Insolvency and Bankruptcy Code 2016 : Short overview and procedure

 

This article is written by Akshita Sodhi,

Fourth year law student

lloyd law college.

 

The code of Insolvency and bankruptcy was passed in the year 2016. This code was enacted with the purpose to provide fast relief to creditors in case their debtors become insolvent. This code provides a time bound process to provide the relief to the debtors.

 

It must be noted that recently in the wake of COVID- 19, a new section(section 10 A)  in IBC 2016 a new section is inserted for the suspension of initiation of insolvency proceedings against the corporate debtor. But this provision shall be applicable for any default arising after 25th march 2020 up to the period of six months.

 

What is Insolvency?

Insolvency is a state of financial and economic distress where the debtor becomes insolvent, i.e., he becomes unable to pay his debts to the creditor. Under IBC Code, 2016, Corporate Insolvency and bankruptcy proceedings can be initiated by the creditor. against a debtor on the minimum amount of default of Rs 1 lakh.

 

What is bankruptcy?

Bankruptcy is the order given by the court for the debtor where the court initiates legal proceedings for the debtor to repay his debts.

 

What is liquidation?

The liquidation is the process of selling goods and assets of the bankrupt person or entity to let the debtor to repay his debt.

 

Applicability of the act.

This act is applicable to all the companies incorporated under Companies Act, 2013, or the company incorporated under any act applicable during the due course of time, limited liability partnerships incorporated under  limited liability partnership act, 2013, partnerships firms and individuals or any such other body incorporated under any act or law for the time being in force.

 

Who can file an application under the act?

Corporate insolvency resolution proceedings can be initiated by a financial creditor, operational creditor or by the corporate debtor itself.[1]

 

Corporate person

Co-operate person includes company registered under the companies act 2013, Limited Liability Partnership (llp), a partnership firm, or any other person incorporated with limited liability under any law at the time being in force except financial service providers.[2]

 

Adjudicating authority under the Code

NCLT(National Company Law Tribunal), DRT(Debt recovery tribunal). NCLT is the adjudicating authority for corporate debtors and personal guarantees. DRT is the adjudicating authority for individuals and partnership firms.

 

Appellate Court

If someone is satisfied by the order of NCLT, an application can also be filled in NCLAT within 30 days of receipt of such order. If the debtor is not satisfied by the order of  NCLAT, he can file an application in the supreme court within 45 days of such order. 

 

Creditor

Creditor is the one who credits money/goods to the debtor. In other words, Creditor is the one to whom any person/ entity/ company owes money.

 

Debtor

Debtor is the person who owes the debt. In short, the debtor is the one to whom the creditor gives money.

 

Debt

Debt is the obligation to pay or repay the money to the one who lends you the same.

 

Financial creditor

In order to understand financial creditors, it is crucial to first know what is ‘financial debt’.

Financial creditor is the one to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.[3]. The relation between the financial creditor and debtor is purely of cash.  Example- loan given by bank, the person who give loan on interest etc.

 

Operational creditor

In order to understand the concept of operational debtor, it is important to know the meaning of operational debt, ‘operational debt’ means a claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of the dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.[4].

In short, an operational creditor is the one who has any amount due towards the debtor and the amount is due because of  supply of goods, services including government dues, taxes etc.  Examples of operational creditors are employers of the company, service providers of a company etc.

In a recent judgement, the Supreme Court has cleared that, operational debt is only confined to goods, services, government and employees dues and home buyers don’t fall in the ambit of this definition.

 

IRP

insolvency resolution professional appointed by the court for resolving the co-operate insolvency resolution process initiated against the debtor.

 

Time Period for completing insolvency proceedings

180 days( 90 days-extended period can also be given on the discretion of the court. )

 

PROCESS INVOLVED UNDER INSOLVENCY AND BANKRUPTCY CODE 2016

 

              Sending of demand notice to the defaulter giving him a 10 day notice period to clear his dues.

     

                                                           

Initiation of corporate insolvency resolution process, i.e. filing of application against the debtor if he doesn’t clear dues within 10 days of receipt of the demand notice or brings it notice to the creditor about the existence of any previous suit or arbitration proceedings filed or pending  before the sending of notice.

                                                       

 Within 14 days of the receipt of the application, the court can either accept it if it is complete or reject it if it is incomplete.

                                                           

Appointment of Insolvency resolution professional by the court as proposed by the creditor.

                                     

After the appointment of interim resolution professionals by the court, all the rights of the directors, partners etc shall be vested in the hand of appointed interim resolution professionals.

Moreover all the affairs of the debtor shall be managed by the interim resolution professionals. Appointed managers or auditors or any other financial institutions shall report to the appointed  interim resolution professionals and provide all the details if so needed by him or he asks them for the same.

                                                        

All the acts/deeds of the debtor shall be executed in the name of  the appointed interim resolution professional. Moreover he should also have control over the financial information including balance sheet, ledger or any other document specified.

                                                     

All the information relating to assets, property of the bankrupt debtor is being collected by the interim resolution professional. He shall also receive and pursuant claims made by the other creditors as well pending against the bankrupt debtor.

                                                     

          Formation of committee of creditors by the interim resolution professional.

                                                     

Within 7 days of the formation of the committee of creditors, the first meeting shall be held and the members of the committee of creditors will decide whether they want the appointed interim resolution professional to be resolutional professional for further proceedings or whether they want to appoint new resolutional professional for further proceedings by 75% majority. The decision of the committee shall be informed to the adjudicating authority and the interim resolution professional as well.

                                                       

Formation of resolution plan by the resolutional applicant and submission of the same to the resolutional professional.

   

                                                         

 

The resolutional professional will check the resolution plan and the same is also being submitted to the committee of creditors and should also be approved by the committee of creditors by more than 75% voting.

                                                              

 

The resolution plan is then submitted to the court.

                                                     

 

If the court approves the resolution plan, the order by the court shall be binding on corporate debtors and all its employees as well.

                                                         

The corporate debtor can also make an appeal to the appellate court if he is not satisfied by the decision of the court.

                                                             

                                                           

The court can even order for the liquidation process for the co-operate as it deems fit or if the same is being requested by the resolutional professional( in discussion and voting with committee of creditors) before the submission of resolution plan.

                                                       

 

The liquidation process is initiated by the court in the same easy, the resolution process is initiated.

 

Endnotes:-

[1]-Section 6 of IBC code 2016.

[2]- Section 3(7) of IBC code 2016

[3]-Section 5(7) of IBC code 2016. 

[4]-Section 5(21) of IBC code 2016.

Insolvency and Bankruptcy Code

Section 3(8): corporate debtor means a corporate person who owes a debt to any person.

Section 5-

(1): Adjudicating Authority, for the purposes of this Part, means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013.

(Section 408 of the Companies Act, 2013: “The Central Government shall, by notification, constitute, with effect from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and such number of Judicial and Technical members, as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force.”)

(20): operational creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

(21): operational debt means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

Section 8 tells that an operational creditor on the occurrence of a default may deliver a demand notice of unpaid operational debt, copy of an invoice demanding payment of the amount involved in the default. The corporate debtor within a period of ten days of the receipt of the demand notice or copy of the invoice, bring to the notice of the operational creditor—

a)      Existence of a dispute and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute

b)      the repayment of unpaid operational debt— (i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor or (ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

Demand notice means a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.

Section 9 tells that after the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment, the operational creditor does not receive payment from the corporate debtor or notice, he may file an application in the prescribed manner and fees before the Adjudicating Authority for initiating a corporate insolvency resolution process. He may propose a resolution professional to act as an interim resolution professional. He shall furnish—

a)      a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor

b)      an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt

c)       a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor

d)      Such other information as may be specified.

Section 9 (5) tells that the Adjudicating Authority shall, within fourteen days of the application, by an order shall admit the application and communicate such decision to the operational creditor and the corporate debtor if the following are fulfilled—

a.       the application is complete

b.      there is no repayment of the unpaid operational debt

c.       the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor

d.      no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility

e.      there is no disciplinary proceeding pending against the resolution professional

And the same will be rejected if the above mentioned are not fulfilled but before rejecting the application, a notice to the applicant will be given to rectify the defect within seven days of the date of receipt of such notice from the adjudicating Authority. Thus, the corporate insolvency resolution process shall commence from the date of admission of the application.

Rules 5 of the code tells that Demand notice by operational creditor shall be delivered with the following documents-

a.       a demand notice in Form 3, or

b.      A copy of an invoice attached with a notice in Form 4.

The demand notice or the copy of the invoice demanding payment may be delivered to the corporate debtor-

a.       at the registered office by hand, registered post or speed post with acknowledgement due, or

b.      By electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor.

Macquarie Bank Limited Appellant Vs. Uttam Galva Metallics Limited

“16. From bare perusal of Form-3 and Form-4, read with sub-Rule (1) of Rule 5 and Section 8 of the ‘I & B Code, it is clear that the ‘Operational Creditor’ can apply himself or through a person authorized to act on behalf of the ‘Operational Creditor’, who hold same position with or in relation to the ‘Operational Creditor’. Thereby such person(s) authorized by ‘Operational Creditor’, holding position with or in relation to the ‘Operational. Creditor’ can only apply.”

“17. In view of such provision we hold that an advocate / lawyer or Chartered Account or a Company Secretary or any other person in absence of any authority by the ‘Operational Creditor’, and if such person do not hold any position with or in relation to the ‘Operational Creditor’, cannot issue notice under Section 8 of ‘I & B Code’, which otherwise can be treated as a lawyer’s notice/ pleader’s notice, as distinct from notice under Section 8 of ‘I & B Code.“

Uttam Galva Steels Limited V. DF Deutsche Forfait AG & Ant.

“30. From bare perusal of Form-3 and Form-4, read with sub-rule (1) of Rule 5 and Section 8 of the I&B Code, it is clear that an Operational Creditor can apply himself or through a person authorised to act on behalf of Operational Creditor. The person who is authorised to act on behalf of Operational Creditor is also required to state “his position with or in relation to the Operational Creditor”, meaning thereby the person authorised by Operational Creditor must hold position with or in relation to the Operational Creditor and only such person can apply.”

AMENDMENT:

On November 23, 2017, President Ram Nath Kovind had given assent to the Insolvency and Bankruptcy Code Amendment Ordinance, 2017, making major amendments to the Insolvency and Bankruptcy Code 2016.

1.       SECTION 5(25): Resolution applicant means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25.

2.       Section 25(2)(h) of the Code is amended to enable the Resolution Professional, with the approval of the Committee of Creditors to specify eligibility conditions while inviting Resolution Plans from prospective Resolution Applicants keeping in view the scale and complexity of operations of business of the Corporate Debtor to avoid frivolous applicants.

3.       29A: A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—

a)                  an undischarged insolvent

b)                  a wilful defaulter

c)                   account has been identified as a non-performing asset for more than a year

d)                  has been convicted of an offence punishable with two or more years of imprisonment

e)                  has been disqualified as a director under the Companies Act, 2013

f)                   has been prohibited from trading in securities by SEBI

g)                  has indulged in undervalued, preferential, or fraudulent transactions

h)                  he has given guarantee on a liability of the defaulting company undergoing resolution or liquidation

i)                    is connected to any person mentioned above (including promoters, management, or any person related to them), or any person related to them)

j)                    Has indulged in these activities abroad.

4.       Section 30(4): The COC may approve a resolution plan by a vote of not less than 75% of voting share of the financial creditors, after considering its feasibility and viability, and other requirements by the Board. The same shall not be approved where the resolution applicant is ineligible under section 29A and may require the resolution professional to invite a fresh resolution plan where no other is available. Where there is ineligibility under clause (c) of section 29A, the applicant shall be allowed, not exceeding thirty days, to make payment of the overdue, but shall not be construed as extension of period for proviso to sub-section (3) of section 12.

5.       Section 35 (1) (f): Provided that the liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant.

6.       Section 235A: If any person contravenes any of the provisions of this Code or the rules or regulations made thereunder for which no penalty or punishment is provided in this Code, such person shall be punishable with fine which shall not be less than one lakh rupees but which may extend to two crore rupees.

Procedure in case of Corporate Debtor under Insolvency and Bankruptcy Code, 2016

Ankur Saboo, Legal Associate at Starlog Enterprises Limited]

I & B code is the codification of laws and its one of its kind which inter- alia shifts the control of the management of corporate persons as well as other persons defined under the Code from debtor driven to creditors driven.

Steps Involved as per latest amendments and judicially settled issues are:

Application for initiation of Corporate Insolvency Resolution Process (CIRP) can be filed by following persons:

Financial Creditor, Operational Creditor and Corporate Debtor.

Default:

The minimum amount of the default shall be one lakh rupees or more for matters relating to insolvency and liquidation.

Types of Creditors:

There are three types of creditors:  Operational Creditor (including workmen and employees), Financial Creditors and creditors who do not come under the previous two categories. The third type of category of the creditors implied to be taken as the creditors as per the notification issued by the Insolvency and Bankruptcy Board of India via its Press release dated 16th August, 2017 as The Insolvency and Bankruptcy Board of India has amended these regulations to provide for a form (Form F) for submission of claims by creditors other than financial and operational creditors. It is still not clarified whether this third type of creditor can initiate CIRP proceedings before the NCLT.

Filing of Application by financial Creditors:

  • A financial creditor either by itself or jointly with other financial creditors may file an application for initiating CIRP.
  • The application before Adjudicating Authority has to be filed under Section 7 of the Insolvency & Bankruptcy Code, 2016.
  • The Adjudicating Authority has to, within fourteen days of the receipt of the application either admit or reject the application.

Filling of Application by Operational Creditors:

  • The application before Adjudicating Authority has to be filed under Section 9 of the Insolvency & Bankruptcy Code, 2016.
  • A mandatory demand notice to be served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred. Some of the key provisions brought in by the code as well as settled proposition by the Adjudicating Authorities regarding structure and mode of serving of demand notice are as follows:-
  • It is mandatory for the operational creditor to deliver the demand notice in Form- 3 or invoice attached with the notice in Form-4.
  • There is a provision of sending the notice by electronic mail to be serviced to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor in addition to the traditional method of servicing of the notice. This added-on method shall expedite the process.
  • Aforesaid notice shall be sent by the person who holds any position with or relation to the ‘operational Creditor’. Thus persons independent of the operational creditor such as advocate/ lawyer or Chartered Accountant or a Company Secretary or any other person in absence of any authority and not holding any position or relation with operational creditor cannot issue the demand notice under Section 8 other code.
  • All the propositions hereinabove stated have also been well settled by Hon’ble NCLAT, Delhi in the matter Macquarie Bank Limited v/s Uttam Galva Metallics Limited.

 

  • Filing of a copy of certificate from the Financial Institution maintaining accounts of the ‘Operational Creditor’ confirming that there is no payment of unpaid operational debt by the ‘Corporate Debtor’ prescribed under clause (c) of sub-section (3) of Section 9 of the Code is to be mandatory followed. (NCLAT in the case of Smart Timing Steel Ltd. v/s National Steel and Agro Industries Ltd.)
  • In the case of Vertiv Energy Private Limited v/s Tecro Systems Limited, in view of the section 11 of the code, it was held that the operational creditor has to become member of the committee of creditor for its claim if he may desire. The separate application under 9 of the code shall not be entertained.

 

Filling of Application by Corporate Debtor:

In addition to the creditors as mentioned above, corporate debtor by its own can also file application for initiation of corporate resolution process under section 10 of the Code.

Proceedings before NCLT:

  • The ‘adjudicating authority’ is duty bound to give a notice to the corporate debtor before admission of a petition under Section 7 or Section 9, a part of rules of natural justice, as stipulated under Section 424 of the Companies Act, 2013. (A well settled proposition in the case of M/s Innoventive Industries Ltd. v/s ICICI Bank subsequently was reiterated in the case of Starlog Enterprises Limited v/s ICICI Bank by Hon’ble NCLAT).
  • The Adjudicating Authority has to, within fourteen days of the receipt of the application either admit or reject the application.
  • In case of financial application by financial creditor, occurrence of default has to be ascertained and satisfaction shall be recorded by the Adjudicating Authority.
  • In case of operational Creditor, the adjudicating shall see that there is no existence of dispute before filling of the application. If there is, the corporate debtor shall bring it to the notice of operation creditor within 10 days of receipt of the demand notice.
  • After admitting the petition, NCLT inter- alia shall declare moratorium till the resolution process is completed, confirm or refer to the IBBI Board for the name of the IRP, direct public notice along with the submission of claims.

Appointment of Interim Resolution Professional:

In case of financial creditor/ corporate debtor: It is mandatory on the part of the financial creditor that along with the application furnishes the name of the resolution professional proposed to act as an interim professional.

In case of operational creditor: Operational Creditor may or may not furnish the name of the resolution professional proposed to act as an interim professional.

However, Adjudicating Authority shall appoint an interim resolution professional within fourteen days from the insolvency commencement date i.e. name proposed by the financial creditor/ corporate debtor and operational creditor if no disciplinary proceedings are pending against the IRPs. In case of no name of IRPs proposed by the operational creditors, the adjudicating authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional. Consequently, the Board shall, within 10 days of the receipt of such reference from the Adjudicating authority recommend the name of the insolvency professional which shall be appointed as the adjudicating authority.

The term of IRP shall not exceed thirty (30) days from date of his appointment. The same or replaced IRP (by committee of creditors) shall be appointed as resolution professional (RP).

Public Announcement:

Public announcement of the CIRP shall be immediately made as will be directed by the Adjudicating authority after admission of the Application.

Submission of Claims:

The financial creditors shall submit their proof of claims by electronic means only. All other creditors may submit the proof of claims in person, by post or by electronic means.

Formation of committee of creditors:

The committee of creditors (COC) shall be constituted by the IRPs and the first meeting of the COC shall take place within a period of seven days of its constitution.

Appointment of Resolution Professional:

The committee of creditors may, in the first meeting either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.

Preparation of Information Memorandum:

Resolution Professional shall prepare information Memorandum as per the code.

Preparation of Resolution Plan:

Resolution plan can be proposed by any person for insolvency resolution of the corporate debtor and shall submit it to the resolution professional. For this purpose, he shall be termed as “Resolution Applicant”.

The Resolution Professional shall present all the resolution plans before the committee of creditors and shall be subject to their approval fulfilling the requisite majority.

Time- line for completing corporate resolution process:

The corporate resolution process shall be completed in 180 days from the date the petition is admitted. However, if the resolution to extend the process of resolution process beyond 180 days but not more than 90 days passed by committee of creditors having a vote of seventy-five per cent of the voting shares, such extension shall be valid and no other such extension can be granted thereafter.

Liquidation:

If the resolution plan is put before the Adjudicating authority after the dead line or not in the manner prescribed under the Code may pass an order requiring the corporate debtor to be liquidated. It is interesting to note that during the existence of resolution process also, the committee of creditors may take direction from NCLT to liquidate the Corporate Debtor. The resolution professional will automatically perform the duties of the liquidator if not replaced. Proceeds from the sale of the liquidation assets shall be distributed in order of priority mentioned under the code.

Dissolving the Corporate Debtor:

Upon the assets of corporate debtor completely liquidated and the liquidator making an application, the NCLT shall pass an order dissolving the corporate debtor.