The Insolvency and Bankruptcy Code, 2016 is an attempt to reform the Corporate Insolvency Resolution Process by allowing faster mechanisms to deal with the Insolvency Process in the minimum amount of time, reducing bankruptcy stigma, improving ease of doing business, and ensuring that the financial risk to foreign investors is reduced. The code consolidated all previous legislation dealing with the insolvency of corporations and individuals into a single piece of legislation, and it has streamlined the company winding-up procedure. The major goal of this code is to enable creditors through the Corporate Insolvency Resolution Process (CIRP) to resurrect the firm and recover defaulted amounts, as stated in the Code's Preamble.
The CIRP in simple terms is a way for creditors to get their money back. A financial creditor, an operational creditor, or the company itself may commence CIRP if it becomes bankrupt. Following the submission of an application, CIRP is activated. The CIRP process determines whether or not the person who has defaulted is capable of repaying the debt. The corporation is restructured or liquidated if a person is unable to repay the loan. Section 6 under Chapter II of The Code defines CIRP as a process initiated by a financial creditor, operational debtor or the corporate debtor itself when payment by the corporate debtor has defaulted.
The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 were also adopted for this purpose. On March 24, 2020, the central government announced that the minimum threshold under section 4 of the Code to commence any bankruptcy proceedings against a company shall be not less than one crore rupees vide Notification No. S.O. 1205(E) dated 24.03.2020. If a firm is unable to pay its debts or is ineffective in settling debts with creditors, it is declared bankrupt. There are two ways for determining whether or not a company is insolvent.
● Cash flow test- If the company is unable to pay its debt in the future within the stipulated time.
● Balance sheet test- If the company's liabilities are increasing and becoming smaller than its assets, also taking into consideration its future liabilities.
Like mentioned, if a debtor fails to pay a creditor within the specified time, the Code allows creditors to launch a CIRP against him. Financial creditors (under section 7), operational creditors (under section 9), and/or the debtor himself (under section 10), as described in the code, are the three types of entities who can file an application for CIRP.
While in other countries, there is no distinction between operational and financial creditors in insolvency proceedings, it was held in the Swiss Ribbons Pvt. Ltd v Union of India (REED 2019 SC 01504) case that there is a discernible difference between the two types of creditors and that this is not an arbitrary violation of Article 14 of the Constitution of India.
● Financial creditor- According to section 5(7) of the IBC, a financial creditor is a bank, a financial institution, a lender, or anybody who provides a loan or other form of financial assistance.
● Operational Creditor- According to section 5(20) of the IBC, an operational creditor is a person who has provided goods and services to the debtor and/ or dues resulting from employment or dues emerging under any law in force at the time and payable to the federal or state government.
● If a corporate debtor is unable to discharge his liabilities and does not have the cash to run a business, he may be eligible to file a voluntary application to enter CIRP on his own as well.
The CIRP is completed in nearly six steps which are explained below with help of a few case laws. The following are the stages:
STEP 1: APPLICATION TO NCLT
When a company defaults in furnishing payments to its creditors, as discussed above, the creditors hold a right to bring forward a CIRP petition before the Adjudicating Authority. In instances wherein a company is the corporate debtor, the appropriate Adjudicating Authority is the National Company Law Tribunal (NCLT). Once filed, the NCLT reviews the merits of the petition considering whether the petition holds a locus standi before the tribunal or not.
If the tribunal does not find merits in the petition, like for instance, the defaulted amount does not meet the minimum threshold of INR One lakh as per section 4 of The Code, which now has been recently changed in the wake of the COVID-19 outbreak on March 24, 2020 to One Crore, then it will reject the petition. However, if the tribunal finds practicable merits in the petition, then it admits the same under section 7, 9 or 10 of the Code, prompting the process to commence. The NCLT is required to call for a hearing within 14 days of the filing of the petition. The Supreme Court in court in the case of Innoventive Industries Limited v. ICICI Bank and Anr. (REED 2017 SC 08563), has stated that 14 days’ time limit is granted to the National company law tribunal to ascertain whether the default on the part of corporate debtor exists or not and not deliberate into its extent or composition.
In the event of a default, an operational creditor would be required to deliver a notice of demand for payment of an overdue obligation. If the corporate debtor does not respond or refund within 10 days of receipt, explaining whether they dispute or settle the overdue obligation, an operational creditor may file an application with NCLT to commence the CIRP.
In the landmark case Era Infra Engineering Ltd. v. Prideco Commercial Projects Pvt. Ltd.(REED 2017 NCLAT Del 05513), the NCLAT had dismissed the application because the operational creditor didn’t serve notice to the other party under section 8 of the Code which says that a demand notice of unpaid operational debtor copies 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 should be given.
STEP 2: APPOINTMENT OF AN INTERIM RESOLUTION PROFESSIONAL (IRP)
A licensed insolvency professional appointed and nominated by the Committee of Creditors, as defined by section 27 of The Code, is appointed by the NCLT as an IRP. The second step in the procedure is for the IRP to choose between finishing the insolvency process and ensuring that the company's operations are not disrupted.
STEP 3: ROLE OF THE INTERIM RESOLUTION PROFESSIONAL
After the appointment of an Interim Resolution Professional under section 16(1) of IBC, as the name itself suggests, the interim professional is appointed for a very short period of time not exceeding 30 days from the date of appointment. The IRP will have to act in accordance with section 18 of the Code and receive the claims and after collecting all claims of the creditors, received against the corporate debtor, and determining the corporate debtor's financial position, form a Committee of Creditors (CoC) who will have control over the corporate debtor's assets and financial details.
In the case of SBI Financial Creditor v. SKC Retails Ltd & Others (REED 2018 NCLAT Del 05527), the financial creditor who is a member of the Committee of Creditors, filed an appeal saying that the CoC is not liable to pay the fees of the IRP, whereas the appellate tribunal said that the applicant who suggests the name of the resolution professionals to be appointed pays the expenses, which is later reimbursed by the CoC.
STEP 4: ANALYSIS OF FACTS BY THE COMMITTEE OF CREDITORS (CoC)
The Interim Resolution Professional is responsible for categorizing and analyzing the claims made in the petition by the petitioner in accordance with section 18(b) of The Code. If the IRP requests an exposition of the petitioner's claim, the Code authorizes the IRP to convene a meeting with the petitioner to obtain the necessary clarification. The committee formed by the IRP eventually forms the decision-making body of various routine tasks involved in CIRP and is also responsible for approving the Resolution Professionals to carry out actions that might affect the CIRP.
Members of the Committee of Creditors are defined under section 21(2) and (3) of the Code that only financial creditors can be included to take part in the Committee of Creditors for making a respective decision under the observation of the Resolution Professionals. Operational creditors, on the other hand, can only participate if their claim is worth more than 10% of the total debt, and they must be allowed to attend the meeting but not vote. Directors of a company cannot be allowed to take part in a meeting of the CoC; however, they may attend the meeting but no voting rights would be granted to them. In the case of Jet Airways (REED 2019 NCLAT Del 09506), it was held that if a parallel insolvency proceeding was initiated against a corporate debtor before the Adjudicating Authority, the respective authority from other countries was also allowed to participate in the Committee of Creditors meeting and join the CIR process in accordance with the IBC, 2016.
All decisions regarding the company's revival, as well as the implementation of a successful resolution plan, must be made by the Committee of Creditors by a majority vote of not less than 66 per cent of financial creditors' voting shares, whereas operational creditors are not permitted to attend Committee of Creditors (CoC) meetings or vote in favour or against such resolution plans except in exceptional circumstances and such operational creditors have limited rights to be present in meeting on condition that their aggregate dues are at minimum equal to 10% of the total debt.
Another point to be noted here is the case of Tata steel Ltd v. Liberty House Group Pte Ltd & Ors (REED 2019 NCLAT Del 02503), wherein, the Supreme Court held that votes of only such Financial Creditors shall be considered as total voting shares who are present in the meeting, one who participated in meeting neither through video conference nor through an in-person, voting share of such person not counted at all.
STEP 5: RESOLUTION PLAN
The first meeting, which must be convened within seven days of the Committee of Creditor's formation as per section 22 of the Insolvency and Bankruptcy Code, 2016, must have a 33 per cent quorum present, and the CoC will designate a person to serve as the Resolution Professional (RP) at the same meeting. According to section 23, the RP must convene a meeting and oversee the operations of the corporate debtor until the resolution is approved.
Once the verification of the claims made by the petitioner, a public announcement by the CoC takes place. The announcement indicates insolvency by stating that the corporate debtor is in the midst of an insolvency proceeding and that all interested candidates or bidders are asked to submit a resolution plan that could be adopted. These bidders could include potential investors, creditors, and others. Depending on the number of resolution plans proposed, the CoC proceeds and the plan that gathers an approval of over 75 per cent of the CoC, is secured to be presented before the NCLT.
In the case of Goa Auto Accessories (REED 2019 NCLT Mum 12505), it was held that it’s the right of the resolution professional to take assets in the custody of the corporate debtor, its duty of the resolution professional to make and submit the information memorandum for sake of resolution applicant, and is also required to examine resolution plan, present those plans before CoC and to submit the resolution plan before the adjudicating authority approved by CoC. In the case of Swiss Ribbon Pvt. Ltd v. Union of India (REED 2019 SC 01504), the Supreme Court observed that “the Resolution Professional is only a facilitator of the Corporate Insolvency Resolution Process and can act only after approval by the Committee of Creditors (CoC).”
Section 29A of the Code, which was added to the Code by ordinance 2017, prohibits anybody who contributed to the corporate debtor's defaults or who is a connected party to another defaulting party from taking control of the corporate debtor by declaring them ineligible to submit a resolution plan.
STEP 6: APPROVAL OF THE RESOLUTION PLAN
After receiving a plan from a resolution application, the Resolution professional must first confirm that the plan complies with the provisions of the code, which may involve corporate debtor restructuring through merger, amalgamation, or demerger, and then present the plans to the CoC, who may accept or reject them. If in any case the plan is not approved by CoC, the resolution professional needs to file an application before adjudicating authority for approval of the plan ratified by the committee. In the case of QVC Exports Pvt. Ltd. v. United Tradeco (REED 2020 NCLAT Del 01619), it was held that “the Adjudicating Authority had no authority or jurisdiction to rectify an approved Resolution Plan and/or make changes in the Plan.”
If the resolution plan does not work, was not approved by the Committee of Creditors or there was no resolution applicant, after putting required efforts by the RP within the time frame of CIRP, the Adjudicating Authority has jurisdiction to order the liquidation of the corporate debtor. If the order is passed, a liquidator will be appointed by approval from the Committee of Creditors to sell, transfer the assets of the corporate debtor and distribute the assets among the creditors, stakeholders. In that case, the assets of the corporate debtor will be distributed as per section 53 of the Code.
But if selected by the CoC, the resolution plan is presented before the NCLT for approval. On approval by the NCLT, it is implemented and becomes legally obligatory on the corporate debtor and all parties. If the NCLT does not sanction the resolution plan or the Committee of Creditors is unable to finalise a resolution plan within the specified time, the tribunal orders the liquidation of the company.
Thus, this was the procedure to be followed under the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016. In order to achieve the aforementioned goals, the Code has been successful in stabilizing and structuring the insolvency process. Before the Act was made public, the lack of a system was a major flaw in the execution of insolvency but now, the process is streamlined and has a set timeframe to follow. It has made strides to strengthen the insolvency process in India and the resolution of stressed assets even while facing a lot of criticism and controversies in its early phases, with the government now increasing the number of NCLT benches around the country. There has been an increase in the speed of the resolution process as well as the success rate. In conclusion, the insolvency process is working better under this code as it has aided creditors and the number of companies that have benefited from the law is substantial.