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Corporate Insolvency resolution process

Financial Creditors assess the financial health of the debtor's business and, if any, other possibilities for its rescue and revival throughout the corporate insolvency resolution process. The debtor will go under a liquidation process, and the liquidator will realise and distribute the debtor's assets if the insolvency resolution process fails or financial creditors decide that the business of the debtor cannot be operated profitably and should be wound up.

Insolvency resolution process is a time bound process of 180 days extendable by 90 days. This code also provides fast track resolution process of corporate persons within 90 days extendable by 45 days.

The assets of borrower may be sold to repay the creditors if insolvency resolution process fails.

Steps Involved In Resolution Process:
  • Application is filed before the adjudicating authority (NCLT)
  • Admission or rejection of application by adjudicating authority
  • Appointment of IRP (interim resolution professional)
  • Moratorium and public announcement
  • Constitution of committee of creditors
  • Resolution plan
  • Approval of resolution plan
An application is filed before NCLT if there is a default in payment of debt by corporate debtor. (Default is defined under section 3(12) of IBC, 2016. Default means when the corporate debtor fails to repay debt).
Application filed by financial creditor: CIRP can be initiated by financial creditor against corporate debtor if debtor has committed a default in payment. Financial creditor should attach proof of default committed by debtor along with application and shall also give the name of IRP. Application filed by operational creditor: If a default is committed by debtor then operational creditor shall:
  • Send a demand notice with copy of invoice to corporate debtor.
  • Corporate debtor shall reply to the notice within 10 days with proof of repayment or existence of dispute.
  • If debtor fails to comply with the notice then corporate debtor can file an application before NCLT for initiation of corporate insolvency resolution process.
Documents to be attached with application:
  • Copy of demand notice
  • An affidavit stating no notice of dispute has been given
  • Copy of certificate from financial institutions confirming no repayment
  • Copy of any record with information utility confirming no repayment
  • Any other proof of no repayment
Application filed by corporate debtor: Corporate debtor itself can file an application before NCLT if a default is committed, along with application debtor shall attach books of account and other information and shall also give name of IRP. Admission or rejection of application by adjudicating authority: NCLT may either reject the application or may approve the application within 14 days of filing the application.
  • If NCLT rejects the application, then a notice is delivered by NCLT to the applicant and then applicant shall be allowed to rectify the defects within 7 days.
  • Insolvency resolution process commence from the date of admission of application.
Appointment of interim resolution professional: According to section 16 0f Insolvency and Bankruptcy code 2016 an interim resolution professional is appointed within 14 days of commencement date.
  • If application is filed before the adjudicating authority by financial creditor or corporate debtor then the name proposed in the application will be appointed as interim resolution professional if no disciplinary proceedings are pending against him.
  • If application is filed by operational creditor then:
    • Adjudicating authority shall refer to the board for recommendation of insolvency professional.
    • If a proposal is made then proposed person shall be appointed as interim resolution professional if no disciplinary proceedings are pending against him.
Key roles of interim resolution professional:
  • Public notice shall be issued for CIRP
  • Collation of the claims
  • Constitution of committee of creditors (COC), committee of creditors shall contain all financial creditors and parties related to debtor cannot be included
  • Conduct a meeting of COC within 7 days of constitution of COC
Moratorium and effects of moratorium: Moratorium is defined under section 14 of Insolvency and Bankruptcy code 2016. Moratorium is a calm period of 180 days during which all the legal proceedings and suits are suspended against the corporate debtor to give time to entity to resolve its status.
  • During moratorium period these acts are prohibited:
    • A court, tribunal, arbitration panel, or other authorities judgment, decree, or order may be executed against a debtor.
    • Transfer, alienation, encumberment of any asset or legal right of debtor
    • Including any action under the sarfesi act, 2002, any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property
    • Any property which is under possession of debtor cannot be recovered by owner or lessor.
  • Public Announcement: Public announcement is defined under section 15 of Insolvency and bankruptcy code 2016, public announcement includes:
    • Corporate debtor's name along with address
    • Authority under which corporate debtor is registered
    • Appointed interim resolution professional details
    • If false claims are made then penalties regarding the same
    • Last date for claims submission
    • Ending date of CIRP

Appointment of Resolution Professional:
  • In the first meeting of committee of creditors, with not less than 75% percent voting shares they will decide either to appoint interim resolution professional as resolution professional or to replace him.
  • If the committee of creditors decides to replace the interim resolution professional then the committee of creditors shall file an application to adjudicating authority along with proposed name.
  • Within 7 days of application NCLT shall refer to board for recommendation and board shall confirm the name within 10 days. If board fails to confirm within 10 days then NCLT shall direct the interim resolution professional to continue until board confirms the name.
Key roles of Resolution professional:
  • Valuation of corporate entity
  • An information memorandum is to be prepared
  • Resolution plan preparation
  • Obtaining approval of COC
  • Updating the board regarding resolution plan
Resolution Plan:
  • When information memorandum is prepared by resolution professional then it shall contain resolution plan.
  • Resolution plan shall be approved by committee of creditors with not less than 75% voting rights. Approved resolution plan shall be submitted before adjudicating authority by resolution professional. Whether to move with revival or liquidation of corporate entity, committee of creditors shall decide it within a period of 180 days.
Order of Liquidation:
  • According to section 33 of Insolvency and Bankruptcy code 2016 NCLT may order for liquidation if:
  • NCLT doesn't receives any resolution plan within 180 days or;
  • Before the expiry of 180 days, committee of creditors decides to intimate the adjudicating authority that they have decided and passed an order for liquidation or;
  • Corporate debtor or any other person whose interest are prejudicially affected by such contravention may make an application to NCLT for liquidation where the resolution plan approved by the adjudicating authority is contravened.
Fast Track resolution process of corporate persons:
  • Fast track resolution process is a process in which insolvency resolution process is completed within 90 days extendable by 45 days. Extension of time period cannot be given more than once. And extension can be given only if aggrieved satisfies the adjudicating authority that insolvency process cannot be completed within 90 days.
  • Application for Fast Track insolvency process can be made by:
  • A Corporate debtor, if his assets are below a certain level as may be notified by the central government or;
  • A Corporate debtor with such amount of debt as may be notified by the central government or;
  • Any other category as may be notified by the central government.

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