INSOVENCY AND BANKRUPTCY SERVICES

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP):

Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism for creditors. If a corporate becomes insolvent, a financial creditor, an operational creditor, or the corporate itself may initiate CIRP.

  • Financial Creditor could be any person to whom a business debt is owed or a person to whom such amount is legally assigned or transmitted. For example: Banks or other financial institutions
  • Operational Creditor could be any person to whom an operational debt is owed and includes any person to whom such amount has been legally assigned or transferred for goods or services done by them. For example: vendors and suppliers, employees, government etc.

The Insolvency and Bankruptcy Code, 2016 (IBC) provides a provision for an application for insolvency or bankruptcy of start-ups, individuals, partnership firms, limited liability partnership, and companies. The government on recently raised the threshold for invoking insolvency under the IBC to Rs 1 crore from the current Rs 1 lakh with a view to prevent triggering of such proceedings against small and medium enterprises

CIRP is the process through which it is determined whether the person who has defaulted is capable of repayment or not. If a person is not capable of repaying the debt the company is restructured or liquidated. Following are the steps to be followed for resolution or liquidation of a corporate:

Application to NCLT: A financial or operational creditor of the company or the company itself can apply to the National Company Law Tribunal (NCLT). The application is made to admit that the Company (Corporate Debtor as per IBC) is into corporate insolvency resolution process. For this the creditor needs to show the default payment of a debt which exceeds INR 1 Crore and within 14 days the NCLT has to pass an order either admitting or denying the application. There are different obligations that a financial and an operational creditor have to comply with when making their applications before NCLT. A financial creditor needs to submit the record of the default whereas an operational creditor needs to first make a demand for his unpaid debt. On the basis of an ongoing dispute, it is open to the corporate debtor to defend the claim.

Interim Resolution Professional & Moratorium: When a corporate debtor is admitted into the CIRP, it suspends the board of directors. Also, the management is placed under an independent ‘Interim Resolution Professional’(IRP). Further, from this point onward the management ceases to have any control over the company affairs till the end of the CIRP. Simultaneously, a moratorium becomes effective which prohibits:

  • Continuation or initiation of any legal proceedings against the corporate debtor
  • Transfer of its assets
  • Enforcement of any security interest
  • Recovery of any property from it by an owner
  • Suspension or termination of the supply of essential goods and services, the moratorium lasts till the corporate debtor is in CIRP

However, the moratorium does not extend to key business contracts entered into by the corporate debtor.

Verification and Analysis of Claims: At this stage, interim resolution professional will summon and verify the claims made the creditors and also classify them. After that, within 30 days of acceptance into CIRP, will form a Committee of Creditors (COC) which comprises of all the financial creditors of the corporate debtor.

Appointment of Resolution Professional: Within seven days of the forming the committee, the COC will have to either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.

Approval of the “Resolution Plan”: A resolution plan for the revival of the company must be approved within 180 days from the commencement of CIRP by creditors. The NCLT can extend this period by another 90 days. Any person, management, the creditors or a third party can propose such a plan. Resolution professional is responsible to ensure that the plan meets the criteria set out in Insolvency and Bankruptcy Code, 2016.

If a plan is approved within this period and sanctioned by NCLT: The approved resolution plan becomes binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholder involved in the resolution plan. It is the duty if the resolution professional to obtain all necessary approvals required under any law for the time being in force within one-year from the date of approval by adjudicating authority.

If no resolution plan is approved within the said period: In case the resolution plan is not approved then NCLT is obliged to order the liquidation of the corporate debtor. After the approval of liquidation, COC appoints the liquidator to sell the assets of the corporate debtor and share them among the stakeholders. The distribution is made according to section 53 of the Insolvency and Bankruptcy Code 2016.

FILING OF APPLICATION TO NCLT UNDER SECTION 7,9 AND 10 OF IBC, 2016

Section-7

  • A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
  • The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.
  • The financial creditor shall, along with the application furnish—
    • record of the default recorded with the information utility or such other record or evidence of default as may be specified;
    • 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.
  • The Adjudicating Authority shall, within fourteen days of the receipt of the application ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.

Section-8

An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

  • existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
  • the payment of unpaid operational debt—
    • by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
    • by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

Section-9

After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescribed.

The operational creditor shall, along with the application furnish—

  • 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;
  • a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor if available; and
  • a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and
  • 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.
  • An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.

The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

  • Admit the application and communicate such decision to the operational creditor and the corporate debtor if—
    • the application made under sub-section (2) is complete;
    • there is no repayment of the unpaid operational debt;
    • the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;
    • no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and
    • there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any. Application for initiation of corporate insolvency resolution process by operational creditor.
  • Reject the application and communicate such decision to the operational creditor and the corporate debtor, if—
    • the application made under sub-section (2) is incomplete;
    • there has been repayment of the unpaid operational debt;
    • the creditor has not delivered the invoice or notice for payment to the corporate debtor;
    • notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or
    • any disciplinary proceeding is pending against any proposed resolution professional:

Provided that Adjudicating Authority, shall before rejecting an application give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority.

The corporate insolvency resolution process shall commence from the date of admission of the application under this section.

Section-10

Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.

The application under section shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.

The corporate applicant shall, along with the application furnish the information relating to—

  • 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 professional proposed to be appointed as an interim resolution professional; and
  • the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.
  • The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order—
    • admit the application, if it is complete and no disciplinary proceeding is pending against the proposed resolution professional; or
    • reject the application, if it is incomplete or any disciplinary proceeding is pending against the proposed resolution professional:

Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice from the Adjudicating Authority.

The corporate insolvency resolution process shall commence from the date of admission of the application under this section.

 
     
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