Conducting Corporate Insolvency Resolution Process

The Corporate Insolvency Resolution Process (‘CIRP’) is a recovery mechanism for the creditors of a corporate debtor. A corporate debtor means a company or Limited Liability Partnership (‘LLP’) that owes a debt to its creditors.

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) lays down the provisions for conducting insolvency or bankruptcy of individuals, partnership firms, LLP and companies. However, the process of insolvency and liquidation of corporate debtors under the IBC applies where the minimum default amount is Rs.1 crore only.

Creditors Under IBC

When a company or LLP becomes insolvent or commits a default, the financial creditor, operational creditor or the corporate debtor can file an application to initiate the CIRP by the Adjudicating Authority, i.e. National Company Law Tribunal (‘NCLT’). 

A financial creditor is a person to whom the business owes a financial debt and includes a person to whom such debt is legally transmitted or assigned. A financial debt means a debt along with interest disbursed against the consideration for the value of money and includes- 

• The amount borrowed against the payment of interest.
• The amount raised by acceptance under the acceptance credit facility or its dematerialised equivalent.
• The amount raised under the note purchase facility or the issue of notes, bonds, loan stock, debentures or any other similar instrument. 
• The amount of the liability relating to a lease or hire purchase contract that is deemed as capital or finance lease under the Indian Accounting Standards or such other accounting standards.
• Receivables discounted or sold other than the receivables sold on a non-recourse basis.
• The amount raised under any other transaction, including any purchase agreement or forward sale having the commercial effect of a borrowing.
• Any derivative transaction entered in connection with benefit from or protection against fluctuation in any price or rate.
• Any counter-indemnity obligation relating to a bond, indemnity, guarantee, documentary letter of credit or other instrument issued by a financial institution or bank.
• The amount of liability relating to any of the indemnity or guarantee for any of the points mentioned above.

An operational creditor is a person to whom the business owes an operational debt and includes persons to whom such amount has been legally transferred or assigned for services or goods given by them. 

An operational debt means a claim relating to the provision of services or goods, including debt or employment regarding payment of dues arising under any law in force and payable to the Central Government, State Government or local authority.

Process of Corporate Insolvency Resolution

The conduct of the CIRP (CIRP) of a corporate debtor is provided in Part II of the IBC, which are as follows-

Initiation of CIRP

The financial creditor can initiate the CIRP against the corporate debtor by applying to NCLT. The operational creditor should first give a demand notice of an unpaid invoice to the corporate debtor demanding the default payment amount. When the operational creditor does not receive payment from the corporate debtor after the expiry of ten days of delivery of the demand notice or invoice demanding payment, he can apply to NCLT for initiating the CIRP.

A partner or member of the corporate debtor authorised to initiate CIRP or a person in charge of managing the affairs or who has control and supervision over the financial affairs of the corporate debtor can initiate the CIRP with NCLT. 

NCLT will pass an order within fourteen days of either admitting or denying the CIRP application. The CIRP will commence from the admission date of the application by NCLT. The CIRP completion period is 180 days from the admission date of the CIRP application. 

Declaration of Moratorium and Public Announcement

After the admission of the CIRP application, NCLT will pass an order- 

• Declaring a moratorium for prohibiting certain actions and transactions.
• Causing a public announcement of initiating the CIRP and call for the submission of claims.
• Appointing an interim resolution professional. 

NCLT orders on the CIRP commencement date declaring the moratorium for prohibiting the following- 

• Continuation or institution of suits or proceedings against the corporate debtor.
• Encumbering, transferring, disposing of or alienating by the corporate debtor of its assets or beneficial interest or legal right.
• Any action to recover, foreclose or enforce any security interest created by the corporate debtor relating to its property, including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 
• Recovery of any property by a lessor or owner, where the property is in possession or occupied by the corporate debtor.

The public announcement of the CIRP should contain the following information- 

• Name and address of the corporate debtor. 
• Name of the authority under which the corporate debtor is registered or incorporated.
• Last date for submission of claims.
• Details of the interim resolution professional who will be responsible for receiving claims and take over the management of the corporate debtor.
• Penalties for misleading or false claims.
• The date of closure of the CIRP, i.e. 180th day from the admission date of the CIRP application.

The interim resolution professional appointed will have the following powers relating to the corporate debtor from the date of his appointment-

• Management of the affairs of the corporate debtor.
• Exercise the powers of the board of directors or partners of the corporate debtor and suspension of the powers of the director or partner of the corporate debtor.
• Officers and managers of the corporate debtor will have to report to the interim resolution professional and give access to the records and documents of the corporate debtor.
• Financial institutions having and maintaining accounts of the corporate debtor will act on the instructions of the interim resolution professional and furnish all available information relating to the corporate debtor.

Committee of Creditors

The interim resolution professional will constitute a committee of creditors after collating all received claims against the corporate debtor and determining its financial position. The committee of creditors will consist of all the financial creditors of the corporate debtor. 

The committee of creditors should hold the first meeting within seven days of the constitution of the committee. The committee of creditors in their first meeting should decide to either appoint or replace the interim resolution professional through a majority vote of not less than 66% of the voting share of the financial creditors.

Appointment of Resolution Professional

When the committee of creditors decide to continue with the interim resolution professional appointed by NCLT as the resolution professional, it should communicate its decisions to NCLT, the interim resolution professional and the corporate debtor.

When the committee of creditors decides to replace the interim resolution professional, it should file an application to NCLT to appoint the proposed resolution professional along with his written consent. 

NCLT should forward the name of the proposed resolution professional submitted by the committee of creditors to the Insolvency and Bankruptcy Board of India (‘Board’) for its confirmation. NCLT shall appoint the proposed resolution professional after receiving confirmation from the Board. 

The resolution professional will conduct the entire CIRP and manage and control the operations of the corporate debtor during the CIRP.

Preparation of Information Memorandum

The resolution professional should prepare an information memorandum in the form and manner containing the relevant information as specified by the Board to formulate a resolution plan. A resolution applicant should submit a resolution plan prepared on the basis of the information memorandum to the resolution professional. 

The resolution applicant is the person who submits a resolution plan either individually or jointly with any other person. The resolution professional will examine each resolution plan submitted to him for confirming that each resolution plan-

• Provides for the payment of the insolvency resolution process costs as specified by the Board prioritising the payment of all other debts of the corporate debtor.
• Provides for the payment of debts of the operational creditors as specified by the Board.
• Provides for managing the affairs of the corporate debtor after approval of the resolution plan.
• Supervision and implementation of the resolution plan.
• It does not contradict the provisions of the law(s) in force. 
• Confirms to such other requirements specified by the Board.

The resolution professional will present the resolution plan after its examination to the committee of creditors for its approval. The committee of creditors can approve the resolution plan by a vote of not less than 66% of the voting share of the financial creditors.

Approval of Resolution Plan

The resolution plan for the revival of the company or LLP should be approved within 180 days from the commencement of the CIRP by the creditors. However, NCLT can extend the period of 180 days by another 90 days. 

NCLT will pass an order approving the resolution plan approved by the committee of creditors after being satisfied that the resolution plan meets the requirements of the IBC. NCLT order of approval of the resolution plan will be binding on the corporate debtor and its employees and members.

NCLT order of approval of the resolution plan will also be binding on the guarantors and stakeholders involved in the resolution plan and the creditors, including the Central or State Government or any local authority.

NCLT can pass an order to reject the resolution plan if it is satisfied that the resolution plan does not meet the requirements laid down under the IBC. When NCLT passes the order of rejection of the resolution plan, it will pass an order of the liquidation of the corporate debtor. 

After the approval of the liquidation of the corporate debtor, the committee of creditors will appoint the liquidator to sell the corporate debtor’s assets and share them among the stakeholders. The distribution of the assets will be made as per the provisions of the IBC.

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