The corporate insolvency resolution process is a process provided under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) When a corporate debtor makes a default in payment due to his creditors, they can initiate a procedure to liquidate the company and pay off the dues. Section 4 states that this code will be applicable to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one crore rupees.
The Code provides for who can initiate the corporate insolvency resolution process-
- Financial Creditor- A financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.
- Operational Creditor- An 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.
- Corporate Debtor- A Company who owes a debt to any person.
The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) shall be the Adjudicating authority as per Section 60 of this Code.
Initiation of CIRP by different persons:
- As per Section 7(1), Financial creditors, either by themselves or jointly with other financial creditors on behalf of any other financial creditor may file an application for initiation of the Corporate Insolvency Resolution Process against the corporate debtor to the NCLT. Such application against the corporate debtor shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10% of the total number of such creditors in the same class whichever of these is less. It is also stated that the corporate insolvency resolution process shall commence from the date of admission of the application.
- As per Section 8, the initiation of CIRP by any operational creditor, after the occurrence of the default, deliver a demand notice, of unpaid operational debtor copy of the invoice demanding payment of the amount involved in the default and notice, to the corporate debtor as per Section 8(1).
- Section 9 talks about the initiation of CIRP by an operational creditor. After the expiry of the 10-day period from the date of delivery of the notice or invoice demanding payment, If the operational creditor does not receive payment from the corporate debtor or notice of the dispute, the operational creditor may file an application before the adjudicating authority for initiating a corporate insolvency resolution process.
- Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating the corporate insolvency resolution process with the Adjudicating Authority, as per Section 10(1). Such application should be passed by a special resolution passed by shareholders of the corporate debtor.
Section 10(4) states that the Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, admit the application, if it complies with all the requirements given under the Code, or reject the application if it is incomplete. The adjudicating authority is required to give notice to the applicant to rectify his defects in the application within 7 days of receipt of such notice. The corporate insolvency resolution process shall commence from the date of admission of the application.
Corporate Insolvency Resolution Process
Step 1– Declaration of moratorium and public announcement
Section 13 marks the first step of the CIRP. The Adjudicating Authority, after admission of the application, shall declare a moratorium for prohibiting the institution of suits or continuation of pending suits, transferring or encumbering any assets, and any action to foreclose or enforce any security interest. Section 14(4) states that the order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process.
Step 2– Public announcement of the corporate insolvency resolution process:
As per the provisions of Section 15, the public announcement of the corporate insolvency resolution process under the order referred to in Section 13 shall contain the name and address of the corporate debtor, the name of the authority under which the debtor is incorporated, and such other information as prescribed.
Step 3– Appointment of interim resolution professional:
Section 16(1) talks about the appointment of an interim resolution professional. The Adjudicating Authority shall appoint an interim resolution professional on the insolvency commencement date. A Resolution Professional can only be appointed if there are no disciplinary proceedings against him.
Step 4– Formation of the Committee of Creditors by the interim resolution professional:
As per the provisions of Section 21, the interim resolution professional shall constitute a committee of creditors. The committee of creditors shall comprise all financial creditors of the corporate debtor.
Step 5– Appointment of resolution professional:
The first meeting of the committee of creditors shall be held within 7 days of the Constitution and they shall, by votes not less than 66%, appoint a Resolution Professional. If they fail to do so within 10 days, the Adjudicating Authority shall direct the interim resolution professional to continue until the committee appoints one themselves.
Step 6– Preparation of information memorandum:
Section 29 talks about the making of the resolution plan as a part of the CIRP. The resolution professional shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan. The resolution professional shall provide the resolution applicant access to all relevant information in physical and electronic form.
Step 7– Submission of resolution plan-
A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum as per Section 30. The resolution professional shall examine each resolution plan and confirm if they comply with the provisions laid down by the Code. The committee of creditors may approve a resolution plan by a vote of not less than 66 percent, after considering its feasibility and viability.
Step 8– Approval of resolution plan:
If the adjudicating authority is satisfied that the resolution plan is approved by the committee of creditors, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the government, if any such dues are owed to them
Step 9– Liquidation
If the resolution plan is accepted and all the conditions of the CIRP process are fulfilled, the corporate debtor goes into liquidation to pay off all the creditors, liquidator, and shareholders.
The Insolvency and Bankruptcy Code, 2016 was enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a timebound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish and Insolvency and Bankruptcy Board of India and such other connected matters.