Insolvency and Bankruptcy Code 2016 seeks to consolidate the existing framework by creating a single and informative law for insolvency and bankruptcy in India. IBC provides a legal framework and tried to resolve the dispute between creditor, debtor, and company. Insolvency and Bankruptcy Code is the unification of all these laws which help do a robust mechanism to revive a company and also provide genuine rehabilitation and restructuring of the company. When a company is unable to pay its debts and when company debts are more than assets then the company becomes insolvent. the corporate Insolvency resolution process is an essential step for reviving the company, like collecting new funds for the function of the company. CIRP also protects the interest of creditors.
Insolvency is a type of state where the liability of an individual or company more than its assets or in other words when a company, individual, and any organization debts more than its assets then it is called insolvency. Corporate insolvency is reflecting the condition of the company that when the company is not able to pay debts to its creditor and the company’s total assets are less than its debts, then it is called the company becomes insolvent. The term insolvency is a state where the company and person unable to contact financial obligations due to excess liability over assets or when a person or company unable to pay debts, which is owed from third entity then it is called the company becomes insolvent.
In India before Insolvency and Bankruptcy Code 2016, there was not a single law and code for prescribing mechanisms to deals with corporate insolvency. The Companies Act 1956, the sick industrial Companies Act 1985, Companies Act 2013 and SARFAESI Act 2002 all these above legislations fail to address the various issues related to the insolvency process specifically time taken to resolve insolvency and investor confidence, the condition of non-performing assets. But after the 2016 Insolvency and Bankruptcy, Code 2016 is significant reforms and tried to solve all problems which arose earlier. This code and provides for a good framework, a prescribed road map for the period to deals with problems or failed businesses.
A factor contributing to become Insolvent
There are various factors behind the company, individual, and organization to become insolvent.
- When the production of goods more than demands then a high probability of the company/organization becomes insolvent.
- When accounting management not doing a job properly and overspending money without a proper plan then chances are high to organization/company become insolvent.
- When goods or services of the company not evolved to fit consumers then it is one of the reasons for the company becomes insolvent.
- When rising vendor costs, it one reason for the company to become insolvent.
- Paying a large amount of money in the form of damage and the company is not able to continue its operation because they have not sufficient funds for running the business. So, it is one reason for the company to become insolvent.
Types of insolvency
There are two types of insolvency
- Cash flow insolvency – when the company suffered a lot of problems related to financial liquidity and in currently or in future unable to pay its due debts then it is called cash flow insolvency.
- Balance sheet insolvency – when company income is too low to pay off their debts in the ordinary course of business or total liability of debtor more than the total values of company assets then it is called balance sheet insolvency.
Types of the Creditor in Insolvency Proceedings
There are two types of creditors in insolvency proceedings.
- Financial creditor – Under Section 5(7) of Insolvency and Bankruptcy code 2016 talks about the financial creditor. When the corporate debtor owes money from any creditor in the form of credit facility i.e. bonds, check, debenture, lease, guarantees, etc then it is called a financial creditor. A financial creditor is a type of entity that provides money to any individual or company, the relation between company and creditor is financially like a loan, debt security, etc. Section 7 of the Insolvency and Bankruptcy Code 2016 talks that financial creditor of defaulting company applies adjudicating authority National Company Law Tribunal. In the case of Union Bank of India v. Era Infra Engineering, the Hon’ble Tribunal held that a debt obligation arising out of a put-option and a non-disposal undertaking, a promoter’s undertaking and a deed of the pledge would qualify as a “contract of guarantee” and would come under the ambit of “financial debt”
- Operational creditor – Under Section 5(20) of Insolvency and Bankruptcy code 2016 talks about the operational creditor. When any creditor owes money from any debtor like sort of goods and service then it is called an operational creditor. An operational creditor is a type of creditor, who provides inputs and another material service to the debtor. Section 9 of the Insolvency and Bankruptcy Code 2016 talk about operational creditor of defaulting company apply to adjudicate authority National Company Law Tribunal. In the case of Col. Vinod Awasthi v. AMR Infrastructure Limited , The question before Hon’ble Tribunal that whether the flat purchaser would fall under of operational creditor. The Hon’ble observed that the framers of the IBC had not intended to include within the expression of an ‘operation debt’ a debt other than financial debt. Under section 5(21) of IBC stated that operational debt would be confined through four ways like goods, service, employment, or government dues.
The Hon’ble Tribunal held that the debt owed to the flat purchasers had not arisen from any goods, services, employment, or dues which were payable under any statute to the Centre / State Government or local bodies. So, The Hon’ble Tribunal held that the Petitioner had neither supplied goods nor had rendered many services to acquire the status of an ‘Operational Creditor’.
What is the corporate insolvency resolution process
The corporate insolvency resolution process is an essential step for reviving the company, like collecting new funds for the function of the company and searching for new buyers to sell the company as going concerned. The outstanding debts may be satisfied by way of another person submitting a resolution plan to take over the affairs of the company and suspends directors’ power immediately and pay off the remaining debts to creditors. When the resolution plan is not submitted and also not approved by the committee of creditors (COC) and CIRP process has not successful than in such case liquidation proceedings would then commence subject to the order of the tribunal. The corporate insolvency resolution process is a type of debt recovery mechanism which is especially for creditors. When the company debts more than its assets then the company becomes insolvent, then financial creditor, an operational creditor, or the corporate/company may initiate a corporate insolvency resolution process. the corporate insolvency resolution process is a medium through which it is analyzed whether the entity who has defaulted is capable of repayment or not. Section 10 of the Insolvency and Bankruptcy Code 2016 talks about how to initiate of corporate insolvency resolution process by corporate applicant.
How to apply for corporate insolvency process
There are various ways for the corporate insolvency resolution process.
- Application before NCLT – A company or financial creditors and operational creditors, anyone for them can apply before National Company Law Tribunal. Creditor should show that the default payment of debts is more than 1,00,000. National Company Law Tribunal has14 days for whether it is admitting or denying the application which is filled by an operational creditor or financial creditor and company for the corporate insolvency resolution process. The financial creditor and operational creditor have separate obligations comply with when making their request before National Company Law Tribunal. A financial creditor needs to submit the report of default and the operational creditor needs to first make a demand for unpaid debts, on the present dispute.
- Interim resolution process – It is a type of process where the company management placed under independent ‘interim resolution professional’. In this process when CIRP is not completed until all power of management of the company and any control activity of the company to be ceased.
- Moratorium process – During the period of the moratorium which is prohibited as under.
- Transfer of company assets.
- Initiating and continuation of any legal proceeding against the corporate debtor.
- Recovery of any types of property to become an owner
- Discontinuing and termination of the supply of basic goods and services, till the end of the moratorium and the corporate debtor, is in the corporate insolvency resolution process.
- Verification and analysis of the creditor claim
Now, interim resolution professionals will summons and also check the claim made by creditors, list them, and after under 30 days of the approval into corporate insolvency resolution process form the committee of creditors (COC) which comprises all the financial creditors of corporate debtors.
- Appointment of resolution professional
under seven days of forming Committee of creditors resolve to appoints an independent person to be resolution professional and the resolution professional is the same or to replace the interim resolution professional by another resolution professional which is depending upon the committee of creditors.
- Acceptance of resolution plan
A resolution plan for the rebuilding of corporate must be approved within the 180 days of commencement of the corporate insolvency resolution process by creditors. If NCLT finds appropriate reason for delay then it can extend 90 days more. Any management, person, and creditors or any third party can propose such a resolution plan. It is the full responsibility of resolution professional to check that resolution plan satisfy the criteria set or describe by Insolvency and Bankruptcy code 2016.
- If the plan gets approved within a prescribed reasonable time and sanctioned by NCLT the accepted approval plan binding on the creditors, corporate debtor, members, employees, guarantor, and other stakeholders who involve in this plan. It is a full obligation of resolution professional to obtain all necessary approval to require under any law time being in force under one year from the date of such approval by adjudicating authority.
- If no resolution plan approved within the prescribed period
If a resolution plan not approved within the prescribed period then NCLT must order the liquidation of the corporate debtor. And after the liquidation process committee of creditors has the power to appoint the liquidator for selling the assets of the corporate debtor and share among the creditors and stakeholder, section 53 of Insolvency and Bankruptcy code 2016 talks about the distribution of assets of the corporate debtor when no resolution plan approved within the prescribed time.
In the end, I would like to say that Insolvency and Bankruptcy code 2016 provide unification of all these laws which help do a robust mechanism to revive a company and also provides genuine rehabilitation and restructuring of the company. Corporate insolvency is occurring when debts more than company assets or the company is unable to pay its debts. So avoids such kinds of ambiguity, IBC provides Corporate Insolvency Resolution Process. CIRP is the best way to protect the interest of creditors and robust mechanism to revive of the insolvent company.
Frequently Asked Questions(FAQs)
- What is corporate insolvency?
- Who is a financial creditor and operational creditor?
- How to apply for the corporate insolvency process?
- What is the corporate insolvency resolution process?
- Dr. D.K Jain, Guide to Insolvency and Bankruptcy Code, (Bharat Law House Pvt Ltd, 2017 1st edn).
- Ashish Makhija, Insolvency and Bankruptcy Code of India, (Lexis Nexis, 2018 1st edn).
- Raghav Wadhwa, Insolvency, and Bankruptcy Code with Procedures, (Wadhwa Brothers, 2020, 1st edn).