Introduction to IBC
The implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 in India has fundamentally shifted the approach to addressing non-performing assets (NPA) and aiding the financial sector with early detection, rehabilitation, and restructuring steps of stressed assets.
Various kinds of demand notice forms are issued under the IBC Code. Insolvency is defined as the state where one is unable to pay their debts. A demand notice to recover the debt is sent under the IBC Code by the creditor, employee, workman, or any other person to the corporate debtor.
Insolvency Resolution Process for Corporate Persons
As per sections 7 and 9 of the IBC, it is not mandatory to allow the corporate debtor the chance to be heard until the IBC application is accepted. Once the IBC application is accepted, the management team is transferred to the Insolvency Resolution Professional (IRP) proposed by the applicant.
This implies that even a small default could potentially lead to a situation where the business changes hands. Creditors recover debts from the bankrupt company, while some creditors use the IBC to pressure corporate debtors to recover their claims. This has influenced companies, as it also contributes to high demand for capital investment and increases pressure on profitability.
The IBC has made a significant change, allowing an operational creditor to take action under the IBC to recover their dues in a cost-effective manner.
Various forms are specified under the Insolvency Resolution Process for Corporate Persons, such as Form A for public announcements, Form B for proof of claim, Form C for submission of a claim by the financial creditor, and so on.
Regulations for Fast Track Insolvency Resolution Process for Corporate Persons
Chapter IV Part II of the Code provides for a fast track process for insolvency resolution, which is applicable in respect of the category of corporate debtors laid down in section 55(2) of the Code. The aim is to expedite the CIRP for startups and small businesses, reduce the time required for insolvency resolution to nearly half compared to the standard Code procedure. The Board notified regulations relating to Corporate Insolvency Resolution Process (CIRP) in November, 2016. The 2016 Code, enables initiation of a CIRP at the earliest and mandates its time bound completion.
This process must be completed within 90 days as compared to 180 days in other cases. The adjudicating authority may extend the duration by up to 45 days, but this can only be done once and only if the Committee of Creditors (COC) agrees.
Liquidation Process
The liquidation process is initiated under section 33 of the IBC 2016 under certain conditions. These include situations where no resolution plan is presented before the insolvency resolution period expires, if the resolution plan is not compliant with section 31, or if the corporate debtor refuses to comply with the approved resolution plan. When the liquidation process begins, a moratorium period commences, and a public announcement is made regarding the liquidation of the corporate debtor. A liquidator is appointed, and the fee for their services is determined and paid from the liquidation asset proceeds.
Understanding the Various Forms
The Insolvency and Bankruptcy Code (IBC), 2016, includes numerous forms to streamline the Corporate Insolvency Resolution Process (CIRP) and Liquidation Process. These forms aid in the structured organization and execution of the processes. Let’s delve into the key forms and their roles in the CIRP and Liquidation Process.
Forms in the Corporate Insolvency Resolution Process (CIRP)
| Forms | Description |
|---|---|
| Form A | Public Announcements Regulation 14 of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 |
| Form AA | Consent to act as Resolution Professional |
| Form AB | Consent to act as an authorised representative |
| Form B | Proof of claim |
| Form C | Submission of a claim by the financial creditor |
| Form CA | Submission of a claim by the financial creditor in a class |
| Form D | Proof of claim by workman or employee |
| Form E | Proof of claim by workman or employee by an authorised representative |
| Form F | Submission of a claim by creditors |
| Form FA | Application for withdrawal of CIRP |
| Form G | Invitation for expression of interest |
| Form H | Compliance certificate |
| Form 1 | Application by financial creditor to initiate CIRP |
| Form 2 | Written communication by proposed IRP |
| Form 3 | Form of Demand Notice demanding payment under IBC code, 2016 |
| Form 4 | Form of Notice with which Invoice demanding payments to be attached |
| Form 5 | Application of Operational Creditor to initiate CIRP |
| Form 6 | Application by Corporate Applicant to start CIRP |
These forms represent various stages of the CIRP, starting from the initiation of the process to the final compliance certificate.
Role of Key Players in IBC Process
One of the most important elements in the IBC process is understanding the role of key players involved in the process. These players include the Resolution Professional, the Committee of Creditors, and the Adjudicating Authority. The following discussion will focus on the role of the Resolution Professional.
The Resolution Professional (RP) plays a pivotal role in the IBC process, acting as the manager of the corporate debtor’s operations during the insolvency resolution period1. The RP is appointed by the Adjudicating Authority (National Company Law Tribunal in India) and is responsible for a multitude of tasks.
The responsibilities of the Resolution Professional include the following:
- Taking control and custody of the corporate debtor’s assets.
- Receiving and collating all the claims submitted by creditors.
- Constituting the Committee of Creditors (CoC).
- Preserving and maintaining the corporate debtor’s assets.
- Representing the corporate debtor in legal proceedings.
- Conducting meetings of the CoC and informing the CoC of the resolution plans.
While the RP has the authority to manage the corporate debtor’s operations, they must do so in the best interests of the creditors. The RP should attempt to revive the corporate debtor and maximise the value of the debtor’s assets.
It’s important to note that the Resolution Professional does not have the authority to make decisions on behalf of the corporate debtor. Instead, the RP presents all the resolution plans received from the prospective resolution applicants to the CoC, and the CoC decides which plan is the most beneficial.
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The Committee of Creditors (CoC)
The CoC is a committee constituted of the financial creditors of the corporate debtor. It is formed after the admission of the insolvency application by the Adjudicating Authority (AA) and the appointment of the Interim Resolution Professional (IRP). The CoC plays a significant role in the insolvency resolution process, including:
- Appointment of the Resolution Professional (RP): The CoC has the power to confirm the appointment of the IRP as the RP or to replace the IRP with another RP.
- Approval of the Resolution Plan: The CoC is responsible for considering and approving the resolution plans submitted by the resolution applicants. A resolution plan requires at least 66% of the voting shares of the CoC for approval.
- Initiation of Liquidation Process: If the CoC decides that the liquidation of the corporate debtor is the most viable option, it can initiate the liquidation process by passing a resolution with at least 66% of the voting shares.
- Miscellaneous Decisions: The CoC also makes other decisions regarding the insolvency resolution process, such as determining the insolvency resolution process costs and ratifying the actions taken by the RP.
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The Adjudicating Authority (AA)
The AA in the context of the IBC refers to the National Company Law Tribunal (NCLT) for corporate debtors. The role of the AA is to oversee the insolvency resolution process and ensure that it is carried out in accordance with the provisions of the IBC. The AA’s responsibilities include:
- Admission or Rejection of Insolvency Application: The AA is responsible for admitting or rejecting the insolvency application submitted by a financial creditor, operational creditor, or the corporate debtor itself.
- Moratorium: Upon the admission of the insolvency application, the AA declares a moratorium prohibiting the initiation or continuation of legal proceedings against the corporate debtor for the duration of the insolvency resolution process.
- Appointment of the Interim Resolution Professional (IRP): The AA appoints the IRP who manages the affairs of the corporate debtor during the interim period, i.e., the period between the admission of the insolvency application and the constitution of the CoC.
- Approval of the Resolution Plan: Once the CoC approves a resolution plan, it is submitted to the AA for its approval. If the AA is satisfied that the resolution plan meets the requirements of the IBC, it approves the plan.
- Ordering of Liquidation: If the CoC resolves to liquidate the corporate debtor, or if no resolution plan is approved by the AA within the statutory period, the AA orders the liquidation of the corporate debtor.
Resolution Process and Role of the Liquidator in IBC 2016
In the Corporate Insolvency Resolution Process (CIRP), if no resolution plan is presented or if the resolution plan is not consistent with the provisions of the IBC 2016, or if the corporate debtor refuses to obey the resolution plan authorized by the adjudicating authority, the winding-up process is activated under section 33 of the Insolvency and Bankruptcy Code 2016. The same happens if a request from the creditors’ committee for the liquidation of the corporate debtor is issued during the corporate insolvency resolution process.
Once the process of liquidation begins in compliance with these requirements, a moratorium period commences. A public announcement is made about the liquidation of the corporate debtor. A liquidator is appointed as per section 34, with the fee to be paid to the liquidator determined and forming part of the liquidation assets proceeds. Until the National Company Law Tribunal (NCLT) replaces the Professional Counsel, they serve as the liquidator.
The liquidator’s role is crucial in the liquidation process. They are responsible for collecting all information relating to the assets, finances, and operations of the corporate debtor for its entire period of operation. The liquidator takes custody and control of the corporate debtor’s assets, provides for their protection, and manages the operations of the corporate debtor as a going concern. They also perform functions relating to the sale of the corporate debtor’s assets, and the distribution of proceeds according to the order of priority specified by the IBC 2016.
Conclusion
The Insolvency and Bankruptcy Code (IBC) 2016 has brought about a paradigm shift in the insolvency and bankruptcy process in India. It has been designed to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner. The IBC’s goal is to promote entrepreneurship, maximize the value of assets, make available credit, and balance the interests of all the stakeholders involved.
The Corporate Insolvency Resolution Process (CIRP) under the IBC, which provides a structured process for resolving insolvency, is a significant improvement over the previous systems. The process ensures fair treatment to all stakeholders, and its strict timeline prevents unnecessary delays. The role of the Resolution Professional (RP) is pivotal in the process, and they play a significant part in ensuring its smooth execution.
The fast-track insolvency resolution process is another important feature of the IBC, which is aimed at insolvency resolution of small companies within a reduced timeframe of 90 days, extendable by 45 days. This process helps in faster resolution of cases related to small companies and start-ups.
The liquidation process under the IBC comes into play when the resolution process fails or if the Committee of Creditors (CoC) decides that liquidation is the best route. The role of the liquidator is crucial during this process, and they have the responsibility to liquidate the corporate debtor’s assets in a fair and transparent manner to repay the creditors.
The implementation of IBC has also seen the establishment of the Insolvency and Bankruptcy Board of India (IBBI) to regulate the insolvency process, and the National Company Law Tribunal (NCLT) acting as the Adjudicating Authority, which plays a vital role in the insolvency resolution and liquidation process.
With the introduction of the IBC, India has seen a fundamental shift in its approach towards insolvency and bankruptcy. It has provided a structured framework for dealing with distressed entities and their creditors and has brought about increased transparency and efficiency to the insolvency and bankruptcy process in the country.
The IBC is not without its challenges, and there are areas where further improvements can be made. However, the overall impact of the IBC on the insolvency and bankruptcy landscape in India has been positive. It has provided a robust mechanism for debt recovery and rehabilitation of distressed entities, contributing to the ease of doing business and fostering a more creditor-friendly environment in the country.
Written by, Parthvi Patel, United World School of Law
