Petition for Corporate Insolvency Resolution Process – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions
Question 1.
Explain the procedure to be followed by the Adjudicating Authority on receipt of an application by the financial creditor for initiation of corporate insolvency resolution process.
Answer:
- Section 7 of the Insolvency and Bankruptcy Code, 2016, allows a financial creditor to initiate Corporate Insolvency Resolution Process (CIRP), via application to an Adjudicating Authority, Le. National Company Law Tribunal (NCLT).
- Where a default has occurred, a financial creditor either by itself or jointly with other financial creditors, may file an application for initiating Corporate Insolvency Resolution Process against a Corporate Debtor before the Adjudicating Authority, i.e. NCLT.
- The financial creditor shall submit application to the Adjudicating Authority, along with the evidence of default and name of interim resolution professional proposed to be appointed.
- On receiving the application from a financial creditor, the Adjudicating Authority (i.e. NCLT) shall follow the procedure
- The Adjudicating Authority shall, within 14 days of the receipt of the application, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.
- Where the Adjudicating Authority is satisfied that default has occurred and application is complete, and there is no disciplinary proceeding pending against the proposed resolution professional, it may admit such application;
- Where the Adjudicating Authority is satisfied that default has not occurred or application is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may reject such application:
- The Adjudicating Authority (i.e. NCLT) shall, before rejecting the application, give a notice to the applicant to rectify the defect in his application within 7 days of receipt of such notice from the Adjudicating Authority.
- The Adjudicating Authority shall communicate to the financial creditor and the corporate debtor, within 7 days of admission or rejection of such application, as the case may be.
Question 2.
X Ltd., a corporate debtor owes to Y Ltd. ₹ 100 lakh on account of unsecured loan at 10% per annum and ₹ 35 lakh towards raw material supplied by Y Ltd. Determine status of Y Ltd. in relation to the corporate debtor. Also, state the status under which Y Ltd. can make representation on the committee of creditors.
Answer:
- As per Insolvency and Bankruptcy Code, 2016, where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process.
- Financial Creditor is any person to whom a financial debt is owned and includes a person to whom such debt has been legally assigned or transferred to Financial Debt means a debt (with interest), related to money borrowed, bonds, notes, deposit, debentures, hire-purchase, lease, indemnity, guarantee etc.
- 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. They are suppliers of goods or services to any company or operational debtor.
- In the given case, Y Ltd. will be classified as financial as well as operational creditor in relation to X Ltd., a corporate debtor.
- Thus, Y Ltd. shall be included in the committee of creditors and shall have a voting share proportionate to the extent of financial debts owed to such creditor. In the instant case, to the extent of 1100 lakh, Y Ltd. being a financial creditor.
Question 3.
Perfect Polyesters Ltd. is undergoing Corporate Insolvency Resolution Process as per Insolvency and Bankruptcy Code, 2016. Committee of Creditors is constituted. In the mean time, the Corporate Debtor, Perfect Polyesters Ltd. made a settlement with the applicant financial creditor and desires to get the application withdrawn and seeks your advice.
Answer:
- The Insolvency and Bankruptcy Code, 2016 provides a default-based test to initiate corporate insolvency resolution process. Such default-based test permits early intervention when the corporate debtor shows early signs of financial distress.
- Section 7 of the Insolvency and Bankruptcy Code, 2016 lays down the procedure for the initiation of the corporate insolvency resolution process by a financial creditor(s).
- Where the Adjudicating Authority (here NCLT) admits the application of the financial creditor, it is known as commencement of the Corporate Insolvency Resolution Process (CIRP).
- As per new section 12A [Insolvency & Bankruptcy Code (Second Amendment) Act, 2018], the Adjudicating Authority may allow the withdrawal of application, on making an application by the applicant with the approval of 90% voting share of the Committee of Creditors
- The Corporate Debtor shall apply to the Resolution Professional and the Committee of Creditors within 7 days and subsequently to Tribunal for approval.
Question 4.
There are certain persons who are not entitled to make application to NCLT for initiation of corporate insolvency resolution process. Explain.
OR
Question 5.
Who are entitled and who are not eligible to make application to Adjudicating authority for corporate insolvency resolution process as per /Insolvency & Bankruptcy Code, 2016?
Answer:
→ In corporate insolvency resolution process, the financial creditors assess the viability of debtor’s business and the options for its revival and rehabilitation.
→ As per IBC, 2016, where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process. Thus, in case of default, the following people are entitled to initiate a corporate insolvency resolution process
(a) financial creditor,
(b) operational creditor, or
(c) corporate debtor itself.
→ However, as per Section 11 of the Insolvency and Bankruptcy Act, 2016, the following persons Eire not entitled to make application to NCLT for initiation of corporate insolvency resolution process
(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed corporate insolvency res-olution process twelve months preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months preceding the date of making application; or
(d) a corporate debtor in respect of whom a liquidation order has been passed so that finality of the liquidation order is ensured.
Question 6.
Explain the steps to be followed for the “Corporate Insolvency Resolution process” with timelines.
Answer:
Following are the steps to be followed for the Corporate Insolvency Resolution Process (CIRP):
(a) In case of default committed by Corporate Debtor, the CIRP may be initiated by a financial creditor (Section 7), an operational creditor (Section 8) or the corporate debtor (Section 10).
(b) A Financial Creditor may apply to NCLT immediately upon do fault of corporate debtor. An Operational Creditor has to send Demand Notice to the Corporate Debtor. After 10 days from date of Demand Notice, the Operational Creditor shall apply to the NCLT.
(c) A Financial Creditor, Operational Creditor or Corporate Debtor shall propose the name of Insolvency Resolution Professional for the purpose of CIRP.
(d) The NCLT, within 14 days of receipt of application, may admit or reject application. Before rejecting, it should give notice to rectify the defects within 7 days of receipt of notice.
(e) Where the NCLT has admitted the application, it shall declare moratorium as well as appoint an Interim Resolution Professional (IRP).
(f) The Interim Resolution Professional shall make a public an-nouncement in newspaper (English and regional language) not later than three days from the date of his appointment. The public announcement shall contain the information of the Corporate Debtor under CIRP, name of the authority with which corporate debtor is registered. The last date for submission of claims and date on which CIRP will be closed.
(g) ‘Insolvency commencement date’ starts from the date of admission of application and it is to be completed within 180 days of commencement which can be extended by 90 days only one time by NCLT. The overall process shall be completed within 330 days including delays.
(h) The Interim Resolution professional to constitute Committee of Creditors (CoC) comprising of financial creditors (except related parties).
(i) The Resolution Professional shall manage the affairs of Corporate Debtor as a going concern, along with support of CoC and supervision of the NCLT. All decisions of Committee of Creditors shall be taken by vote not less than 66% of voting share of financial creditors.
(j) The Resolution Professional shall invite resolution plans from resolution applicants. A resolution applicant means any person who submits resolution plan. Such resolution plans shall place it before the Committee of Creditors for its approval. The resolution plan shall be accepted by the Committee of Creditors by 66% majority.
(k) Resolution Professional shall to submit approved Resolution Plan to NCLT which shall approve or reject it and order liquidation.
(l) The approved plan shall be binding on the corporate debtor, and its employees, members, creditors, guarantors and other stake-holders involved in the resolution plan.
(m) The moratorium ends on the date of approval of the resolution plan.
(n) Appeal may be made to NCLAT against the order passed by NCLT within 30 days from date of an order approving or rejecting the resolution plan.
(o) The Tribunal may order Liquidation in the following cases:
- NCLT does not receive a resolution plan within the maximum time period permitted; or
- NCLT rejects the resolution plan for non-compliance of the specified requirements; or
- During CIRP, the Committee of Creditors have decided to liquidate the Corporate Debtor, in their meeting, by not less than 66% of the voting share.; or
- Where resolution plan approved by NCLT is contravened by the Corporate Debtor.