Introduction

This blog meant to provide an overview of the Insolvency Process and some important provisions of Insolvency and Bankruptcy Code. The highlight of the Code is the institutional framework it envisions. This framework consists of the regulator (Insolvency and Bankruptcy Board of India) insolvency professionals, information utilities and adjudicatory mechanisms (National Company Law Tribunal NCLT and National Company Law Appellate Tribunal-NCLAT). These institutions and structures are aimed at promoting corporate governance and also enable a time bound and formal resolution of insolvency.

The major features of the Code include a two step process -insolvency resolution for corporate debtors where the minimum amount of the default is ₹1,00,00,000/-.

Two processes are proposed by the Code:

a) Insolvency resolution process (Sections 6 to 32 of the Code) – In this, the creditors play a crucial role in evaluating and ultimately determining whether the debtor’s business can be continued and if so, what are the choices for its revival; and

b) Liquidation [Sections 33-54 Code] – If revival fails or is not a feasible option, then creditors can resolve to wind up the company. Upon winding up, assets of the debtor are to be distributed.

Important Steps of Insolvency Process:-

Who is Corporate Debtor-

Against whom debt has be unpaid which is more than 1 crore

There are three ways by which Insolvency proceedings can be started against the corporate debtor. The insolvency resolution process under Section 6 can be initiated by the financial creditor [Section 7], operational creditor [Section 8] or Corporate Debtor himself.

  1. Under Section 7 of the Insolvency Code- any financial creditor can file the Insolvency Proceedings against the corporate debtor.
  2.  Under Section 8 of the Insolvency Code – any operational creditor [subject to issuing a demand notice to the corporate debtor stating the amount involved in the default, under Section 8, of the Code] can file the Insolvency Proceedings against the corporate debtor against the corporate debtor in the NCLT. It includes employees of the corporate debtor as well.
  3. Under Section 10 of the Code -Voluntary insolvency proceedings may also be initiated by the defaulting company, its employees or shareholders.

Once the resolution process begins, for the entire period, a moratorium is ordered by the NCLT on the debtor’s Section 13 (Declaration of moratorium and public announcement) provides that the Adjudicating Authority shall

(a) declare a moratorium for the purposes referred to under Section 14,

(b) cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15, and

(c) appoint an interim resolution professional in the manner as laid down in Section 16.

A public announcement is to be made immediately after the appointment of the interim resolution professional, whereby inviting creditors of the corporate debtor to submit their respective claim against it.

Moratorium – During this period, no judicial proceedings can be initiated. There can also be no enforcement of securities, sale or transfer of assets or termination of essential contracts against the debtor. Section 14 (Moratorium) provides that on the insolvency commencement date, the Adjudicating Authority shall declare a moratorium prohibiting

(a) the institution or continuation of suits or proceedings against the corporate debtor including execution of a judgment, decree, order, etc;

(b) transferring, encumbering alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest;

(c) 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 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and

(d) recovery of any property by an owner or lessor where such property is occupied by, or in the possession of the corporate debtor. Section 16 provides for the appointment and tenure of an interim resolution professional.

The next step is appointment of an Interim Resolution Professional under Section16 of the Code. The resolution professional has to work under the broad guidelines of the committee of creditors (or “COC”- in terms of Section 21 of the Code).

The CoC includes all the financial creditors of the corporate debtor, except all related parties and operational creditors.  From the Supreme court ruling Home buyers also forms part of Committee of Creditors.

Further, Section 22 of the Code provides that the CoC has to appoint the resolution professional. This resolution professional can also be the interim resolution professional.

CoC has a power to invite revival plans and accept them, Different types of revival plans include fresh finance, sale of assets, haircuts (i.e. acceptance by creditors of amounts lower than what is due to them), change of management etc. The committee should approve the resolution plan forwarded by the creditor. A vote of 75% of the voting share shall determine the decisions of the committee to opt for either a revival or liquidation (Section 30).  The decision of the CoC is binding not only on debtors, but also on all the other creditors.

Only upon approval does the resolution professional forward the plan to the adjudicating authority for final approval. The resolution plan has to be approved by the NCLT;

Appellant Provision-

Appeal can be filed under Section 32 against the order of NCLT wherein accepting the Resolution plan in accordance with the grounds mentions in sub-section (3) of section 61 including:-

(3) An appeal against an order approving a resolution plan under section 31 may be filed on the following grounds, namely: –

(i) the approved resolution plan is in contravention of the provisions of any law for the time being in force;

(ii) there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period;

(iii) the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board;

(iv) the insolvency resolution process costs have not been provided for repayment in priority to all other debts; or

(v) the resolution plan does not comply with any other criteria specified by the Board.

Water Fall Provisions which forms crucial part of the code and the process is mentioned under Section 53 i.e. Distribution of assets. – the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely:-

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following:

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following: –

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

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