INSOLVENCY PROCESS

Insolvency is defined as the state of being insolvent during which a company is unable to pay its debt owed to the creditors. When a corporate debtor or a company owing debt is unable to pay the money owed, it is declared as insolvent. The Insolvency and Bankruptcy Code, 2016 lays down provisions for matters related to insolvency of corporate persons, partnership firms and individuals. 

Process for filing insolvency application

Who can file an application?

Sec 6 of the Insolvency and Bankruptcy Code (IBC), 2016 states that process for declaring insolvency of the corporate debtor known as the corporate insolvency resolution process (CIRP) can be initiated by a financial creditor, an operational creditor or the corporate debtor itself.

When can the application be filed?

An application for initiating the insolvency process can be initiated when there is a default by the corporate debtor. Default is termed as the non-payment of the whole or any part of the debt amount is due and is not repaid by the corporate debtor. It includes default of repayment of debt of two financial creditors including the one filing the application for the initiation of the insolvency process. 

Process for a financial creditor for filing the application

•    The financial creditor can make an application for initiating the insolvency process in a manner prescribed in IBC along with the prescribed application fee. 

•    The financial creditor shall furnish the following with the application:

1.    Default recorded with the information utility or any other evidence or record of default.

2.    The name of the resolution professional proposed to act as the interim resolution professional. 

3.    Any other information specified by the Insolvency and Bankruptcy Board of India.

•     Receipt of application- within 14 days of receipt of the application, the Adjudicating Authority ascertains the existence of a default by the corporate debtor on the basis of evidence. 

•     Acceptance of application- Once the Adjudicating Authority is satisfied that a default has occurred, the application is completed and there are pending proceedings against the proposed resolution professional, it may admit the application. The application can be rejected in cases where no default has occurred, the application is incomplete or there are any pending disciplinary proceedings against the resolution professional.

•     Initiation of insolvency process- The corporate insolvency resolution process commences from the date of admission of the application by the Adjudicating Authority. It is communicated to the corporate debtor and the financial creditor.

Process for an operational creditor for filing an application

•    Before filing an application for initiating the insolvency process against the corporate debtor, the operational creditor may deliver a demand notice to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.

•    Within 10 days from the receipt of demand notice, the operational debtor may bring to the notice of the operational creditor existence of any dispute or the repayment of unpaid operational debt.

•    If the operational creditor receives no notice from the corporate debtor the, after the expiry of 10 days, it may file an application to the Adjudicating Authority in the prescribed manner along with the application fee.

•    The operational creditor may furnish the following with the application:

1.    A copy of the demand notice or of the invoice delivered to the corporate debtor.

2.    An affidavit declaring that the no notice has been corporate debtor regarding an existing dispute or repayment of operational debt.

3.    A copy of the certificate of from the financial institution maintaining accounts of the operational creditor confirming that no payment of the debt has been made by the corporate debtor. 

4.    Any other required information.

5.    Name of the proposed resolution professional to act as an interim resolution professional.

•    Receipt of application- within 14 days of receipt of the application, the Adjudicating Authority ascertains the existence of a default by the corporate debtor on the basis of evidence. 

•    Acceptance of application- Once the Adjudicating Authority is satisfied that a default has occurred, the application is completed and there are pending proceedings against the proposed resolution professional, it may admit the application. The application can be rejected in cases where no default has occurred, the application is incomplete or there are any pending disciplinary proceedings against the resolution professional.

•    Initiation of insolvency process- The corporate insolvency resolution process commences from the date of admission of the application by the Adjudicating Authority. It is communicated to the corporate debtor and the financial creditor.

Commencement of Insolvency process

After the Adjudicating Authority admits the application for initiating the insolvency process against the corporate debtor, it issues an order regarding the following:

1.    Declaration of Moratorium period-

a)    On the date of commencement of the insolvency process, the Adjudicating Authority declares moratorium period for the corporate debtor which results in the prohibition of the institution of new suits or continuance of pending suits or proceedings against the corporate debtor in any court of law. 

b)    Transferring, encumbering, alienating or disposing of any assets, legal rights or beneficial interests of the corporate debtor are also prohibited during the moratorium period.

c)     There shall be no action to foreclose, recover or enforce any security interest created by the corporate debtor or any action under the SARFAESI Act, 2002.

d)    Owner or lessor of any property occupied by the corporate debtor cannot recover such property during the moratorium period.

e)    Termination, suspension or interruption of supply of essential goods or services is prohibited during the moratorium period. 

2.    Appointment of Interim Resolution Professional (IRP)

a)    Within 14 days of the initiation of the CIRP, an interim resolution professional is appointed by the Adjudicating Authority.

b)    The proposed resolution professional in the application filed by the financial creditor, operational creditor or the corporate debtor is appointed as the IRP provided no disciplinary proceedings against him are pending.

c)    The IRP shall maintain the affairs of the corporate debtor

3.    Public Announcement- 

After the appointment of the IRP, a public announcement of the initiation of CIRP and for submissions of claims are made. The public announcement contains the following.

a)    Name and address of the corporate debtor.

b)    Name of the authority with which the corporate debtor is incorporated or registered.

c)    The last date for submission of claims.

d)    Details of the interim resolution professional.

e)    Penalties for false or misleading claims.

f)    The date on which the corporate insolvency resolution process shall close.

The CIRP shall be completed within 180 days from the date of admission of the application to initiate the process

Formation of Committee of Creditors

After the submission of all claims against the corporate debtor, the IRP constitutes a Committee of Creditors which consists of all financial creditors. Their voting right is based on the financial debt owed to them. Any decision taken by the Committee of Creditors should be not voted less than 75%. The first meeting of the Committee is held within 7 days of its constitutions. The Committee also decides through 75% votes that whether the IRP should be appointed as the resolution professional or should be replaced.

Formation of Resolution Plan

A resolution plan is formed which shall provide for the costs of the insolvency resolution process, the repayment of debts owed to the operational creditors, management of affairs of corporate debtors after approval of resolution plan, implementation and supervision of the resolution plan. The resolution plan shall not contravene any of the provisions in the law for the time being in force and shall conform to other requirements specifies by the Board. If the resolution plan fails to be formed or approved then the company is liquidated or dissolved.

The resolution plan shall be approved by the Committee of Creditors and the Adjudicating authority. After the approval, the moratorium period ceases to have an effect.

Liquidation Process

The Adjudicating Authority shall pass an order for the liquidation of the corporate debtor in the following cases-

1.    Before the expiry of the insolvency resolution process period or after the expiry of the period if the resolution plan is not submitted by the resolution professional.

2.    When the resolution plan is rejected or is not according to the provisions laid down in IBC, 2016.

3.    When the committee of Creditors decided to liquidate the corporate debtor.

4.    When the corporate debtor contravenes the resolution plan.

During the liquidation process, the resolution professional shall as the liquidator. All the powers of the board of directors, managerial personnel, and partners of the corporate debtor are ceased and vested with the liquidator.

Effect of Liquidation

•    Once a liquidation order has been passed by the adjudicating authority, no suit or other legal proceedings are instituted by or against the corporate debtor.

•    The order for liquidation is deemed to serve as a notice of discharge to the officers, employees and workmen of the corporate debtor.

•     The liquidator forms an estate of the assets of the corporate debtor and holds it as a fiduciary for the benefit of all the creditors.

•    Liquidation estate assets include the following:

1.    Any asset owned by the corporate debtor which are evidenced in the balance sheet, information utility, records in the register or any security depository recordings of the corporate debtor. It shall also include shares held in any subsidiary of the corporate debtor.

2.    Assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets.

3.    Immovable or movable tangible assets.

4.    Intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights

5.    Assets subject to the determination of ownership by the court or authority.

6.    Any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter.

7.    Any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest.

8.    Any other property belonging to or vested in the corporate debtor at the insolvency commencement date.

9.    All proceeds of liquidation as and when they are realized.

•     The liquidator receives claims of the creditors within thirty date days from the date of commencement of the liquidation process.

•     After determining the value of claims, the Adjudicating Authority may direct the providing of security or charge on any property for the discharge of any financial or operational debt.

•     A secured creditor receives proceeds from the sale of the assets by the liquidator. The debt is then discharged.

•     Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator according to the provisions laid down in the code.

Voluntary Liquidation

Sec 59 of IBC, 2016 states that any corporate person who has not committed default and intends to liquidate itself voluntarily can initiate voluntary liquidation proceedings.

Requirements for voluntary liquidation

•    Voluntary liquidation requires a declaration from the majority of the directors of the company. The declaration shall be accompanied by an affidavit stating that the company has made no default and that it will be able to pay its debt after liquidation. It should also state that the company is not being liquidated to defraud any person.

•    The declaration shall be accompanied by the audited financial statements and record of the business operations of the company for the period of two years or for the period since its incorporation. A report of the valuation of the assets of the company is also required.

•    The company intending to liquidate voluntarily shall form a special resolution of the members of the company in a general meeting within four weeks of the declaration. The company shall also appoint an insolvency professional acting as the liquidator.

•    The company shall inform the Registrar of Companies about the formation of resolution.

•    The company seeking voluntary liquidation shall be liquidated within 7 days of such resolution.

Conclusion

The process of declaring a company as insolvent and its liquidation is laid down in the Insolvency and Bankruptcy Code, 2016. After the declaration of insolvency, the corporate debtor can pay off its debts with the help of a resolution plan or it may be liquidated. A company can also seek voluntary liquidation.
 

Author:

eStartIndia Team