There are cases when the party becomes insolvent or bankrupt to pay the due amount or debts. To recover the amount in such cases, India follows the Insolvency and Bankruptcy Code, 2016.
Insolvency can be defined as a temporary situation when the debtor is unable to meet the outstanding debt of the creditor. Whereas bankruptcy is permanent when a person himself approaches the court and declares himself insolvent.
The IBC, 2016 aims to consolidate and amend the rules relating to debt settlement for companies and organizations with limited liability, corporate governance, contained in various legislation, into a single law. The Code sets out a comprehensive framework to help companies rehabilitate their business or develop a rehabilitation program, and for investors to move out. Significantly, this Code also empowers active lenders (employees, suppliers, etc.) to begin the process of resolving non-lending in the event of an error.
The procedure under the Code
Insolvency can be resolved in two ways:
- Changing the payment system to lenders or investors.
- Sell company assets and repay to creditors or investors with proceeds from the sale of assets.
If the debt exceeds one lakh rupees (which may be increased to one crore by government notification), the creditor may begin the insolvency resolution process. It has two stages: (a) Insolvency Resolution Process – credit providers assess whether the debtor’s business is viable for redemption and recovery, and (b) Liquidation – if the loan settlement process fails or credit providers decide to reduce the debt and distribute the debtor’s assets.
INSOLVENCY RESOLUTION PROCESS
1. Insolvency refers to a debtor’s inability to pay debts to a creditor, investor, or lender, or any corporate entity. Any Financial Creditor, Operational Creditor, or Corporate Debtor can apply with the National Company Law Tribunal (NCLT) to begin the insolvency resolution process (Section 6).
2. “Financial Creditor” is defined in Section 5(7) of the Act as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred. For example, a bank or financial institution or any other lender or provider of a loan, credit facility, or other financial assistance.
- The financial creditor either by himself or jointly shall initiate the filing of the application before NCLT against the corporate debtor for insolvency proceedings (Section 7(1)).
- A financial creditor must submit an application that includes fees, a default history, and the name of the professional who will act as an interim resolution professional.
- Within 14 days of receiving the application, the Adjudicating Authority accepts or rejects it. Before rejecting an application, the authority must give the applicant notice to correct his application within seven days of receiving such notice.
3. Section 3(8) defines a “corporate debtor” as a corporate person who owes a debt to any person.
- On default of the corporate debtor, he can apply for initiating the insolvency resolution process.
- He with his application should furnish information of books of account, a proposed resolution professional to appoint as an interim resolution professional.
- Within 14 days of receiving the application, the Adjudicating Authority accepts or rejects it. Before rejecting an application, the authority must give the applicant notice to correct his application within seven days of receiving such notice.
4. Section 5(20) states “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. For example, Suppliers and service providers.
- If there is a default, an operational creditor needs to send a notice of default payment to the corporate debtor giving him 10 days to pay back the dues.
- If he fails to do so, or if he fails to bring any dispute or arbitration proceeding pending against it to the attention of the operational creditor, the operational creditor may seek insolvency relief.
- Within 14 days of receiving the application, the Adjudicating Authority accepts or rejects it.
- Before rejecting the application, the authority shall give notice to the applicant to rectify his application within 7 days of receiving such notice by the authority (Proviso, Section 9(5)).
5. The period of completing the insolvency resolution process is mentioned in section 12 of the Code.
- To begin such a process, you must wait 180 days from the date of your application’s acceptance.
- If the adjudicating authority is satisfied that the case cannot be completed in time, it may order to extend it but not exceed 90 days. Also, the extension shall not be granted more than once.
6. Appointment of Interim Professional: In terms of section 16 of the NCLT, an interim insolvency professional will be appointed with the approval of the insolvency and bankruptcy board within 14 days of receiving the application. Interim IP serves a tenure of 30 days only. He takes control of the debtor’s assets and company’s operations and collects financial information of the debtor from information utilities.
7. The NCLT declares public announcement and initiation of insolvency resolutions and calls for the submission of claims when the application is admitted under sections 7, 9, or 10. In addition, it appoints IP under Section 16 and declares a moratorium for Section 14.
8. Under section 21, a creditor’s committee will be formed and all the creditors who have submitted the claims shall be a part of the creditors’ committee.
- As Section 21 (2) of the Code says the creditors’ committee shall consist of only financial creditors.
- Operational Creditors cannot be a member of the creditor’s committee.
- The decision of the Creditors Committee regarding the reason for the company’s failure to repay the debt, whether it is a business or a financial crisis, will guide the committee to decide on a debt resolution plan or liquidation of creditors.
- Within 7 days of being appointed the creditors’ committee will hold its first meeting.
- If satisfied by the debt resolution plan submitted by the resolution applicant, the plan is presented to the Creditors’ committee for approval. The plan will be confirmed based on the 75% of votes of the creditors of the Creditors’ committee in favor.
- If the approval is obtained then NCLT will order the execution of the restructuring plan in a prescribed manner.
LIQUIDATION
When an applicant fails to submit a resolution plan to the NCLT by the deadline, the plan is rejected due to non-compliance with the Code’s requirements, the creditors’ committee decides by a majority vote, or the debtor violates a plan, liquidation proceedings begin. Section 33 of the Code defines the beginning of the liquidation process.
The resolution professional can act as a liquidator unless replaced by the Adjudicating authority. The liquidator shall verify claims of the creditors, take into custody all the corporate debtor’s assets, property, effects, and actionable claims and evaluate. It Should [perform the duties mentioned under Section 35 of the code. The Creditor may appeal to the adjudicator within 14 days.