Corporate Insolvency Resolution Process and Liquidation
The Insolvency and Bankruptcy Code (IBC), based upon the recommendations of the Bankruptcy Law Reform Committee, provides for a single Code to resolve insolvency for all companies, limited liability partnerships, partnership firms and individuals. Initially, India had enacted numerous statutes to punish the defaulters like the Indian Contract Act, the Recovery of debts due to Banks and Financial Institution Act 1993, the Securitizations and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), etc. However, a need was felt for new laws which would take care of the existing defaulters in a time-bound manner.
A good insolvency and bankruptcy code balances three interests:
- It effectively rehabilitates the company and help promote its interest;
- It protect the interests of the creditors;
- It invites future creditors to participate in the business.
To quote the Finance Minister Mr. Arun Jaitley “This code will provide a specialized resolution mechanism to deal with bankruptcy situations in banks, insurance firms and financial sector entities. This code will provide a comprehensive resolution mechanism for our economy.”
This article focuses on the procedure prescribed under the IBC for Corporate Insolvency Resolution Process & Liquidation. When a corporate enters into an insolvency proceeding, there are two possible outcomes – the continuation or sale of the existing business as a going concern (known as insolvency resolution) or the winding up and liquidation of the company. The IBC is a single consolidated law that provides for both insolvency resolution and, in the case where a business cannot be saved, their winding up and liquidation.
Insolvency Resolution Process (IRP): A step by step guide:
- Who can initiate the process? – In case of default, any financial creditor, operational creditor or the corporate debtor itself may file an application for insolvency resolution under the IBC.
- What constitutes default? – Default means failure or non-payment of a debt by the corporate. To initiate the process, this default must be of an amount of not less than Rs. 1, 00,000 (One Lakh).
- How to initiate the process? –
Filing of Application by Financial Creditors: A financial creditor either by itself or jointly with other financial creditors may file an application (Form 1) for initiating IRP with the National Company Law Tribunal. The application must be accompanied by evidence proving default and the name of a person who will act as the Interim Resolution Professional.
Filing of Application by Operational Creditors: An operational creditor has to first deliver a Demand Notice (Form 3) to the corporate debtor. If the debtor fails to either pay the unpaid dues or prove the existence of a dispute in relation to the payment of said debt within 10 days of the demand notice, the operational creditor may file an application (Form 5) for IRP with the National Company Law Tribunal. The application must include the Demand Notice & Invoices against which payments are pending. The Operational Creditor will also require a certificate from the Financial Institution maintaining its accounts confirming that there is no payment of unpaid operational debt by the corporate debtor.
Filing of Application by Corporate Debtor: The corporate debtor can itself initiate IRP by filing an application (Form 6) with the National Company Law Tribunal (NCLT). The application will include the books of account of the company and the name of a person who will act as the Interim Resolution Professional.
NCLT shall have 14 days to either admit or reject the application made to it.
- Declaration of Moratorium – After the application is admitted by NCLT, a 180-day moratorium comes into effect. During this period, all pending suits against the debtor stay and no new actions can be initiated. Furthermore, the debtor is prevented from transferring, encumbering or disposing of its assets. The idea behind this moratorium is to provide a calm period for the debtor and creditors to discuss their future course of action.
- Public Announcement – After the admission of the application, NCLT will also make a Public Announcement of the initiation of corporate insolvency resolution process and call for the submission of claims by the creditors.
- Insolvency Resolution Professional – It is the responsibility of the Resolution Professional to administer the resolution process. He is in charge of the management of the affairs of the corporate debtor and runs the company as a going concern with all the employees and other stakeholders reporting to him. Powers of the Board of Directors all vest in him. Plus, he shall also prepare the information Memorandum of the corporate debtor.
- Formation of the Committee of Creditors – The committee of creditors (COC) shall be constituted by the Interim Resolution Professional, who will either confirm him as the Resolution Professional or replace him. COC will consist of financial creditors only and their first meeting shall take place within a period of 7 days of its constitution. Any decision made by the COC will have to have 75% majority of the total voting share.
- Resolution Plan – A Resolution Plan can be proposed by any person and shall be submitted to the resolution professional. For this purpose, the person submitting the plan shall be called “Resolution Applicant”. The plan must not be against any provisions of the law for the time being in force & must necessarily provide for the following:
- Payment of insolvency resolution process costs
- Repayment of the debts of operational creditors
- Management of the affairs of the Corporate debtor
- Implementation and supervision of the resolution plan
The Resolution Professional shall present all the resolution plans before the COC for their approval/confirmation with a 75% vote. The approved plan will then be sent to NCLT.
- Timeframe for completion of IRP – The corporate resolution process shall be completed within 180 days from the date on which the application is admitted. However, on request by the COC, this period can be extended, but not for more than 90 days and no other extension can be granted thereafter.
- How does the IRP end? – IBC is a time bound process. Therefore, it needs to end within 180 days, subject to a one time 90-day extension in exceptional cases. The process comes to an end on the approval and acceptance of the Resolution Plan by the COC and the NCLT. Thereafter, it becomes binding on the corporate debtor, creditors, employees and all other stakeholders. If the Resolution Plan is not accepted and approved then an Order of Liquidation is passed against the corporate debtor.
The liquidation proceedings may be commenced under the following circumstances:
- If no insolvency resolution plan is submitted to the NCLT/DRT within the prescribed period;
- If the insolvency resolution plan is rejected by the NCLT/DRT;
- Upon an application by the party affected in case of contravention of the insolvency resolution plan approved by the NCLT/DRT by the debtor; or
- If the committee of creditors resolves to liquidate the debtor.
On passing of an order for liquidation by NCLT, the resolution professional will automatically start performing the duties of the liquidator, if not replaced. The liquidator shall form the Liquidation estate, take control of the assets of the company, collect and consolidate the creditors’ claims and to the extent required, carry out the business of the company for the benefit of the liquidation.
Distribution of Assets upon Liquidation: Priority of Claims
The priority of distribution (in order of precedence) amongst different classes of creditors is as follows:
- Insolvency Resolution Process Cost
- Secured creditors and workmen dues for upto 24 months
- Other employee dues for upto 12 months
- Unsecured creditors
- Government dues & unpaid secured creditors
- Remaining dues (including those against operational creditors)
- Preference shareholders
- Equity shareholders