Corporate Insolvency Resolution

Demand Notice under the Insolvency and Bankruptcy Code, 2016

Chandni Joshi , ,

Demand Notice under the Insolvency and Bankruptcy Code, 2016

 

Introduction

The Insolvency and Bankruptcy code, 2016 (IBC) is a consolidation of all existing insolvency laws in India. The code provides a time bound and expedited process for resolving insolvency and bankruptcy cases in India. It was introduced in 2015 by the former finance minister of India, Late Arun Jaitley. The Code proposes two separate tribunals to oversee the process of insolvency resolution namely:

  1. The National Company Law Tribunal
  2. The Debt Recovery Tribunal

Format Of Section 8 Demand Notice Under IBC 2016 - Registrationwala

Demand Notice under IBC

Section 8 of the Insolvency and Bankruptcy Code, 2016, as mentioned below, lists down the procedure to be followed by an operational creditor in case of default by the debtor.

  1. (1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) existence of a dispute, if any, 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.

Explanation: For the purposes of this section, a “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.

The IBC Code, 2016 mandates it for an operational creditor (complainant) to send a demand notice to the debtor in question before initiating corporate insolvency resolution proceedings.

An “operational creditor” is further defined under Section 5(20) as follows:

(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;

LANDMARK JUDGEMENTS

In the 2017 case of Macquarie Bank Limited vs Shilpi Cable Technologies Ltd, the Supreme Court settled the law pertaining to two important issues mentioned below.

Firstly, whether the provision under Section 9 (3)(c) of the Code which mandates that in order to trigger CIRP against the Corporate Debtor, “”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.” is it mandatory or not?

And secondly, whether a demand notice of an unpaid Operational Debt under Section 8 can be issued by a lawyer or an authorized representative on behalf of the Operational Creditor?

Clarifying about the provisions mentioned under Section 9(3)(c), the Supreme Court observed that, “it is equally clear that a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor is certainly not a condition precedent to triggering the insolvency process under the Code. The expression “confirming” makes it clear that this is only a piece of evidence, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt. This becomes clearer when we go to sub-clause (d) of Section 9(3) which requires such other information as may be specified has also to be furnished along with the application.”

This issue is specifically relevant to the foreign operational creditors who could not maintain accounts with the recognized financial institutions and thus were prevented from initiating the insolvency proceedings since such institutions were unable to produce the requisite certificate.[1]

In reference to the second issue, the Supreme Court noted that, “Section 8 of the Code speaks of an operational creditor delivering a demand notice. It is clear that had the legislature wished to restrict such demand notices being sent by the operational creditor himself, the expression used would perhaps have been “issued” and not “delivered”. Delivery, therefore, would postulate that such notice could be made by an authorized agent. In fact, in Forms 3 and 5 extracted hereinabove, it is clear that this is the understanding of the draftsman of the Adjudicatory Authority Rules, because the signature of the person “authorized to act” on behalf of the operational creditor must be appended to both the demand notice as well as the application under Section 9 of the Code. The position further becomes clear that both forms require such authorized agent to state his position with or in relation to the operational creditor. A position with the operational creditor would perhaps be a position in the company or firm of the operational creditor, but the expression “in relation to” is significant. It is clear, therefore, that both the expression “authorized to act” and “position in relation to the operational creditor” go to show that an authorized agent or a lawyer acting on behalf of his client is included within the aforesaid expression. A conjoint reading of Section 30 of the Advocates Act, 1961 and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would further yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order.”

Another landmark judgement was delivered by the Supreme Court in the case of Alloysmin Industries Vs. Raman Casting Pvt. Ltd. on the issue of delivery of a demand notice. It was held that, “If the demand notice under Section 8 (1) is served on Corporate Debtor either on its Registered Office or its Corporate Office, it should be treated to be valid service of notice under Section 8 and application under Section 9 on failure of payment, if filed after 10 days, is maintainable.”

The case of Sandesh Ltd vs. Realm Media Solutions Pvt. Ltd. divulges into the issue of ignorance by the corporate debtor of the demand notice. The appellant rightly issued a demand notice before initiating CIPR against the debtor. No reply being received, the appellant filed a case under the Code. After NCLT rejected the application on the ground that there is no proof that the notice was delivered to the ‘Corporate Debtor’ at the registered office, the appellant issued fresh notice to the current address of the debtor. The appellant further published the notice in two newspapers but failed to get an acknowledgement from the respondent. After this incident, the NCLAT held that, “the Respondent is deliberately avoiding the service of notice and the stand taken by the Appellant that the Respondent is deliberately avoiding to receive the Demand Notice u/s. 8(1) of the Insolvency & Bankruptcy Code (I&B Code) is correct. In the circumstances, we hold that the Demand Notice u/s. 8(1) of the Insolvency & Bankruptcy Code (I&B Code) deemed to have been served on the Respondent and thereby the application u/s. 9 was maintainable.”

AUTHOR: VISMITA RATHI

 

[1] https://www.mondaq.com/india/insolvencybankruptcy/670620/demand-notice-under-section-8-of-the-insolvency-and-bankruptcy-code-2016-can-be-filed-by-lawyer-on-behalf-of-the-operational-creditor-provision-under-section-93c-of-the-code-is-not-mandatory

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

Chandni Joshi , , , ,

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

 

Introduction

Under the Insolvency and Bankruptcy Code, 2016, the Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism made available to creditors (IBC). The concerned creditor or the corporate entity (the debtor) itself may commence CIRP if a corporate entity becomes insolvent (unable to repay debt).

Initiation of Insolvency

Chapter 2, section 6 of IBC, 2016 states that, “where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under the act”.

IBC: Getting your dues: Procedure for creditors to file under IBC - The Economic Times

Steps for CIRP (Process)

 

  • Initiation of Corporate Insolvency Resolution process by Financial Creditor

 

  • Section 5 (7) of IBC, 2016 defines “financial creditor” as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
  • Section 7 of IBC, 2016 mentions process for Initiation of Corporate Insolvency Resolution process by Financial Creditor –

Submission of Application

  1. When a default has occurred, a financial creditor may submit an application with the Adjudicating Authority to begin the corporate insolvency resolution procedure against a corporate debtor, either individually or collectively with other financial creditors.
  • Adjudicating Authority for the purposes of this act, means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013.
  1. The financial creditor shall make an application in such form and manner and accompanied with such fee as may be prescribed.
  2. The financial creditor shall, along with the application furnish –
  1. record of the default recorded with the information utility or such other record or evidence of default as may be specified,
  2. the name of the resolution professional proposed to act as an interim resolution professional,
  3. any other information as may be specified by the Board.
  1. The Adjudicating Authority shall, within 14 days of the receipt of the application, ascertain the existence of a default from the records of an information or on the basis of other evidence furnished by the financial creditor.
  2. The adjudicating authority must be satisfied that the application is proper and complete, that a default has occurred, and that no disciplinary proceeding against the proposed resolution professional is pending. If the adjudicating authority is not satisfied, the application may be rejected. If the application is not complete then, adjudicating authority shall give the applicant the timeline of 7 days to amend the application.
  3. The corporate insolvency resolution process shall commence from the date of admission of the application.
  4. The Adjudicating Authority shall communicate the order to the financial creditor and the corporate debtor within 7 days of admission or rejection of such application, as the case may be

Initiation of Corporate Insolvency resolution process by operational creditor

  • Section 5 (20) of IBC, 2016 defines “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.
  • Section 8 of IBC, 2016 mentions Insolvency resolution by operational creditor,

Delivery of Demand Notice

  1. On the occurrence of a default, an operational creditor may deliver to the corporate debtor a demand notice of unpaid operational debtor copy of an invoice seeking payment of the amount involved in the default in the form and manner authorised.
  2. It is the responsibility of the Corporate Debtor to respond to the Operational Creditor’s Demand Notice within 10 days of receiving it. To bring to the notice of the operational creditor—
  1. existence of a dispute, if any,
  2. the repayment of unpaid operational debt
  • A “demand notice” is a notification delivered by an operational creditor to the corporate debtor seeking repayment of the operational debt in respect of which the default has occurred for the purposes of this section.
  • Section 9 of IBC, 2016 provides Application for initiation of corporate insolvency resolution process by operational creditor –

Process after expiry of 10 days after delivering notice

  1. After the expiry of the period of 10 days 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.
  2. The application shall be filed in such form and manner and accompanied with such fee as may be prescribed.
  3. The operational creditor shall, along with the application furnish—
  1. a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
  2. an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
  3. 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; and
  4. such other information as may be specified.
  1. An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.
  2. The Adjudicating Authority shall, within 14 days of the receipt of the application, by an order admit the application and communicate such decision to the operational creditor and the corporate debtor if it is satisfied that the application made is complete, there is no repayment of the unpaid operational debt, the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor, no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility and there is no disciplinary proceeding pending against any resolution professional. If the Adjudicating Authority is not satisfied it can reject the application.
  3. If the application is not complete then, adjudicating authority shall give the applicant the timeline of 7 days to amend the application.
  4. The corporate insolvency resolution process shall commence from the date of admission of the application.
  5.     Initiation of corporate insolvency resolution process by corporate applicant.
  • As per Section 10, a corporate applicant may file an application before adjudicating Authority for initiating CIRP against corporate debtor. The corporate applicant has been defined by the Code under Section 5 (5) which is reproduced here:
  1. corporate debtor; or
  2. a member or partner of the corporate debtor who is authorised to make an application for the corporate insolvency resolution process under the constitutional document of the corporate debtor; or
  3. an individual who is in charge of managing the operations and resources of the corporate debtor; or
  4. a person who has the control and supervision over the financial affairs of the corporate debtor;
  • Section 10, IBC 2016 provides Initiation of corporate insolvency resolution process by corporate applicant
  1. When a corporate debtor defaults, a corporate applicant may submit an application with the Adjudicating Authority to initiate the corporate insolvency resolution procedure.
  2. The application shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.
  3. The corporate applicant shall, along with the application furnish the information relating to
  1. its books of account and such other documents relating to such period as may be specified; and
  2. the resolution professional proposed to be appointed as an interim resolution professional.
  1. The application will be accepted or rejected by the Adjudicating Authority. If the application is rejected, the Adjudicating Authority shall allow the applicant a 7-day period from the date of receipt of the rejection notice to rectify or amend the application.
  2. The corporate insolvency resolution process shall commence from the date of admission of the application.

Fastrack CIRP

Chapter 4 of IBC, 2016 deals with FAST TRACK CORPORATE INSOLVENCY RESOLUTION PROCESS. The major goal of including the idea of fast track CIRP in the insolvency law was to enhance our country’s ease of doing business rating. The goal of fast track CIRP procedures is to reduce the unnecessary delay created by a small-scale company’s insolvency.

 

  • Fast track corporation insolvency resolution process.

 

As per section 55 of IBC, 2016 defines states that an application for initiation of Corporate Insolvency Process can be made only against these below-mentioned corporate debtors

  1. a corporate debtor with assets and income below a level as may be notified by the Central Government,
  2. corporate debtor with such class of creditors or such amount of debt as may be notified by the Central Government,
  3. such other categories of corporate persons as may be notified by the Central Government.

 

  • Time period for completion of fast-track corporate insolvency resolution process

 

As per Section 56,

  1. The fast-track corporate insolvency resolution process shall be completed within a period of 90 days from the insolvency commencement date.
  2. The resolution professional shall file an application to the Adjudicating Authority to extend the period of the fast-track corporate insolvency resolution process beyond 90 days if instructed to do so by a resolution passed at a meeting of the committee of creditors and supported by a vote of 75 percent of the voting share.
  3. On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that fast track corporate insolvency resolution process cannot be completed within a period of 90 days, it may, by order, extend the duration of such process beyond the said period of 90 days by such further period, as it thinks fit, but not exceeding 45 days: Provided that any extension of the fast track corporate insolvency resolution process under this section shall not be granted more than once.

Manner of initiating fast track corporate insolvency resolution process.

As per Section 57,

  1.  An application for fast-track corporate insolvency resolution process may be filed by a creditor or corporate debtor as the case may be, along with
  2. the proof of the existence of default as evidenced by records available with an information utility or such other means as may be specified by the Board
  3. such other information as may be specified by the Board to establish that the corporate debtor is eligible for fast-track corporate insolvency resolution process. 

REMOVAL OF COMPANY LIQUIDATOR UNDER IBC

Chandni Joshi , , , , ,

REMOVAL OF LIQUIDATOR

Under section 275 of the Companies Act, 2013 for the purposes of winding up of a company by the Tribunal, the Tribunal at the time of passing winding up order shall appoint an Official Liquidator or a liquidator from a panel maintained under sub-section (2) as the Company Liquidator. The sub-section (2) of section 275 was amended by the Insolvency Code, 2016, providing that the provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016. 

  1. Removal of the Liquidator:

The inherent powers of  NCLT – Rule 11 of the NCLT Rules, 2016 read with section 60 (5) C

  1. Rule 11 of the NCLT Rules is carefully worded
  2. Section 60 (5) C of Insolvency & Bankruptcy code 2016

 

An Overview of Liquidator under Companies Act, 2013

Section 60 (5) C

 Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—

 

(a)…

(b)…

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

 

“11. Inherent Powers. – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”

It is important to note that these rules are not specific to a particular act or do not derive their powers solely to be made applicable to a particular act. These are general rules that govern the Tribunal, while dealing with cases brought before it – by any and all acts that have appointed the Tribunal to adjudicate on certain disputes. Therefore, it would be improper to say that the Tribunal cannot use its inherent powers. Considering how the Bankruptcy Law Reforms Committee (BLRC) wished to use the existing infrastructure in place, it is clear that the Tribunal was to be utilised to meet the ends of justice in adjudicating Insolvency matters of corporate persons.

Two important terms in the Preamble of the Insolvency and Bankruptcy Code, 2016 are time bound manner for maximisation of value of assets and balance the interests of all the stakeholders Removal and replacement of a Liquidator is an act that NCLT must undertake for the purpose of value maximisation of assets and to balance the interests of all the stakeholders.

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 cannot be drawn into picture here since, in Rule 2 of the said Rules, it is clearly mentioned that these Rules would be applicable to matters relating to Corporate Insolvency Resolution Process. The same rules define Corporate Insolvency Resolution Process to mean the resolution process for corporate persons under Chapter II of Part II of the Code. However, liquidation squarely falls in Chapter III of Part II of the Code. Therefore, arguments limiting use of NCLT’s inherent powers cannot be taken.

Section 276. Removal and replacement of liquidator: [Effective from 15-12-2016]

  1.  The Tribunal may, on a reasonable cause being shown and for reasons to be recorded in writing, remove the provisional liquidator or the Company Liquidator , as the case may be, as liquidator of the company  on any of the following grounds, namely:—

 

  • Misconduct;
  • fraud or misfeasance;
  • professional incompetence or failure to exercise due care and diligence in performance of the powers and functions;
  • inability to act as provisional liquidator or as the case may be, Company Liquidator;
  • conflict of interest or lack of independence during the term of his appointment that would justify removal.

 

 

  • In the event of death, resignation or removal of the provisional liquidator or as the case may be, Company Liquidator, the Tribunal may transfer the work assigned to him or it to another Company Liquidator for reasons to be recorded in writing.
  • Where the Tribunal is of the opinion that any liquidator is responsible for causing any loss or damage to the company due to fraud or misfeasance or failure to exercise due care and diligence in the performance of his or its powers and functions, the Tribunal may recover or cause to be recovered such loss or damage from the liquidator and pass such other orders as it may think fit.
  • The Tribunal shall, before passing any order under this section, provide a reasonable opportunity of being heard to the provisional liquidator or, as the case may be, Company Liquidator.

 

According to the Black’s Dictionary term Misfeasance includes ,strictly is not doing a lawful act in a proper manner, omitting to do it as it should be done; while malfeasance is the doing an act wholly wrongful;  and nonfeasance is an omission to perform a duty or a total neglect of duty. But “misfeasance” is often carelessly used in the sense of “malfeasance.”


  1. Section 16 of the General Clauses Act, 1897

“Power to appoint to include power to suspend or dismiss. Where, by any [Central Act] or Regulation, a power to make any appointment is conferred, then, unless a different intention appears, the authority having [for the time being] power to make the appointment shall also have power to suspend or dismiss any person appointed [whether by itself or any other authority] in exercise of that power.”

This is an important provision in understanding how NCLT has the inherent power to remove a Liquidator who has been appointed.

According to Woodroffe’s Book on Receivers, it is said:

“The power to terminate flows naturally and as a necessary sequence from the power to create. The power of the Courts to remove or discharge a Receiver whom it has appointed may be exercised at any stage of the litigation. It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.”

It was also noted by the Federal Court in Kutoor Vengayil Rayarappan Nayanar v. Kutoor Vengayil Valia Madhavi Amma

“It seems because of this statutory rule based on the principles mentioned above that in Order XL Rule 1 of the Code of Civil Procedure no express mention was made of the power of the court in respect of the removal or suspension of a receiver. The General Clauses Act has been enacted so as to avoid superfluity of language in statutes wherever it is possible to do so. The legislature instead of saying in Order XL Rule 1, that the court will have power to appoint, suspend or remove a receiver, simply enacted that wherever convenient the court may appoint a receiver and it was implied within that language that it may also remove or suspend him. If Order XL Rule 1 of the Code of Civil Procedure is read along with the provisions above mentioned, then it follows by necessary implication that the order of removal falls within the ambit of that rule…”

To further drive home the point that such an exercise of power to remove a receiver, is exercised by the inherent powers of a court, it was noted that:

In M.K. Subramania Iyer v. Muthulakshmi Ammal, held that.

“It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, .that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.” I take it, therefore, that the present petition is put in for the exercise of the inherent powers of the Court, though it does not come under any particular section or rule in the Code.

The same reasoning was also used in  Chacko v. Jaya Varma

The inherent powers of the court under the Code of Civil Procedure (CPC) are found in various sections The relevant section similar to the current issue is Section 151 CPC which reads as follows, “Nothing in this Code shall be deemed to limit or otherwise affect the inherent powers of the Court to make such orders as may be necessary for the ends of the justice or to prevent abuse of the process of the court.” Rule 11 of the NCLT Rules and Section 151 CPC are similarly worded. Therefore, even in the absence of a specific provision, NCLT can exercise its inherent powers along with Section 16 of the General Clauses Act to remove a Liquidator.

INITIATION OF LIQUIDATION:

Liquidation may be initiated under Section 33 of the Code when Adjudicating Authority (“AA”) either does not receive the Resolution Plan under Section 30(6) of the Code or the maximum period prescibed for corporate insolvency resolution process expires or in case where AA rejects the resolution plan under Section 31 of the Code. Further, the Committee of Creditors (“CoC”) may also, with at least 66 % votes, decide to liquidate the Corporate Debtor (“CD”) under Section 33(2), any time before the resolution plan is approved and the Resolution Professional intimates AA of such decision. Also, if the CD contravenes any terms of an approved resolution plan, any person whose interest is prejudicially affected by such contravention may apply for liquidation of CD.

AA while passing the order of Liquidation of CD, shall direct issuance of public announcement under Section 33(1) of the Code that the CD is in liquidation and require that such order is also sent to registering authority of CD, such as Registrar of Companies in case of companies.

MORATORIUM:

As in the Corporate Insolvency Resolution Process, moratorium kicks in on passing of the order of liquidation also. No suit or legal proceedings shall be instituted by or against the CD. However, the liquidator may file such proceedings on behalf of CD, with prior approval of AA.

DIRECTORS AND EMPLOYEES:

All powers of the Board of Directors, Key Managerial Personnel and the Partners of the CD, as the case may be, shall cease to have effect and shall vest with the Liquidator.

Furthermore, an order for liquidation shall be deemed to be notice of discharge to all employees of the CD. However, they may be retained where business of CD is proposed to be continued during the liquidation process.

All persons viz. Officers, Directors, Partners, Auditors, and Resolution Professional as well as those holding properties of CD have a duty to assist and cooperate with the Liquidator in managing the affairs of CD.

The CD is also required to add the phrase ‘In Liquidation’ after its name in all correspondence.

LIQUIDATOR AND FEES:

While passing the order of liquidation, AA is required to name an Insolvency Professional (IP) as Liquidator. In case any IP is already appointed as Resolution Professional for Corporate Insolvency Resolution Process, he may be continued or another IP can be appointed, subject to his consent for appointment and independence etc. There are provisions for his replacement in certain circumstances as mentioned under Section 34(4) of the Code.

Fee payable shall be decided by CoC under Regulation 39D of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, where they do not approve the resolution plan. Financial creditors are also required to advance sums required for liquidation cost over liquid assets available, which would be refunded with interest out of proceeds of liquidation. In all other cases, fees would be on percentage basis on realizations and distribution to stakeholders, as prescribed under Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations).

POWERS AND DUTIES OF A LIQUIDATOR:

A liquidator is required to oversee the entire process of liquidation, right from the liquidation order to the dissolution of the CD. He has to take custody of all the assets, evaluate them properly and dispose them in a transparent manner keeping in mind the objectives of the Code. In the interim, he has to preserve and protect them. He has to invite claims and verify them for consolidation. Thereafter, he may admit or reject the claims. He has to defend any suit, prosecution or other legal proceedings, civil or criminal, in the name and on behalf of the CD.

A creditor may appeal to the AA, against the decision of the liquidator, accepting or rejecting the claims within fourteen days of the receipt of such decision.

Liquidator has the power to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities. Furthermore, in case any clarification is required, AA’s direction can be obtained.

ROLE OF COC IN THE PROCESS OF LIQUIDATION:

In Punjab National Bank vs. Kiran Shah, the liquidator of ORG Information Ltd.1 , National Company Law Appellate Tribunal (NCLAT) held that after Liquidation order is passed, CoC has no role to play and they are merely claimant. They cannot even seek replacement of liquidator in absence of any such provision in law.

A Creditors Consultation Committee is required to be formed, but the liquidator is not bound by their advice.

The liquidator has the power to consult any of the stakeholders entitled to a distribution of proceeds. Further, record of such consultation would be available to all stakeholders for the sake of transparency. The liquidator also has the power to access any information systems for the purpose of admission and proof of claims and identification of the assets relating to CD from any source, such as information utility, credit information systems regulated under any law for the time being in force, any agency of the Central, State or Local Government including any registration authorities, data bank maintained by the Insolvency and Bankruptcy Board of India.

REPORTS:

Liquidator must prepare and submit the following as per Regulation 5 of the Liquidation Regulations:

  1. A preliminary report within 75 days of liquidation commencement date;
  2. An asset memorandum;
  3. Progress reports on quarterly basis;
  4. Sale report;
  5. Minutes of consultation with stakeholders; and
  6. The final report prior to dissolution to the AA.

Liquidator should also get accounts completed and brought up to date, wherever they are found incomplete. He is also required to maintain cash book and ledgers and various registers for assets, security and investment. Further, the liquidator is required to preserve physical and electronic copy of reports and books for 8 years after dissolution.

DISSOLUTION OF CORPORATE DEBTOR:

Where the assets of the CD have been completely liquidated, the liquidator shall make an application to the AA for the dissolution of such CD under Section 54 of the Code. Early dissolution can be applied for under Regulation 14 of the Liquidation Regulations any time after preliminary report is prepared, where it appears to liquidator that there are insufficient realizable assets to cover the liquidation cost and no further investigation into affairs of CD is required. Once order of dissolution is passed, same is required to be filed with authority where CD is registered.

 

Corporate Insolvency Resolution Process

Chandni Joshi , , , , , , , ,

Corporate Insolvency Resolution Process

INTRODUCTION

In India, the Corporate Insolvency Resolution Process (“CIRP”) takes place under the Insolvency and Bankruptcy Code, 2016 (“IBC”). It involves a Resolution Professional inviting resolution plans for the corporate debtor undergoing insolvency. These plans are submitted by various Resolution Applicants and the best resolution plan is approved by the Committee of Creditors and sanctioned by the National Company Law Tribunal. Thus, from an acquisition perspective, the potential acquirer of the stressed asset is required to provide the best bid (in the form of the resolution plan) for the stressed asset which would be able to garner the approval of the Committee of Creditors.

Corporate Insolvency and Resolution Process - iPleaders

 

CIRCUMSTANCES WHEN CORPORATE INSOLVENCY RESOLUTION PROCESS TRIGGERED.

Corporate social insolvency process has been defined under the Chapter II of IBC licensed professional administrators the resolution process, manages the assets of the debtor, and provides information for creditors to assist them in decision making. The CIRP Triggered under Section 6 of IBC that is Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate a corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under preceding sections of chapter II of IBC like under section 7 Financial creditor can initiate the the resolution process by giving an application of corporate insolvency resolution process. (CIRP), same can be done by Operational creditor under section 8 & Section 9 and by Corporate applicant under section 10.

Section 7: Initiation of corporate insolvency resolution process by financial creditor.

(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified.
(b) the name of the resolution professional proposed to act as an interim resolution professional and
(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).

Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate—
(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor,

within seven days of admission or rejection of such application, as the case may be.

Section 8: Insolvency resolution by operational creditor.

(1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) existence of a dispute, if any, or 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 payment 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.

Explanation.—For the purposes of this section, a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process under Section 9.

Section 10-Initiation of corporate insolvency resolution process by corporate applicant.

(1) Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.

(2) The application under sub-section (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.
(3) The corporate applicant shall, along with the application, furnish-

(a) the information relating to its books of account and such other documents for such period as may be specified.

(b) the information relating to the resolution professional proposed to be appointed as an interim resolution professional and

(c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.

(4) The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order—

(a) admit the application, if it is complete and no disciplinary proceeding is pending against the proposed resolution professional; or

(b) reject the application, if it is incomplete or any disciplinary proceeding is pending against the proposed resolution professional :

Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice from the Adjudicating Authority.

(5) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (4) of this section.

“10A. Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date as may be notified in this behalf.”

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation- For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.

Further Committee of creditor is to be made under Section 21 of IBC The committee of creditors shall comprise all financial creditors of the corporate debtor party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors Whereas the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them, The Board may specify the manner of determining the voting share in respect of financial debts issued as securities under sub-section (6) of Section 21. When a corporate debtor is accepted into the CIRP (Corporate Insolvency Resolution Process), it checks the board of directors. Further, the management is placed under an independent “interim resolution professional”. From this and till the end of the CIRP (Corporate Insolvency Resolution Process), the management ceases to have any control over the activities of the company.

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What is Corporate Insolvency Resolution process? – NCLT

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Here’s a stage-wise process for Corporate Insolvency Resolution process – NCLT:-

  1. In case a corporate debtor makes a default in repayment of dues of the creditors, the financial creditor/s, an operational creditor or a corporate debtor through Corporate applicant or any authorised member, a person who has the controlling capacity over the financial affairs of the corporate debtor has the power to start the insolvency resolution process. In order to initiate the resolution process, an application has to be made to National Company Law Tribunal (NCLT) under (Section 10, IBC, 2016 in case of Corporate Debtor, Section 7 and 9 of IBC, 2016 in case of Financial Creditors and Operational Creditors).
  2. A ten days demand notice under (Section 8(2) of IBC, 2016 in case of Operational Creditors) has to be given to the corporate debtor by the Operational Creditors before he approaches the NCLT under Section 9 of IBC, 2016). However, an operational creditor can directly approach the NCLT if the corporate debtor does not repay the outstanding dues or fails to show any existing difference. (Kindly refer to Section 8: Insolvency resolution by operational creditor. & Section 9: Application for initiation of corporate insolvency resolution process by operational creditor.)
  3. The new code states that the insolvency process of a Corporate Debtor must be concluded within 180 days from the date of initiation in the NCLT (Section 12, IBC of 2016). The claims of the Creditors shall be frozen for a period of six months on admission of application by NCLT. During this time, the NCLT shall listen to the options to revive and decide the future course of action. It is further clarified that unless a resolution plan is made or liquidation process is initiated, no legal claim shall be sought against the corporate debtor in any other forum or Court (Section 14 of IBC, 2016).
  4. When the application for insolvency is accepted under Section 7/9/10 of IBC, 2016 the NCLT within fourteen days appoints an Insolvency Resolution Professional (IRP) on receiving a confirmation from Board of Insolvency and Bankruptcy. The appointed IP then takes up the responsibility of the debtor’s properties and functioning. He also collects all the information that is relevant with regard to the financial condition of the debtor from information utilities. IP is appointed for a term of thirty days only within which he does all the necessary scrutinization (Section 18, IBC, 2016).
  5. The next step is to make a public announcement about the commencement of corporate insolvency process so that claims from any other creditors can also come forward, if any. A creditor’s committee is constituted by the IRP post receiving any claims by public announcement (Section 13 of IBC, 2016). In the event any financial creditor is a related party of the defaulting debtor, such a creditor will not have the right to represent, participate or vote in the committee of creditors so constituted by the IP. In order to be a part of the Creditor’s Committee, the average dues of the operational creditors must be at least ten percent of the debt. The Committee of Creditors shall first seven days of its incorporation decide through seventy five percent votes whether the interim IRP should be used as a Resolution Professional or should be replaced with someone else.
  6. After the Committee finalizes the Resolution Professional he is appointed by the NCLT (Section 16 of IBC, 2016). The Resolution Professional so appointed can be replaced anytime by the Creditor’s Committee with a majority of seventy five percent votes. In the interim, i.e. till the appointed of any new Resolution Professional, the Creditor’s Committee can take decisions with regard to insolvency resolution by seventy five percent majority voting.
  7. In the event majority (75%) of the financial creditors are of the view that the case is very complex and more time extension is required, the NCLT may grant a one-time extension of up to a maximum of 90 days over and above the pre decided tenure of 180 days. It shall be the sole responsibility of the Resolution Professional to manage and conduct the corporate insolvency resolution procedure during such a term (Section 18 of IBC, 2016).
  8. To enable the resolution applicant for preparing a resolution plan, the Resolution Professional shall compile a statistics note. A resolution applicant can be defined as an individual who has the duty and responsibility to submit a resolution plan to the Resolution Professional. The Creditor’s Committee further receives the plan from the Resolution Professional for its approval.
  9. On the resolution being approved, the next step by the Creditor’s Committee is to come up with options on restructuring which can be either coming up with a modified repayment plan or to simply liquidate the properties of the company in order to recover dues. If the Creditor’s Committee fails to take any binding decision with regard to the repayment by the debtor, the debtor’s assets are liquidated in order to pay back the creditors. If there is a plan prepared for resolution, the same shall be sent to NCLT for approval and implementation.

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Read More here : Introduction – The Insolvency and Bankruptcy Code – NCLT

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