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Corporate Insolvency Resolution Process

By March 24, 2020 May 1st, 2020 No Comments
Corporate Insolvency Resolution Process

Corporate Insolvency Resolution Process

A. INTRODUCTION:

Periodically, there have been numerous occurrences of delay in a culmination of the corporate insolvency principles as per the processes recommended under the Insolvency and Bankruptcy Code, 2016 (“Code”). The current backlog is due to the filing of numerous legal cases by stakeholders and its continuity of the same. The Corporate Insolvency Resolution Procedure (“CIRP”) is a time-bound procedure, which provides for the recovery of monetary dues from a debtor by a creditor in accordance with the provisions as laid down in the Code.

This article focuses on the initiation of CIRP against a corporate debtor by an operational creditor under Section 9 of the Code.

B. IMPORTANT DEFINITIONS:

Section 5 (20) of the Code defines an Operational Creditor as follows:

“operational creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.”

For the purpose of the definition mentioned above, the Code defines Operational Debt as follows:

Section 5 (21): Operational Debt

“operational debt means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.”

Section 3 (8) of the Code defines Corporate Debtor as follows:

“corporate debtor means a corporate person who owes a debt to any person.”

Most importantly, a corporate debtor shall be a corporate entity owing a debt, which shall be above Rs.1,00,000/- to a creditor, there shall not be any pre-existing dispute, for the purpose of initiation of CIRP, whereas an operational creditor can either be an individual or a corporate entity for the purpose of initiation of CIRP against a corporate debtor.

C. CORPORATE INSOLVENCY RESOLUTION PROCESS:

The CIRP is a debt-recovery process which can be initiated by the operational creditors in accordance with section 9 of the Code before the National Company Law Tribunal (“NCLT”).

1. Issuance of Demand Notice:

A demand notice in accordance with Section 8 of the Code, shall be issued by the operational creditor to the corporate debtor, demanding the repayment of the monetary dues. The corporate debtor shall reply to the demand notice within 10 (ten) days from the date of receipt of the demand notice or shall dispute or inform the operational creditor with regard to the pendency of a suit or arbitration, which was filed against the corporate debtor prior to the receipt of the demand notice by the corporate debtor.

For the purpose of the aforementioned, the dispute in accordance with section 5 (6) of the Code shall mean and include:

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty.

In the event of failure on the part of the corporate debtor to reply within the prescribed time period of 10 (ten) days, the operational creditor shall make an application in Form 5 for the initiation of CIRP against the corporate debtor before the NCLT.

2. Documents Accompanying Application:

The operational creditor shall along with the application, file relevant documents before the NCLT. The documents are as follows:

  1. A copy of the demand notice demanding payment of outstanding dues along with the acknowledgment copy showcasing the delivery of the demand notice.
  2. Invoices raised against the corporate debtor.
  3. A general verification affidavit.
  4. Ledger statement of the corporate debtor.
  5. An affidavit under section 9 (3) (b) of the Code.
  6. Board Resolution authorizing the signatory.
  7. Bank Statements, showcasing the receipt of amounts with respect to various invoices raised against the corporate debtor.
  8. Email communications/ WhatsApp communications, if any.
  9. If any email communications have been attached, an affidavit with respect to the email communications under Section 65 (b) of the Indian Evidence Act, 1872.

3. Admission/ Rejection of Application:

Prior to the admission of the application, the counsels for both the corporate debtor and the operational creditor put forth their arguments before the NCLT and the NCLT passes an order based on the representations made, either ordering admission of the application or rejection of the admission of the application.

a. Admission of Application:

The NCLT passes an order, admitting the application, upon the satisfaction of the following conditions:

  1. The application shall be complete.
  2. No payment has been received from the corporate debtor with respect to the operational debt.
  3. Delivery of the demand notice by the operational creditor to the corporate debtor.
  4. Failure on the part of the corporate debtor to send a notice disputing the debt amount.

4. The time limit for the completion of CIRP:

The Code was amended in 2019 and the amended Code states that the insolvency process shall be concluded within a period of 330 days from the date of initiation of CIRP, failing which an additional 90 days is provided for the conclusion of CIRP.

5.Orders passed by the NCLT upon Admission:

  1. A moratorium shall be declared, during which all other legal proceedings initiated before other forums against the corporate debtor, institution of any other legal proceeding, transfer or the alienation of the assets of the corporate debtor shall be temporarily suspended. The duration of moratorium shall come into effect from the date of the order passed until the completion of the CIRP.
  2. Make a public announcement with regard to the initiation of CIRP.
  3. Interim Resolution Professional (“IRP”) to be appointed within 14 days from the date of commencement of insolvency.

6. Interim Resolution Professional:

Once the IRP is appointed, the powers with respect to the management of affairs of the corporate debtor shall be vested in the IRP. The IRP shall have access to all the documents and information and the managers of the corporate debtor shall report to the IRP and shall cooperate fully with the IRP with regard to the provision of information and documentation as and when required by the IRP.

7. Proof of Claims:

Proof of claims shall be submitted to the IRP by the operational creditor, workmen and employees and financial creditors and such proof of claims shall be submitted to the IRP prior to the last date as mentioned in the public announcement. Such proof of claims which have been received by the corporate debtor shall be verified by the IRP, after which, the IRP shall make a list of creditors, with the amounts due to them by the corporate debtor.

8. Constitution of Committee of Creditors:

Upon the collection of the claims and upon ascertaining the position of the corporate debtor, the IRP shall constitute a committee of creditors (“CoC”). A report shall be submitted to the NCLT stating the constitution of the CoC within 30 days and a report of the first meeting of the CoC within a period of further 7 days shall be submitted to the NCLT.

9. Appointment of Resolution Professional (“RP”):

In the first meeting of the CoC, the CoC either appoints the IRP as the RP or replaces the IRP with a new RP, with a majority vote of 60% of the voting share of the financial creditors. In the event of the appointment of an RP who is not the same as the IRP, the name of the proposed new RP shall be informed by NCLT to the Insolvency and Bankruptcy Board of India (“Board”). However, an RP can be appointed only with the approval of the Board.

The RP shall be responsible for conducting the complete CIRP and shall be responsible for managing the affairs and the operations of the corporate debtor during the pendency of CIRP. All the actions with regard to the CIRP shall be taken by the RP only after seeking a prior vote of 60% from the CoC. However, any action taken by the RP shall be void, in the event, the approval has not been taken from the CoC.

10. Preparation of Information Memorandum:

The RP shall prepare an information memorandum, for the purpose of formulating a resolution plan. The information memorandum shall contain assets and liabilities of the corporate debtor as on the insolvency commencement date, latest annual financials, audited financial statements for the preceding two years and provisional financial statements for the current year, list of creditors containing the amounts due to them, details of debts due from or to the corporate debtor with respect to related parties, details of guarantees with the list of the guarantors being related parties, details of the members holding at least 1% stake in the corporate debtor, details of all the litigations and proceedings going on against the corporate debtor, the number of workers and employees and the liabilities of the corporate debtor towards them and any other information required by the RP.

11. Preparation of Resolution Plan:

The RP shall obtain various resolution plans from various resolution applicants. A resolution applicant is any person who individually or jointly with another person submits a resolution plan to the RP. The RP shall invite prospective resolution applicant(s) for the purpose of the formulation of a resolution plan. However, the RP may lay down certain criteria, with the approval of the CoC for the purpose of deciding as to who shall be eligible to be a resolution applicant, considering the complexity of the corporate debtor’s operations. The resolution applicant shall be a person with resources and shall be a person with technical and financial competency.

The RP shall provide the resolution applicant with all the information as may be required for the purpose of the formulation of resolution plan and the resolution applicant shall ensure that all the information and documentation provided to the resolution applicant is maintained in strictest confidence; ensure the protection of the intellectual property of the corporate debtor, and ensure that no information has been disseminated to any third party.

The RP shall make an invitation for the expression of interest, publishing the particulars of the interested eligible resolution applicants, not later than 75 days from the insolvency commencement date. Such publication shall be made by the RP in Form G in the newspapers, the website of the corporate debtor, the website as may be designated by the Board for this purpose and in any other manner as may be prescribed by the Board. The www.ibbi.gov.in shall be referred to for this purpose. The submission of the interest shall be made within 15 days from the date of publication.

The RP shall conduct due diligence of all the prospective resolution applicants and shall prepare a provisional list of eligible resolution applicants. A final list of prospective resolution applicants shall be prepared by the RP within 10 days for the submission to the CoC. The RP issues the information memorandum along with an evaluation matrix and requests for resolution plans within 5 days of the issuance of the provisional list to the resolution applicants. The resolution applicants shall be provided with a period of 30 days for the purpose of submission of resolution plans.

The resolution plan submitted to the RP shall be accompanied by an affidavit stating that the resolution applicant is eligible for the purpose of the submission of the resolution plan.

According to Section 5 (26), a resolution plan shall mean a plan proposed by a resolution applicant for insolvency resolution of the corporate debtor as a going concern.

A resolution plan shall as per Section 30 (2) of the Code and shall provide for the measures with regard to the payment of insolvency resolution process costs; priority to the payment of debts to the operational creditors than the financial creditors; provide measures for the management of the affairs of the corporate debtor upon the approval of the resolution plan; the proper implementation of the resolution plan; no contravention of the applicable laws in force and any other specifications as may be specified by the Board.

12. Approval of the Resolution Plan:

The RP shall examine the resolution plans and present before the CoC, for its approval, the resolution plans which are in conformation with Section 30 (2) of the Code. The CoC evaluates the resolution plans as per the evaluation matrix and the best among the resolution plans are approved by the CoC. A resolution plan may be approved by the CoC by a vote of not less than 66% of the voting share of the financial creditors, considering the reasonableness and the practicability of the resolution plan.

Upon the approval of the resolution plan by the CoC, the RP shall submit the resolution plan to the NCLT and upon satisfaction that the resolution plan meets the criteria as laid down under Section 30 (2) of the Code, the NCLT passes an order approving the resolution plan. The order copy shall be provided to the resolution applicant and all the other participants by the RP. The resolution plan which has been approved by the NCLT shall be fully binding on the corporate debtor and its employees.

However, in the event of rejection of the resolution plan for the revival of the corporate debtor, by the NCLT, the liquidation of the corporate debtor shall commence, the moratorium ceases and the assets of the corporate debtor shall be liquidated in order to repay the creditors, subject to the following as mentioned herein-below:

  1. Insolvency Process Costs
  2. Liquidation Costs
  3. Workmen Dues of 24 months and Secured Creditors Debts
  4. Wages and Unpaid Dues of Employees for a period of 12 years
  5. Unsecured Creditors
  6. Crown Debts (Debts to the Central Government + State Government) and the balances, if any, to the secured creditors
  7. Other Debts
  8. Preference Shareholders
  9. Equity Shareholders

Few assets of the corporate debtor cannot be attached for the purpose of liquidation and these funds are as follows:

  1. Pension Funds
  2. Gratuity Funds
  3. Provident Funds

These funds shall not be attached in the process of corporate resolution and during the liquidation of the assets of the corporate debtor solely for the purpose that these funds belong to the employees employed with the corporate debtor.

D. CONCLUSION

All in all, the Government has improved and simplified the path for the creditors to recover their monetary dues with brief and precise legal procedures. A halfway arrangement has been allowed through a resolution plan to the corporate indebted individuals and to forestall the damages faced by them through CIRP.

Authors: Prashant Jain, Co-Founder & Partner; Kriti Sanghi, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) kritisanghi@samistilegal.in.

Updated as on March 24, 2020.

Image generation credits: https://www.canva.com/templates/

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