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CIRP Process under IBC

In the year 2016, India passed the Insolvency and Bankruptcy Code (IBC). The IBC brought some about significant changes and improvements and was termed the largest economic reform. It is widely seen as a regulation that will speed up India's insolvency procedure.

The primary aim of IBC is to amalgamate and amend the laws concerning insolvency of corporate persons, individuals, and partnership firms, etc. CIRP is a process through which proceedings against the debtors be initiated by:
  1. financial creditors;
  2. operational creditors;
  3. corporate persons.

The National Company Law Tribunal (NCLT) is the forum where corporate insolvency proceedings can be start off, and appeals against its decisions can be taken to the National Company Law Appellate Tribunal (NCLAT). The NCLT has all of the functions of the Debt Recovery Tribunal under the IBC.
Keywords: IBC, corporate insolvency resolution process, NCLT, NCLAT, financial creditors operational creditors, corporate debtors.

Introduction:
The Insolvency and Bankruptcy Code [IBC], 2016, was enacted with the goal of synthesizing and amending the rules and regulations relating to reorganizing and insolvency resolution of corporate persons, partnership firms, and individuals in a time specified manner in order to increase the value of such person's assets, foster entrepreneurship, and increase credit availability while balancing the benefit of all stakeholders, including creditor.

Part II of the IBC lays out the insolvency and liquidation procedures for all corporate debtors. It establishes a 180-day deadline, which can be increased by another 90 days to finish the process.

In terms of corporate insolvency, a few of the novel features of the IBC include the establishment of a new forum to adjudicate insolvency proceedings, the establishment of a dedicated regulator, the creation of a new category of insolvency professionals, and the creation of a new category of information utility providers. IBC, 2016 was written in a manner that corporations do not have to go into liquidation. The firm only falls into liquidation if a settlement is not reached.

The Apex Court highlighted for the first time in M/s Innoventive Industries Ltd. vs. ICICI Bank[1]how the recently adopted Code of 2016, which consolidates and changes all laws relating to insolvency and bankruptcy processes, has generated a fundamental change in the law.

Corporate Insolvency Resolution Process:

CIRP stands for Corporate Insolvency Resolution Process. It is a mechanism of recovery from the Corporate Debtors. Even if the default is wilful, i.e., when the corporate debtor has the means to pay but chooses not to, CIRP can be initiated. As a result, the focal point of the IBC is the default of a payment obligation.

If any Corporation becomes insolvent, then CIRP can be initiated against the corporation. The Code has set a default value in each category, but the final amount must be declared by the government as the potential trigger for the procedure to begin, bearing in mind the economy's fluctuation. It's vital to note that the stated amount is a range, not a minimum or maximum set sum of debt default.

Initiation of CIRP can be done by:

  1. Financial Creditor:
    Any person who is owing to a business obligation or o whom such an amount has been legally allocated or conveyed. E.g., Banks and other financial institutions are a type of financial entity.
     
  2. Operational Creditor:
    Anyone owing them an operational obligation, as well as anyone to whom that sum has been lawfully assigned or transferred in exchange for goods or services they have delivered. E.g., vendors, employees.
     
  3. Corporate Applicant:
    Anyone who is a corporate debtor or a corporate debtor's member or partner who is permitted to file an application or an individual who is in command of the corporate debtor's activities and resources or a person who has control and oversight over the corporate debtor's financial activities.

CIRP Process:

After the commencement of the CIRP under Sections 7 or 8 and 9, or 10 of the Insolvency Code of 2016, the Adjudicating Authority will take additional action (NCLT).
Section 12(1)[2] of the Insolvency Code, 2016 mandates that the CIRP be finished between the span of 180 days of NCLT's application to initiate the said process. However, if the application is filed to Adjudicating Authority by the resolution professional the said time period can be further extended and initiated.[3]

And if instructed by a resolution obtained by a vote of 66% by the voting shares of the Committee of Creditors at a meeting. On receipt of such approval, the application made to adjudicating Authority shall be made by a resolution professional.[4] On receipt of such application, Adjudicating Authority can grant only one extension up to a maximum of 90 days.[5] The CIRP must be completed within 330 days of the insolvency starting date, togetheriwth any augmentation of the term of CIRP given under the Code[6] and duration spent in legal procedure related to the corporate debtor's resolution process.
  1. Application to National Company Tribunal:
    where a company fails to make payments, then the concerned creditors have the right to file a CIRP petition to Adjudicating Authority, i.e., NCLT. It is considered to be a competent authority for adjudication in cases where the company is the corporate debtor. The Merits of the petition filed are considered, and once it is submitted, it is determined whether the petition has a locus standi before NCLT. NCLT can reject the petition if the merits of the case are not satisfied.

    For instance, if the defaulted amount is not equivalent with the minimum sum of INR 1,00,000.[7] If the Tribunal determines that the petition has merit, then it will be submitted under sections 7[8], 9[9] , or 10[10] of the Insolvency Code, and the procedure will begin. Tribunal schedules a hearing within 14 days after receiving the petition.
     
  2. Application for Interim Resolution Process:
    A resolution professional is a licensed insolvency professional nominated and appointed by the Committee of creditors (CoC)[11] so that Tribunal appoints the IRP for the time being. In the second stage of the process, the IRP must choose between finishing the rest of the insolvency procedure or assuring that the corporate debtor's activities concern.
     
  3. Moratorium:
    After the Tribunal approves the petition, the moratorium period starts. Financial creditors cannot get any sum from the account of the corporate debtor after the moratorium is declared.

    The Tribunal is prohibited while this is declared[12]:
    1. Commencement of new lawsuits or continuation of existing lawsuits against the corporate debtor (in respect of financial debt
    2. Defenestration of the corporate debtor from any operational, financial, legal, or managerial obligation;
    3. Any subsequent foreclosure or debt collection against the corporate debtor under the SARFAESI Act of 2002;[13] and
    4. Any property owned by the corporate debtor under the SARFAESI Act of 2002.
    The moratorium will remain in place until the CIRP procedure has been completed. This term can last up to 180 days, with a 90-day extension allowed in exceptional circumstances.
     
  4. Collation and analysis of facts:
    The IRP is in charge of identifying and evaluating the charges made by the petitioner. The Code permits IRP to hold a meeting with the petitioner to acquire any clarity needed if IRP asks for an exposition of the claim made by the petitioner.[14] Within 30 days of the CIRP's start date, the IRP must appoint a Committee of Creditors (CoC). The Committee selects a Resolution professional after the founding of the CoC. (RP). Within seven days of the Committee's formation, the CoC must decide whether to appoint a temporary RP as a resolution professional or to appoint another RP to replace the interim resolution professional.[15]
     
  5. Verification and Analysis of Claims:
    At this point, IPRs will summon and verify the creditor's claims, as well as classify them. Following that, a CoC will be constituted, which will include all of the corporate debtor's financial creditors, after 30 days of being accepted into CIRP.
     
  6. Resolution Plan:
    CoC must make a public pronouncement following the IRP/collation RPs and verification of the petitioner's assertions. The notice of insolvency states that the corporate debtor is undergoing an insolvency action and that all interested candidates or bidders are asked to submit a resolution plan that could be chosen. Potential investors, creditors, and others could be among the bidders. Based on the number of suggestions, the CoC reviews the suggested resolution plans. The proposal that wins more than 75% of the CoC's support will be submitted to the NCLT without question.
     
  7. Decision:
    A resolution plan is to be adopted by the CoC and then presented to the NCLT. The resolution plan is implemented and becomes legally operative on the corporate debtor and all parties if the NCLT authorizes it. The Tribunal may order the corporate debtor's liquidation if the NCLT does not sanction the resolution plan or the CoC is unable to complete a resolution plan within the given period.

Developments:
We must examine several stages of the proceedings to determine the impact of COVID-19 on IBC 2016. In light of economic imbalance caused by Pandemic Covid-19 and the associated restrictions on economic affairs, the Indian government proposed postponing the right to commence insolvency resolution proceedings under the IBC, 2016, for a six months period. In response, the government passed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, which took effect on June 5, 2020. The Ordinance revised Section 66 of the IBC and added a new Section 10A[16] (Suspension of Initiation of Corporate Insolvency Resolution Process) (Fraudulent Trading or Wrongful Trading).

Conclusion and Suggestions:
As blanket legislation, the IBC is important for the country's insolvency regulations to be implemented. Since the IBC is a newly enacted law that is continually being developed, it is vital to study the changes as well as court judgments in order to fully appreciate the complexities. CIRP helps creditors to recover their money while simultaneously looking out for the company's best interests.

For initiation of the CIRP process, the Code specifies three persons who can initiate the process under the concerning Sections. Although IBC has some shortcomings and there are some challenges with the Code's obligations, but the problems are being resolved through the courts and tribunals. Also, comprehensive insolvency and bankruptcy legislation is being given to creditors and businesses.

The IBC allows the interim insolvency professional to take over the administration of the company without the NCLT taking into account whether the debtor is better prepared to do so. Even under the existing IBC structure, when the Insolvency Professional assumes control, there are initiation problems or disincentives for initiating the IBC resolution process.

Suggestions
  • In reference to avoiding value destruction in the context of corporate insolvency might have been better served if the debtor company had the option to retain control over its management, where appropriate. Because they have the better understanding of business operations and the best way-out to resolve the insolvency process.
     
  • Nonetheless, Due to practical constraints, CIRPs were unable to finish all processes within 270 days. This was one of the flaws that the 2019 amendment addressed. Despite this, the change said that the processes must be completed within 330 days, with a 90-day transitional period after which the company may be liquidated. This was also acting against the interests of multiple stakeholders due to the adjudicating Authority's delay. Thus, based on this, SC overruled the obligatory clause in the case of Essar Steel.[17] Therefore, currently, it is the responsibility of the Adjudicating and appellate Authority to ensure 330 days deadline can only be increased in exceptional cases.
References:
  1. M/s Innoventive Industries Ltd. vs ICICI Bank, AIR 2017 SC 4084.
  2. Insolvency and Bankruptcy Code, 2016, . 12(1).
  3. Insolvency and Bankruptcy Code, 2016, . 12(2).
  4. Regulation 40 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
  5. Insolvency and Bankruptcy Code, 2016, . 12(2).
  6. Insolvency and Bankruptcy Code, 2016, . 12.
  7. Insolvency and Bankruptcy Code, 2016, . 4.
  8. Insolvency and Bankruptcy Code, 2016, 7.
  9. Insolvency and Bankruptcy Code, 2016, 9.
  10. Insolvency and Bankruptcy Code, 2016, 10.
  11. Insolvency and Bankruptcy Code, 2016, 22.
  12. Insolvency and Bankruptcy Code, 2016, 14.
  13. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  14. Insolvency and Bankruptcy Code, 2016, 18(b).
  15. Insolvency and Bankruptcy Code, 2016, 18(c).
  16. Insolvency and Bankruptcy Code, 2016, . 10A.
  17. Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta and Others, (2020) 8 SCC 531

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