Insolvency Resolution

The Corporate Insolvency Resolution Process, as part of the Insolvency and Bankruptcy Code, 2016 (IBC/Code), has brought a new and efficient era in handling insolvency proceedings. The new procedure has eased the activities of the business in the Indian real estate and other sectors, with regards to redressal mechanisms in case of a default.

What is insolvency resolution?

The Corporate Insolvency Resolution Process (CIRP) is a recovery mechanism introduced by the Insolvency and Bankruptcy Act 2016 for facilitating the creditors to initiate a judicial process if the corporate entity becomes insolvent and unable to repay the debt. The Code aims to balance the interest of the stakeholders by the amendment of the existing laws reorganising and insolvency of corporate entities, individuals and partnership firms.

Who can initiate a Corporate Insolvency Resolution Process?

When the debtor, a corporate entity becomes insolvent and resulting to be a defaulter to the operational and financial creditors, then the creditor or the debtor himself may approach the National Company Law Tribunal, the assigned adjudicating Authority for insolvency resolution of corporate persons.

For handing over an application to initiate CIRP or initiating proceedings and other tribunal formalities prescribed to be followed in the respective category.

The provisions of IBC define the financial creditors as those who owe a financial debt and in terms of real estate, if an amount is raised under a project from an allottee, has been used for the commercial effect, then the allottee or home buyer is the financial creditor and the builder is the debtor.

How can a financial creditor initiate CIRP?

The process to initiate the CIRP is to primarily file an application under CIRP with the Adjudicating Authority along with the evidence of default. The Financial Creditor, Operational Creditor or Corporate Debtor can initiate a CIRP before the NCLT in case a default is committed by the corporate debtor.

The application must be furnished along with the prescribed fee and the following:

• Evidence of the debt default or record of default

• Name of the resolution professional which the creditors propose to be the Interim Resolution Professional

• Any other information as required by the Insolvency and Bankruptcy Board of India

The NCLT, on receiving the application, within 14 days shall establish the existence of the default by assessing the records and other evidence provided by the applicant. In case the tribunal does not act within the time limit, then it'll record the reason for the same in writing.

On establishing the default, the tribunal checks if there are any pending disciplinary proceedings against the proposed Resolution Professional.

In case the Adjudicating Authority finds any mistake in any of the above mentioned three factors, the tribunal gives one chance before rejecting the application, where the applicant is notified of the mistake made, or missing record, and the applicant has to furnish the appropriate record within seven days of receiving the notification for rectification.

If admitted, NCLT will communicate the order to the financial creditor and the corporate debtor, and the resolution process shall begin from the date of admission of the application.

What is the eligibility of an insolvency resolution applicant?

Section 29A of IBC enacted various layers of relations to stop the back-door entry of promoters or those who are connected to the promoter group of the corporate debtor to acquire the ailing company (corporate debtor) at a discount. Accordingly, for the submission of the resolution plan, the applicant must possess the following qualities:

• is an undischarged insolvent

• is a willful defaulter as per the guidelines of the Reserve Bank of India (RBI)

• has an account classified as a Non-Performing Asset (NPA)

• is a promoter of a corporate debtor, the account of which has been classified as an NPA

• is in the management of a corporate entity (corporate debtor), the account of which is classified as an NPA

• is in control of a corporate debtor, the account of which is classified as a non-performing asset

How are the insolvency resolutions provided by NCLT?

Once the corporate debtor admits the resolution process, an Interim Resolution Professional is appointed and the following procedure is followed:

Step one: The verification and analysis of the claim

At this stage of the proceeding, the information furnished regarding the corporate debtor shall be evaluated. However, this is not limited to the assets and liabilities, business operations, financial and operational payments for the previous two years.

The IRP will view, summon and verify the claims made by the financial creditors and also classify the same. Also, a Committee of Creditors shall be constituted to comprise all the financial creditors of the corporate debtor.

If there are two or more financial creditors as part of a consortium, as is usually the case with homebuyers of a real estate project, each such financial creditor would be part of the COC, and their voting share would be determined on the basis of the financial debts owed to them.

Step two: Appointment of resolution professional

Within seven working days of the COC formation, the committee is going to decide with a majority of 66% voting share minimum, to keep the existing IRP as the resolution professional or to replace the IRP with another resolution professional. Whatever the decision will be, it will be communicated to the Adjudicating Authority by the committee.

The duties of the resolution professional are:

• To protect and preserve the assets of the corporate debtor

• Convene and attend all COC meetings

• Exercising rights for the benefit of the corporate debtor in quasi-judicial, judicial or arbitration proceedings.

Step three: Submission of the resolution plan

After the examination of every resolution plan submitted by the eligible applicants to ensure the plan for the payment of debts of the corporate debtors as well as the costs of the corporate insolvency resolution process.

The COC shall approve the plan with the support of at least 66% of voting shares of the financial creditors and submitted to the Adjudicating Authority.

This plan must be approved within 180 days from the beginning of CIRP by financial creditors. However, the Adjudicating Authority can extend this period up to 90 days.

After the approval of the same, the committee of creditors appoints the liquidator to sell off the assets of the debtor and distribute them among stakeholders.

When is the fast-track corporate insolvency resolution process is applicable?

The fast-track CIRP is applicable when:

• It is a small company

• It is a startup

• It is an unlisted company with total assets as recorded in the financial statements of the preceding fiscal year, not more than 1 crore.

Through this process, the corporate insolvency resolution is achieved within 90 days. However, if required it can be extended for a period of maximum 45 days.