BASICS OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 - CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

PART-1

By Revanth Ashok (Associate, Prodigy Legal LLP)

This is for educational purposes only and is not legal advice. Please discuss any legal questions with a lawyer.

The Insolvency and Bankruptcy Code, 2016 (“the Act”) was enacted to amend and consolidate the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals. The act purports to make the proceedings under the Act efficacious by specifying the timelines by which the proceedings must conclude. IBC, therefore, would help both the creditors and debtors in maximizing and realizing the value of assets through a time-bound and streamlined process.

This is a two-part article. The first part will deal with sections 6 through 12 of the Act and the second part will deal with the rest of the provisions involving CIRP. This article outlines who may apply for a CIRP, when an application can be made, the time limit to complete the CIRP, and how an application can be withdrawn.

The Corporate Insolvency Resolution Process (“CIRP”)

Sections 6 through 32 of the IBC specifically deal with the CIRP. The application to initiate a CIRP is made before the National Company Law Tribunal (“the NCLT”). Such applications can be made by the corporate debtor or the financial creditor or the operational creditor. The application cannot be initiated if there is no default committed by the corporate debtor.

1. Initiation by the Financial creditor

If a financial creditor wishes to initiate the CIRP, it may do so by itself or with other financial creditors. A financial creditor may apply for CIRP even if the default is committed for a financial debt not owed to it. Further, the financial creditor is allowed to appoint an interim resolution professional.

The CIRP begins once the Adjudicating Authority concludes that a default has occurred, the application is complete, and no disciplinary proceedings pending against the proposed resolution professional.

1. Operational creditor

The operational creditor has to send a demand notice to the corporate debtor. This notice will demand the repayment of the amount in default which is owed to the operational debtor. Then, the corporate debtor has 10 days to reply to the notice. If the corporate debtor fails to repay the debt from the date of the notice, then the operational creditor has can apply for initiating CIRP.

The CIRP begins once the Adjudicating Authority concludes that the demand notice was duly sent, a default on the operational debt has occurred, the application is complete, and no disciplinary proceedings pending against the proposed resolution professional.

1. Corporate debtor

The corporate debtor (also called the corporate applicant) may apply for CIRP by providing, along with the application, the books of account and other documents, information relating to the interim resolution professional, and 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.

Within 14 days, the Adjudicating Authority will either admit or reject the application.

1. Time Limit to complete the CIRP process

Section 12 of the Act states that the CIRP shall be completed within 180 days from the date of admitting the application. This 180-day period can be extended to a maximum of 270 days if the resolution professional makes an application justifying the need to extend the CIRP. The resolution professional can make such application only if it is instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of sixty-six per cent of the voting shares.

The Act states that in any case the CIPR shall be completed within 330 days from the date of commencement of proceedings.

1. Withdrawal of application

The Adjudicating Authority may allow the withdrawal of admitted applications filed by the corporate debtor or the financial creditor or the operational creditor if such withdrawal application is made by the approval of 90% voting share of the committee of creditors.

BASICS OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 - CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

PART-2

By Revanth Ashok (Associate, Prodigy Legal LLP)

This is for educational purposes only and is not legal advice. Please discuss any legal questions with a lawyer.

This is the second part of the Basics of IBC, 2016 - Corporate Insolvency Resolution Process (CIRP) article. The first part of the article dealt with sections 6 through 12 and this part will be dealing with other major provisions in the CIRP process.

1. Moratorium

Section 13 and 14 of the Act deals with moratorium. Section 13 talks about the declaration of moratorium which is done after the admission of application under section 7, 9, or 10. As per section 13(b), a public announcement must be made of the initiation of the CIRP Process. An interim resolution professional is appointed as per section 13(c) prior to the public announcement.

Section 14 deals with prohibited certain activities against the Corporate Debtor during the moratorium period. The following activities are prohibited:

1. the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;

2. transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;

3. any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

4. the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

Generally, during the moratorium, the supply of essential goods and services to the Corporate Debtor must not be stopped.

Section 14(3) provides exception to section 14(1). These exceptions are:

1. Certain transactions as notified by the Central Government in consultation with any financial sector regulator or any other authority;

2. a surety in a contract of guarantee to a corporate debtor.

The moratorium ends on the date on which the Adjudicating Authority approves the resolution plan or passes an order for liquidation of the Corporate Debtor.

1. Announcement of CIRP

As per section 13(b) read with section 15, the public announcement of the CIRP must include certain key details such as name and address of the corporate debtor, name of the authority with which the corporate debtor is incorporated or registered, details of the interim resolution professional, the date on which the corporate insolvency resolution process shall close, etc.

1. Interim Resolution Professional

A resolution professional can be the interim resolution professional if the application for CIRP is made by the Corporate Debtor or the Financial creditor and if they had proposed a resolution professional. (section 16)

An interim resolution professional is appointed to manage the affairs of the Corporate Debtor. Section 17 of the Act gives wide powers to the interim resolution professional including the powers of the board of directors/partners, power to access all necessary documents from officers and mangers of the Corporate debtor, powers to act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, etc.

The tenure of the interim resolution professional starts from his/her appointment and continues until a resolution professional is appointed by the committee of creditors. (section 16)

Section 18 lists out the duties of the interim resolution professional which includes, collection of information about the Corporate Debtor, Collection of claims made by the creditors, constituting a committee of creditors, monitor and take control of assets, do the necessary filings, etc.

1. Committee of Creditors (CoC)

The interim resolution professional will for the committee of creditors after collection of all claims from the creditors. The CoC will consist of all financial creditors of the Corporate Debtor.

If a person is both a financial as well as an operational creditor, then to the extent of debt owed to him/her, he shall be a part of the CoC as a financial creditor.

The CoC votes on votes on the resolution plans and the appointment of professionals, etc. All decisions of the committee of creditors must be taken by a vote of not less than fifty-one per cent. of voting share of the financial creditors. (Section 21(7))

The resolution professional is required to report to the CoC and provide certain documents to the CoC at their request. (Section 21(10))

Meeting of CoC: The meeting may be in person or through other means. The meetings are conducted by the resolution professional after giving due notice to the CoC. Each creditor votes in accordance with the voting share assigned to him based on the financial debts owed to such creditor. The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Board.

1. Resolution Professional

The Resolution professional is usually appointed by the CoC during its first meeting. A majority vote of 66% is required to appoint the interim resolution professional as the resolution professional or to appoint a new resolution professional.

The resolution professional has all the powers and the corresponding duties that the interim resolution professional possesses. The resolution professional conducts the CIRP and manages the operations of the Corporate Debtor. In particular, the duties of the resolution professional include (Section 25):

1. take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;

2. represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings;

3. raise interim finances subject to the approval of the committee of creditors under section 28;

4. appoint accountants, legal or other professionals in the manner as specified by Board;

5. maintain an updated list of claims;

6. convene and attend all meetings of the committee of creditors;

7. prepare the information memorandum in accordance with section 29;

8. invite prospective resolution applicants;

9. present all resolution plans at the meetings of the committee of creditors;

10. file application for avoidance of transactions in accordance with Chapter III, if any; and

11. such other actions as may be specified by the Board.

The resolution professional may be replaced by the CoC. A majority vote of 66% of the CoC members is required to remove the old resolution professional and appoint a new one.

Under section 28 of the Act, The CoC is required to give its approval for certain actions by the resolution professional. Some examples are: raising any interim finance in excess of the amount decided by CoC, creating any security interest over the assets of the corporate debtor, changing the capital structure of the corporate debtor, and recording any change in the ownership interest of the corporate debtor.

1. Information memorandum

Section 28 deals with information memorandum. The Resolution professional has to prepare an information memorandum for formulating a resolution plan.

The resolution professional provides the resolution applicant access to all relevant information in physical and electronic form if the applicant satisfies certain conditions.

1. Resolution Plan

A resolution applicant may submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. It is the duty of the resolution professional to scrutinize the plans. Once the scrutiny is over, the plan is sent to the CoC for approval. The plan is approved if 66% or more votes are registered in favour of the plan. (Section 30)

Section 31 talks about approval of plan by the Adjudicating Authority. If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under section 30(4) meets the requirements as referred to in section 30(2), it shall by order approve the resolution plan.

After the order of approval, the moratorium ends.

1. Appeal

Section 32 talks about appeal process regarding the order of approval of resolution plan. Under section 61(1), an aggrieved person may appeal the order to the National Company Law Tribunal within 30 days of the order. Section 61(3) deals with the grounds on which the resolution plan can be appealed. Few of the grounds are: contravention of law, material irregularity in exercise of the powers by the resolution professional, and the insolvency resolution process costs have not been provided for repayment in priority to all other debts.