required and in case of partnership firm at least ¾ voting is mandatory.
4. Adjudicating authority shall within 14 days of the application admit, if it is consistent with section 10 or there are no pending disciplinary proceedings and shall reject if it is inconsistent or pending disciplinary proceedings exists. Adjudicating Authority should give the applicant the right to correct the inconsistency within 7 days.
5. The date of admissibility of application will be the beginning date of the insolvency resolution process.
Step 3: Appointment of interim resolution professional:
According to section 16 of the IBC, 2016,
1. Adjudicating Authority shall appoint the interim resolution profession on the beginning date of insolvency process.
2. Interim resolution professional shall be the person who is recommended by corporate debtor and financial creditor, only if there are no pending disciplinary process exists.
3.In case of operational creditors, interim resolution professional shall be the person who is recommended by them or the Board can recommend the interim resolution professional as per the Adjudicating Authority’s reference.
4. When the reference is made to the Board, the recommendation should be made within 10 days from the reference, whom should not have any pending disciplinary proceedings against him.
5. The interim resolution professional shall continue to work till the date of appointment of resolution professional.
Step 4: Declaration of Moratorium and Public announcement:
According to section 13 of the IBC, 2016, Adjudicating Authority shall declare moratorium, make public announcement about the initiation of CIRP, scrutinize claims that are submitted, and appoint interim resolution professional before public announcement.
Step 5: Constitution of Committee of Creditors:
According to section 21 of the IBC, 2016,
1. Interim resolution professional forms the committee of creditor after collecting all claim against the company and study the company’s all financial conditions.
2. The CoC mainly includes all financial creditors like banks and leaders. But, if a financial creditor is related party of the company, they cannot participate, attend or vote for in CoC meeting.
3. If a company has taken loans from multiple financial creditors under one agreement, then all financial creditors will be part of the CoC, and their voting powers depends on how much money the company owes them.
4. If a person is both a financial creditor and an operational creditor, they will have voting right proportionate to financial debt as a financial creditor. And also, they will be treated as an operational creditor for the proportionate amount of operational debt.
5. When the operational creditor transfers operational debt to financial creditors, the operational debtor will be considered as operational debtor only for the debt owed.
6. When loans given through the multiple financial creditors under single agreement, each financial creditors can authorize the agent to represent them, appoint another insolvency professional and vote jointly with others.
7. The Board (IBBI) will decide how voting and voting shares are calculated as per financial debt.
8. Decision making CoC divisions must need at least 51% of voting share.
9. Committee of Creditor can ask the Resolution Professional for any financial information about the company at any time.
10. The Resolution Professional must provide the requested information within 7 days to Committee of Creditor.
Step 6: Appointment of resolution of professional:
According to Section 22 of IBC 2016,
1. After the appointment of the committee of creditors, the first meeting must be conducted within 7 days.
2. In the first meeting, at least 66% of Committee of Creditors can vote to authorise the interim resolution professional as the full resolution professional or replace the Interim Resolution professional with a new RP.
3. When the Committee of creditors decides to continue the interim resolution professional as resolution professional, they must first get written consent from interim resolution professional in the prescribed manner. The decision must be informed this decision to interim resolution professional, the company and the Adjudicating Authority. Or else, if the Committee of creditors decides to replace the IRP, then they will have to apply to the Adjudicating Authority and suggest a new resolution professional along with written consent in prescribed manner.
4. The adjudicating authority can appoint the resolution professional, only after confirmation from the Board.
5. The Board must approve the resolution professional within 10 days, if not the adjudicating authority can direct the interim resolution professional to continue as a resolution professional until the date of confirmation from the Board.
Step 7: Preparation of information memorandum:
According to section 29 of the IBC, 2016, the resolution professional shall prepare an information that is relevant for resolution and make it available to the committee of creditors in both physical and electronic medium.
Step 8: Resolution Plan:
Who are not eligible for applying resolution plan?
According to section 29A of the IBC, 2016, persons who were not eligible as resolution applicant are Undischarged insolvent, Wilful defaulter, NPA-linked default (person or corporate), a person convicted of serious crimes, a disqualified director, a person restricted by SEBI, a promoter who involved in fraudulent transactions, guarantee whom didn’t paid the insolvency, a person who is ineligible in foreign countries, and connected persons to other ineligible persons.
If eligible, submitting Resolution Plan:
According to section 30 of the IBC, 2016,
1. Resolution applicant may send the resolution plan to resolution professional along with the affidavit of his eligibility.
2. Resolution professional examines the consistency of that resolution plan with information memorandum and other legal requirements.
3. If it agreed by 66% of the members of the committee of creditors, then the resolution professional will send the resolution plan will be sent to the adjudicating authority.
Adjudicating Authority shall:
According to section 31 of the IBC, 2016,
1. If the legal requirements are consistent with section 30(2), then the adjudicating authority shall approve the resolution plan.
2. If requirements are not meet, then adjudicating authority can reject the resolution plan.
The aggrieved party will have the right to appeal within 30 days before NCLAT under section 61 and if not, it will enter liquidation process.
In Vidarbha Industries Power Ltd. V. Axis Bank Ltd. (2022), the NCLT and NCLAT were set aside by the Supreme Court and held that Section 7(5)(a) to be directory to the tribunals to pass the application upon consideration circumstances like financial health beyond the presence of a debt. This a classic example for understanding that even with debt company should be given the opportunity for revival.
Conclusion:
In conclusion, if eligibility criteria are met, insolvency applicant files for CIRP, if satisfied then adjudicating authority accepts the application. After approving, Adjudicating Authority declares Moratorium and the appoints the Interim Resolution Professional. Interim Resolution Professional makes public announcement and collects all the claims. IRP helps in forming Committee of Creditors and then CoC appoints Resolution Professional. Resolution Professional prepares information memorandum and provides it available to CoC. When an eligible resolution applicant submits a plan, it must be approved by 66% of CoC. At last, if the plan is approved by Adjudicating Authority, it will be executed. Appeal can be made within 30 days of the approval by NCLT.
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