Insolvency and Bankruptcy
IBC is a comprehensive legislation framework which has consolidated several laws governing Insolvency and Bankruptcy and it primarily provides for a time bound process to resolve insolvency.
Benefits of IBC
This code came in the year 2016 and since then is benefitting entrepreneurs and Private individuals, The IBC strives to protect small investors' interests while also making the business process easier, the whole process of the resolution of insolvency is quite long in itself, but IBC makes this entire process effective and timely.
IBC promotes competitiveness and economy, it prioritizes the interests of the stakeholders, debtors as well as the creditors.
Insolvency vs Bankruptcy
The words Insolvency and Bankruptcy are not very different from each other, The term insolvency can be used for both individuals and organizations. For individuals, it is known as bankruptcy and for a corporate entity it is called corporate insolvency. Both refer to a situation when an individual or company is not able to pay the debt in the present or near future and the value of assets held by them are less than liability.
Adjudicating Authorities under IBC
National company law tribunal (NCLT) and Debt Recovery Tribunal are the two bodies which are constituted for adjudicating matters pertaining to insolvency resolution, the matters in these two tribunals can be further appealed in NCLAT (National Company Law Appellate Tribunal) and DRAT (Debt Recovery Appellate Tribunal) and finally can be taken against the Supreme Court.
Who are creditors and what is the difference between operational creditor and financial creditor?
Creditors are individuals, people, or other entities (i.e., Organization, government body, etc.) that are owed money because they have provided goods or services or loaned money to another entity.
Under IBC there are financial creditors and operational creditors, a financial creditor is a person to whom the corporate debtors owe some money under the form of any credit facility like guarantee, debentures etc. they are basically the individuals who give money to the promoters of the organization, whereas on the other hand operational debtor is a person who has given or provided certain sought of services or goods to the debtor, of which the payment is still due, in simpler words operational creditors are the creditors who do not give any cash to the promoters of the corporate entity, rather they provide goods and services in the corporation.
Committee of Creditors
Committee of Creditors is a committee which only consists of financial creditors, the basic role of COC is to approve or disapprove the resolution plan formulated by the appointed resolution professional, the minimum vote required to pass a plan is 75 percent in the meeting of COC. Operational creditors can always take part in the committee meetings, they can get involved throughout the entire decision process but do not hold any kind of voting rights.
What if a person is both a financial creditor as well as an operational creditor?
When a person is both financial creditor as well as the operational creditor, then that individual will be considered as a financial creditor to the extent of the financial debt due by the corporate debtor and will be a member of the committee of creditors with voting rights proportional to the number of financial debts owed to such creditor. And would be similarly considered to be an operational creditor to the extent of the operational debt owed by the corporate debtor to such creditor.
Corporate Debtor
Corporate debtors are the promoters who take loans or money from financial creditors or take goods or services from operational creditors as a debt as defined under section 5 of the Insolvency and Bankruptcy code.
Insolvency Professional
Insolvency professionals are the professionals who help and assist in the insolvency resolution plan, these professionals are registered under Insolvency and Bankruptcy Board of India and are enrolled in insolvency professional agency as its member.
There are basically two kinds of insolvency professionals, one being the interim and the other being the final, insolvency professionals are appointed by a committee of creditors by a majority vote of 75% in the first meeting of the COC. And if the COC is unsatisfied with the appointment of the insolvency professional then they can make an application before the adjudicating authority to appoint a new insolvency professional.
Insolvency and Bankruptcy Board of India
Insolvency and bankruptcy board of India is a statutory body which was established in the year 2016 in accordance with the provisions of Insolvency and Bankruptcy code.
The main role of IBBI is act as a governing body for all the resolution process, also for all the insolvency agencies and lastly for appointment of the insolvency professionals. IBBI is the main regulatory body in India which sets down rules and regulations for all the matters dealing with insolvency, it also brings out new amendments in the act and regulations.
Corporate Insolvency Resolution Process
There are primarily 5 steps in the CIRP namely-
- Application given to the Adjudicating Authority.
- Appointment and finalization of interim resolution professionals.
- Formation of COC (committee of creditors).
- Preparation of memorandum of information by the insolvency professional.
- Resolution presented before the COC, further there are two outcomes of CIRP.
Initiation of CIRP
A CIRP can be initiated whenever there is default on the part of the of the corporate debtor, the default shall be a minimum of 1 lakh rupees, it can be initiated by making an application before the adjudicating authority, and such application can be made via 3 persons under section 6 of the Insolvency and Bankruptcy code namely -
1.Financial creditor (FC).
The financial creditors can file an application before the adjudicating authority. After furnishing the information, within 14 days the adjudicating authority has to ascertain the default and if default has occurred then the application is admitted or else the application is rejected.
Adjudicating authority has to communicate the admission of the application to the financial creditors within 7 days of the admission and after that corporate insolvency resolution process takes place.
2.An operational creditor (OC).
The operational creditor sends demand notice to the corporate debtor on occurrence of default. Debtor intimates the creditor within 10 days of notice of repayment of the unpaid operational or notice of existence of disputes. If the payment of dispute is not paid within 10 days, then file the operational creditors files an application before the adjudicating authority accompanied with an invoice demanding the payment of the money along with the proof that the required payment was not being made, and thus within 14 days the adjudicating authority either admits or rejects the application.
3.A corporate applicant of a corporate debtor.
Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process before the Adjudicating Authority accompanied with the books of account and the proposed name for the insolvency professional under section 10 of the Insolvency and Bankruptcy code.
Understanding CIRP
Once the application is made before the Adjudicating Authority, so now it falls in the discretion of NCLT to either accept the application or reject the same, if the application is admitted the whole CIRP process then should be concluded in a given time period of 180 days, the adjudicating authority can only grant one time extension of 90 days.
Once the application is accepted the Moratorium period starts, this period is stated as the calm period wherein no judicial proceedings take place, The interim insolvency professionals are thus appointed who further constitute COC (Committee of creditors), the COC has its first meeting within 7 days of its formation and then in the first meeting either the interim resolution professional is made the resolution professional or he is replaced by some other resolution professional under section 22 of the insolvency and bankruptcy code.
The resolution professional then starts to prepare an information memorandum, which covers and contains all the relevant information that is necessary for making a resolution plan. The resolution professional shall provide all these relevant information to resolution applicant either in electric or physical form under section 29 of the act, a resolution applicant is someone who presents the resolution plan to the resolution professionals, the plan so presented is accompanied with an affidavit that he or she is not disqualified under section 29(a) of the insolvency Act.
There are two consequences following the initiation of CIRP
1.Revival of the corporate debtor, the corporate debtor is revived from his very state following the resolution plan so presented.
2. Liquidation: If no resolution is prepared within the specified timeline or the COC does not approve of the plan by a vote of not less than 66 percent then in that case the corporate debtor goes into liquidation and the insolvency professional so appointed becomes the liquidator for the liquidation process.
Winding Up
The companies law earlier dealt with two kinds of winding up process, one voluntary other compulsory which is winding up by a tribunal, but now after the IBC it only deals with the compulsory winding up, voluntary winding up is explicitly dealt in section 59 of the IBC.
Earlier the grounds for winding up by the tribunal also included inability to pay debt under section 271 as one of the 6 grounds however after passing of the IBC, it is now omitted under companies act, and is specifically covered under the Insolvency and Bankruptcy code as Corporate Insolvency Resolution Process.
Voluntary Liquidation
Section 59 of the Insolvency and Bankruptcy Code states that a corporate person who has not done any default and is willing to liquidate himself can proceed and do so in accordance with the provisions of this code.
A person can initiate the process of voluntary liquidation by making an application before the adjudicating authority, the authority may pass an order to dissolve the given person, stating that the corporate debtor is dissolved, and thus the given personnel is dissolved accordingly.
If the corporate person for this instance is registered as a company, then there are certain requirements which are to be fulfilled namely
- A declaration is to be made by the directors of the company stating that they have made full inquiry of the accounts of the company and have also stated that the liquidation is not initiated to defraud any individual.
- A declaration stating the valuation of the assets of the company.
- Resolution shall be passed in the general meeting of the company regarding voluntary liquidation
- And a resolution shall also be passed by the creditors of the company.
The registrar shall be informed about the resolution of the liquidation of the company.
Thus, a company can be liquidated after the fulfillment of all these requirements.
The CIRP process is one of the key measures done to simplify doing business in India. The IBC has adopted some of the best asset resolution mechanisms used globally. It permits the release of finance that has been tied up in stressed assets for improved resource allocation, and it offers a respectable departure strategy for sincere business failures. This open, market-driven resolution mechanism boosts financial system confidence and draws a lot of new investors to invest in Indian companies. Change in the debtor-creditor relationship has been one of the IBC's major accomplishments. In order to prevent being forced into insolvency, debtors are settling stress early. Find your insolvency lawyer in Delhi with RR legal, Contact us now.
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1. What is the objective of Insolvency and Bankruptcy Code, 2016?
The IBC Code was formed after consolidating several other codes dealing with insolvency. Its main objective is to provide an effective resolution process in a time bound manner. Every procedure dealt under the IBC is confined to a specific time limit. The IBC seeks to prioritize the interest of the shareholders and the creditors of the company by maximizing the value of assets. The IBC has also formulated the Insolvency and Bankruptcy Board of India whose main objective is to regulate and make rules and procedures for governing matters of insolvency in our country.
2. On whom does this Code apply?
The IBC is applicable on procedures pertaining to insolvency, liquidation, bankruptcy and for voluntary winding up of the personnels mentioned specifically mention in Section 2 of the IBC, namely-
1. Any company incorporated under companies act 2013, or under any other act.
2. Any company governed under any Special Act.
3. Any Limited Liability Partnership incorporated under the Limited Liability Partnership Act.
4. Partnership firms.
5. Guarantors to corporate debtors.
6. Or any individual person.
3. Who is a corporate person?
A corporate person means:
1. Any company Registered under the Companies Act.
2. A Limited Liability Partnership registered under the Limited Liability Partnership Act.
3. Any other person having limited liability under any other law.
4. Who are Corporate Debtors and Corporate Creditors?
A corporate debtor is a person who owes a debt to another person, and a corporate creditor means a person to whom the debt is owed. It includes a financial debtor, an operational debtor, a decree holder, a secured creditor and an unsecured creditor as per Section 3 of the Insolvency and Bankruptcy Code.
5. What is corporate insolvency?
Corporate insolvency is primarily a state wherein a corporate person is unable to pay off its debts to the creditors either operational or financial. It is basically a state of financial distress wherein the liabilities are more than the value of the corporate personnel or the value of the assets of the company.
6. What is the Corporate Insolvency Resolution Process?
Corporate Insolvency Resolution Process (CIRP) is a process of resolving the insolvency of a corporate debtor. A resolution plan is passed which acts as a recovery mechanism for the creditors of the company. Resolution professionals are thus appointed, who make and present a resolution plan before the stakeholders, who in return, either reject or accept the said plan.
7. Who can initiate CIRP?
CIRP can be initiated by either of the 3 persons mentioned in the Code in case of any default namely-
1.The financial creditor.
2.The operational creditor.
3.Corporate applicant of the corporate debtor himself.
8. What is the minimum default amount for initiating CIRP?
The minimum default shall be of 1 crore rupees, for initiating the CIRP. Earlier the minimum amount was Rs. 1 lakh but now it has been increased.
9. Which court or tribunal has the authority to hear the cases pertaining to CIRP?
The National Company Law Tribunal having territorial jurisdiction over the specific place wherein the office of the corporate personnel is registered acts as the Adjudicating Authority and deals with cases of insolvency and liquidation.
10. In how many days does the Adjudicating Authority either accept or reject the application?
The Adjudicating Authority either accepts or rejects the application within 14 days from the day it was made, wherein it ascertains whether or not there is actually a default that has taken place on the part of the corporate debtor. No need to find more Insolvency and bankruptcy lawyer in Delhi, we are one stop solution for you. Contact us now
