Insolvency Resolution Process
The Code makes a significant departure from the existing
resolution regimen by shifting the responsibility on the creditor to initiate
the insolvency resolution process against the corporate debtor. Under the
existing legal framework, the primary onus to initiate a resolution process
lies with the debtor, and creditor may pursue separate actions for recovery,
security enforcement and debt restructuring.
I.
Insolvency Resolution and Liquidation
Process for Corporate
If the default is above Rs.1 Lakh (may be increased up to Rs.1 Cr
by the Government, by notification), the creditor may initiate insolvency
resolution process. The Code proposes two independent stages:
A) Insolvency Resolution Process – during which financial creditors assess whether the
debtor’s business is viable to continue and the options for its rescue and
resurrection.
1. A financial creditor (himself or
jointly with other financial creditors), an operational creditor or the
corporate debtor (through Corporate applicant i.e. corporate debtor itself; or
an authorised member, partner of corporate debtor; or a person who has control
and supervision over the financial affairs of the corporate debtor) may
initiate corporate insolvency resolution process in case a default is committed
by corporate debtor. An application can be made before the National Company Law
Tribunal (NCLT) for initiating the resolution process. Operational creditor
needs to give demand notice of 10 days to corporate debtor before approaching
the NCLT. If corporate debtor fails to repay dues to operational creditor or
fails to show any existing dispute or arbitration, then the operational
creditor can approach NCLT.
2. Corporate insolvency process shall be
completed within 180 days of admission of application by NCLT. Upon admission
of application by NCLT, Creditors’ claims will be frozen for 180 days, during
which time NCLT will hear proposals for revival and decide on the future course
of action. And thereupon, no coercive proceedings can be launched against the
corporate debtor in any other forum or under any other law, until approval of
resolution plan or until initiation of liquidation process.
3.
NCLT appoints an interim Insolvency
Professional (IP) upon confirmation by the Insolvency and Bankruptcy Board
(hereinafter, “the Board”) within 14 days of acceptance of application. Interim
IP holds office for 30 days only. Interim IP takes control of the debtor’s
assets and company’s operations, collect financial information of the debtor
from information utilities.
4.
NCLT causes public announcement to be
made of the initiation of corporate insolvency process and calls for submission
of claims by any other creditors.
5. After receiving claims pursuant to
public announcement, interim IP constitutes the creditors’ committee. All
financial creditors shall be part of creditors’ committee and if any financial
creditor is related party of corporate debtor, then such financial creditor
will not have any right of representation, participation or voting. Operational
creditors should be part of Creditors’ Committee (without voting right) if their
aggregate dues are not less than 10% of the debt.
6. Creditors’ committee shall meet first
within seven days of its constitution and decide by 75% of votes either to
replace or confirm interim IP as Resolution Professional. Thereupon, Resolution
Professional is appointed by the NCLT upon confirmation by the Board. The
creditors’ committee, with a majority of 75% votes, can change Resolution
Professional any time.
7.
The creditors’ committee has to then
take decisions regarding insolvency resolution by a 75% majority voting.
8. If three-fourths of the financial
creditors consider the case complex and require extension of time beyond 180
days, the NCLT can grant a one-time extension of up to 90 days.
9. Resolution Professional to conduct
entire corporate insolvency resolution process and manage the corporate debtor
during the period.
10. Resolution Professional shall prepare
information memorandum for the purpose of enabling resolution applicant to
prepare resolution plan. A resolution applicant means any person who submits resolution
plan to the resolution professional. And upon receipt of resolution plans,
Resolution Professional shall place it before the creditors’ committee for its
approval.
11. Once a resolution is passed, the
creditors’ committee has to decide on the restructuring process that could
either be a revised repayment plan for the company, or liquidation of the
assets of the company. If no decision is made during the resolution process,
the debtor’s assets will be liquidated to repay the debt.
12. The resolution plan will be sent to
NCLT for final approval, and implemented once approved.
AND
B) Liquidation – if the insolvency resolution process fails or financial
creditors decide to wind down and distribute the assets of the debtor.
1.
The commencement of liquidation process
take place on account of:
i. failure to submit the resolution plan
to the NCLT within the prescribed period, or
ii. rejection of resolution plan for
non-compliance with the requirements of the Code,
iii. or decision of creditors’
committee based on vote of majority, or
iv.
Contravention of resolution plan by the
debtor.
2.
During liquidation, no suit or other
proceedings shall be instituted by or against the corporate debtor; except
through the liquidator on behalf of corporate debtor with permission of the
NCLT.
3.
The Resolution Professional shall
act as liquidator unless replaced.
4.
The liquidator shall form an
estate of all assets of corporate debtor called the liquidation estate.
5.
Liquidator shall receive, verify and
admit or reject, as the case may be, the claims of creditors within the
prescribed time. Creditor may appeal to the adjudicator within 14 days.
6.
A secured creditor may either
relinquish its security interest to the liquidation estate and receive on first
priority, the proceeds of the sale by the liquidator or realise its security
interest by enforcing, realising, settling, compromising or dealing with the
secured asset in accordance with such law as applicable to the secured
interest. Any surplus amount so realised shall be tendered to the liquidator.
In case of any shortfall in recovery, the secured creditors will be paid by the
liquidator out of the assets of the corporate debtor. However, his claim will
be junior to the unsecured creditors to the extent of the shortfall.
7.
Assets will be distributed by the
liquidator in the manner of priorities of debts laid in the Code (see below).
Individual claimants or those claiming to have any special rights on assets of
the debtor will form part of the liquidation process.
8.
All sums due to any workman or employee
from the provident fund, the pension fund and the gratuity fund will be
considered as priority dues and is not to be included in the liquidation estate
and estate of bankrupt.
9.
Upon the assets of corporate debtor
completely liquidated and the liquidator making an application, the NCLT shall
pass an order dissolving the corporate debtor.
Disclaimer
The content of this article is intended
to provide a general guide to the subject matter. Specialist advice should be
sought about specific circumstances and queries.
By CS Diwakar Agrawal
